<PAGE> 1
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE
-------------------------------------------------------------------------
SERIES FUNDS, INC.
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Balanced Fund................ 1
Balanced Capital Focus Fund........... 13
Basic Value Focus Fund................ 25
Developing Capital Markets Focus
Fund................................ 38
Domestic Money Market Fund............ 57
Fundamental Growth Focus Fund......... 68
Global Bond Focus Fund................ 81
Global Growth Focus Fund.............. 95
Global Strategy Focus Fund............ 110
Government Bond Fund.................. 129
High Current Income Fund.............. 141
Index 500 Fund........................ 156
International Equity Focus Fund....... 172
Natural Resources Focus Fund.......... 192
Prime Bond Fund....................... 204
Quality Equity Fund................... 218
Reserve Assets Fund................... 232
Small Cap Value Focus Fund............ 241
Utilities and Telecommunications Focus
Fund................................ 255
</TABLE>
Semi-Annual Report
June 30, 2000
<PAGE> 2
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Economic slowing has finally arrived in the United States. As a result,
significant increases in inflation and interest rates appear less likely, which
is usually good news for financial assets. On the other hand, profit growth is
likely to decelerate from unsustainably high levels.
Investor sentiment changed significantly during the first half of 2000. In
general, concerns centered on economic growth being too strong. A recent
inflection could indicate healthy, but slower economic and profit growth in the
second half of the year. Following potential uncertainty during the adjustment
period, the sustainability of the economic expansion could buoy investor
expectations.
During the first half of the year, equity investors switched gears from an
excessive focus on momentum, which was prevalent during most of 1999. This
transition to a more balanced focus on both valuation and earnings growth, which
began in March, can provide a healthier investment backdrop. However, this
change has caused deterioration in many extremely highly valued securities with
speculative fundamentals and improvement in previously neglected, solidly
performing companies.
In the coming months, we believe investors are likely to focus on continuing
cyclical economic developments as well as the presidential election campaign.
Cyclical concerns remain increasing labor costs as well as volatile, but rising,
commodity prices. Federal budget policy, social security funding options and
trade policy are likely to shape investor interest in the outcome of the
election. Generally, financial markets have tended to do better under divided
governments, preferring legislative gridlock. In part, US markets historically
have done well as a result of fiscal policy restraint and could react poorly to
any significant reversal of that trend.
Despite near-term uncertainties surrounding economic slowdown, earnings growth
and valuation levels, long-term forces supporting US economic and financial
market leadership seem to remain in place. Chief among these are continued heavy
investments in technology, telecommunications and other efficiency-enhancing
projects, thus potentially enabling productivity-led growth.
PORTFOLIO MATTERS
As of June 30, 2000, the Fund's asset allocation was: US stocks, 59% of net
assets; US bonds, 39%; and cash reserves, 2%.
The Fund's position in US bonds was essentially unchanged at 39.1% of net
assets during the first half of 2000. The appeal of US bonds seemed enhanced in
an environment of more aggressive tightening by the Federal Reserve Board and
since there was evidence of a beginning in the slowdown of US economic activity.
However, we believe a significant decline in US interest rates will likely hinge
on expectations that the Federal Reserve Board will actually reverse its
restrictive monetary policy. Given this outlook, the average duration of the
Fund's US bond holdings is currently maintained at a defensive average of 4.3
years.
Within the equity sector, we expanded the Fund's commitment to US equities
from 54% of net assets to 59%. We continue to allocate substantial assets to
"new economy" equities. Companies in technology-oriented areas such as
telecommunications equipment, computers, and software and services should be
relatively immune to a global economic slowdown of modest proportions, in our
view. Representation in old economy sectors was maintained on a selective basis
in order to maintain diversification consistent with the Fund's objectives.
Areas with significant representation included financial services, consumer
staples and health care.
IN CONCLUSION
We appreciate your investment in American Balanced Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Thomas R. Robinson
Thomas R. Robinson
Senior Vice President and Portfolio Manager
July 26, 2000
1
<PAGE> 3
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 + 6.72%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +11.87
--------------------------------------------------------------------------------
Ten Years Ended 6/30/00 +10.46
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 +2.63% +6.72%
-----------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
2
<PAGE> 4
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AEROSPACE 10,000 The Boeing Company........................ $ 418,125 0.3%
14,245 United Technologies Corporation........... 838,674 0.5
------------ -----
1,256,799 0.8
----------------------------------------------------------------------------------------------------------------------
APPAREL 10,200 The Gap, Inc. ............................ 318,750 0.2
----------------------------------------------------------------------------------------------------------------------
APPLICATION DEVELOPMENT SOFTWARE 4,600 +Siebel Systems, Inc. .................... 752,388 0.5
----------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE PRODUCTS 2,100 +General Motors Corporation (Class H)..... 184,275 0.1
----------------------------------------------------------------------------------------------------------------------
BANKING 12,871 Bank of America Corporation............... 553,453 0.4
17,800 The Bank of New York Company, Inc. ....... 827,700 0.5
9,525 The Chase Manhattan Corporation........... 438,745 0.3
------------ -----
1,819,898 1.2
----------------------------------------------------------------------------------------------------------------------
BEVERAGES 32,400 The Coca-Cola Company..................... 1,860,975 1.2
38,000 PepsiCo, Inc. ............................ 1,688,625 1.1
------------ -----
3,549,600 2.3
----------------------------------------------------------------------------------------------------------------------
BROADCAST--MEDIA 4,600 Time Warner Inc. ......................... 349,600 0.2
2,500 +Univision Communications Inc. (Class
A)...................................... 258,750 0.2
------------ -----
608,350 0.4
----------------------------------------------------------------------------------------------------------------------
BROADCASTING--CABLE 68,800 +AT&T Corp.--Liberty Media Group (Class
A)...................................... 1,668,400 1.1
----------------------------------------------------------------------------------------------------------------------
BROADCASTING & PUBLISHING 14,000 +TV Guide, Inc. (Class A)................. 479,500 0.3
----------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 5,400 +American Tower Corporation (Class A)..... 225,112 0.1
----------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 13,650 +Oracle Corporation....................... 1,146,600 0.7
----------------------------------------------------------------------------------------------------------------------
CABLE 18,800 +Charter Communications, Inc. (Class A)... 309,025 0.2
----------------------------------------------------------------------------------------------------------------------
CAPITAL EQUIPMENT 4,920 +Agilent Technologies, Inc. .............. 362,850 0.3
12,900 Hewlett-Packard Company................... 1,610,887 1.0
------------ -----
1,973,737 1.3
----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS 3,100 Minnesota Mining and Manufacturing Company
(3M).................................... 255,750 0.2
----------------------------------------------------------------------------------------------------------------------
CELLULAR TELEPHONES 6,100 +Dobson Communications Corporation (Class
A)...................................... 117,425 0.1
----------------------------------------------------------------------------------------------------------------------
CHEMICALS 14,000 Rohm and Haas Company..................... 483,000 0.3
----------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES 17,950 +Convergys Corporation.................... 931,156 0.6
----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 8,600 +Pegasus Communications Corporation....... 420,863 0.3
----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT 29,850 Lucent Technologies Inc. ................. 1,768,613 1.1
21,175 +WorldCom, Inc. .......................... 971,403 0.6
------------ -----
2,740,016 1.7
----------------------------------------------------------------------------------------------------------------------
COMPUTER RELATED PRODUCTS 4,400 +VERITAS Software Corporation............. 497,200 0.3
----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 21,600 +America Online, Inc. .................... 1,139,400 0.7
55,424 +Cisco Systems, Inc. ..................... 3,522,911 2.3
10,700 Electronic Data Systems Corporation....... 441,375 0.3
600 +StorageNetworks, Inc. ................... 54,150 0.0
------------ -----
5,157,836 3.3
----------------------------------------------------------------------------------------------------------------------
COMPUTER TECHNOLOGY 6,100 +Solectron Corporation.................... 255,438 0.2
----------------------------------------------------------------------------------------------------------------------
COMPUTERS 12,400 Compaq Computer Corporation............... 316,975 0.2
17,000 +Dell Computer Corporation................ 838,312 0.5
12,000 +EMC Corporation.......................... 923,250 0.6
12,985 International Business Machines
Corporation............................. 1,422,669 0.9
9,500 RadioShack Corporation.................... 450,063 0.3
15,750 +Sun Microsystems, Inc. .................. 1,432,266 0.9
3,500 Symbol Technologies, Inc. ................ 189,000 0.1
------------ -----
5,572,535 3.5
----------------------------------------------------------------------------------------------------------------------
CONGLOMERATES 17,400 Honeywell International Inc. ............. 586,162 0.4
----------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DIVERSIFIED COMPANIES 4,900 +Conexant Systems, Inc. .................. $ 237,956 0.2%
4,100 Corning Incorporated...................... 1,106,487 0.7
3,700 Textron, Inc. ............................ 200,956 0.1
------------ -----
1,545,399 1.0
----------------------------------------------------------------------------------------------------------------------
ELECTRIC & GAS 34,800 +Calpine Corporation...................... 2,288,100 1.5
----------------------------------------------------------------------------------------------------------------------
ELECTRICAL 500 +Capstone Turbine Corporation............. 22,594 0.0
14,400 DPL Inc. ................................. 315,900 0.2
------------ -----
338,494 0.2
----------------------------------------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS 13,600 +The AES Corporation...................... 620,500 0.4
----------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS 51,910 General Electric Company.................. 2,751,230 1.8
39,850 Intel Corporation......................... 5,324,956 3.4
4,800 +LSI Logic Corporation.................... 259,800 0.2
27,300 Motorola, Inc. ........................... 793,406 0.5
------------ -----
9,129,392 5.9
----------------------------------------------------------------------------------------------------------------------
ELECTRONICS 2,400 +Broadcom Corporation (Class A)........... 525,450 0.3
4,400 +Gemstar International Group Limited...... 270,325 0.2
15,400 Texas Instruments Incorporated............ 1,057,788 0.7
------------ -----
1,853,563 1.2
----------------------------------------------------------------------------------------------------------------------
FINANCE 10,300 Federal Home Loan Mortgage Association.... 417,150 0.3
----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 5,400 Associates First Capital Corporation
(Class A)............................... 120,487 0.1
11,250 The Charles Schwab Corporation............ 378,281 0.2
32,700 Citigroup Inc. ........................... 1,970,175 1.3
22,200 Wells Fargo Company....................... 860,250 0.5
------------ -----
3,329,193 2.1
----------------------------------------------------------------------------------------------------------------------
HEALTHCARE--PRODUCTS & SERVICES 19,700 HCA--The Healthcare Corporation........... 598,387 0.4
----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 26,800 Colgate-Palmolive Company................. 1,604,650 1.0
3,600 The Procter & Gamble Company.............. 206,100 0.1
------------ -----
1,810,750 1.1
----------------------------------------------------------------------------------------------------------------------
INSURANCE 14,200 AXA Financial, Inc. ...................... 482,800 0.3
7,800 American International Group, Inc. ....... 916,500 0.6
4,100 ITT Industries, Inc. ..................... 124,537 0.1
------------ -----
1,523,837 1.0
----------------------------------------------------------------------------------------------------------------------
INTERNET SOFTWARE 4,600 +IntraNet Solutions, Inc. ................ 176,525 0.1
2,150 +VeriSign, Inc. .......................... 379,072 0.2
------------ -----
555,597 0.3
----------------------------------------------------------------------------------------------------------------------
INTERNETWORKING 300 +Alamosa PCS Holdings, Inc. .............. 6,262 0.0
2,700 +InfoSpace.com, Inc. ..................... 149,175 0.1
2,500 +Inktomi Corporation...................... 295,625 0.2
------------ -----
451,062 0.3
----------------------------------------------------------------------------------------------------------------------
LASER SYSTEMS & COMPONENTS 20,550 +JDS Uniphase Corporation................. 2,462,147 1.6
----------------------------------------------------------------------------------------------------------------------
MANUFACTURING 15,300 Tyco International Ltd. .................. 724,838 0.5
----------------------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 17,950 Johnson & Johnson......................... 1,828,656 1.2
----------------------------------------------------------------------------------------------------------------------
METAL 18,400 Alcoa Inc. ............................... 533,600 0.3
----------------------------------------------------------------------------------------------------------------------
NATURAL GAS 30,700 Enron Corp. .............................. 1,980,150 1.3
----------------------------------------------------------------------------------------------------------------------
NATURAL RESOURCES 25,800 Burlington Resources Inc. ................ 986,850 0.6
----------------------------------------------------------------------------------------------------------------------
NETWORKING PRODUCTS 1,600 +ONI Systems Corp. ....................... 187,500 0.1
----------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 5,200 +Nabors Industries, Inc. ................. 216,125 0.1
----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 26,273 Exxon Mobil Corporation................... 2,062,430 1.3
----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OIL SERVICES 8,000 Schlumberger Limited...................... $ 597,000 0.4%
----------------------------------------------------------------------------------------------------------------------
PETROLEUM 9,700 Unocal Corporation........................ 321,313 0.2
----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 18,100 American Home Products Corporation........ 1,063,375 0.7
16,300 Cardinal Health, Inc. .................... 1,206,200 0.8
5,400 Eli Lilly and Company..................... 539,325 0.4
21,200 Merck & Co., Inc. ........................ 1,624,450 1.0
39,150 Pfizer Inc. .............................. 1,879,200 1.2
6,800 Schering-Plough Corporation............... 343,400 0.2
------------ -----
6,655,950 4.3
----------------------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 27,500 +AMFM Inc. ............................... 1,897,500 1.2
----------------------------------------------------------------------------------------------------------------------
RETAIL 18,300 Lowe's Companies, Inc. ................... 751,444 0.5
14,700 +Safeway Inc. ............................ 663,338 0.4
18,000 Wal-Mart Stores, Inc. .................... 1,037,250 0.7
------------ -----
2,452,032 1.6
----------------------------------------------------------------------------------------------------------------------
SCIENTIFIC EQUIPMENT 8,100 Millipore Corporation..................... 610,538 0.4
----------------------------------------------------------------------------------------------------------------------
SOFTWARE 11,900 +Amdocs Limited........................... 913,325 0.6
24,700 +Microsoft Corporation.................... 1,974,456 1.2
13,600 +Network Associates, Inc. ................ 277,100 0.2
4,000 +RSA Security Inc. ....................... 278,000 0.2
4,000 +Yahoo! Inc. ............................. 495,500 0.3
------------ -----
3,938,381 2.5
----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 14,200 +AT&T Wireless Group...................... 395,825 0.3
9,700 +Adelphia Business Solutions, Inc. ....... 224,312 0.1
33,600 GTE Corporation........................... 2,091,600 1.3
3,000 +Level 3 Communications, Inc. ............ 263,813 0.2
24,000 +McLeodUSA Incorporated (Class A)......... 496,500 0.3
32,799 SBC Communications Inc. .................. 1,418,557 0.9
4,400 Sprint Corp. (FON Group).................. 224,400 0.2
------------ -----
5,115,007 3.3
----------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 9,700 Constellation Energy Group................ 315,856 0.2
----------------------------------------------------------------------------------------------------------------------
UTILITIES--GAS PIPELINE 6,000 Dynegy Inc. (Class A)..................... 409,875 0.3
----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS 600 +Telaxis Communications Corporation....... 18,713 0.0
----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- 20,000 +Nextel Communications, Inc. (Class A).... 1,223,750 0.8
DOMESTIC PAGING & CELLULAR
12,800 +Sprint Corp. (PCS Group)................. 761,600 0.5
------------ -----
1,985,350 1.3
----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST--$71,041,635) 91,071,050 58.5
----------------------------------------------------------------------------------------------------------------------
<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............................... 3,254,580 2.1
----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 1,227,126 Federal Home Loan Mortgage Corporation
MORTGAGE-BACKED OBLIGATIONS* Participation Certificates Gold Program
#10036, 7.50% due 6/01/2007............. 1,229,654 0.8
----------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE PERCENT OF
INDUSTRY AMOUNT FIXED-INCOME INVESTMENTS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT & AGENCY Federal National Mortgage Association:
OBLIGATIONS
$ 7,760,000 5.625% due 3/15/2001...................... $ 7,694,506 5.0%
1,550,000 5.25% due 1/15/2009....................... 1,366,186 0.9
600,000 6.375% due 6/15/2009...................... 570,372 0.4
US Treasury Bonds:
3,400,000 6.25% due 8/15/2023....................... 3,427,608 2.2
900,000 5.25% due 11/15/2028...................... 796,923 0.5
10,800,000 6.125% due 8/15/2029...................... 10,908,000 7.0
US Treasury Notes:
4,800,000 5% due 4/30/2001.......................... 4,742,976 3.0
13,700,000 5.75% due 6/30/2001....................... 13,601,538 8.7
9,500,000 5.50% due 7/31/2001....................... 9,403,480 6.0
4,000,000 5.50% due 8/31/2001....................... 3,955,640 2.5
------------ -----
56,467,229 36.2
----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS
(COST--$60,732,175) 60,951,463 39.1
----------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHORT-TERM SECURITIES
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER** 3,286,000 General Motors Acceptance Corp., 7.13% due
7/03/2000............................... 3,284,048 2.1
----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$3,284,048) 3,284,048 2.1
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$135,057,858).... 155,306,561 99.7
OTHER ASSETS LESS LIABILITIES............. 404,772 0.3
------------ -----
NET ASSETS................................ $155,711,333 100.0%
============ =====
----------------------------------------------------------------------------------------------------------------------
</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 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.
6
<PAGE> 8
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$135,057,858)....... $155,306,561
Cash........................................................ 279
Receivables:
Interest.................................................. $863,690
Dividends................................................. 43,518
Capital shares sold....................................... 455 907,663
--------
Prepaid expenses and other assets........................... 12,561
------------
Total assets................................................ 156,227,064
------------
-------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 351,988
Capital shares redeemed................................... 70,703
Investment adviser........................................ 65,580 488,271
--------
Accrued expenses and other liabilities...................... 27,460
------------
Total liabilities........................................... 515,731
------------
-------------------------------------------------------------------------------------
NET ASSETS.................................................. $155,711,333
============
-------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 1,033,673
Paid-in capital in excess of par............................ 126,911,076
Undistributed investment income--net........................ 1,827,159
Undistributed realized capital gains on investments--net.... 5,690,722
Unrealized appreciation on investments--net................. 20,248,703
------------
NET ASSETS.................................................. $155,711,333
============
-------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $155,711,333 and 10,336,732
shares outstanding........................................ $ 15.06
============
-------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
7
<PAGE> 9
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 1,972,146
Dividends................................................... 343,663
-----------
Total income................................................ 2,315,809
-----------
------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $436,541
Accounting services......................................... 15,917
Custodian fees.............................................. 12,368
Professional fees........................................... 9,856
Printing and shareholder reports............................ 6,939
Transfer agent fees......................................... 2,521
Directors' fees and expenses................................ 1,624
Pricing services............................................ 1,192
Other....................................................... 1,685
--------
Total expenses.............................................. 488,643
-----------
Investment income--net...................................... 1,827,166
-----------
------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET:
Realized gain on investments--net........................... 5,794,846
Change in unrealized appreciation on investments--net....... (3,469,094)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 4,152,918
===========
------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE> 10
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 1,827,166 $ 4,663,079
Realized gain on investments--net........................... 5,794,846 11,119,754
Change in unrealized appreciation on investments--net....... (3,469,094) (1,634,882)
------------ ------------
Net increase in net assets resulting from operations........ 4,152,918 14,147,951
------------ ------------
-----------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (2,050) (9,159,666)
Realized gain on investments--net:
Class A................................................... (1,382,405) (25,700,159)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (1,384,455) (34,859,825)
------------ ------------
-----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital
share transactions........................................ (13,462,509) 32,782
------------ ------------
-----------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (10,694,046) (20,679,092)
Beginning of period......................................... 166,405,379 187,084,471
------------ ------------
End of period*.............................................. $155,711,333 $166,405,379
============ ============
-----------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 1,827,159 $ 2,043
============ ============
-----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE> 11
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE -------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000+ 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 14.80 $ 16.74 $ 16.59 $ 16.01 $ 15.17
-------- -------- -------- -------- --------
Investment income--net................................. .17 .45 .40 .54 .53
Realized and unrealized gain on investments--net....... .22 .83 1.60 1.87 .89
-------- -------- -------- -------- --------
Total from investment operations....................... .39 1.28 2.00 2.41 1.42
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................... --** (.85) (.54) (.27) (.56)
Realized gain on investments--net.................... (.13) (2.37) (1.31) (1.56) (.02)
-------- -------- -------- -------- --------
Total dividends and distributions...................... (.13) (3.22) (1.85) (1.83) (.58)
-------- -------- -------- -------- --------
Net asset value, end of period......................... $ 15.06 $ 14.80 $ 16.74 $ 16.59 $ 16.01
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:***
Based on net asset value per share..................... 2.63%++ 8.73% 13.56% 17.11% 9.73%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................... .61%* .61% .62% .60% .60%
======== ======== ======== ======== ========
Investment income--net................................. 2.30%* 2.70% 2.37% 3.17% 3.39%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $155,711 $166,405 $187,084 $194,747 $212,047
======== ======== ======== ======== ========
Portfolio turnover..................................... 50.78% 105.48% 102.47% 136.71% 236.50%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Amount is less than $.01 per share.
*** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
10
<PAGE> 12
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--AMERICAN BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that as of June 30, 2000 was comprised of 19
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
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Short-term securities are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
- Options--The Fund may write covered call options. When the Fund writes an
option, an amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option written. When
a security is purchased or sold through an exercise of an option, the related
premium paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the security
sold. When an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Interest income (including
amortization of premium and discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(e) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Invest-
11
<PAGE> 13
--------------------------------------------------------------------------------
ment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton Services,
Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which is the
limited partner.
MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $3,432 in commissions
on the execution of portfolio security transactions.
For the six months ended June 30, 2000, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $273 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.
FAM Distributors, Inc., ("FAMD"), which is a wholly-owned subsidiary of
Merrill Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $75,908,144 and $82,052,574, respectively.
Net realized gains (losses) for the six months ended June 30, 2000 and net
unrealized gains as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
--------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $5,795,188 $20,248,703
Short-term investments................ (342) --
---------- -----------
Total................................. $5,794,846 $20,248,703
========== ===========
--------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $20,248,703, of which $24,577,971 related to appreciated securities
and $4,329,268 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $135,057,858.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 43,355 $ 648,212
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 92,606 1,384,455
---------- ------------
Total issued........................... 135,961 2,032,667
Shares redeemed........................ (1,040,472) (15,495,176)
---------- ------------
Net decrease........................... (904,511) $(13,462,509)
========== ============
------------------------------------------------------------------
</TABLE>
<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>
12
<PAGE> 14
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Effective July 1, 2000, Capital Focus Fund was renamed Balanced Capital Focus
Fund. The Fund's investment objective remains the same: to seek high total
investment return. In order to reach this objective, the Fund uses a fully
managed investment policy utilizing equity, debt (including money market) and
convertible securities.
PORTFOLIO MATTERS
The volatile performance of the US financial markets during the first half of
2000 was 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 the first two months of the six-month period,
continued strong noninflationary economic growth, expectations for upbeat first
quarter corporate profits reports and the belief that the Federal Reserve
Board's action to increase short-term interest rates was nearing an end combined
to produce a solid advance in equity prices. Fourth quarter 1999 gross domestic
product (GDP) growth was revised upwards to a +7.3% annual rate, while the price
deflator measure of inflation remained below 2%. Most economists anticipated a
5% rate of GDP growth in the first quarter of 2000. Largely driven by
productivity improvements, this economic backdrop was expected to result in
approximately 20% corporate profits growth in the first quarter of 2000. In
addition, as a result of the Federal Funds rate having been increased for the
fifth time since fall, many investors believed the Federal Reserve Board would
soon conclude its monetary tightening initiatives.
In March, the character and composition of the market's advance began to
change, shifting toward the stocks of "old economy" companies in the basic
industry, consumer and industrial sectors and away from the hard charging
technology names, bringing to at least a temporary halt the period of dramatic
outperformance of technology and telecommunications stocks to the exclusion of
virtually everything else. Coordinated global economic growth, declining oil
prices, ongoing restructuring and productivity improvements, easy year-over-year
earnings comparisons and low valuations created a highly attractive environment
for these traditional companies, while the unprecedented valuation of many
technology stocks left no room for disappointment. As a result, investors
exploited the attractive investment potential in the value sectors of the market
while taking profits in the "new economy" arena.
Stocks weakened in April and May, driven by more aggressive action by the
Federal Reserve Board to slow economic growth and curb rising inflationary
pressures. The 50 basis point (0.50%) increase in the Federal Funds rate in May
marked the sixth increase this tightening cycle and a significant departure from
the prior, moderate 25 basis point moves, reflecting the undiminished strength
in the US economy. This also suggested further such Federal Reserve Board
actions could be forthcoming. As rising interest rates typically slow economic
growth and compress stock market valuation, equity prices declined. Within this
tougher environment, the value style of investing continued to outpace the
growth style of investing as investors shifted away from the highly priced
growth and technology sectors of the market toward more defensive categories.
However, in June accumulating evidence of an economic slowdown suggested the
Federal Reserve Board's tightening bias might be nearing an end, leading to a
recovery in stock prices and resurgence in the growth and technology categories.
For the six-month period ended June 30, 2000, the unmanaged Standard & Poor's
500 (S&P 500) Index earned a -0.42% total return, the first time since 1994 that
the market has registered a first half-year decline. The US bond market
performed well, as the Merrill Lynch Domestic Bond Master Index provided a
+3.99% total return for the same period. While short-term interest rates rose,
intermediate-term and long-term interest rates declined as investors believed
Federal Reserve Board action would slow the economy and contain incipient
inflationary pressures. US Treasury securities in particular benefited from
their safety and security in this unpredictable period. Cash equivalents
provided a +2.93% total return, as measured by the Merrill Lynch 91-day Treasury
Bill Index. The Balanced Capital Focus Fund's relative performance closely
paralleled these shifting market dynamics. The Fund outperformed its peers
during the middle months of the period, which we attribute to our value
orientation and consequent underweighting in the technology sector. However, the
Fund underperformed its peers early and late in the period when growth and
technology stocks were ascendant. For the six months as a whole, the Fund
modestly underperformed its peer group. The equity component of the Fund
benefited from our exposures in the energy, healthcare and wireless
communications sectors, while industrial, tele-
13
<PAGE> 15
--------------------------------------------------------------------------------
phone and selected financial stocks performed poorly. The fixed-income component
of the Fund benefited from a relatively higher duration as intermediate-term
interest rates declined and from a concentration of corporate debt exposures in
shorter maturities.
Rising short-term interest rates, slowing economic growth and uncertain
Federal Reserve Board policies have combined to produce a highly volatile
investment environment. We believe such current conditions argue for the
maintenance of a conservative investment posture. At June 30, 2000, 63.3% of
portfolio net assets was invested in equities, 32.5% in fixed-income securities
and 4.2% in cash equivalents. This compares to 60.2% in equities, 32.9% in
fixed-income securities and 6.9% in cash equivalents at December 31, 1999.
Within the equity portfolio, we have emphasized investments in companies whose
ability to create shareholder value is not necessarily captive to economic
conditions. We increased our exposure to non-economically sensitive market
sectors such as consumer non-durables and healthcare, which appear to offer good
value in an environment of slowing economic growth and rising earnings and stock
price risks. Recent portfolio additions include Anheuser-Busch Companies, Inc.,
the world's largest brewer, Avon Products, Inc., the global cosmetics company
and Tenet Healthcare Corporation, the hospital management concern. We
concurrently reduced exposures in commodity, industrial and consumer cyclical
sectors, eliminating positions in Honeywell International Inc., Rockwell
International Corporation and Carnival Corporation in response to lessened
confidence in these companies' earnings growth projections and stock price
performance potential. Within the fixed-income portfolio, we maintained quality
and improved liquidity while increasing yield. We increased our exposure to US
Treasury securities from 28% of fixed-income assets at December 31, 1999 to 33%
of fixed-income assets at June 30, 2000, while reducing investment-grade
corporate bonds from 63% of fixed-income assets to 58% and maintaining our
position in high-yield corporate bonds near 9%. Average quality ratings were
unchanged at A2/A, while average yield-to-maturity increased 13 basis points to
7.70%.
Balanced Capital Focus Fund seeks to invest in above-average companies whose
stocks sell at below-average valuation levels. On average, the stocks in the
Fund have generated comparable returns on shareholders equity and have stronger
balance sheets, while offering faster earnings growth than the average company
as measured by the S&P 500. However, at period-end these same stocks sold at an
average price to earning ratio of 19.3 times estimated year 2000 earnings per
share versus 26.8 times for the S&P 500, at 5.3 times current book value per
share versus 7.1 times for the S&P 500, and provide an above average 1.4%
dividend yield versus 1.1% for the S&P 500. We believe this formula could
provide superior risk adjusted equity returns over time.
IN CONCLUSION
We appreciate your investment in Balanced Capital Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategy with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Kurt Schansinger
Kurt Schansinger
Senior Vice President and
Senior Portfolio Manager
July 26, 2000
14
<PAGE> 16
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 -2.24%
--------------------------------------------------------------------------------
Inception (6/05/98) through 6/30/00 +2.35
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
RECENT PERFORMANCE RESULTS*
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
--------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares -0.32% -2.24%
</TABLE>
--------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
15
<PAGE> 17
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<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................................. $ 502,850 1.5%
-----------------------------------------------------------------------------------------------------------------------
BANKING 500,000 Provident Bank, 6.375% due 1/15/2004......... 469,481 1.5
-----------------------------------------------------------------------------------------------------------------------
CHEMICALS 500,000 Airgas Inc., 7.14% due 3/08/2004............. 455,715 1.4
-----------------------------------------------------------------------------------------------------------------------
FINANCE 500,000 Deutsche Telekom International Finance, 8%
due 6/15/2010.............................. 498,285 1.5
500,000 General Motors Acceptance Corp., 5.75% due
11/10/2003................................. 473,425 1.5
500,000 Household Finance Corp., 7.875% due
3/01/2007.................................. 498,060 1.5
----------- -----
1,469,770 4.5
-----------------------------------------------------------------------------------------------------------------------
HOME--BUILDERS 500,000 Champion Enterprises, Inc., 7.625% due
5/15/2009.................................. 455,552 1.4
-----------------------------------------------------------------------------------------------------------------------
NATURAL GAS SUPPLIERS 500,000 The Coastal Corporation, 6.50% due
6/02/2008.................................. 459,225 1.4
-----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT 250,000 R & B Falcon Corporation, 6.75% due
4/15/2005.................................. 225,000 0.7
-----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 500,000 Occidental Petroleum Corp., 6.50% due
4/01/2005.................................. 474,145 1.5
-----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 500,000 Champion International Corp., 6.65% due
12/15/2037................................. 459,190 1.4
-----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION 250,000 Northwest Airlines, Inc., 7.875% due
3/15/2008.................................. 220,430 0.7
-----------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 500,000 Royal Caribbean Cruises Ltd., 7.25% due
8/15/2006.................................. 442,505 1.4
-----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS US Treasury Notes & Bonds:
500,000 5.875% due 11/15/2005...................... 491,405 1.5
1,000,000 5.625% due 2/15/2006....................... 970,160 3.0
750,000 6.50% due 10/15/2006....................... 759,023 2.4
500,000 3.625% due 1/15/2008....................... 513,779 1.6
250,000 6% due 2/15/2026........................... 244,805 0.8
500,000 5.50% due 8/15/2028........................ 458,595 1.4
----------- -----
3,437,767 10.7
-----------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATIONS 500,000 Sprint Capital Corporation, 6.90% due
5/01/2019.................................. 444,580 1.4
-----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- 500,000 Nextel Communications, Inc., 9.375% due
DOMESTIC PAGING & CELLULAR 11/15/2009................................. 477,500 1.5
-----------------------------------------------------------------------------------------------------------------------
YANKEE CORPORATES*** 500,000 Enersis SA, 6.60% due 12/01/2026(1).......... 475,445 1.5
-----------------------------------------------------------------------------------------------------------------------
TOTAL BONDS (COST--$10,798,529) 10,469,155 32.5
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES
HELD COMMON STOCKS
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AEROSPACE 13,500 The Boeing Company........................... 564,469 1.8
-----------------------------------------------------------------------------------------------------------------------
BANKING 9,000 The Chase Manhattan Corporation.............. 414,562 1.3
10,000 Citigroup Inc. .............................. 602,500 1.9
15,000 Mellon Financial Corporation................. 546,563 1.7
----------- -----
1,563,625 4.9
-----------------------------------------------------------------------------------------------------------------------
BEVERAGES 7,500 Anheuser-Busch Companies, Inc. .............. 560,156 1.7
-----------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS 15,000 Masco Corporation............................ 270,937 0.8
-----------------------------------------------------------------------------------------------------------------------
CHEMICALS 8,000 E.I. du Pont de Nemours and Company.......... 350,000 1.1
11,000 Pharmacia Corporation........................ 568,563 1.7
----------- -----
918,563 2.8
-----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES/SOFTWARE 5,000 International Business Machines
Corporation................................ 547,812 1.7
-----------------------------------------------------------------------------------------------------------------------
COMPUTERS 20,000 Compaq Computer Corporation.................. 511,250 1.6
-----------------------------------------------------------------------------------------------------------------------
COSMETICS 14,000 Avon Products, Inc. ......................... 623,000 1.9
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DIVERSIFIED COMPANIES 7,500 Kansas City Southern Industries, Inc. ....... $ 665,156 2.1%
10,000 United Technologies Corporation.............. 588,750 1.8
----------- -----
1,253,906 3.9
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 9,000 Federal National Mortgage Association........ 469,687 1.5
15,000 Wells Fargo Company.......................... 581,250 1.8
----------- -----
1,050,937 3.3
-----------------------------------------------------------------------------------------------------------------------
FOOTWEAR 10,000 Nike, Inc. (Class B)......................... 398,125 1.2
-----------------------------------------------------------------------------------------------------------------------
HOSPITAL MANAGEMENT 17,500 +Tenet Healthcare Corporation................ 472,500 1.5
-----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 10,000 Kimberly-Clark Corporation................... 573,750 1.8
-----------------------------------------------------------------------------------------------------------------------
INSURANCE 5,000 American International Group, Inc. .......... 587,500 1.8
14,000 ITT Industries, Inc. ........................ 425,250 1.3
10,000 XL Capital Ltd. (Class A).................... 541,250 1.7
----------- -----
1,554,000 4.8
-----------------------------------------------------------------------------------------------------------------------
NATURAL GAS SUPPLIERS 10,000 The Coastal Corporation...................... 608,750 1.9
15,000 The Williams Companies, Inc. ................ 625,313 1.9
----------- -----
1,234,063 3.8
-----------------------------------------------------------------------------------------------------------------------
NATURAL RESOURCES 13,000 Burlington Resources Inc. ................... 497,250 1.5
-----------------------------------------------------------------------------------------------------------------------
OFFICE--RELATED 12,500 Pitney Bowes Inc. ........................... 500,000 1.6
-----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT 12,000 Halliburton Company.......................... 566,250 1.8
-----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 15,000 Unocal Corporation........................... 496,875 1.5
-----------------------------------------------------------------------------------------------------------------------
PETROLEUM 11,500 Anadarko Petroleum Corporation............... 567,094 1.8
-----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 10,000 American Home Products Corporation........... 587,500 1.8
-----------------------------------------------------------------------------------------------------------------------
PUBLISHING 11,000 The New York Times Company (Class A)......... 434,500 1.3
-----------------------------------------------------------------------------------------------------------------------
RAILROADS 5,000 Union Pacific Corporation.................... 185,938 0.6
-----------------------------------------------------------------------------------------------------------------------
RESTAURANTS 17,000 McDonald's Corporation....................... 559,937 1.7
-----------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 16,500 Motorola, Inc. .............................. 479,531 1.5
-----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 10,000 +Bell Atlantic Corporation................... 508,125 1.6
10,000 Lucent Technologies Inc. .................... 592,500 1.8
25,000 Telefonaktiebolaget LM Ericsson (ADR)*....... 500,000 1.5
12,500 +WorldCom, Inc. ............................. 573,438 1.8
----------- -----
2,174,063 6.7
-----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT 10,000 Alcatel (ADR)*............................... 665,000 2.1
-----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- 10,000 +Nextel Communications, Inc. (Class A)....... 611,875 1.9
DOMESTIC PAGING & CELLULAR
-----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST--$18,505,096) 20,422,906 63.3
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT AGENCY $1,637,000 Federal Home Loan Mortgage Corporation, 6.57%
OBLIGATIONS** due 7/03/2000.............................. 1,636,104 5.1
-----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$1,636,104) 1,636,104 5.1
-----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$30,939,729)........ 32,528,165 100.9
LIABILITIES IN EXCESS OF OTHER ASSETS........ (289,664) (0.9)
----------- -----
NET ASSETS................................... $32,238,501 100.0%
=========== =====
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Certain US Government Agency Obligations are traded on a discount basis;
the interest rate shown reflects the discount rate paid at the time of
purchase by the Fund.
*** Corresponding industry groups for foreign securities:
(1) Industrial.
+ Non-income producing security.
See Notes to Financial Statements.
17
<PAGE> 19
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$30,939,729)........ $32,528,165
Cash........................................................ 924
Receivables:
Interest.................................................. $164,243
Securities sold........................................... 108,141
Capital shares sold....................................... 31,317
Dividends................................................. 14,640 318,341
--------
Deferred organization expenses.............................. 5,467
Prepaid expenses and other assets........................... 2,482
-----------
Total assets................................................ 32,855,379
-----------
------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 572,797
Capital shares redeemed................................... 21,911
Investment adviser........................................ 14,988 609,696
--------
Accrued expenses............................................ 7,182
-----------
Total liabilities........................................... 616,878
-----------
------------------------------------------------------------------------------------
NET ASSETS.................................................. $32,238,501
===========
------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 319,913
Paid-in capital in excess of par............................ 30,493,741
Undistributed investment income--net........................ 420,981
Accumulated realized capital losses on investments--net..... (584,666)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 1,588,532
-----------
NET ASSETS.................................................. $32,238,501
===========
------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $32,238,501 and 3,199,129
shares outstanding........................................ $ 10.08
===========
------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
18
<PAGE> 20
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 415,002
Dividends (net of $1,183 foreign withholding tax)........... 137,808
---------
Total income................................................ 552,810
---------
-----------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 96,793
Custodian fees.............................................. 6,623
Professional fees........................................... 4,657
Accounting services......................................... 4,257
Transfer agent fees......................................... 1,810
Pricing services............................................ 818
Amortization of organization expenses....................... 770
Printing and shareholders reports........................... 520
Registration fees........................................... 353
Directors' fees and expenses................................ 336
Other....................................................... 940
---------
Total expenses.............................................. 117,877
---------
Investment income--net...................................... 434,933
---------
-----------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized loss on investments--net........................... (547,439)
Change in unrealized appreciation on:
Investments--net.......................................... (35,193)
Foreign currency transactions--net........................ 30 (35,163)
--------- ---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(147,669)
=========
-----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE> 21
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 434,933 $ 816,568
Realized gain (loss) on investments--net.................... (547,439) 578,626
Change in unrealized appreciation on investments and foreign
currency transactions--net................................ (35,163) 844,879
----------- -----------
Net increase (decrease) in net assets resulting from
operations................................................ (147,669) 2,240,073
----------- -----------
--------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... -- (1,076,650)
In excess of investment income--net:
Class A................................................... -- (15,634)
Realized gain on investments--net:
Class A................................................... (177,746) --
----------- -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (177,746) (1,092,284)
----------- -----------
--------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital
share transactions........................................ (520,306) 4,871,704
----------- -----------
--------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (845,721) 6,019,493
Beginning of period......................................... 33,084,222 27,064,729
----------- -----------
End of period*.............................................. $32,238,501 $33,084,222
=========== ===========
--------------------------------------------------------------------------------------------------
* Undistributed (accumulated distributions in excess of)
investment income--net.................................... $ 420,981 $ (13,952)
=========== ===========
--------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
20
<PAGE> 22
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE ----------------------------------------------------
BEEN DERIVED FROM INFORMATION PROVIDED IN THE FOR THE SIX FOR THE FOR THE PERIOD
FINANCIAL STATEMENTS. MONTHS ENDED YEAR ENDED JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 DEC. 31, 1999 TO DEC. 31, 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 10.17 $ 9.76 $ 10.00
------- ------- -------
Investment income--net...................................... .13 .26 .09
Realized and unrealized gain(loss) on investments and
foreign currency transactions--net........................ (.17) .50 (.33)
------- ------- -------
Total from investment operations............................ (.04) .76 (.24)
------- ------- -------
Less dividends and distributions:
Investment income--net.................................... -- (.34) --
In excess of investment income--net....................... -- (.01) --
Realized gain on investments--net......................... (.05) -- --
------- ------- -------
Total dividends and distributions........................... (.05) (.35) --
------- ------- -------
Net asset value, end of period.............................. $ 10.08 $ 10.17 $ 9.76
======= ======= =======
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... (.32%)++ 7.85% (2.40%)++
======= ======= =======
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .73%* .71% .86%*
======= ======= =======
Investment income--net...................................... 2.69%* 2.59% 2.54%*
======= ======= =======
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $32,239 $33,084 $27,065
======= ======= =======
Portfolio turnover.......................................... 44.30% 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.
21
<PAGE> 23
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BALANCED 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 as of June 30, 2000 was comprised of 19
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. Balanced
Capital Focus Fund (the "Fund") (formerly Capital Focus Fund) is classified as
"diversified," as defined in the Investment Company Act of 1940. The Fund's
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal, recurring nature. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Short-term securities are valued
at amortized cost, which approximates market value. Futures contracts are valued
at the settlement price at the close of the applicable exchange. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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.
22
<PAGE> 24
--------------------------------------------------------------------------------
(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 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.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $2,652 in commissions
on the execution of portfolio security transactions.
For the six months ended June 30, 2000, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $508 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $14,160,630 and $13,512,567, respectively.
Net realized losses for the six months ended June 30, 2000 and net unrealized
gains as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Realized Unrealized
Losses Gains
-----------------------------------------------------------------
<S> <C> <C>
Long-term investments................... $(547,439) $1,588,436
Foreign currency transactions........... -- 96
--------- ----------
Total................................... $(547,439) $1,588,532
========= ==========
-----------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $1,588,436, of which $3,188,073 related to appreciated securities and
$1,599,637 related to depreciated securities. At June 30, 2000, the aggregate
cost of investments for Federal income tax purposes was $30,939,729.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-----------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 257,710 $ 2,573,280
Shares issued to shareholders in
reinvestment of distributions.......... 18,515 177,746
-------- -----------
Total issued............................ 276,225 2,751,026
Shares redeemed......................... (328,705) (3,271,332)
-------- -----------
Net decrease............................ (52,480) $ (520,306)
======== ===========
-----------------------------------------------------------------
</TABLE>
23
<PAGE> 25
--------------------------------------------------------------------------------
<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>
24
<PAGE> 26
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six-month period ended June 30, 2000, total returns for Basic Value
Focus Fund's Class A and Class B Shares were +0.67% and +0.59%, respectively.
During the same period, the unmanaged Russell 1000 Value Index returned -4.23%.
The Fund's relative outperformance was driven by our energy and healthcare
holdings. New additions to the portfolio came primarily from two
sectors--healthcare and media.
Earlier in the year, we purchased healthcare stocks for a number of reasons.
Hospital management stocks were out of favor as investors feared that full
employment would raise salaries and negatively impact margins. We purchased
Tenet Healthcare Corporation with the expectation that the fears were overrated
and the company was about to enter a period of strong free cash flow generation.
We also purchased the shares of three pharmaceutical companies whose stock
prices were depressed for various reasons. Bristol-Myers Squibb Company
announced a delay in the approval of its major drug, Van-lev. Abbott
Laboratories reported a problem with its manufacturing operations, and Pharmacia
Corporation was experiencing weakness in its agricultural subsidiary. We added
these stocks to the portfolio subsequent to these problems since we welcome the
opportunity to own companies whose valuations are depressed as a result of
short-term problems but have promising long-term growth rates.
We also added a number of media stocks to the portfolio during the six-month
period. Fox Entertainment Group, Inc. stock was suffering from a recent ratings
slide at the Fox Network. However, we chose to focus on the substantial growth
prospects enjoyed by the company's cable networks and television production
studio. USA Networks, Inc. was trading at the lowest valuation level among a
peer group of entertainment companies as a result of the loss of its
highest-rated show. Despite this setback, we believe the company maintains one
of the strongest growth profiles in the industry, thereby creating what to us is
a compelling investment opportunity. Finally, we purchased shares of Comcast
Corporation as cable valuations became depressed in response to overblown
competitive fears. At the same time, cash flow and new cable service uptake
levels remained strong.
For our remaining additions, we utilized a rifle approach to stock selection
as no major industry themes were adopted. We added individual equities from many
different sectors to the portfolio when they encountered operational
difficulties and their stock prices came under pressure. For example, we
purchased Xerox Corporation since it is undergoing a major product and sales
reorganization in order to more effectively compete in the digital age. We added
Ford Motor Company because it was significantly undervalued relative to General
Motors Corp., despite possessing a materially better product portfolio. The
Procter & Gamble Company is currently being negatively impacted by a strong
dollar but owns some of the most important global consumer brands. Phelps Dodge
Corporation is a premier copper company that is trading at recession type
levels. Finally, we added WorldCom Inc., a major global telecommunications
company, to the portfolio subsequent to its announced acquisition of Sprint
Corp.
On the sell side, we eliminated our holdings in stocks such as Motorola, Inc.,
Champion International Corporation, General Motors Corporation and Integrated
Device Technologies, which had reached our price objectives. We also reduced our
exposure to a number of equities that were underperforming our expectations,
including CINergy Corp., Newmont Mining Corp. and National City Corp.
In addition to our overweighting in the healthcare sector, the Fund remains
overweighted in the capital goods sector, particularly in defense stocks that we
feel positive about given higher Governmental spending trends. We are also
overweighted in the energy sector as the stocks continue to be undervalued
relative to the high prices currently being paid for oil and gas. Poor drilling
success over the past few years, coupled with increased demand trends, should
ensure higher prices for quite some time. Despite the addition of WorldCom Inc.
and the purchase of additional shares of AT&T Corp., the Fund is underweighted
in the communications sector. We remain constructive on this industry for the
longer term and expect to utilize the sector's recent weakness to increase our
exposure here.
IN CONCLUSION
In the current environment, the market continues to drift, and trendless
volatility is the norm. Companies that miss earnings expectations will probably
be punished by investors. As contrarians, we are ready to move assets into those
companies that have significantly better long-term growth prospects than stocks
in the traditional value/cyclical arena.
25
<PAGE> 27
--------------------------------------------------------------------------------
IN CONCLUSION
We look forward to upgrading the quality of our portfolio in these uncertain
times and will review our progress with you in our next report to shareholders.
We appreciate your investment in Basic Value Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategy with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Kevin M. Rendino
Kevin M. Rendino
Senior Vice President and Portfolio Manager
July 26, 2000
26
<PAGE> 28
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 - 0.21%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +16.16
--------------------------------------------------------------------------------
Inception (7/01/93) to 6/30/00 +15.44
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS B SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 - 0.35%
--------------------------------------------------------------------------------
Inception (11/03/97) to 6/30/00 +11.19
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 +0.67% -0.21%
-----------------------------------------------------------------------------------------
Class B Shares +0.59 -0.35
-----------------------------------------------------------------------------------------
</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 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.
27
<PAGE> 29
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOW PRICE TO BOOK VALUE
------------------------------------------------------------------------------------------------------------------------
FINANCIALS 1,500,000 Ace Limited................................. $ 42,000,000 3.8%
EXPLORATION & PRODUCTION 650,000 Burlington Resources Inc. .................. 24,862,500 2.3
BANKS 900,000 The CIT Group, Inc. (Class A)............... 14,625,000 1.3
ENTERTAINMENT 400,000 +Fox Entertainment Group, Inc. (Class A).... 12,150,000 1.1
HEALTHCARE 520,100 HCA-The Healthcare Corporation.............. 15,798,037 1.4
COMPUTER HARDWARE 400,000 Harris Corporation.......................... 13,100,000 1.2
COMPUTER SOFTWARE SERVICES 1,300,000 +Inprise Corporation........................ 7,881,250 0.7
AEROSPACE & DEFENSE 900,000 Lockheed Martin Corporation................. 22,331,250 2.1
AEROSPACE & DEFENSE 350,000 Northrop Grumman Corporation................ 23,187,500 2.1
INSURANCE 600,000 The St. Paul Companies, Inc. ............... 20,475,000 1.9
REFINERS 500,000 Sunoco, Inc. ............................... 14,718,750 1.3
ENTERTAINMENT 403,700 +USA Networks, Inc. ........................ 8,730,013 0.8
-------------- -----
219,859,300 20.0
------------------------------------------------------------------------------------------------------------------------
BELOW-AVERAGE PRICE/EARNINGS RATIO
------------------------------------------------------------------------------------------------------------------------
INSURANCE 1,000,000 The Allstate Corporation.................... 22,250,000 2.0
FINANCIALS 800,000 Associates First Capital Corporation (Class
A)........................................ 17,850,000 1.6
BANKS 700,000 Bank One Corporation........................ 18,593,750 1.7
HEALTHCARE 350,010 Becton, Dickinson and Company............... 10,040,912 0.9
AEROSPACE & DEFENSE 400,000 The Boeing Company.......................... 16,725,000 1.5
COMPUTER HARDWARE 800,000 Compaq Computer Corporation................. 20,450,000 1.9
CONTAINERS 1,600,000 Crown Cork & Seal Company, Inc. ............ 24,000,000 2.2
MACHINERY 400,000 Deere & Company............................. 14,800,000 1.3
AUTO 1,100,000 Delphi Automotive Systems Corporation....... 16,018,750 1.5
DRILLERS 700,000 Diamond Offshore Drilling, Inc. ............ 24,587,500 2.2
CHEMICALS 300,000 E.I. du Pont de Nemours and Company......... 13,125,000 1.2
MACHINERY 200,000 Eaton Corporation........................... 13,400,000 1.2
EXPLORATION & PRODUCTION 390,000 El Paso Energy Corporation.................. 19,865,625 1.8
ELECTRICAL EQUIPMENT 250,000 Emerson Electric Co. ....................... 15,093,750 1.4
AUTO 300,000 Ford Motor Company.......................... 12,900,000 1.2
DRILLERS 400,000 Halliburton Company......................... 18,875,000 1.7
CHEMICALS 1,000,000 Hercules Incorporated....................... 14,062,500 1.3
COMPUTER HARDWARE 175,000 International Business Machines
Corporation............................... 19,173,437 1.8
PUBLISHING--NEWSPAPER 400,000 Knight Ridder, Inc. ........................ 21,275,000 1.9
COMPUTER HARDWARE 552,000 Koninklijke (Royal) Philips Electronics NV
(NY Registered Shares).................... 26,220,000 2.4
BANKS 500,000 Mellon Financial Corporation................ 18,218,750 1.7
CHEMICALS 400,000 Potash Corporation of Saskatchewan Inc. .... 22,075,000 2.0
FOOD/BEVERAGE 250,000 The Procter & Gamble Company................ 14,312,500 1.3
DRILLERS 600,000 +Rowan Companies, Inc....................... 18,225,000 1.7
FOOD/BEVERAGE 800,000 Sara Lee Corporation........................ 15,450,000 1.4
HEALTHCARE 600,000 +Tenet Healthcare Corporation............... 16,200,000 1.5
COMPUTER HARDWARE 1,000,000 +Unisys Corporation......................... 14,562,500 1.3
RETAIL 1,000,000 +Venator Group, Inc. ....................... 10,250,000 0.9
AUTO 39,280 +Visteon Corporation........................ 476,269 0.0
COMMUNICATION SERVICES 360,000 +WorldCom, Inc. ............................ 16,515,000 1.5
PHOTOGRAPHY & IMAGING 500,000 Xerox Corporation........................... 10,375,000 1.0
-------------- -----
515,966,243 47.0
------------------------------------------------------------------------------------------------------------------------
ABOVE-AVERAGE YIELD
------------------------------------------------------------------------------------------------------------------------
COMMUNICATION SERVICES 600,000 AT&T Corp. ................................. 18,975,000 1.7
HEALTHCARE 300,000 Abbott Laboratories......................... 13,368,750 1.2
COMMUNICATIONS EQUIPMENT 443,600 Alcatel (ADR)*.............................. 29,499,400 2.7
HEALTHCARE 300,000 Bristol-Myers Squibb Company................ 17,475,000 1.6
PHOTOGRAPHY & IMAGING 46,400 Eastman Kodak Company....................... 2,760,800 0.3
BANKS 600,000 First Union Corporation..................... 14,887,500 1.4
COMMUNICATION SERVICES 400,000 GTE Corporation............................. 24,900,000 2.3
FOOD/BEVERAGE 400,000 General Mills, Inc. ........................ 15,300,000 1.4
BANKS 600,000 National City Corporation................... 10,237,500 0.9
</TABLE>
28
<PAGE> 30
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABOVE-AVERAGE YIELD (CONCLUDED)
------------------------------------------------------------------------------------------------------------------------
MINING & METALS 275,000 Phelps Dodge Corporation.................... $ 10,226,562 0.9%
COMMUNICATION SERVICES 375,000 SBC Communications Inc. .................... 16,218,750 1.5
REAL ESTATE INVESTMENT TRUST 601,694 Simon Property Group, Inc. ................. 13,350,086 1.2
ELECTRICAL EQUIPMENT 900,000 Thomas & Betts Corporation.................. 17,212,500 1.6
EXPLORATION & PRODUCTION 800,000 Unocal Corporation.......................... 26,500,000 2.4
-------------- -----
230,911,848 21.1
------------------------------------------------------------------------------------------------------------------------
SPECIAL SITUATIONS
------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT 76,280 +Agilent Technologies, Inc. ................ 5,625,650 0.5
COMMUNICATION SERVICES 400,000 +Comcast Corporation (Class A).............. 16,225,000 1.5
COMPUTER HARDWARE 200,000 Hewlett-Packard Company..................... 24,975,000 2.3
HEALTHCARE 250,000 Pharmacia Corporation....................... 12,921,875 1.2
-------------- -----
59,747,525 5.5
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
TOTAL STOCKS (COST--$1,061,959,947) 1,026,484,916 93.6
------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SHORT-TERM SECURITIES
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER** $51,580,000 General Electric Capital Corp., 6.90% due
7/03/2000................................. 51,550,342 4.7
10,000,000 National Rural Utilities Cooperative Finance
Corp., 6.65% due 7/14/2000................ 9,974,139 0.9
-------------- -----
61,524,481 5.6
------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 10,000,000 Federal Home Loan Mortgage Corporation,
OBLIGATIONS** 6.41% due 7/11/2000....................... 9,980,414 0.9
------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$71,504,895)......................... 71,504,895 6.5
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$1,133,464,842)...................... 1,097,989,811 100.1
LIABILITIES IN EXCESS OF OTHER ASSETS....... (1,085,531) (0.1)
-------------- -----
NET ASSETS.................................. $1,096,904,280 100.0%
============== =====
------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* American Depositary Receipts (ADR).
** Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown reflect the discount rates paid at the
time of purchase by the Fund.
See Notes to Financial Statements.
29
<PAGE> 31
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$1,133,464,842)..... $1,097,989,811
Receivables:
Securities sold........................................... $11,817,998
Dividends................................................. 2,080,443
Capital shares sold....................................... 329,836 14,228,277
-----------
Prepaid expenses and other assets........................... 72,109
--------------
Total assets................................................ 1,112,290,197
--------------
------------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 12,249,223
Custodian bank............................................ 1,995,980
Investment adviser........................................ 525,339
Capital shares redeemed................................... 383,559
Distributor............................................... 3,310 15,157,411
-----------
Accrued expenses and other liabilities...................... 228,506
--------------
Total liabilities........................................... 15,385,917
--------------
------------------------------------------------------------------------------------------
NET ASSETS.................................................. $1,096,904,280
==============
------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 300,000,000
shares authorized......................................... $ 8,027,390
Class B Shares of Common Stock, $.10 par value, 100,000,000
shares authorized......................................... 196,489
Paid-in capital in excess of par............................ 1,063,214,863
Undistributed investment income--net........................ 9,180,061
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 51,760,508
Unrealized depreciation on investments--net................. (35,475,031)
--------------
NET ASSETS.................................................. $1,096,904,280
==============
------------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $1,070,759,298 and
80,273,898 shares outstanding............................. $ 13.34
==============
Class B--Based on net assets of $26,144,982 and 1,964,894
shares outstanding........................................ $ 13.31
==============
------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
30
<PAGE> 32
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $103,256 foreign withholding tax)......... $ 11,097,595
Interest and discount earned................................ 1,598,899
Other....................................................... 17,664
------------
Total income................................................ 12,714,158
------------
----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 3,214,660
Accounting services......................................... 98,002
Registration fees........................................... 54,973
Printing and shareholder reports............................ 47,332
Professional fees........................................... 40,588
Custodian fees.............................................. 40,472
Distribution fees--Class B.................................. 16,897
Directors' fees and expenses................................ 10,066
Transfer agent fees......................................... 2,457
Pricing services............................................ 1,717
Other....................................................... 6,902
-----------
Expenses.................................................... 3,534,066
------------
Investment income--net...................................... 9,180,092
------------
----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain (loss) from:
Investments--net.......................................... 53,807,308
Foreign currency transactions--net........................ (110) 53,807,198
-----------
Change in unrealized appreciation/depreciation on
investments--net.......................................... (54,499,019)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 8,488,271
============
----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
31
<PAGE> 33
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 9,180,092 $ 14,234,535
Realized gain on investments and foreign currency
transactions--net......................................... 53,807,198 94,705,059
Change in unrealized appreciation/depreciation on
investments--net.......................................... (54,499,019) 45,817,385
-------------- --------------
Net increase in net assets resulting from operations........ 8,488,271 154,756,979
-------------- --------------
------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (2,982) (23,452,307)
Class B................................................... (29) (272,872)
Realized gain on investments--net:
Class A................................................... (24,820,655) (187,394,822)
Class B................................................... (513,862) (1,741,999)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (25,337,528) (212,862,000)
-------------- --------------
------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 51,817,626 362,136,699
-------------- --------------
------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 34,968,369 304,031,678
Beginning of period......................................... 1,061,935,911 757,904,233
-------------- --------------
End of period*.............................................. $1,096,904,280 $1,061,935,911
============== ==============
------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 9,180,061 $ 2,980
============== ==============
------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
32
<PAGE> 34
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--BASIC VALUE FOCUS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN CLASS A
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL --------------------------------------------------------------------
STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000++ 1999++ 1998++ 1997 1996
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 13.60 $ 14.67 $ 15.84 $ 14.74 $ 13.10
---------- ---------- -------- -------- --------
Investment income--net.............................. .11 .22 .19 .19 .17
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............ (.05) 2.37 1.10 2.52 2.37
---------- ---------- -------- -------- --------
Total from investment operations.................... .06 2.59 1.29 2.71 2.54
---------- ---------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ --+ (.38) (.19) (.09) (.18)
Realized gain on investments--net................. (.32) (3.28) (2.27) (1.52) (.72)
---------- ---------- -------- -------- --------
Total dividends and distributions................... (.32) (3.66) (2.46) (1.61) (.90)
---------- ---------- -------- -------- --------
Net asset value, end of period...................... $ 13.34 $ 13.60 $ 14.67 $ 15.84 $ 14.74
========== ========== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. .67%++ 21.12% 9.44% 20.62% 20.69%
========== ========== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .65%* .66% .66% .65% .66%
========== ========== ======== ======== ========
Investment income--net.............................. 1.71%* 1.59% 1.26% 1.36% 1.37%
========== ========== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $1,070,759 $1,042,885 $754,519 $671,325 $524,930
========== ========== ======== ======== ========
Portfolio turnover.................................. 29.12% 86.46% 113.44% 95.52% 68.41%
========== ========== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.01 per share.
++ Aggregate total investment return.
++ Based on average shares outstanding.
See Notes to Financial Statements.
33
<PAGE> 35
--------------------------------------------------------------------------------
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 FOR THE
FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. YEAR ENDED
FOR THE SIX DEC. 31,++ FOR THE PERIOD
MONTHS ENDED ------------------- NOV. 3, 1997+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000++ 1999 1998 TO DEC. 31, 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 13.58 $ 14.65 $ 15.84 $15.89
------- ------- ------- ------
Investment income--net...................................... .11 .21 .16 .01
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net........................ (.06) 2.36 1.10 (.06)
------- ------- ------- ------
Total from investment operations............................ .05 2.57 1.26 (.05)
------- ------- ------- ------
Less dividends and distributions:
Investment income--net.................................... --+++ (.36) (.18) --
Realized gain on investments--net......................... (.32) (3.28) (2.27) --
------- ------- ------- ------
Total dividends and distributions........................... (.32) (3.64) (2.45) --
------- ------- ------- ------
Net asset value, end of period.............................. $ 13.31 $ 13.58 $ 14.65 $15.84
======= ======= ======= ======
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... .59%++ 20.97% 9.28% (.31%)++
======= ======= ======= ======
----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .80%* .81% .82% .82%*
======= ======= ======= ======
Investment income--net...................................... 1.58%* 1.49% 1.12% 1.27%*
======= ======= ======= ======
----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $26,145 $19,051 $ 3,385 $ 348
======= ======= ======= ======
Portfolio turnover.......................................... 29.12% 86.46% 113.44% 95.52%
======= ======= ======= ======
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Aggregate total investment return.
+++ Amount is less than $.01 per share.
++ Based on average shares outstanding.
See Notes to Financial Statements.
34
<PAGE> 36
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price. Short-term securities are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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.
(f) Custodian bank--The Fund recorded an amount payable to the Custodian Bank
reflecting
35
<PAGE> 37
--------------------------------------------------------------------------------
an overnight overdraft resulting from a failed trade, which settled the next
day.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM 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 FAM Distributors, Inc. ("FAMD" or the
"Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLIM 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.
MLIM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $83,157 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 MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $298,848,917 and $306,685,961, respectively.
Net realized gains (losses) for the six months ended June 30, 2000 and net
unrealized losses as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Realized
Gains Unrealized
(Losses) Losses
------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $53,807,308 $(35,475,031)
Foreign currency transactions......... (110) --
----------- ------------
Total................................. $53,807,198 $(35,475,031)
=========== ============
------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized depreciation for Federal income tax purposes
aggregated $35,475,031, of which $132,076,910 related to appreciated securities
and $167,551,941 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was
$1,133,464,842.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$51,817,626 and $362,136,699 for the six months ended June 30, 2000 and the year
ended December 31, 1999, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 4,585,020 $ 59,744,180
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 2,061,764 24,823,637
---------- ------------
Total issued.......................... 6,646,784 84,567,817
Shares redeemed....................... (3,040,616) (40,144,296)
---------- ------------
Net increase.......................... 3,606,168 $ 44,423,521
========== ============
-------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
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 B Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-----------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 600,833 $ 7,947,198
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 42,788 513,891
------- -----------
Total issued........................... 643,621 8,461,089
Shares redeemed........................ (81,590) (1,066,984)
------- -----------
Net increase........................... 562,031 $ 7,394,105
======= ===========
-----------------------------------------------------------------
</TABLE>
36
<PAGE> 38
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Class B Shares for the Year Ended Dollar
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>
37
<PAGE> 39
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six-month period ended June 30, 2000, total returns for Developing
Capital Markets Focus Fund's Class A and Class B Shares were -4.41% and -4.42%,
respectively. The unmanaged Morgan Stanley Capital International Emerging
Markets Free (MSCI EMF) Index had a return of -7.99%. The Fund's outperformance
stemmed largely from its investments in Brazil, Hong Kong, Malaysia and Taiwan.
Weighing against this was the underperformance of our stocks in South Korea.
INVESTMENT OVERVIEW
The six-month period ended June 30, 2000 was more highly volatile than the
-7.99% in the MSCI EMF Index decline suggests. The revaluation of companies in
Internet-related businesses that started in mid-1999 continued into 2000.
Telecommunications, media and technology stocks rallied in tandem with the
NASDAQ on investors' enthusiasm for virtually any stock idea with an Internet
angle. Valuations of some stocks were rising to mimic those in the United
States, but fortunately the "irrational exuberance" for Internet stocks in
emerging markets did not last long. Not surprisingly, when the NASDAQ corrected,
emerging market stocks that were riding on the Internet theme declined. Less
rationally, other issues sold off as well, regardless of their fundamental
vulnerability to higher US rates, slower US growth or unfulfilled US earnings
expectations, the concerns prevailing in investors' minds. From peak to trough
during the six-month period, emerging markets declined 23.21%.
We believe that heightened sensitivity to US technology and Internet stock
movements is temporary, and does not take away from the value in our portfolio
investments. For example, the telecommunications stocks we hold provide
telephony services that are enjoying strong demand growth. Many of these
companies have managers who are mindful of their shareholders' interests. The
valuations of these companies are not excessive and are not yet reflecting the
long-term revenue enhancement from increased Internet usage. Furthermore,
despite their having a more attractive growth profile, the valuations are a
fraction of those in the United States, Japan and major European countries.
Many of the countries in which the Fund is invested, such as China, Russia and
Brazil, are recovering from recession and their earnings are recovering from
lows. With little indication of rising inflation, interest rates in these
countries have potential to decline. In these markets, aggregate earnings
valuations relative to earnings growth are very low, less than half of those
that prevail in the United States. In summary, the technology and Internet
stocks trading on the NASDAQ should not govern the performance of these markets
over time.
In China, cellular phone penetration is still very low, estimated at less than
4%, but the number of subscribers is growing rapidly. It is estimated that the
cellular market will more than double over the next year. This is faster than
the projected growth for regular telephony, although penetration of that sector
is also very low (approximately 12%). The company with the far dominant market
share in mobile telephony is China Mobile (Hong Kong) Limited, our largest
holding in China. Competition will inevitably erode the company's market share
in the coming years as China becomes more integrated into the global economy as
foreign phone companies gain access to the local market and as the Chinese
government itself allows greater competition. Although the cellular market will
be sufficiently large enough to accommodate several competitors, China Mobile
(Hong Kong)'s management is preparing itself by investing to build transmission
facilities and obtain new technology, acquiring cellular assets and offering new
services such as wireless data. The company's plan is to invest more than $10
billion over the next two years.
Russia has enjoyed resurgence in economic performance, owing in large part to
the export benefits of its currency devaluation in 1998 and the higher oil
prices of the past year. Our largest holding in Russia is Surgutneftegaz
(Surgut). The company is currently an oil exploration and production company,
which, through a restructuring exercise with its parent, will become a
vertically integrated oil and gas company. It does not suffer from the cash
collection problem that Russian "blue chips" are notorious for; thus, its
financial strength and cash position may be unique among Russian companies. On
cash generation measures, we believe that Surgut is among the most attractively
valued oil companies in the world.
We maintained a significant weighting in Brazil and, in particular, the
Brazilian telecommunications companies. Brazil's economic recovery is at an
early stage following two years of recession and a devaluation. Although
interest rates are still very high, a decline may occur since
38
<PAGE> 40
--------------------------------------------------------------------------------
inflation is under control. Fundamentals for the region are very positive, as
the devaluation removed some of the economic imbalances. Exports have benefited
from this and from the strength in commodity prices. Fiscal targets are being
met, and the debt profile restructured. We believe that among the markets we
invest in, Brazil has the most room to surprise positively.
The Brazilian cellular industry remains very fragmented as a result of the
privatization of the telephone holding company, Telebras, in 1997. Currently,
there are 19 companies operating in different regions throughout the country.
Stocks such as Telesp Celular Participacoes SA seem very attractively valued in
absolute terms and relative to their counterparts in other countries. These
companies are exhibiting strong and profitable growth. However, what attracts us
most is the potential for a major consolidation in the sector, which could
further boost profitability in companies such as Telesp Celular Participacoes.
IN CONCLUSION
The long-anticipated correction of the NASDAQ has led declines in markets
worldwide and cooled enthusiasm for technology and Internet-related stocks. As a
result, risk-averse investors became wary of the more volatile emerging market
investments. In our view, short-term market volatility does not diminish the
potential for long-term appreciation of our investments.
We thank you for your continuing 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
July 26, 2000
39
<PAGE> 41
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +16.27%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 + 3.28
--------------------------------------------------------------------------------
Inception (5/02/94) through 6/30/00 + 1.35
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS B SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +16.08%
--------------------------------------------------------------------------------
Inception (11/03/97) through 6/30/00 + 3.82
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 -4.41% +16.27%
------------------------------------------------------------------------------------------
Class B Shares -4.42 +16.08
------------------------------------------------------------------------------------------
</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.
40
<PAGE> 42
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
AFRICA INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SOUTH AFRICA BANKING 453,024 FirstRand Limited....................... $ 467,056 0.4%
19,772 Nedcor Limited.......................... 415,270 0.4
43,318 Standard Bank Investment Corporation
Limited............................... 169,311 0.2
------------ -----
1,051,637 1.0
-----------------------------------------------------------------------------------------------------
BEVERAGES 51,075 +South African Breweries PLC............ 381,179 0.4
16 +South African Breweries PLC (ADR)(a)... 119 0.0
------------ -----
381,298 0.4
-----------------------------------------------------------------------------------------------------
CONTAINERS & 125,161 Nampak Limited.......................... 270,444 0.2
PACKAGING
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 38,790 Rembrandt Group Limited................. 374,741 0.4
FINANCIALS
-----------------------------------------------------------------------------------------------------
FOOD & DRUG 542,743 Metro Cash and Carry Limited............ 336,212 0.3
RETAILING
73,637 Pepkor Limited.......................... 265,006 0.3
------------ -----
601,218 0.6
-----------------------------------------------------------------------------------------------------
IT CONSULTING & 112,029 +Dimension Data Holdings Limited........ 926,966 0.9
SERVICES
-----------------------------------------------------------------------------------------------------
INSURANCE 28,532 Liberty Life Association of Africa
Limited............................... 271,433 0.3
146,932 +Sanlam Limited......................... 173,588 0.1
------------ -----
445,021 0.4
-----------------------------------------------------------------------------------------------------
METALS & MINING 10,710 +Anglo American PLC..................... 508,962 0.5
17,877 AngloGold Limited (ADR)(a).............. 367,596 0.3
37,635 De Beers (ADR)(a)....................... 912,649 0.9
251,449 Gencor Limited.......................... 723,194 0.7
20,816 Impala Platinum Holdings Limited........ 774,306 0.8
154 Iscor Limited........................... 262 0.0
------------ -----
3,286,969 3.2
-----------------------------------------------------------------------------------------------------
MULTILINE RETAIL 8,527 Edgars Consolidated Stores Limited...... 81,749 0.1
-----------------------------------------------------------------------------------------------------
OIL & GAS 38,600 Sasol Limited........................... 259,041 0.2
-----------------------------------------------------------------------------------------------------
WIRELESS 99,200 M-Cell Limited.......................... 480,637 0.5
TELECOMMUNICATION
SERVICES
---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AFRICA
(COST--$7,873,569) 8,159,721 7.9
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EUROPE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CZECH BANKING 21,647 +Komercni Banka AS...................... 439,172 0.4
-----------------------------------------------------------------------------------------------------
REPUBLIC DIVERSIFIED 22,659 +SPT Telecom AS......................... 383,981 0.4
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE CZECH REPUBLIC 823,153 0.8
---------------------------------------------------------------------------------------------------------------------------
GREECE BANKING 7,952 Alpha Credit Bank....................... 314,956 0.3
-----------------------------------------------------------------------------------------------------
BEVERAGES 8,007 +Hellenic Bottling Co. ................. 127,819 0.1
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 88,944 Hellenic Telecommunication Organization
TELECOMMUNICATION SA (OTE) (ADR)(a)..................... 1,084,005 1.1
SERVICES
-----------------------------------------------------------------------------------------------------
WIRELESS 69,357 +Panafon Hellenic Telecom Co. .......... 789,426 0.8
TELECOMMUNICATION
SERVICES
26,680 +STET Hellas Telecommunications SA
(ADR)(a).............................. 530,265 0.5
------------ -----
1,319,691 1.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GREECE 2,846,471 2.8
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 43
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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 10,676 OTP Bank Rt. (GDR)(b)................... $ 539,138 0.5%
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 170,058 Magyar Tavkozlesi Rt.--Matav............ 1,187,902 1.2
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
OIL & GAS 27,036 +MOL Magyar Olaj-es Gazipari Rt.
(GDR)(b).............................. 369,041 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HUNGARY 2,096,081 2.0
---------------------------------------------------------------------------------------------------------------------------
POLAND BANKING 11,894 +Bank Polska Kasa Opieki Grupa
Pekao SA.............................. 143,110 0.2
8,665 Bank Rozwoju Eksportu SA (BRE).......... 268,605 0.2
24,449 Wielkopolski Bank Kredytowy SA.......... 142,596 0.2
------------ -----
554,311 0.6
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 27,812 Telekomunikacja Polska SA............... 199,250 0.2
TELECOMMUNICATION
SERVICES
31,550 Telekomunikacja Polska SA (GDR)(b)...... 216,118 0.2
------------ -----
415,368 0.4
-----------------------------------------------------------------------------------------------------
TRADING COMPANIES 10,667 +Elektrim Spolka Akcyjna SA............. 122,468 0.1
& DISTRIBUTORS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN POLAND 1,092,147 1.1
---------------------------------------------------------------------------------------------------------------------------
RUSSIA DIVERSIFIED 493,800 Bashinformsvyaz......................... 31,109 0.0
TELECOMMUNICATION
SERVICES
49,457 Nizhegorodsvyazinform................... 49,457 0.1
6,000 Tyumentelecom........................... 5,700 0.0
------------ -----
86,266 0.1
-----------------------------------------------------------------------------------------------------
ELECTRIC 199,692 Bashkirenergo........................... 9,985 0.0
UTILITIES
275,000 Irkutskenergo........................... 19,250 0.0
4,187,300 RAO Unified Energy Systems.............. 481,539 0.5
------------ -----
510,774 0.5
-----------------------------------------------------------------------------------------------------
ELECTRICAL 32,000 +Lenenergo.............................. 6,400 0.0
COMPONENTS &
DISTRIBUTION
-----------------------------------------------------------------------------------------------------
OIL & GAS 14,880 LUKoil Holding (ADR)(a)................. 760,666 0.8
74,061 Surgutneftegaz (ADR)(a)................. 962,793 0.9
------------ -----
1,723,459 1.7
-----------------------------------------------------------------------------------------------------
WIRELESS 7,700 +Mobile Telesystems (ADR)(a)............ 172,288 0.1
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN RUSSIA 2,499,187 2.4
---------------------------------------------------------------------------------------------------------------------------
SPAIN IT CONSULTING & 1,100 +Terra Networks, SA..................... 42,706 0.0
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 42,706 0.0
---------------------------------------------------------------------------------------------------------------------------
TURKEY BANKING 56,334,975 +Turkiye Garanti Bankasi AS............. 682,021 0.6
137,905,452 +Yapi ve Kredi Bankasi AS............... 1,535,993 1.5
------------ -----
2,218,014 2.1
-----------------------------------------------------------------------------------------------------
BEVERAGES 3,415,043 Ege Biracilik Ve Malt Sanayii AS........ 223,259 0.2
-----------------------------------------------------------------------------------------------------
FOOD & DRUG 1,819,314 Migros Turk T.A.S. ..................... 337,726 0.4
RETAILING
-----------------------------------------------------------------------------------------------------
HOUSEHOLD 1,058,000 +Vestel Elektronik Sanayi ve Ticaret
DURABLES AS.................................... 320,218 0.3
-----------------------------------------------------------------------------------------------------
INDUSTRIAL 10,522,000 +Dogan Sirketler Grubu Holding A.S. .... 254,770 0.2
CONGLOMERATES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TURKEY 3,353,987 3.2
---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EUROPE
(COST--$12,974,840) 12,753,732 12.3
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 44
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN SHARES HELD/ PERCENT OF
AMERICA INDUSTRY FACE AMOUNT INVESTMENTS VALUE NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARGENTINA OIL & GAS 24,757 PC Holdings SA (ADR)(a)................. $ 453,363 0.4%
-----------------------------------------------------------------------------------------------------
REAL ESTATE 8,111 IRSA Inversiones y Representaciones SA
(GDR)(b).............................. 185,539 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ARGENTINA 638,902 0.6
---------------------------------------------------------------------------------------------------------------------------
BRAZIL BANKING 11,783 +Uniao de Bancos Brasileiros SA
(Unibanco) (GDR)(b)................... 338,761 0.3
-----------------------------------------------------------------------------------------------------
BEVERAGES 1,413,065 Companhia Cervejaria Brahma
(Preferred)........................... 1,198,442 1.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 89,844,900 Embratel Participacoes SA............... 1,673,386 1.6
TELECOMMUNICATION
SERVICES
105,075 Embratel Participacoes SA (ADR)(a)...... 2,482,397 2.4
1,423 +Tele Centro Sul Participacoes SA
(ADR)(a).............................. 103,968 0.1
25,156 Telefonica SA........................... 542,581 0.5
7,544 +Telefonica SA (ADR)(a)................. 483,302 0.5
------------ -----
5,285,634 5.1
-----------------------------------------------------------------------------------------------------
ELECTRIC 60,078,608 Companhia Energetica de Minas Gerais
UTILITIES SA--CEMIG (Preferred)................. 1,049,044 1.0
-----------------------------------------------------------------------------------------------------
ENERGY SOURCES 22,090 +Companhia Paranaense de Energia--Copel
(ADR)(a).............................. 205,713 0.2
-----------------------------------------------------------------------------------------------------
FOOD & DRUG 18,209 Companhia Brasileira de Distribuicao
RETAILING Grupo Pao de Acucar (ADR)(a).......... 584,964 0.6
-----------------------------------------------------------------------------------------------------
METALS & MINING 28,589 Companhia Vale do Rio Doce 'A'
(Preferred)........................... 806,641 0.8
Brl 10,296 Companhia Vale do Rio Doce, 0% due
12/31/2049(d)......................... 0 0.0
------------ -----
806,641 0.8
-----------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 393,375 Itausa-Investimentos Itau SA
(Preferred)........................... 381,600 0.4
-----------------------------------------------------------------------------------------------------
OIL & GAS 46,003 Petroleo Brasileiro SA--Petrobras
(Preferred)........................... 1,389,783 1.3
-----------------------------------------------------------------------------------------------------
PAPER & FOREST 16,100 Aracruz Celulose SA (ADR)(a)............ 310,931 0.3
PRODUCTS
-----------------------------------------------------------------------------------------------------
WIRELESS 1,574,000 Celular CRT Participacoes SA
TELECOMMUNICATION (Preferred)........................... 689,279 0.6
SERVICES
25,881,000 +Tele Celular Sul Participacoes SA...... 91,100 0.1
55,350 +Tele Centro Oeste Celular Participacoes
SA (ADR)(a)........................... 664,200 0.7
2,800 +Tele Leste Celular Participacoes SA
(ADR)(a).............................. 123,900 0.1
1,200 +Tele Nordeste Celular Participacoes SA
(ADR)(a).............................. 83,100 0.1
25,832 +Tele Norte Leste Participacoes SA
(ADR)(a).............................. 610,281 0.6
45,757,321 Telemig Celular Participacoes SA........ 147,113 0.1
3,450 Telesp Celular Participacoes SA
(ADR)(a).............................. 154,819 0.2
------------ -----
2,563,792 2.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 14,115,305 13.7
---------------------------------------------------------------------------------------------------------------------------
MEXICO BANKING 79,500 +Grupo Financiero Banamex Accival, SA de
CV (Banacci) 'O'...................... 333,555 0.3
796,700 +Grupo Financiero Bancomer, SA de CV
'O'................................... 404,683 0.4
------------ -----
738,238 0.7
-----------------------------------------------------------------------------------------------------
BEVERAGES 74,874 Panamerican Beverages, Inc. 'A' (US
Registered Shares).................... 1,118,430 1.1
-----------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 45
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LATIN
AMERICA SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MEXICO CONSTRUCTION 36,272 Cemex, SA de CV (ADR)(a)................ $ 847,870 0.8%
(CONCLUDED) MATERIAL
2,000 Cemex, SA de CV (Warrants)(e)........... 1,036 0.0
------------ -----
848,906 0.8
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 41,819 +Grupo Carso SA de CV 'A1'.............. 146,569 0.1
FINANCIALS
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 36,244 Telefonos de Mexico SA (ADR)(a)......... 2,070,439 2.0
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 160,937 +Grupo Industrial Bimbo SA de CV 'A'.... 253,418 0.3
444,383 Grupo Industrial Maseca SA de CV 'B'.... 209,472 0.2
------------ -----
462,890 0.5
-----------------------------------------------------------------------------------------------------
MACHINERY 23,766 Tubos de Acero de Mexico SA (ADR)(a).... 329,753 0.3
-----------------------------------------------------------------------------------------------------
MEDIA 21,178 +Grupo Televisa SA (GDR)(b)............. 1,459,958 1.4
684,600 TV Azteca, SA de CV..................... 556,387 0.6
104,640 TV Azteca, SA de CV (ADR)(a)............ 1,379,940 1.3
------------ -----
3,396,285 3.3
-----------------------------------------------------------------------------------------------------
MERCHANDISING 104,250 Grupo Elektra, SA de CV................. 104,425 0.1
-----------------------------------------------------------------------------------------------------
MULTILINE RETAIL 18,431 +Grupo Sanborns SA 'B1'................. 29,771 0.0
-----------------------------------------------------------------------------------------------------
PAPER & FOREST 313,727 Kimberly-Clark de Mexico, SA de CV
PRODUCTS 'A'................................... 887,621 0.9
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 10,133,327 9.8
---------------------------------------------------------------------------------------------------------------------------
VENEZUELA DIVERSIFIED 8,140 Compania Anonima Nacional Telefonos de
TELECOMMUNICATION Venezuela (CANTV)(ADR)(a)............. 221,306 0.2
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN VENEZUELA 221,306 0.2
---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LATIN AMERICA
(COST--$19,760,031) 25,108,840 24.3
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MIDDLE
EAST
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EGYPT BANKING 15,209 +Commercial International Bank
(GDR)(b).............................. 159,694 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN EGYPT 159,694 0.2
---------------------------------------------------------------------------------------------------------------------------
ISRAEL BANKING 187,218 Bank Hapoalim........................... 542,900 0.5
248,093 Bank Leumi Le-Israel.................... 512,227 0.5
------------ -----
1,055,127 1.0
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS 9,000 ECI Telecom Limited (US Registered
EQUIPMENT Shares)............................... 320,625 0.3
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 71,966 Bezeq Israeli Telecommunication
TELECOMMUNICATION Corporation Ltd. ..................... 400,986 0.4
SERVICES
-----------------------------------------------------------------------------------------------------
IT CONSULTING & 4,630 +Check Point Software Technologies
SERVICES Ltd. ................................. 982,717 0.9
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 10,700 Teva Pharmaceutical Industries Ltd.
(ADR)(a).............................. 593,181 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ISRAEL 3,352,636 3.2
---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE MIDDLE EAST
(COST--$2,736,583) 3,512,330 3.4
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 46
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC SHARES PERCENT OF
BASIN/ASIA INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHINA CHEMICALS 16,020 Beijing Yanhua Petrochemical Company
Ltd. (ADR)(a)......................... $ 88,110 0.1%
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS 273,000 Eastern Communication Co., Ltd. 'B'..... 239,148 0.3
EQUIPMENT
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 16,066 +China Mobile (Hong Kong) Limited
TELECOMMUNICATION (ADR)(a).............................. 2,856,736 2.8
SERVICES
27,700 +China Unicom Limited (ADR)(a).......... 588,625 0.5
------------ -----
3,445,361 3.3
-----------------------------------------------------------------------------------------------------
ELECTRIC 906,000 Beijing Datang Power Generation Company
UTILITIES Limited 'H'........................... 203,392 0.2
32,073 Huaneng Power International, Inc.
(ADR)(a).............................. 426,972 0.4
------------ -----
630,364 0.6
-----------------------------------------------------------------------------------------------------
INTERNET SOFTWARE 500 +AsianInfo Holdings, Inc. .............. 22,344 0.0
& SERVICES
-----------------------------------------------------------------------------------------------------
MACHINERY 1,247,000 Qingling Motor Company 'H'.............. 142,372 0.2
-----------------------------------------------------------------------------------------------------
OIL & GAS 21,000 +PetroChina Company Limited (ADR)(a).... 439,688 0.4
-----------------------------------------------------------------------------------------------------
SOFTWARE 170,000 +Founder Holdings Limited............... 75,783 0.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHINA 5,083,170 4.9
---------------------------------------------------------------------------------------------------------------------------
HONG KONG CHEMICALS 10,407,000 Jilin Chemical Industrial Company
Limited 'H'........................... 634,142 0.6
-----------------------------------------------------------------------------------------------------
CONSTRUCTION 5,074,370 +Anhui Conch Cement Co. Ltd. 'H'........ 410,100 0.4
MATERIAL
-----------------------------------------------------------------------------------------------------
INTERNET SOFTWARE 5,400 +SINA.com............................... 137,025 0.2
& SERVICES
-----------------------------------------------------------------------------------------------------
MEDIA 14,880 +i-CABLE Communications Limited
(ADR)(a).............................. 114,390 0.1
-----------------------------------------------------------------------------------------------------
REAL ESTATE 69,000 Hongkong Land Holdings Limited.......... 110,400 0.1
80,000 Hysan Development Company Limited....... 84,153 0.1
------------ -----
194,553 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HONG KONG 1,490,210 1.5
---------------------------------------------------------------------------------------------------------------------------
INDIA BANKING 59,779 State Bank of India..................... 302,893 0.3
-----------------------------------------------------------------------------------------------------
CHEMICALS 81,140 +Reliance Industries Ltd. .............. 619,187 0.6
2,333 +Reliance Industries Ltd. (GDR)(b)...... 48,410 0.1
------------ -----
667,597 0.7
-----------------------------------------------------------------------------------------------------
CONSTRUCTION & 25,014 Larsen & Toubro Ltd. ................... 138,137 0.2
ENGINEERING
7,060 Larsen & Toubro Ltd. (GDR)(b)........... 75,895 0.0
------------ -----
214,032 0.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 274,706 +ICICI Ltd. ............................ 771,434 0.8
FINANCIALS
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 35,618 Videsh Sanchar Nigam Ltd. (GDR)(b)...... 543,174 0.5
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
HOUSEHOLD 14,102 Hindustan Lever Limited................. 895,365 0.8
PRODUCTS
-----------------------------------------------------------------------------------------------------
IT CONSULTING & 6,687 +Infosys Technologies Limited........... 1,245,244 1.2
SERVICES
10,301 Satyam Computer Services Limited........ 687,686 0.6
11,293 Satyam Computer Services Limited (New
Shares)............................... 753,912 0.8
------------ -----
2,686,842 2.6
-----------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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>
INDIA INTERNET SOFTWARE 26,500 +Pentamedia Graphics Ltd. .............. $ 349,369 0.3%
(CONCLUDED) & SERVICES
-----------------------------------------------------------------------------------------------------
METALS & MINING 52,709 Hindalco Industries Ltd. ............... 931,707 0.9
2,048 Hindalco Industries Ltd. (GDR)(b)....... 39,424 0.0
------------ -----
971,131 0.9
-----------------------------------------------------------------------------------------------------
OIL & GAS 20,818 Bharat Petroleum Corporation Ltd. ...... 89,871 0.1
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 1,371 Ranbaxy Laboratories Limited (GDR)(b)... 21,593 0.0
-----------------------------------------------------------------------------------------------------
SOFTWARE 5,818 Wipro Limited........................... 377,687 0.4
-----------------------------------------------------------------------------------------------------
TOBACCO 22,540 ITC Limited............................. 400,949 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDIA 8,291,937 8.0
---------------------------------------------------------------------------------------------------------------------------
INDONESIA BANKING 19,558,000 +PT Bank Internasional Indonesia........ 223,456 0.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 12,120 PT Indosat (Persero) Tbk (ADR)(a)....... 137,865 0.2
TELECOMMUNICATION
SERVICES
1,065,000 PT Telekomunikasi Indonesia............. 374,165 0.3
------------ -----
512,030 0.5
-----------------------------------------------------------------------------------------------------
PAPER & FOREST 1,038,000 +PT Indah Kiat Pulp & Paper Corporation
PRODUCTS Tbk................................... 210,506 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN INDONESIA 945,992 0.9
---------------------------------------------------------------------------------------------------------------------------
MALAYSIA BANKING 71,100 AMMB Holdings Berhad.................... 237,624 0.3
176,600 Malayan Banking Berhad.................. 715,695 0.7
172,600 Public Bank Berhad 'Foreign'............ 172,600 0.1
------------ -----
1,125,919 1.1
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 463,000 Telekom Malaysia Berhad................. 1,596,132 1.6
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRIC 358,000 Tenaga Nasional Berhad.................. 1,168,211 1.1
UTILITIES
-----------------------------------------------------------------------------------------------------
HOTELS, 204,000 Resorts World Berhad.................... 558,316 0.5
RESTAURANTS &
LEISURE
-----------------------------------------------------------------------------------------------------
SEMICONDUCTOR 31,000 Malaysian Pacific Industries Berhad..... 318,158 0.3
EQUIPMENT &
PRODUCTS
12,100 Unisem (M) Berhad....................... 85,974 0.1
------------ -----
404,132 0.4
-----------------------------------------------------------------------------------------------------
TOBACCO 71,800 British American Tobacco Berhad......... 585,737 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MALAYSIA 5,438,447 5.3
---------------------------------------------------------------------------------------------------------------------------
PHILIPPINES ELECTRIC 236,304 Manila Electric Company 'B'............. 347,104 0.3
UTILITIES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PHILIPPINES 347,104 0.3
---------------------------------------------------------------------------------------------------------------------------
SINGAPORE SEMICONDUCTOR 28,474 +St Assembly Test Services Limited
EQUIPMENT & (ADR)(a).............................. 729,646 0.7
PRODUCTS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SINGAPORE 729,646 0.7
---------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA AUTOMOBILES 20,195 Hyundai Motor Company Ltd. ............. 258,997 0.2
-----------------------------------------------------------------------------------------------------
BANKING 24,294 +Housing & Commercial Bank, Korea....... 568,663 0.6
37,435 Kookmin Bank............................ 476,740 0.4
16,350 Shinhan Bank............................ 153,965 0.2
------------ -----
1,199,368 1.2
-----------------------------------------------------------------------------------------------------
CHEMICALS 6,970 Honam Petrochemical Corporation......... 46,695 0.1
18,260 L.G. Chemical Limited................... 365,192 0.3
------------ -----
411,887 0.4
-----------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 48
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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>
SOUTH KOREA DIVERSIFIED 16,330 +Daewoo Securities...................... $ 87,580 0.1%
(CONCLUDED) FINANCIALS
6,843 Dongwon Securities...................... 49,342 0.1
12,498 Hyundai Securities...................... 124,413 0.1
4,990 LG Investment & Securities Company
Limited............................... 64,891 0.0
9,213 Samsung Securities Company Ltd. ........ 202,434 0.2
------------ -----
528,660 0.5
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 6,644 Korea Telecom Corporation (ADR)(a)...... 321,404 0.3
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRIC 62,300 Korea Electric Power Corporation........ 1,933,212 1.9
UTILITIES
-----------------------------------------------------------------------------------------------------
ELECTRONIC 2,023 Samsung Display Devices Co., Ltd. ...... 97,066 0.1
EQUIPMENT &
INSTRUMENTS
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 3,324 Cheil Jedang Corporation................ 152,334 0.2
572 Cheil Jedang Corporation (3rd
Preferred)............................ 8,310 0.0
770 Cheil Jedang Corporation (Preferred).... 11,256 0.0
------------ -----
171,900 0.2
-----------------------------------------------------------------------------------------------------
INTERNET SOFTWARE 8,170 +Haansoft Inc. ......................... 132,256 0.1
& SERVICES
-----------------------------------------------------------------------------------------------------
METALS & MINING 17,186 Pohang Iron & Steel Company Ltd.
(ADR)(a).............................. 412,464 0.4
-----------------------------------------------------------------------------------------------------
OIL & GAS 10,860 SK Corporation.......................... 199,177 0.2
-----------------------------------------------------------------------------------------------------
SEMICONDUCTOR 16,729 Samsung Electronics..................... 5,536,200 5.4
EQUIPMENT &
PRODUCTS
-----------------------------------------------------------------------------------------------------
WIRELESS 19,150 +Hansol M.com Co., Ltd.(c).............. 370,969 0.3
TELECOMMUNICATION
SERVICES
7,700 +Korea Telecom Freetel.................. 513,092 0.5
36,993 SK Telecom Co. Ltd. (ADR)(a)(c)......... 1,343,308 1.3
------------ -----
2,227,369 2.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH KOREA 13,429,960 13.0
---------------------------------------------------------------------------------------------------------------------------
TAIWAN BANKING 321,000 +Bank Sinopac........................... 206,357 0.2
1,952,706 +E. Sun Commercial Bank................. 824,194 0.8
156,000 United World Chinese Commercial Bank.... 147,896 0.1
------------ -----
1,178,447 1.1
-----------------------------------------------------------------------------------------------------
CHEMICALS 565,113 +Formosa Plastic Corporation............ 1,064,174 1.1
-----------------------------------------------------------------------------------------------------
COMPUTERS & 75,000 +Acer Inc. ............................. 140,016 0.1
PERIPHERALS
100,480 Asustek Computer Inc. .................. 828,634 0.8
111,381 Compal Electronics Inc. ................ 273,027 0.2
273,000 +First International Computer Inc. ..... 255,273 0.3
81,200 Quanta Computer Inc. ................... 403,364 0.4
------------ -----
1,900,314 1.8
-----------------------------------------------------------------------------------------------------
CONSTRUCTION 115,800 Asia Cement Corporation................. 75,195 0.1
MATERIAL
119,300 Taiwan Cement Corporation............... 94,510 0.1
------------ -----
169,705 0.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 270,600 +China Development Industrial Bank
FINANCIALS Inc. ................................. 360,214 0.4
-----------------------------------------------------------------------------------------------------
ELECTRICAL 303,000 +Pacific Electrical Wire & Cable Co.
EQUIPMENT Ltd. ................................. 242,006 0.2
-----------------------------------------------------------------------------------------------------
ELECTRONIC 105,600 +Chroma Ate Inc. ....................... 236,571 0.2
EQUIPMENT &
INSTRUMENTS
-----------------------------------------------------------------------------------------------------
INSURANCE 136,640 Cathay Life Insurance Co., Ltd. ........ 314,982 0.3
-----------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 49
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC
BASIN/ASIA SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TAIWAN INTERNET SOFTWARE 2,800 +GigaMedia Ltd. ........................ $ 33,600 0.0%
(CONCLUDED) & SERVICES
-----------------------------------------------------------------------------------------------------
SEMICONDUCTOR 194,600 +Mosel Vitelic, Inc. ................... 486,500 0.5
EQUIPMENT &
PRODUCTS
752,867 +Taiwan Semiconductor Manufacturing
Company............................... 3,568,786 3.3
496,800 +United Microelectronics Corporation,
Ltd. ................................. 1,379,104 1.4
451,112 +Vanguard International Semiconductor
Corporation........................... 783,587 0.8
------------ -----
6,217,977 6.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TAIWAN 11,717,990 11.3
---------------------------------------------------------------------------------------------------------------------------
THAILAND BANKING 238,400 +Bangkok Bank Public Company Limited
'Foreign'............................. 291,732 0.3
69,000 +Siam Commercial Bank Public Company
Limited (Registered).................. 38,700 0.1
457,000 Siam Commercial Bank Public Company
Limited (Warrants)(e)................. 53,593 0.0
387,900 +Thai Farmers Bank Public Company
Limited 'Foreign'..................... 326,340 0.3
------------ -----
710,365 0.7
-----------------------------------------------------------------------------------------------------
COMPUTERS & 69,500 +Shin Corporations Public Company
PERIPHERALS Limited (Foreign)..................... 364,997 0.3
-----------------------------------------------------------------------------------------------------
CONSTRUCTION 12,926 +The Siam Cement Public Company
MATERIAL Limited............................... 242,538 0.3
-----------------------------------------------------------------------------------------------------
MEDIA 69,540 BEC World Public Company Limited
'Foreign'............................. 407,755 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THAILAND 1,725,655 1.7
---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PACIFIC
BASIN/ASIA (COST--$43,899,619) 49,200,111 47.6
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE SHORT-TERM
AMOUNT SECURITIES ISSUE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER* $2,083,000 General Motors Acceptance Corp., 7.13%
due 7/03/2000......................... 2,081,762 2.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES (COST--$2,081,762) 2,081,762 2.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$89,326,404)... 100,816,496 97.5
OTHER ASSETS LESS LIABILITIES........... 2,589,668 2.5
------------ -----
NET ASSETS.............................. $103,406,164 100.0%
============ =====
---------------------------------------------------------------------------------------------------------------------------
</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 June
30, 2000, 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 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.
48
<PAGE> 50
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$89,326,404)........ $100,816,496
Foreign cash................................................ 4,125,754
Receivables:
Securities sold........................................... $1,115,916
Dividends................................................. 340,044
Capital shares sold....................................... 94,869 1,550,829
----------
Prepaid expenses and other assets........................... 16,686
------------
Total assets................................................ 106,509,765
------------
---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 2,540,867
Investment adviser........................................ 79,702
Capital shares redeemed................................... 24,541
Distributor............................................... 289 2,645,399
----------
Accrued expenses and other liabilities...................... 458,202
------------
Total liabilities........................................... 3,103,601
------------
---------------------------------------------------------------------------------------
NET ASSETS.................................................. $103,406,164
============
---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares Common Stock, $.10 par value,100,000,000
shares authorized......................................... $ 1,025,641
Class B Shares Common Stock, $.10 par value,100,000,000
shares authorized......................................... 24,929
Paid-in capital in excess of par............................ 126,387,622
Undistributed investment income--net........................ 224,050
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (35,639,620)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 11,383,542
------------
NET ASSETS.................................................. $103,406,164
============
---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $100,956,476 and 10,256,408
shares outstanding........................................ $ 9.84
============
Class B--Based on net assets of $2,449,688 and 249,290
shares outstanding........................................ $ 9.83
============
---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
49
<PAGE> 51
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $107,994 withholding tax on foreign
dividends)................................................ $ 1,312,710
Interest and discount earned................................ 128,972
------------
Total income................................................ 1,441,682
------------
-----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 546,890
Custodian fees.............................................. 236,796
Professional fees........................................... 10,261
Accounting services......................................... 6,911
Printing and shareholder reports............................ 5,785
Transfer agent fees......................................... 3,196
Distribution fees--Class B.................................. 1,412
Directors' fees and expenses................................ 1,084
Pricing services............................................ 434
Other....................................................... 1,733
------------
Total expenses before reimbursement......................... 814,502
Reimbursement of expenses................................... (127,031)
------------
Total expenses after reimbursement.......................... 687,471
------------
Investment income--net...................................... 754,211
------------
-----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain from:
Investments--net.......................................... 12,095,821
Foreign currency transactions--net........................ 19,678 12,115,499
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (17,599,731)
Foreign currency transactions--net........................ (107,879) (17,707,610)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (4,837,900)
============
-----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
50
<PAGE> 52
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 754,211 $ 1,131,275
Realized gain (loss) on investments and foreign currency
transactions--net......................................... 12,115,499 (264,395)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (17,707,610) 39,825,770
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (4,837,900) 40,692,650
------------ ------------
------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (524,875) (2,102,112)
Class B................................................... (8,626) (11,709)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (533,501) (2,113,821)
------------ ------------
------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 385,910 5,260,179
------------ ------------
------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (4,985,491) 43,839,008
Beginning of period......................................... 108,391,655 64,552,647
------------ ------------
End of period*.............................................. $103,406,164 $108,391,655
============ ============
------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 224,050 $ 3,340
============ ============
------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
51
<PAGE> 53
--------------------------------------------------------------------------------
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 CLASS A
FINANCIAL STATEMENTS. ------------------------------------------------------------------
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000+ 1999+ 1998+ 1997 1996
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 10.34 $ 6.43 $ 9.22 $ 10.05 $ 9.32
-------- -------- -------- -------- -------
Investment income--net.......................... .07 .11 .18 .11 .20
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net............................. (.52) 4.01 (2.86) (.75) .76
-------- -------- -------- -------- -------
Total from investment operations................ (.45) 4.12 (2.68) (.64) .96
-------- -------- -------- -------- -------
Less dividends from investment income--net...... (.05) (.21) (.11) (.19) (.23)
-------- -------- -------- -------- -------
Net asset value, end of period.................. $ 9.84 $ 10.34 $ 6.43 $ 9.22 $ 10.05
======== ======== ======== ======== =======
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............. (4.41%)++ 65.52% (29.39%) (6.53%) 10.59%
======== ======== ======== ======== =======
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................. 1.25%* 1.25% 1.25% 1.25% 1.25%
======== ======== ======== ======== =======
Expenses........................................ 1.48%* 1.67% 1.42% 1.42% 1.31%
======== ======== ======== ======== =======
Investment income--net.......................... 1.38%* 1.47% 2.30% 1.15% 2.42%
======== ======== ======== ======== =======
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $100,956 $107,079 $ 64,312 $141,451 $95,599
======== ======== ======== ======== =======
Portfolio turnover.............................. 30.77% 97.79% 121.06% 93.62% 87.33%
======== ======== ======== ======== =======
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
52
<PAGE> 54
--------------------------------------------------------------------------------
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
FOR THE SIX DEC. 31, FOR THE PERIOD
MONTHS ENDED --------------------- NOV. 3, 1997+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000++ 1999++ 1998++ TO DEC. 31, 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $10.33 $ 6.42 $ 9.22 $ 9.30
------ ------ ------- ------
Investment income--net.................................. .07 .07 .17 .01
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net.................... (.52) 4.04 (2.86) (.09)
------ ------ ------- ------
Total from investment operations........................ (.45) 4.11 (2.69) (.08)
------ ------ ------- ------
Less dividends from investment income--net.............. (.05) (.20) (.11) --
------ ------ ------- ------
Net asset value, end of period.......................... $ 9.83 $10.33 $ 6.42 $ 9.22
====== ====== ======= ======
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................... (4.42%)++ 65.38% (29.51%) (.86%)++
====== ====== ======= ======
---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................... 1.44%* 1.40% 1.40% 1.39%*
====== ====== ======= ======
Expenses................................................ 1.64%* 1.87% 1.72% 1.58%*
====== ====== ======= ======
Investment income--net.................................. 1.30%* .83% 2.37% 1.16%*
====== ====== ======= ======
---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................ $2,450 $1,313 $ 241 $ 32
====== ====== ======= ======
Portfolio turnover...................................... 30.77% 97.79% 121.06% 93.62%
====== ====== ======= ======
---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment return excludes insurance-related fees and expenses. If
applicable, the Company's Investment Adviser voluntarily waived a portion of
its management fee. Without such waiver, the Fund's performance would have
been lower.
+ Commencement of operations.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
53
<PAGE> 55
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DEVELOPING CAPITAL MARKETS FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that as of June 30, 2000 was comprised of 19
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 accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments, which are, in the
opinion of management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal, recurring
nature. The following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Futures contracts are valued at the
settlement price at the close of the applicable exchange. Short-term securities
are valued at amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
54
<PAGE> 56
--------------------------------------------------------------------------------
value of the contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the time it
was closed.
- Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets and liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of premium and discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM 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 FAM Distributors, Inc. ("FAMD" or the
"Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA. For
the six months ended June 30, 2000, MLIM earned fees of $546,890, of which
$127,031 was voluntarily waived.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $32,118 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 MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
55
<PAGE> 57
--------------------------------------------------------------------------------
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $31,658,291 and $32,629,530, respectively.
Net realized gains for the six months ended June 30, 2000 and net unrealized
gains (losses) as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Realized Unrealized
Gains Gains (Losses)
--------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $12,095,821 $ 11,490,092
Foreign currency transactions......... 19,678 (106,550)
----------- ------------
Total................................. $12,115,499 $ 11,383,542
=========== ============
--------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $11,490,092, of which $21,505,415 related to appreciated securities
and $10,015,323 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $89,326,404.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was $385,910
and $5,260,179 for the six months ended June 30, 2000 and for the year ended
December 31, 1999, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 2,107,404 $ 21,938,581
Shares issued to shareholders in
reinvestment of dividends............ 46,614 524,875
---------- ------------
Total issued.......................... 2,154,018 22,463,456
Shares redeemed....................... (2,252,005) (23,333,411)
---------- ------------
Net decrease.......................... (97,987) $ (869,955)
========== ============
-------------------------------------------------------------------
</TABLE>
<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 B Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-----------------------------------------------------------------
<S> <C> <C>
Shares sold............................... 126,768 $1,301,498
Shares issued to shareholders in
reinvestment of dividends................ 767 8,626
------- ----------
Total issued.............................. 127,535 1,310,124
Shares redeemed........................... (5,306) (54,259)
------- ----------
Net increase.............................. 122,229 $1,255,865
======= ==========
-----------------------------------------------------------------
</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>
5. COMMITMENTS:
At June 30, 2000, the Fund had entered into foreign exchange contracts, under
which it had agreed to purchase and sell various foreign currencies with
approximate values of $148,000 and $647,000, respectively.
6. CAPITAL LOSS CARRYFORWARD:
At December 31, 1999, the Fund had a 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.
56
<PAGE> 58
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six-month period ended June 30, 2000, Domestic Money Market Fund's net
annualized yield for Class A Shares was 5.69%. The Fund's Class A Shares' 7-day
yield as of June 30, 2000 was 6.12%. The average portfolio maturity was 58 days
at June 30, 2000, compared to 61 days at December 31, 1999.
THE ENVIRONMENT
During the first quarter of 2000, economic growth remained strong, resulting
in two additional 25 basis point (0.25%) interest rate increases that were
implemented in February and March. At that time, the Treasury also announced
anticipated changes to the auction schedule. The Federal budget surplus has made
it necessary to reduce the number of securities sold by the Treasury, therefore
the changes will include reduced auctions, reduced auction sizes and a buy-back
program (the Treasury intends to buy back old off-the-run less liquid issues in
order to keep current issues liquid). The announcement caused unintended results
as the yield curve inverted dramatically as investors rushed to buy longer-term
issues.
At this time, it is unclear when this technical inversion will be unwound, as
it seems likely that further short-term interest rate increases could be
forthcoming as long as the current economic momentum continues. Although
Treasury yields moved sharply lower as a result of this reduction of supply,
other fixed-income asset classes did not participate to the fullest extent. In
addition, the business practices of Government-sponsored agencies were placed
under scrutiny by Congress, which pressured quality spreads across the yield
curve.
In early May, investors began to price in an additional 50 basis point move
and a greater probability of more increases later in the summer. New home sales
grew by an alarming 966,000 pace and the unemployment rate fell to 3.9%. Citing
the risk of accelerating inflation, the Federal Reserve Board tightened interest
rates by 50 basis points at its May meeting. As the Federal Reserve Board's bias
toward tightening continued, the US markets remained fixated on the next Federal
Open Market Committee meeting on June 28, 2000. At that meeting, the Federal
Reserve Board moved to keep monetary policy on hold, as was widely expected by
investors. However, the Federal Reserve Board's accompanying statement suggested
that while there were tentative signs of economic cooling, underlying price
pressures were accelerating. Therefore, the Federal Reserve Board believed that
the risks remain tilted toward conditions that could foster higher inflation.
PORTFOLIO MATTERS
During the six-month period ended June 30, 2000, we maintained a conservative
approach because of the rising interest rate environment. We adopted a barbell
strategy incorporating one-month and two-month commercial paper with one-year
bank certificates of deposit. While domestic securities in the one-year area
were attractively priced, they were trading at a premium to foreign issues. We
also looked to replace maturing floating rate notes since we believe that they
will continue to provide protection for the Fund against rising interest rates.
The Fund's composition at the end of June and as of our last report to
shareholders is detailed below:
<TABLE>
<CAPTION>
------------------------------------------------------
6/30/00 12/31/99
------------------------------------------------------
<S> <C> <C>
Bank Notes....................... 6.7% 13.2%
Certificates of Deposit.......... 2.4 1.5
Commercial Paper................. 51.4 35.4
Corporate Notes.................. 22.8 35.8
Funding Agreements............... 5.6 4.6
Promissory Notes................. 1.8 1.7
Repurchase Agreements............ -- 0.2
US Government, Agency &
Instrumentality
Obligations--Non-Discount...... 9.6 6.5
Liabilities in Excess of Other
Assets......................... (0.3) --
Other Assets Less Liabilities.... -- 1.1
----- -----
Total............................ 100.0% 100.0%
===== =====
------------------------------------------------------
</TABLE>
IN CONCLUSION
We appreciate your investment in Domestic Money Market Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to
57
<PAGE> 59
--------------------------------------------------------------------------------
sharing our investment outlook with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Jacqueline Rogers
Jacqueline Rogers
Vice President and Portfolio Manager
July 26, 2000
--------------------------------------------------------
We are pleased to announce that Jacqueline Rogers is responsible for the
day-to-day management of Domestic Money Market Fund of Merrill Lynch Variable
Series Funds, Inc. Ms. Rogers has been employed by Merrill Lynch Investment
Managers, L.P. since 1985 as Vice President.
--------------------------------------------------------
58
<PAGE> 60
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANK NOTES--6.7% $ 5,000,000 American Express Centurion Bank+.. 6.75 % 7/13/2000 $ 5,000,000
5,000,000 Bank of America, N.A.+............ 6.65 6/06/2001 4,999,120
4,750,000 Bank of America, N.A. ............ 7.10 6/21/2001 4,734,952
10,000,000 Banc One, Illinois, N.A. ......... 6.96 12/27/2000 9,986,940
5,000,000 First Union National Bank+........ 6.87 8/28/2000 5,000,474
-------------------------------------------------------------------------------------------------------------------------
TOTAL BANK NOTES (COST--$29,749,877) 29,721,486
-------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF 6,750,000 SouthTrust Bank, N.A. ............ 6.86 12/19/2000 6,747,361
DEPOSIT--2.4%
4,000,000 SunTrust Bank..................... 6.78 4/18/2001 3,989,096
-------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (COST--$10,749,405) 10,736,457
-------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--51.4% 5,000,000 AT&T Corp.+....................... 6.706 8/07/2000 5,000,000
10,000,000 AT&T Corp.+....................... 6.566 3/08/2001 9,998,680
8,236,000 Apreco, Inc. ..................... 6.59 7/27/2000 8,199,816
7,000,000 Apreco, Inc. ..................... 6.65 8/08/2000 6,953,450
5,000,000 Asset Securitization Coop.
Corp. .......................... 6.60 9/07/2000 4,936,915
10,000,000 Bear Stearns Companies, Inc. ..... 6.60 9/07/2000 9,873,830
10,000,000 Bear Stearns Companies, Inc. ..... 6.60 9/14/2000 9,860,980
11,490,000 CIT Group Holdings, Inc. (The).... 6.60 7/25/2000 11,443,657
2,490,000 COFCO Capital Corp. .............. 6.58 7/18/2000 2,483,173
5,000,000 CXC Incorporated.................. 6.60 9/19/2000 4,925,900
3,700,000 Caterpillar Financial Services
Corp. .......................... 6.10 8/17/2000 3,669,747
820,000 Centric Capital Corp. ............ 6.65 7/24/2000 816,819
2,074,000 Centric Capital Corp. ............ 6.60 9/08/2000 2,047,451
10,000,000 Ciesco L.P. ...................... 6.95 7/03/2000 10,000,000
9,634,000 Clipper Receivables Corp. ........ 6.60 9/15/2000 9,498,305
12,000,000 Corporate Asset Funding Co.,
Inc. ........................... 6.61 7/17/2000 11,969,153
7,550,000 Edison Asset Securitization,
LLC............................. 6.60 8/11/2000 7,496,017
3,936,000 Enterprise Funding Corp. ......... 6.60 9/05/2000 3,887,784
11,443,000 Eureka Securitization Inc. ....... 6.59 7/07/2000 11,434,621
130,000 Ford Motor Credit Company......... 7.00 7/12/2000 129,772
973,000 General Electric Capital Corp. ... 6.60 7/10/2000 971,751
1,000,000 General Electric Capital Corp. ... 6.60 7/17/2000 997,433
3,750,000 General Electric Capital Corp..... 6.221 10/04/2000 3,748,496
3,030,000 Honeywell International Inc. ..... 6.60 8/01/2000 3,013,891
8,598,000 Kitty Hawk Funding Corp. ......... 6.62 7/18/2000 8,574,305
2,674,000 Kitty Hawk Funding Corp. ......... 6.60 8/07/2000 2,656,920
8,500,000 Kitty Hawk Funding Corp. ......... 6.62 9/11/2000 8,386,517
10,433,000 Knight-Ridder, Inc. .............. 6.59 9/01/2000 10,312,843
4,500,000 Lehman Brothers Holdings Inc. .... 6.17 8/17/2000 4,463,206
10,000,000 Lehman Brothers Holdings Inc. .... 6.15 8/18/2000 9,916,401
1,184,000 Morgan Stanley, Dean Witter &
Co. ............................ 6.59 9/05/2000 1,169,496
18,491,000 New Center Asset Trust............ 6.60 7/17/2000 18,443,540
6,283,000 Salomon, Smith Barney Holdings,
Inc. ........................... 6.60 9/21/2000 6,187,580
9,877,000 Variable Funding Capital Corp. ... 6.61 9/07/2000 9,752,382
4,428,000 Variable Funding Capital Corp. ... 6.63 9/21/2000 4,360,752
-------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$227,636,269) 227,581,583
-------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--22.8% 1,360,000 AT&T Capital Corp. ............... 7.50 11/15/2000 1,362,103
4,000,000 Asset-Backed Securities Investment
Trust 1997-F+................... 6.731 9/15/2000 4,000,000
2,000,000 Associates Corp. of North
America......................... 6.25 9/15/2000 1,996,442
1,100,000 Beneficial Corp. ................. 5.95 7/20/2000 1,099,868
2,750,000 CIT Group Holdings, Inc. (The)+... 6.80 9/15/2000 2,749,457
1,020,000 CIT Group Holdings, Inc. (The)+... 6.875 1/16/2001 1,018,721
4,750,000 CIT Group Holdings, Inc. (The)+... 6.605 4/24/2001 4,747,379
750,000 Finova Capital Corp. ............. 6.84 8/08/2000 744,246
1,000,000 Ford Motor Credit Company......... 6.65 8/01/2000 1,000,591
</TABLE>
59
<PAGE> 61
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE NOTES $ 3,000,000 Ford Motor Credit Company+........ 6.77 % 10/02/2000 $ 3,000,213
(CONCLUDED) 2,250,000 Ford Motor Credit Company......... 6.375 10/06/2000 2,245,307
500,000 Ford Motor Credit Company......... 6.25 11/08/2000 498,432
2,000,000 General Motors Acceptance Corp. .. 6.875 7/17/2000 2,000,258
3,850,000 General Motors Acceptance Corp.+.. 6.253 7/20/2000 3,848,984
2,000,000 General Motors Acceptance Corp.+.. 6.83 9/01/2000 2,000,079
1,400,000 General Motors Acceptance Corp.+.. 6.99 12/01/2000 1,400,713
1,000,000 General Motors Acceptance Corp. .. 5.625 2/15/2001 991,113
900,000 General Motors Acceptance Corp.+.. 6.858 2/27/2001 899,806
2,000,000 Goldman Sachs Group, Inc. ........ 6.00 8/07/2000 1,999,501
5,750,000 Goldman Sachs Group, Inc. ........ 6.55 12/22/2000 5,750,000
700,000 Goldman Sachs Group, Inc.+ ....... 6.40 7/13/2001 699,805
1,500,000 Household Finance Corp. .......... 5.678 7/07/2000 1,499,847
5,000,000 Household Finance Corp. .......... 5.75 2/22/2001 4,952,695
3,500,000 Household Finance Corp. .......... 6.669 5/04/2001 3,498,471
6,500,000 Household Finance Corp.+ ......... 6.715 7/20/2001 6,496,880
9,500,000 Morgan Stanley, Dean Witter &
Co. ............................ 6.43 1/22/2001 9,505,159
5,000,000 Morgan Stanley, Dean Witter &
Co.+............................ 6.781 1/22/2001 5,000,785
5,800,000 New Court Credit Group Inc.+...... 6.971 12/01/2000 5,816,615
5,000,000 Norwest Financial, Inc.+.......... 6.643 9/07/2000 4,999,468
2,000,000 SMM Trust, Series 1999-H+......... 6.845 9/25/2000 2,000,000
1,500,000 Salomon, Smith Barney Holdings,
Inc. ........................... 6.625 11/30/2000 1,496,814
4,000,000 Salomon, Smith Barney Holdings,
Inc. ........................... 5.875 2/01/2001 3,970,016
5,000,000 Salomon, Smith Barney Holdings,
Inc. ........................... 6.59 2/21/2001 4,980,240
2,500,000 Xerox Corp. ...................... 5.70 7/26/2000 2,498,825
-------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$100,853,091) 100,768,833
-------------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--5.6% 5,000,000 Allstate Life Insurance Co.+...... 6.656 7/03/2000 5,000,000
5,000,000 Allstate Life Insurance Co.+...... 6.741 11/01/2000 5,000,000
5,000,000 Allstate Life Insurance Co.+...... 6.705 7/02/2001 5,000,000
5,000,000 Jackson National Life Insurance
Co.+............................ 6.691 5/01/2001 5,000,000
5,000,000 Metropolitan Life Insurance
Company+........................ 6.691 5/01/2001 5,000,000
-------------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING AGREEMENTS (COST--$25,000,000) 25,000,000
-------------------------------------------------------------------------------------------------------------------------
PROMISSORY NOTES--1.8% 8,000,000 Goldman Sachs Group, Inc.+........ 6.711 7/07/2000 8,000,000
-------------------------------------------------------------------------------------------------------------------------
TOTAL PROMISSORY NOTES (COST--$8,000,000) 8,000,000
-------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY & 1,300,000 Federal Home Loan Mortgage
INSTRUMENTALITY Corporation..................... 5.18 11/24/2000 1,292,054
OBLIGATIONS--
NON-DISCOUNT--9.6% 2,000,000 Federal Home Loan Mortgage
Corporation..................... 5.25 1/19/2001 1,983,580
2,000,000 Federal National Mortgage
Association+.................... 6.374 7/21/2000 1,999,951
1,000,000 Federal National Mortgage
Association..................... 5.07 12/14/2000 992,585
1,425,000 Federal National Mortgage
Association..................... 5.21 1/26/2001 1,412,500
9,250,000 Federal National Mortgage
Association+.................... 6.354 4/19/2002 9,250,000
10,750,000 Student Loan Marketing
Association+.................... 6.494 9/29/2000 10,749,512
</TABLE>
60
<PAGE> 62
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US GOVERNMENT AGENCY & $ 9,500,000 Student Loan Marketing
INSTRUMENTALITY Association+...................... 6.364% 8/23/2001 $ 9,495,854
OBLIGATIONS--
NON-DISCOUNT (CONCLUDED) 600,000 US Treasury Notes................. 4.50 9/30/2000 597,375
600,000 US Treasury Notes................. 4.625 11/30/2000 595,687
2,000,000 US Treasury Notes................. 4.625 12/31/2000 1,981,874
1,900,000 US Treasury Notes................. 4.50 1/31/2001 1,878,625
-------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$42,320,824) 42,229,597
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$444,309,466)--100.3%...... 444,037,956
LIABILITIES IN EXCESS OF OTHER
ASSETS--(0.3%).................. (1,532,240)
------------
NET ASSETS--100.0%................ $442,505,716
============
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government & Agency Obligations are traded on
a discount basis; the interest rates shown reflect the discount rates paid at
the time of purchase by the Fund. Other securities bear interest at the rates
shown, payable at fixed dates or upon maturity. The interest rates on variable
rate securities are adjusted periodically based upon appropriate indexes; the
interest rates shown are the rates in effect at June 30, 2000.
+ Variable rate notes.
See Notes to Financial Statements.
61
<PAGE> 63
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost $444,309,466*)....... $444,037,956
Cash........................................................ 5,201
Receivables:
Interest.................................................. $2,333,001
Capital shares sold....................................... 2,239,985 4,572,986
----------
Prepaid expenses............................................ 34,613
------------
Total assets................................................ 448,650,756
------------
--------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 5,000,000
Capital shares redeemed................................... 905,038
Investment adviser........................................ 166,105
Dividends to shareholders................................. 118 6,071,261
----------
Accrued expenses and other liabilities...................... 73,779
------------
Total liabilities........................................... 6,145,040
------------
--------------------------------------------------------------------------------------
NET ASSETS.................................................. $442,505,716
============
--------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value,
1,300,000,000 shares authorized+.......................... $ 44,277,723
Paid-in capital in excess of par............................ 398,499,503
Unrealized depreciation on investments--net................. (271,510)
------------
NET ASSETS.................................................. $442,505,716
============
--------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $442,505,716 and 442,777,226
shares outstanding........................................ $ 1.00
============
--------------------------------------------------------------------------------------
</TABLE>
* Cost for Federal income tax purposes. As of June 30, 2000, net unrealized
depreciation for Federal income tax purposes amounted to $271,510, of which
$5,593 related to appreciated securities and $277,103 related to depreciated
securities.
+ The Fund is also authorized to issue 1,300,000,000 Class B Shares.
See Notes to Financial Statements.
62
<PAGE> 64
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $13,260,416
--------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $1,069,498
Accounting services......................................... 41,650
Professional fees........................................... 23,426
Printing and shareholder reports............................ 20,774
Custodian fees.............................................. 11,496
Directors' fees and expenses................................ 4,783
Transfer agent fees......................................... 2,650
Pricing services............................................ 1,467
Other....................................................... 570
----------
Total expenses.............................................. 1,176,314
-----------
Investment income--net...................................... 12,084,102
-----------
--------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET:
Realized gain on investments--net........................... 3,659
Change in unrealized depreciation on investments--net....... 26,316
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $12,114,077
===========
--------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
63
<PAGE> 65
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 12,084,102 $ 21,094,119
Realized gain on investments--net........................... 3,659 17,656
Change in unrealized appreciation/depreciation on
investments--net.......................................... 26,316 (287,952)
------------- -------------
Net increase in net assets resulting from operations........ 12,114,077 20,823,823
------------- -------------
-----------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (12,084,102) (21,094,119)
Realized gain on investments--net:
Class A................................................... (3,659) (17,656)
------------- -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (12,087,761) (21,111,775)
------------- -------------
-----------------------------------------------------------------------------------------------
CLASS A CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares............................ 186,091,640 279,226,568
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions............... 12,085,404 21,108,016
------------- -------------
198,177,044 300,334,584
Cost of shares redeemed..................................... (223,478,717) (240,782,799)
------------- -------------
Net increase (decrease) in net assets derived from Class A
capital share transactions................................ (25,301,673) 59,551,785
------------- -------------
-----------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (25,275,357) 59,263,833
Beginning of period......................................... 467,781,073 408,517,240
------------- -------------
End of period............................................... $442,505,716 $ 467,781,073
============= =============
-----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
64
<PAGE> 66
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--DOMESTIC MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment income--net................................. .0281 .0473 .0506 .0511 .0504
Realized and unrealized gain (loss) on
investments--net..................................... .0001 (.0006) --+ .0001 (.0005)
-------- -------- -------- -------- --------
Total from investment operations....................... .0282 .0467 .0506 .0512 .0499
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................... (.0281) (.0473) (.0508) (.0511) (.0504)
Realized gain on investments--net.................... --+ --+ --+ --+ (.0001)
-------- -------- -------- -------- --------
Total dividends and distributions...................... (.0281) (.0473) (.0508) (.0511) (.0505)
-------- -------- -------- -------- --------
Net asset value, end of period......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..................... 5.69%* 4.84% 5.20% 5.24% 5.13%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................... .55%* .55% .56% .54% .54%
======== ======== ======== ======== ========
Investment income--net, and realized gain on
investments--net..................................... 5.64%* 4.76% 5.03% 5.12% 4.97%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $442,506 $467,781 $408,517 $318,052 $274,756
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.0001 per share.
See Notes to Financial Statements.
65
<PAGE> 67
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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 accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities with remaining maturities
of greater than sixty days, 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 seller 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
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM 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
66
<PAGE> 68
--------------------------------------------------------------------------------
net assets. Any such expenses in excess of 1.25% of average daily net assets
will be reimbursed to the Fund by MLIM 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, PSI, FDS, FAMD, 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
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.
67
<PAGE> 69
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide you with the first semi-annual shareholder report
for Fundamental Growth Focus Fund of Merrill Lynch Variable Series Funds, Inc.
The Fund's investment objective is to seek long-term growth of capital by
investing primarily in a portfolio of common stocks of US companies that Fund
management believes have shown above-average rates of growth earnings over the
long term. In this and future reports to shareholders, we will provide
information on the Fund's performance, discuss our investment strategies and
highlight some of the Fund's holdings.
THE ENVIRONMENT
Economic slowing has finally arrived in the United States. As a result,
significant increases in inflation and interest rates appear less likely, which
is usually good news for financial assets. On the other hand, profit growth is
likely to decelerate from unsustainably high levels.
Investor sentiment changed significantly during the first half of 2000. In
general, concerns centered around economic growth being too strong. A recent
inflection could indicate healthy, but slower economic and profit growth in the
second half of the year. Following potential uncertainty during the adjustment
period, the sustainability of the economic expansion could buoy investor
expectations.
During the first half of the year, equity investors switched gears from an
excessive focus on momentum, which was prevalent during most of 1999. This
transition to a more balanced focus on both valuation and earnings growth, which
began in March, can provide a healthier investment backdrop. However, this
change has caused deterioration in many extremely highly valued securities with
speculative fundamentals and improvement in previously neglected, solidly
performing companies.
In the coming months, we believe investors are likely to focus on continuing
cyclical economic developments as well as the presidential election campaign.
Cyclical concerns remain increasing labor costs as well as volatile, but rising,
commodity prices. Federal budget policy, social security funding options and
trade policy are likely to shape investor interest in the outcome of the
election. Generally, financial markets have tended to do better under divided
governments, preferring legislative gridlock. In part, US markets historically
have done well as a result of fiscal policy restraint and could react poorly to
any significant reversal of that trend.
Despite near-term uncertainties surrounding economic slowdown, earnings growth
and valuation levels, long-term forces supporting US economic and financial
market leadership seem to remain in place. Chief among these are continued heavy
investments in technology, telecommunications and other efficiency-enhancing
projects, thus potentially enabling productivity-led growth.
PORTFOLIO MATTERS
Fundamental Growth Focus Fund commenced operations on April 3, 2000. As of
June 30, 2000, the net assets of the Fund were $8.7 million, and the Fund's
Class A Shares had a net asset value of $10.19 per share. The Fund had net cash
reserves of about 12%. Since inception to June 30, 2000, the Fund's Class A
Shares had a total return of +1.90% compared to the -3.1% return for the
unmanaged Standard & Poor's 500 Index for the same period. The major reason for
Fundamental Growth Focus Fund's positive performance was that we were able to
initiate a program of investing our new cash on an opportunistic basis as the US
equity markets declined during the months of April and May.
At the present time, our investment strategy is to focus on leading growth
companies, which are providing the Internet communication infrastructure
switches, routers and transmission systems, as communication service companies
around the globe install the systems to provide the latest digital, broadband
communication capabilities over wireline as well as wireless communication
systems.
On June 30, 2000, the Fund's largest equity holdings included Cisco Systems,
Inc., Nortel Networks Corporation and JDS Uniphase Corporation. These companies
are major global suppliers of the latest communication infrastructure including
optical switching systems and components. Other major stock holdings in the Fund
as of June 30, 2000 were EMC Corporation, General Electric Company, Sun
Microsystems, Inc., Citigroup Inc., America Online, Inc., Pfizer Inc. and Enron
Corp.
The overall investment weighting of technology companies in the Fund was
almost 46% at mid-year 2000. The next largest industry sector represented in the
Fund was energy, with a focus on the largest integrated, global companies such
as Exxon Mobil Corporation and BP
68
<PAGE> 70
--------------------------------------------------------------------------------
Amoco PLC. Looking ahead, we plan to continue to invest our cash reserve on an
opportunistic basis.
IN CONCLUSION
We appreciate your investment in Fundamental Growth Focus Fund of Merrill
Lynch Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Lawrence R. Fuller
Lawrence R. Fuller
Senior Vice President and Portfolio Manager
July 26, 2000
69
<PAGE> 71
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
AGGREGATE TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Inception (4/03/00) to 6/30/00 +1.90%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
RECENT PERFORMANCE RESULTS*
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE INCEPTION
TOTAL RETURN
-------------------------------------------------------------------------------
<S> <C>
Class A Shares +1.90%
</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.
70
<PAGE> 72
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADVERTISING 800 The Interpublic Group of Companies, Inc. ................... $ 34,400 0.4%
----------------------------------------------------------------------------------------------------------------------
AUTOMOBILES 125 Toyota Motor Corporation (ADR)*............................. 11,648 0.1
----------------------------------------------------------------------------------------------------------------------
BANKING & 4,085 Citigroup Inc. ............................................. 246,121 2.9
FINANCIAL
----------------------------------------------------------------------------------------------------------------------
BEVERAGES 2,920 The Coca-Cola Company....................................... 167,717 1.9
----------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY 65 +Affymetrix, Inc............................................ 10,729 0.1
1,785 +Immunex Corporation........................................ 88,246 1.0
---------- -----
98,975 1.1
----------------------------------------------------------------------------------------------------------------------
BROADCASTING/MEDIA 825 +Infinity Broadcasting Corporation (Class A)................ 30,061 0.4
----------------------------------------------------------------------------------------------------------------------
BROADCASTING/RADIO 300 +AMFM Inc. ................................................. 20,700 0.2
& TELEVISION 275 +Clear Channel Communications, Inc.......................... 20,625 0.2
700 +Viacom, Inc. (Class A)..................................... 47,863 0.6
---------- -----
89,188 1.0
----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 1,525 +3Com Corporation........................................... 87,783 1.0
EQUIPMENT 250 +Alteon Websystems, Inc. ................................... 25,000 0.3
6,900 +Cisco Systems, Inc. ....................................... 438,581 5.1
2,825 +JDS Uniphase Corporation................................... 338,470 3.9
500 Nokia Oyj 'A' (ADR)*........................................ 24,969 0.3
6,000 Nortel Networks Corporation................................. 409,500 4.7
200 +SDL Inc. .................................................. 57,038 0.7
4,240 Telefonaktiebolaget LM Ericsson (ADR)*...................... 84,800 1.0
---------- -----
1,466,141 17.0
----------------------------------------------------------------------------------------------------------------------
COMPUTERS 5,290 +EMC Corporation............................................ 406,999 4.7
3,800 +Sun Microsystems, Inc. .................................... 345,563 4.0
---------- -----
752,562 8.7
----------------------------------------------------------------------------------------------------------------------
ELECTRICAL 7,375 General Electric Company.................................... 390,875 4.5
EQUIPMENT
----------------------------------------------------------------------------------------------------------------------
ELECTRONICS 400 +Broadcom Corporation (Class A)............................. 87,575 1.0
700 +LSI Logic Corporation...................................... 37,887 0.5
2,300 STMicroelectronics NV (NY Registered Shares)................ 147,631 1.7
1,800 Texas Instruments Incorporated.............................. 123,638 1.4
200 +Xilinx, Inc. .............................................. 16,513 0.2
---------- -----
413,244 4.8
----------------------------------------------------------------------------------------------------------------------
ENERGY 2,800 BP Amoco PLC (ADR)*......................................... 158,375 1.9
2,200 El Paso Energy Corporation.................................. 112,062 1.3
3,600 Enron Corp. ................................................ 232,200 2.7
2,360 Exxon Mobil Corporation..................................... 185,260 2.1
2,260 Royal Dutch Petroleum Company (NY Registered Shares)........ 139,131 1.6
---------- -----
827,028 9.6
----------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT 925 The Walt Disney Company..................................... 35,902 0.4
----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 1,300 T. Rowe Price Associates, Inc. ............................. 55,250 0.6
----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD 1,800 Colgate-Palmolive Company................................... 107,775 1.2
PRODUCTS........
----------------------------------------------------------------------------------------------------------------------
INFORMATION 4,600 +America Online, Inc. ...................................... 242,650 2.8
PROCESSING 1,350 +China.Com Corporation 'A'.................................. 27,506 0.3
4,500 +Exodus Communications, Inc. ............................... 207,281 2.4
200 +Palm, Inc. ................................................ 6,675 0.1
---------- -----
484,112 5.6
----------------------------------------------------------------------------------------------------------------------
INSURANCE 1,600 American International Group, Inc. ......................... 188,000 2.2
----------------------------------------------------------------------------------------------------------------------
LEISURE 560 Sony Corporation (ADR)*..................................... 52,815 0.6
----------------------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 350 Medtronic, Inc. ............................................ 17,434 0.2
----------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE> 73
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OIL SERVICES 2,950 Baker Hughes Incorporated................................... $ 94,400 1.1%
600 Diamond Offshore Drilling, Inc. ............................ 21,075 0.2
1,200 Halliburton Company......................................... 56,625 0.7
1,700 Schlumberger Limited........................................ 126,863 1.5
---------- -----
298,963 3.5
----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 2,475 Merck & Co., Inc. .......................................... 189,647 2.2
5,000 Pfizer Inc. ................................................ 240,000 2.8
---------- -----
429,647 5.0
----------------------------------------------------------------------------------------------------------------------
RETAIL 1,100 +Amazon.com, Inc. .......................................... 39,944 0.5
500 +eBay Inc. ................................................. 27,125 0.3
---------- -----
67,069 0.8
----------------------------------------------------------------------------------------------------------------------
RETAIL--SPECIALTY 70 CVS Corporation............................................. 2,800 0.0
250 +Staples, Inc. ............................................. 3,844 0.0
125 Walgreen Co. ............................................... 4,023 0.1
---------- -----
10,667 0.1
----------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 750 +ASM Lithography Holding NV (ADR)*.......................... 33,047 0.4
1,400 +Applied Materials, Inc. ................................... 126,875 1.5
535 +KLA-Tencor Corporation..................................... 31,331 0.3
---------- -----
191,253 2.2
----------------------------------------------------------------------------------------------------------------------
SOFTWARE-- 3,600 +BEA Systems, Inc. ......................................... 177,750 2.1
COMPUTER 1,300 +Commerce One, Inc. ........................................ 59,231 0.7
2,500 +Oracle Corporation......................................... 210,000 2.4
190 +Rational Software Corporation.............................. 17,646 0.2
800 +Siebel Systems, Inc. ...................................... 130,850 1.5
---------- -----
595,477 6.9
----------------------------------------------------------------------------------------------------------------------
WIRELESS 500 Sonera Oyj (ADR)*........................................... 22,969 0.3
COMMUNICATIONS 310 Sprint Corp. (PCS Group).................................... 18,445 0.2
3,750 Vodafone AirTouch PLC (ADR)*................................ 155,391 1.8
1,500 +Western Wireless Corporation (Class A)..................... 81,656 0.9
---------- -----
278,461 3.2
----------------------------------------------------------------------------------------------------------------------
WIRELINE 2,100 AT&T Corp. ................................................. 66,413 0.8
COMMUNICATIONS 3,560 +Equant (NY Registered Shares).............................. 153,080 1.8
2,125 +Infonet Services Corporation (Class B)..................... 25,367 0.3
1,125 +NorthPoint Communications Group, Inc. ..................... 12,516 0.1
800 +WorldCom, Inc. ............................................ 36,700 0.4
---------- -----
294,076 3.4
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCK
(COST--$7,478,190) 7,634,861 88.3
----------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE> 74
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE PERCENT OF
AMOUNT SHORT-TERM SECURITIES VALUE NET ASSETS
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US GOVERNMENT $1,542,000 Federal Home Loan Mortgage Corporation, 6.57% due
AGENCY 7/03/2000................................................. $1,541,437 17.8%
OBLIGATIONS**
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST--$1,541,437) 1,541,437 17.8
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$9,019,627)........................ 9,176,298 106.1
LIABILITIES IN EXCESS OF OTHER ASSETS....................... (525,758) (6.1)
---------- -----
NET ASSETS.................................................. $8,650,540 100.0%
========== =====
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Certain US Government Agency Obligations are traded on a discount basis; the
interest rate shown reflects the discount rate paid at the time of purchase by
the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
73
<PAGE> 75
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$9,019,627)......... $9,176,298
Cash........................................................ 764
Receivables:
Capital shares sold....................................... $ 94,309
Dividends................................................. 2,142 96,451
--------
Prepaid expenses............................................ 24,392
----------
Total assets................................................ 9,297,905
----------
-----------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 612,032
Investment adviser........................................ 3,753
Capital shares redeemed................................... 329 616,114
--------
Accrued expenses and other liabilities...................... 31,251
----------
Total liabilities........................................... 647,365
----------
-----------------------------------------------------------------------------------
NET ASSETS.................................................. $8,650,540
==========
-----------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 84,897
Paid-in capital in excess of par............................ 8,379,663
Undistributed investment income--net........................ 9,107
Undistributed realized capital gains on investments--net.... 20,202
Unrealized appreciation on investments--net................. 156,671
----------
NET ASSETS.................................................. $8,650,540
==========
-----------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $8,650,540 and 848,966
shares outstanding........................................ $ 10.19
==========
-----------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
74
<PAGE> 76
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
STATEMENT OF OPERATIONS FOR THE PERIOD APRIL 3, 2000+ TO JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 16,469
Dividends (net of $166 foreign withholding tax)............. 4,742
--------
Total income................................................ 21,211
--------
-------------------------------------------------------------------------------
EXPENSES:
Offering costs.............................................. $8,015
Investment advisory fees.................................... 6,668
Accounting services......................................... 590
Registration fees........................................... 81
------
Total expenses before reimbursement......................... 15,354
Reimbursement of expenses................................... (3,250)
--------
Total expenses after reimbursement.......................... 12,104
--------
Investment income--net...................................... 9,107
--------
-------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET:
Realized gain on investments--net........................... 20,202
Unrealized appreciation on investments--net................. 156,671
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $185,980
========
-------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
75
<PAGE> 77
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 3, 2000+
INCREASE IN NET ASSETS: TO JUNE 30, 2000
--------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Investment income--net...................................... $ 9,107
Realized gain on investments--net........................... 20,202
Unrealized appreciation on investments--net................. 156,671
----------
Net increase in net assets resulting from operations........ 185,980
----------
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 7,464,560
----------
--------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 7,650,540
Beginning of period......................................... 1,000,000
----------
End of period*.............................................. $8,650,540
==========
--------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 9,107
==========
--------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
76
<PAGE> 78
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL GROWTH FOCUS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM FOR THE PERIOD
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. APRIL 3, 2000+
INCREASE IN NET ASSET VALUE: TO JUNE 30, 2000
-----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $10.00
------
Investment income--net....................................... .01
Realized and unrealized gain on investments--net............. .18
------
Total from investment operations............................. .19
------
Net asset value, end of period............................... $10.19
======
-----------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................... 1.90%++
======
-----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................... 1.18%*
======
Expenses..................................................... 1.50%*
======
Investment income--net....................................... .89%*
======
-----------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................... $8,651
======
Portfolio turnover........................................... 20.91%
======
-----------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses. The
Company's Investment Adviser voluntarily waived a portion of its management fee.
Without such waiver, the Fund's performance would have been lower.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
77
<PAGE> 79
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--FUNDAMENTAL 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 as of June 30, 2000 was comprised of 19
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. Fundamental Growth Focus Fund (the "Fund") is classified as
"diversified," as defined in the Investment Company Act of 1940. Prior to
commencement of operations on April 3, 2000, the Fund had no operations other
than those relating to organizational matters and the issuance of 100,000 Class
A Shares of the Fund on March 20, 2000 to MLLIC for $1,000,000. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. The Fund's financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments, which are, in the
opinion of management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal, recurring
nature. The following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Short-term securities are valued at
amortized cost, which approximates market value. Futures contracts are valued at
the settlement price at the close of the applicable exchange. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
78
<PAGE> 80
--------------------------------------------------------------------------------
as collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the time it
was closed.
- Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets and liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of premium and discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
For the period April 3, 2000 to June 30, 2000, MLIM earned fees of $6,668, of
which $3,250 was voluntarily waived.
MLIM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by MLIM which, in turn, will be reimbursed by MLLA.
For the period April 3, 2000 to June 30, 2000, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, a subsidiary of ML & Co., earned $222 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
period April 3, 2000 to June 30, 2000 were $8,136,678 and $678,798,
respectively.
79
<PAGE> 81
--------------------------------------------------------------------------------
Net realized gains (losses) for the period April 3, 2000 to June 30, 2000 and
net unrealized gains as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $20,300 $156,671
Short-term investments.............. (98) --
------- --------
Total............................... $20,202 $156,671
======= ========
---------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $156,671, of which $479,889 related to appreciated securities and
$323,218 related to depreciated securities. At June 30, 2000, the aggregate cost
of investments for Federal income tax purposes was $9,019,627.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Class A Shares for the Period April 3, 2000+ to Dollar
June 30, 2000 Shares Amount
----------------------------------------------------------------------
<S> <C> <C>
Shares sold................................. 750,338 $7,478,049
Shares redeemed............................. (1,372) (13,489)
------- ----------
Net increase................................ 748,966 $7,464,560
======= ==========
----------------------------------------------------------------------
</TABLE>
+ Prior to April 3, 2000 (commencement of operations), the Fund issued 100,000
shares to MLLIC for $1,000,000.
80
<PAGE> 82
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six months ended June 30, 2000, global fixed-income markets were
shaped by the concerns about the effects of the Year 2000 (Y2K) date change, the
continued economic robustness throughout the world (excluding Japan), and the
fear of higher interest rates needed to quell the rate of economic growth and
inflationary pressures.
In the last two weeks of December 1999, global fixed-income markets were
virtually at a standstill as investors waited for the end of the year to bring
some market disruption. Although trading was limited, by the first trading day
of the new year it was evident that Y2K problems were overblown. There were few
disruptions in the markets and investors returned to worrying about higher
interest rates very quickly. Although there were several economies that were
experiencing growth without inflation, the United States was by far the most
conspicuous. After a series of interest rate increases in 1999 totaling 75 basis
points (0.75%), the US economy was still moving along at 7.3% for the fourth
quarter. There was very little inflation, although the prices of oil and housing
were still climbing. There was a temporary rise in the consumer price index
(CPI) in April. The headline CPI was 0.7%, which was higher than the expected
0.5%. However, the real surprise was the core CPI (excluding food and energy) of
0.4%, compared to the previous months' increases of only 0.1%-0.2%. As a result,
investors were concerned that the US Federal Reserve Board would have to raise
interest rates much further. By late May this view had turned almost 180
degrees, when a few economic statistics pointed to potential slowdown.
Growth without inflation was also continuing in Canada, Australia, the United
Kingdom and Germany. However, the central banks were concerned that the
continued growth in their economies would eventually spur inflation in the labor
markets. The vigilance and persistence of these central banks caused interest
rates in the back end of the yield curve to descend by the latter part of
January. This topping of interest rates was further exacerbated in the United
States by the paydown in long-dated securities. The United States was using its
budgetary surplus to pay down as much as $30 billion in Government securities.
The announcement of this paydown resulted in an inversion of the yield curve
from ten-year-30-year securities. These developments helped global sovereign
yield curves to flatten and, in some cases, to invert.
Dollar Bloc Markets
Although the US Federal Reserve Board paused in December from raising interest
rates, it continued on this path in early February. The Federal funds rate went
up 25 basis points in February and March to 6.00%. The US Federal Reserve Board
continued its gradualist approach of raising interest rates in 25 basis point
increments in an attempt to guide the economy into a soft landing. However, in
late April investors began to perceive that the US Federal Reserve Board would
need to be more aggressive, given that the first quarter gross domestic product
(GDP) was reported at 5.4%, which was not indicative of a slowdown. On May 16,
2000, the US Federal Reserve Board changed from a gradualist to an aggressive
approach of raising interest rates, increasing interest rates by 50 basis points
to 6.50%. By the end of May, the first signs of a slowdown appeared in durable
goods, which was down 6.4%, and leading indicators, which were down 0.1%. The
unemployment numbers that were reported in early June were most telling, with an
increase in the unemployment rate from 3.9% to 4.1%, and the non-farm payroll
statistic, excluding census workers, down 116,000. On June 28, the US Federal
Reserve Board paused in its interest rate increases to assess whether the US
economy was truly slowing as some economic statistics were indicating. Although
this seemed like a quick downturn, investors were still cautious, waiting for
more data to confirm an economic slowdown. Investor expectation was that the US
Federal Reserve Board would wait until its August meeting to decide the future
course of interest rates. In cash securities, interest rates declined 41 basis
points in ten-year Government securities. The rise in interest rates had been
more dramatic from January 1 (6.44%) to January 20 (6.79%), but with the shift
in investor sentiment and the paydown announced in January, the long end of the
yield curve began to drop. The ten-year Treasury note ended the period at 6.03%.
Meanwhile, Canada continued to experience a high level of economic growth
similar to the United States. Canada maintained its robust economy from internal
and external demand. Real GDP increased 0.6% in November, registering the
sixteenth consecutive rise, the longest streak since 1961. Consumer prices, as
reported by the CPI statistic, were 2.3% year over year, slightly above the
midpoint of the acceptable inflation range of 1%-3% established by the Bank of
Canada (BoC). This rise in inflation, along with a tight labor market, can
portend
81
<PAGE> 83
--------------------------------------------------------------------------------
higher inflation in the near future. As a result,
the BoC raised interest rates 25 basis points on February 3 and March 22. The
BoC moved again on May 17 by 50 basis points, again matching the increases seen
in the United States.
During the period, we went from a short duration position to a long duration
position for both the United States and Canada relative to our benchmark, the
unmanaged JP Morgan Global Government Bond Index. Within this long position, we
overweighted the long end and underweighted the short end to take advantage of
the flattening and inversion of both yield curves. In addition, the central
banks' increase of short-term interest rates has aided our underweighted
position because these increases only affect the short end of curves, mostly
securities with maturities of less than five years. By June 30, 2000, we went to
a neutral duration, looking for opportunities to add duration.
Europe
The euro's weakness was the most dominant factor in the global markets. At the
beginning of the six-month period ended June 30, 2000, the euro stood at 1.0062
relative to the US dollar. It broke through parity on January 27, and settled
the day at 0.9882. It temporarily traded above parity on February 22, hit the
low of 0.8946 on May 18, and traded up to 0.9525 by the end of June. Overall,
the euro declined 5.34% for the six-month period. The main cause of this decline
was the disinvestment from the euro into the stronger currencies and Japanese
and US equity markets. In addition, the reluctance by the European Central Bank
(ECB) to aggressively raise interest rates put added pressure on the euro. The
ECB appeared to us as indecisive and non-credible in its statements about an
appropriate level for the euro. Contradictory statements from several members of
the ECB put the euro in a precarious position. Oil prices also created problems
for Europeans in terms of a drag on the economy and an inflationary stimulant.
Crude oil prices rose 50.7% during the period.
The economy of Euroland continued to expand during the six-month period.
Fourth quarter 1999 GDP rose 0.9% quarter over quarter and 3.0% year over year.
Given the acceleration in industrial production and the increase in business
confidence, as reported in the Reuters Purchasing Managers' Index, the economy
is expected to continue its expansion at a 3.5% pace for 2000. On the inflation
front, February's consumer prices came to 2% year over year. For most of this
period, the increase in oil prices did not seriously affect the underlying
inflation rate because of its volatility. In February the price of oil rose to
more than $34 per barrel, but by the end of May it had traded down to $29.01.
However, by the end of June the price rose to a high of $32.50. During the
period, the ECB raised interest rates by 25 basis points on February 3 and on
April 27. The ECB paused during May, but surprised investors on June 8 with an
aggressive rise of 50 basis points, thereby giving a lift to the euro. In cash
securities, the ten-year Bund yield fell 14 basis points for the period, but it
fluctuated widely as investors' perception of inflation increased or decreased.
The 30-year Bund was the best-performing security on the yield curve as it
declined in yield by 53 basis points. In this environment, we continued to
underweight the front end of the yield curve and overweight the long end.
A development that influenced the global bond market during this period was
the Universal Mobile Telecommunications Systems (UMTS) auctions. These UMTS
auctions are the selling of third-generation mobile phone licenses by the
respective government to local businesses. The United Kingdom raised (pound
sterling) 23 billion at its April auction. This was extraordinary since the
government estimated raising only (pound sterling) 3 billion-(pound sterling) 4
billion. In addition, the auction caught the attention of bond market investors
because these proceeds could be utilized to pay down the government's debt. As a
result, Germany is expected to hold a similar auction this summer that is
expected to generate more than (pound sterling) 50 billion. With this success,
several other countries are contemplating utilizing the UMTS auctions. If this
trend continues, it may mean lower interest rates in the long end of the
respective yield curves. In this environment, we moved from a short duration to
a slightly long duration relative to our benchmark. We concentrated on buying
the 30-year sectors in order to add duration and take advantage of the potential
results of these auctions.
In non-EMU countries, the central banks were also raising interest rates. The
Bank of England raised interest rates by 25 basis points on January 13 and
February 10. Denmark raised interest rates 30 basis points on February 3, 25
basis points on April 27 and 50 basis points on June 8 to 4.25%. Sweden raised
interest rates 50 basis points on February 4 and June 14. The only exception to
this trend was in Greece, where the central bank reduced interest rates by 225
basis points. On January 26, the central bank lowered interest rates by 75 basis
points and then followed with 50 basis points on March 8 and April 19. In
addition, it cut interest rates by 50 basis points on June 28. In cash
securities, the ten-year Gilt yield in the United Kingdom declined by 24 basis
points, while
82
<PAGE> 84
--------------------------------------------------------------------------------
Denmark's ten-year sector rose 4 basis points. Sweden's ten-year sovereign fell
44 basis points, and Greece's ten-year sovereign fell 40 basis points. As the
ten-year sovereign's yield was approximately the yield of Norway's ten-year
sovereign, we traded out of Greece into Norway, believing that the Norwegian
krona would outperform the Greek drachma over the near future. During this
period, we remained long duration versus our benchmark.
Japan
Unlike most of the other global economies, Japan had no growth and inflation.
It has stumbled along, occasionally rising above recessionary levels. The latest
two GDP reports have indicated that Japan was back in a recession. The third and
fourth quarter reports for 1999 were both negative, -0.9% and -1.4%,
respectively. The main drag in the fourth quarter report continued to be
personal consumption, which fell 1.6% quarter over quarter. While consumption
remained somewhat of a concern, business activity was increasing, which should
help consumption going forward.
Japan's March Tankan report showed some positive signs. In this report,
Japanese companies assessed business conditions as improving. The index for
large enterprises rose from -17 to -9. Another piece of potentially positive
news for the economy was that the new Prime Minister, Yoshiro Mori, is committed
to following the economic policies of Keizo Obuchi. He said that fiscal
consolidation is necessary, but must be delayed until the economy has recovered.
Mori said he does not have any plans for a new fiscal package, but investors
perceive that a package may be necessary later in the year in order to help
support growth. In addition, the June Tankan report is expected to be -3
compared to the -9 of the March report, thereby prompting a possible end to the
"zero interest rate policy" in either July or September. During this period, the
ten-year Japanese government bond yield rose by 4 basis points and the US dollar
relative to the yen appreciated 3.5%. In this environment, we held a short
duration relative to our benchmark and were long in US dollars relative to the
yen.
IN CONCLUSION
We thank you for your investment in Global Bond Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Harry Escobar
Harry Escobar
Senior Vice President and Portfolio Manager
July 26, 2000
83
<PAGE> 85
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 -2.02%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +3.87
--------------------------------------------------------------------------------
Inception (7/01/93) through 6/30/00 +4.21
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 -0.99% -2.02%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<C> <S>
* Total investment returns are based on changes in net asset
values for the periods shown, and assume reinvestment of all
dividends and capital gains distributions at net asset value on
the payable date. Insurance-related fees and expenses are not
reflected in these returns.
Past results shown should not be considered a representation of
future performance.
</TABLE>
84
<PAGE> 86
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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 SUPRANATIONAL C$ 2,030,000 Inter-American Development Bank,
7.25% due 11/03/2003............... $ 1,406,528 3.6%
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
CANADA 1,406,525 3.6
------------------------------------------------------------------------------------------------------------------------
UNITED STATES COMPUTERS Y 58,800,000 IBM Corporation, 0.90% due
4/14/2003.......................... 555,461 1.4
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES DM 2,425,000 Ford Motor Credit Co., 5.25% due
6/16/2008.......................... 1,127,478 2.8
------------------------------------------------------------------------------------------------------
GAMING Jazz Casino Co. LLC:
US$ 235,790 6.046% due 11/15/2009 (a)............ 40,084 0.1
21,000 Contingent Notes due 11/15/2009
(b)................................ 0 0.0
----------- -----
40,084 0.1
------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Bonds:
OBLIGATIONS 2,545,000 5.25% due 11/15/2028................. 2,253,521 5.7
2,940,000 6.125% due 8/15/2029................. 2,969,400 7.5
----------- -----
5,222,921 13.2
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN THE
UNITED STATES 6,945,944 17.5
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES
HELD COMMON STOCKS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES GAMING 6,089 +JCC Holding Company (Class A)....... 4,947 0.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE UNITED
STATES 4,947 0.0
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH AMERICA
(COST--$8,548,082) 8,357,419 21.1
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PACIFIC FACE
BASIN AMOUNT FIXED-INCOME INVESTMENTS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA FOREIGN GOVERNMENT A$ 500,000 Australian Government Bond, 5.75% due
OBLIGATIONS 6/15/2011.......................... 289,692 0.7
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
AUSTRALIA 289,692 0.7
------------------------------------------------------------------------------------------------------------------------
JAPAN BANKING Y 101,000,000 KFW International Finance, 1% due
12/20/2004......................... 959,073 2.4
------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT Japan Government Bonds:
OBLIGATIONS 252,000,000 #151, 5% due 9/20/2002............... 2,615,336 6.6
246,000,000 #174, 4.60% due 9/20/2004............ 2,672,287 6.8
----------- -----
5,287,623 13.4
------------------------------------------------------------------------------------------------------
SUPRANATIONAL 70,000,000 Japan Bank for International
Cooperative, 2.875% due 7/28/2005.. 717,966 1.8
250,000,000 World Bank, 5.25% due 3/20/2002...... 2,564,151 6.5
----------- -----
3,282,117 8.3
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
JAPAN 9,528,813 24.1
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PACIFIC
BASIN (COST--$9,727,194) 9,818,505 24.8
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Y=yen
E=euro
L=pound sterling
85
<PAGE> 87
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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>
AUSTRIA FOREIGN GOVERNMENT Y 67,000,000 Republic of Austria, 4.75% due
OBLIGATIONS 12/20/2004......................... $ 737,276 1.9%
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
AUSTRIA 737,276 1.9
------------------------------------------------------------------------------------------------------------------------
FINLAND FOREIGN GOVERNMENT E 1,177,315 Finnish Government Bond, 7.25% due
OBLIGATIONS 4/18/2006.......................... 1,233,514 3.1
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
FINLAND 1,233,514 3.1
------------------------------------------------------------------------------------------------------------------------
FRANCE FOREIGN GOVERNMENT 1,900,000 Caisse D'Amort Dette Societe, 4% due
OBLIGATIONS 10/12/2000......................... 1,815,648 4.6
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 1,295,816 France Telecom, 5.75% due
4/25/2007.......................... 1,225,289 3.1
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
FRANCE 3,040,937 7.7
------------------------------------------------------------------------------------------------------------------------
GERMANY FOREIGN GOVERNMENT Bundesrepublic Deutschland:
OBLIGATIONS 650,000 4.75% due 7/04/2028.................. 555,690 1.4
2,090,000 6.25% due 1/04/2030.................. 2,231,672 5.6
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
GERMANY 2,787,362 7.0
------------------------------------------------------------------------------------------------------------------------
ITALY FOREIGN GOVERNMENT 1,641,977 Buoni Poliennali Del Tesoro, 10% due
OBLIGATIONS 8/01/2003.......................... 1,782,138 4.5
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
ITALY 1,782,138 4.5
------------------------------------------------------------------------------------------------------------------------
NETHERLANDS FOREIGN GOVERNMENT 1,230,000 Netherlands Government Bond, 5.25%
OBLIGATIONS due 7/15/2008...................... 1,171,710 3.0
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN THE
NETHERLANDS 1,171,710 3.0
------------------------------------------------------------------------------------------------------------------------
NORWAY FOREIGN GOVERNMENT NOK 16,000,000 Norwegian Government, 5.50% due
OBLIGATIONS 5/15/2009.......................... 1,785,373 4.5
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
NORWAY 1,785,373 4.5
------------------------------------------------------------------------------------------------------------------------
SPAIN FOREIGN GOVERNMENT E 1,000,000 Bonos y Obligation Del Estado, 5.25%
OBLIGATIONS due 1/31/2003...................... 960,160 2.4
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN
SPAIN 960,160 2.4
------------------------------------------------------------------------------------------------------------------------
UNITED FOREIGN GOVERNMENT United Kingdom Gilt:
KINGDOM OBLIGATIONS L 1,000,000 6.75% due 11/26/2004................. 1,576,189 4.0
1,250,000 7.50% due 12/07/2006................. 2,086,576 5.3
------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME INVESTMENTS IN THE
UNITED KINGDOM 3,662,765 9.3
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN EUROPE
(COST--$18,584,826) 17,161,235 43.4
------------------------------------------------------------------------------------------------------------------------
</TABLE>
Y=yen
E=euro
L=pound sterling
86
<PAGE> 88
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM FACE PERCENT OF
SECURITIES AMOUNT ISSUE VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL US$ 1,086,000 General Motors Acceptance Corp.,
PAPER++ 7.13% due 7/03/2000................ $ 1,085,570 2.7%
------------------------------------------------------------------------------------------------------------------------
FOREIGN A$ 1,030,000 Australian Treasury Bill, 5.75% due
GOVERNMENT 8/03/2000.......................... 615,659 1.6
OBLIGATIONS++
C$ 910,000 Ontario Treasury Bill, 5.437% due
7/06/2000.......................... 613,588 1.5
----------- -----
1,229,247 3.1
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES (COST--$2,309,988) 2,314,817 5.8
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NOMINAL VALUE
OPTIONS COVERED BY
PURCHASED OPTIONS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENCY PUT 1,700,000 Japanese Yen, expiring July 2000 at Y
OPTIONS PURCHASED 108................................ 4,250 0.0
------------------------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED
(COST--$4,760) 4,250 0.0
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$39,174,850).................. 37,656,226 95.1
UNREALIZED DEPRECIATION ON FORWARD
FOREIGN EXCHANGE CONTRACTS--
NET+++............................. (20,301) (0.1)
OTHER ASSETS LESS LIABILITIES........ 1,958,196 5.0
----------- -----
NET ASSETS........................... $39,594,121 100.0%
=========== =====
------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ Commercial Paper and certain Foreign 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 June 30, 2000 were as follows:
Y=yen
E=euro
L=pound sterling
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------
UNREALIZED
FOREIGN APPRECIATION
CURRENCY PURCHASED EXPIRATION DATE (DEPRECIATION)
---------------------------------------------------
<S> <C> <C>
E 3,038,524 July 2000 $ 50,485
Y 291,221,901 July 2000 (28,993)
---------------------------------------------------
TOTAL (US$ COMMITMENT--$5,652,983) 21,492
--------
---------------------------------------------------
</TABLE>
Y=yen
E=euro
L=pound sterling
<TABLE>
<CAPTION>
FOREIGN
CURRENCY SOLD
---------------------------------------------------
<S> <C> <C>
A$ 1,011,821 July 2000 (13,579)
E 3,551,105 July 2000 (52,491)
L 319,506 July 2000 (1,208)
Y 548,146,076
July 2000 25,485
---------------------------------------------------
TOTAL (US$ COMMITMENT--$9,641,272) (41,793)
--------
---------------------------------------------------
TOTAL UNREALIZED DEPRECIATION ON
FORWARD
FOREIGN EXCHANGE CONTRACTS--NET $(20,301)
========
---------------------------------------------------
</TABLE>
(a) Represents a pay-in-kind security which may pay interest/dividends in
additional face amount/shares.
(b) 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.
Y=yen
E=euro
L=pound sterling
See Notes to Financial Statements.
87
<PAGE> 89
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$39,170,090)........ $37,651,976
Options purchased, at value (cost--$4,760).................. 4,250
Foreign cash................................................ 906,015
Cash........................................................ 140
Receivables:
Securities sold........................................... $3,849,677
Interest.................................................. 637,866
Forward foreign exchange contracts........................ 909 4,488,452
----------
Prepaid expenses............................................ 3,366
-----------
Total assets................................................ 43,054,199
-----------
------------------------------------------------------------------------------------------
LIABILITIES:
Unrealized depreciation on forward foreign exchange
contracts................................................. 20,301
Payables:
Securities purchased...................................... 3,386,151
Capital shares redeemed................................... 20,997
Investment adviser........................................ 18,287
Forward foreign exchange contracts........................ 326 3,425,761
----------
Accrued expenses............................................ 14,016
-----------
Total liabilities........................................... 3,460,078
-----------
------------------------------------------------------------------------------------------
NET ASSETS.................................................. $39,594,121
===========
------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 200,000,000
shares authorized+........................................ $ 475,669
Paid-in capital in excess of par............................ 46,698,077
Accumulated distributions in excess of investment
income--net............................................... (572,874)
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (5,479,923)
Unrealized depreciation on investments and foreign currency
transactions--net......................................... (1,526,828)
-----------
NET ASSETS.................................................. $39,594,121
===========
------------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $39,594,121 and 4,756,689
shares outstanding........................................ $ 8.32
===========
------------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
88
<PAGE> 90
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned (net of $4,396 foreign
withholding tax).......................................... $ 1,183,675
-------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 126,629
Custodian fees.............................................. 13,927
Accounting services......................................... 5,752
Professional fees........................................... 5,678
Transfer agent fees......................................... 2,580
Printing and shareholder reports............................ 1,926
Directors' fees and expenses................................ 475
Pricing services............................................ 325
Other....................................................... 965
-----------
Total expenses.............................................. 158,257
-----------
Investment income--net...................................... 1,025,418
-----------
-------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized loss from:
Investments--net.......................................... (628,682)
Foreign currency transactions--net........................ (1,559,499) (2,188,181)
-----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 407,342
Foreign currency transactions--net........................ 245,650 652,992
----------- -----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (509,771)
===========
-------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
89
<PAGE> 91
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
DECREASE IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 1,025,418 $ 2,926,605
Realized loss on investments and foreign currency
transactions--net......................................... (2,188,181) (3,229,165)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 652,992 (4,765,058)
----------- ------------
Net decrease in net assets resulting from operations........ (509,771) (5,067,618)
----------- ------------
--------------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (870,921) (1,506,947)
In excess of investment income-net:
Class A................................................... -- (221,514)
Return of capital--net:
Class A................................................... -- (1,501,179)
----------- ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (870,921) (3,229,640)
----------- ------------
--------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (5,423,775) (14,720,434)
----------- ------------
--------------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (6,804,467) (23,017,692)
Beginning of period......................................... 46,398,588 69,416,280
----------- ------------
End of period............................................... $39,594,121 $ 46,398,588
=========== ============
--------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
90
<PAGE> 92
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL BOND FOCUS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A+
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN -----------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
STATEMENTS. MONTHS ENDED -------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 8.58 $ 9.90 $ 9.32 $ 9.76 $ 9.79
------- ------- ------- ------- -------
Investment income--net.............................. .20 .48 .55 .56 .78
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............ (.29) (1.27) .58 (.40) (.03)
------- ------- ------- ------- -------
Total from investment operations.................... (.09) (.79) 1.13 .16 .75
------- ------- ------- ------- -------
Less dividends:
Investment income--net............................ (.17) (.25) (.47) (.29) (.78)
In excess of investment income--net............... -- (.04) (.08) (.03) --
Return of capital--net............................ -- (.24) -- (.28) --
------- ------- ------- ------- -------
Total dividends..................................... (.17) (.53) (.55) (.60) (.78)
------- ------- ------- ------- -------
Net asset value, end of period...................... $ 8.32 $ 8.58 $ 9.90 $ 9.32 $ 9.76
======= ======= ======= ======= =======
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. (.99%)++ (8.18%) 12.62% 1.95% 8.02%
======= ======= ======= ======= =======
-------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .75%* .77% .75% .73% .69%
======= ======= ======= ======= =======
Investment income--net.............................. 4.88%* 5.21% 5.72% 6.11% 7.95%
======= ======= ======= ======= =======
-------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $39,594 $46,399 $69,416 $76,107 $93,790
======= ======= ======= ======= =======
Portfolio turnover.................................. 142.33% 136.25% 127.93% 568.76% 267.13%
======= ======= ======= ======= =======
-------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
**Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
91
<PAGE> 93
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Futures contracts are valued at the
settlement price at the close of the applicable exchange. Short-term securities
are valued at amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase of decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
92
<PAGE> 94
--------------------------------------------------------------------------------
amount of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
- Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets and liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of premium and discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Dividends and distributions--Dividends 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. A portion of the net investment income dividend paid by the
Fund for the year ended December 31, 1999 is characterized as a return of
capital.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith,
Incorporated, $113 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $53,028,039 and $58,267,970, respectively.
93
<PAGE> 95
--------------------------------------------------------------------------------
Net realized gains (losses) for the six months ended June 30, 2000 and net
unrealized gains (losses) as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Realized Unrealized
Gains Gains
(Losses) (Losses)
-------------------------------------------------------------------
<S> <C> <C>
Long-term investments................... $ (628,682) $(1,518,114)
Foreign currency options purchased...... (80,482) (510)
Forward foreign exchange contracts...... 110,464 (20,301)
Foreign currency transactions........... (1,589,481) 12,097
----------- -----------
Total................................... $(2,188,181) $(1,526,828)
=========== ===========
-------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized depreciation for Federal income tax purposes
aggregated $1,518,114, of which $479,403 related to appreciated securities and
$1,997,517 related to depreciated securities. At June 30, 2000, the aggregate
cost of investments for Federal income tax purposes was $39,170,090.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-----------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 6,511 $ 54,899
Shares issued to shareholders in
reinvestment of dividends.............. 104,984 870,921
-------- -----------
Total issued............................ 111,495 925,820
Shares redeemed......................... (761,831) (6,349,595)
-------- -----------
Net decrease............................ (650,336) $(5,423,775)
======== ===========
-----------------------------------------------------------------
</TABLE>
<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>
5. COMMITMENTS:
At June 30, 2000, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
had agreed to sell foreign currency with an approximate value of $232,000.
6. 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.
7. SUBSEQUENT EVENT:
On July 3, 2000, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.031453 per Class A Share payable on July 3, 2000 to
shareholders of record as of July 3, 2000.
94
<PAGE> 96
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Economic slowing has finally arrived in the United States. As a result,
significant increases in inflation and interest rates appear less likely, which
is usually good news for financial assets. On the other hand, profit growth is
likely to decelerate from unsustainably high levels.
Investor sentiment changed significantly during the first half of 2000. In
general, concerns centered on economic growth being too strong. A recent
inflection could indicate healthy, but slower economic and profit growth in the
second half of the year. Following potential uncertainty during the adjustment
period, the sustainability of the economic expansion could buoy investor
expectations.
During the first half of the year, equity investors switched gears from an
excessive focus on momentum, which was prevalent during most of 1999. This
transition to a more balanced focus on both valuation and earnings growth, which
began in March, can provide a healthier investment backdrop. However, this
change has caused deterioration in many extremely highly valued securities with
speculative fundamentals and improvement in previously neglected, solidly
performing companies.
In the coming months, we believe investors are likely to focus on continuing
cyclical economic developments as well as the presidential election campaign.
Cyclical concerns remain, increasing labor costs as well as volatile, but
rising, commodity prices. Federal budget policy, social security funding options
and trade policy are likely to shape investor interest in the outcome of the
election. Generally, financial markets have tended to do better under divided
governments, preferring legislative gridlock. In part, US markets historically
have done well as a result of fiscal policy restraint and could react poorly to
any significant reversal of that trend.
Despite near-term uncertainties surrounding economic slowdown, earnings growth
and valuation levels, long-term forces supporting US economic and financial
market leadership seem to remain in place. Chief among these are continued heavy
investments in technology, telecommunications and other efficiency-enhancing
projects, thus potentially enabling productivity-led growth.
PORTFOLIO MATTERS
For the six-month period ended June 30, 2000, Global Growth Focus Fund's Class
A Shares had a total return of -1.19%, as compared to -2.56% (in US dollars) for
the unmanaged Morgan Stanley Capital International (MSCI) World Stock Index. For
the 12 months ended June 30, 2000, Global Growth Focus Fund's Class A Shares
returned +29.64% and the MSCI World Stock Index returned +12.19% (in US
dollars). For the six months ended June 30, 2000, the actively managed
portfolios in the Lipper Analytical Services Global Funds Average returned
-1.20%.
The primary reason for the Fund's comparative investment performance is our
continued focus on the investment strategy that we implemented early in the
September 1999 quarter. During the third calendar quarter of 1999, we shifted
company investments in banking and financial, financial services, insurance,
health care, food and household product industries into technology organizations
where the focus was providing systems for the new Internet communication
infrastructure.
We have continued to focus the company investments on the leading technology
organizations in the communications systems and components areas, such as Cisco
Systems, Inc., Nortel Networks Corporation, Texas Instruments Incorporated,
STMicroelectronics NV, JDS Uniphase Corporation and Nokia Oyj. Secondarily, we
have emphasized company investments in large global energy and oil service
organizations, such as Enron Corp. and Schlumberger Limited. Also, we continued
to invest positive cash inflows during the months of April and May 2000 as the
overall declines took place in the global stock markets.
IN CONCLUSION
We appreciate your investment in Global Growth Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to
95
<PAGE> 97
--------------------------------------------------------------------------------
sharing our investment outlook and strategies with you in our next report to
shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Lawrence R. Fuller
Lawrence R. Fuller
Senior Vice President and Portfolio Manager
July 26, 2000
96
<PAGE> 98
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +29.64%
--------------------------------------------------------------------------------
Inception (6/05/98) to 6/30/00 +20.98
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 -1.19% +29.64%
</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.
97
<PAGE> 99
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH SHARES PERCENT OF
AMERICA INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CANADA COMMUNICATIONS 160,000 Nortel Networks Corporation................. $ 11,089,964 4.1%
EQUIPMENT
------------------------------------------------------------------------------------------------------
WIRELINE 28,328 +AT&T Canada Inc............................ 936,594 0.4
COMMUNICATIONS
100,000 +Rogers Communications, Inc. 'B'............ 2,831,207 1.0
------------ -----
3,767,801 1.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CANADA 14,857,765 5.5
-------------------------------------------------------------------------------------------------------------------------
UNITED STATES ADVERTISING 11,863 The Interpublic Group of Companies, Inc. ... 510,109 0.2
------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY 5,000 +Affymetrix, Inc. .......................... 825,312 0.3
73,000 +Immunex Corporation........................ 3,608,937 1.3
------------ -----
4,434,249 1.6
------------------------------------------------------------------------------------------------------
BROADCASTING 10,056 +AMFM Inc. ................................. 693,864 0.2
13,150 +Infinity Broadcasting Corporation (Class
A)........................................ 479,153 0.2
------------ -----
1,173,017 0.4
------------------------------------------------------------------------------------------------------
BROADCASTING--RADIO 8,665 +Viacom, Inc. (Class B)..................... 590,845 0.2
& TELEVISION
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 57,643 +3Com Corporation........................... 3,318,075 1.2
EQUIPMENT 210,200 +Cisco Systems, Inc. ....................... 13,360,837 5.0
46,000 +JDS Uniphase Corporation................... 5,511,375 2.0
------------ -----
22,190,287 8.2
------------------------------------------------------------------------------------------------------
COMPUTERS 84,000 +EMC Corporation............................ 6,462,750 2.4
100,000 +Sun Microsystems, Inc. .................... 9,093,750 3.4
------------ -----
15,556,500 5.8
------------------------------------------------------------------------------------------------------
ELECTRICAL 115,000 General Electric Company.................... 6,095,000 2.3
EQUIPMENT
------------------------------------------------------------------------------------------------------
ELECTRONICS 24,000 +Broadcom Corporation (Class A)............. 5,254,500 2.0
24,000 +LSI Logic Corporation...................... 1,299,000 0.5
40,000 Texas Instruments Incorporated.............. 2,747,500 1.0
21,000 +Xilinx, Inc. .............................. 1,733,813 0.6
------------ -----
11,034,813 4.1
------------------------------------------------------------------------------------------------------
ENERGY 21,968 El Paso Energy Corporation.................. 1,118,995 0.4
68,685 Enron Corp. ................................ 4,430,182 1.6
------------ -----
5,549,177 2.0
------------------------------------------------------------------------------------------------------
ENTERTAINMENT 19,816 The Walt Disney Company..................... 769,109 0.3
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 52,016 T. Rowe Price Associates, Inc. ............. 2,210,680 0.8
------------------------------------------------------------------------------------------------------
INFORMATION 45,000 +America Online, Inc. ...................... 2,373,750 0.9
PROCESSING 132,000 +Exodus Communications, Inc. ............... 6,080,250 2.3
11,000 +Palm, Inc. ................................ 367,125 0.1
------------ -----
8,821,125 3.3
------------------------------------------------------------------------------------------------------
OIL SERVICES 64,497 Baker Hughes Incorporated................... 2,063,904 0.8
2,725 Diamond Offshore Drilling, Inc. ............ 95,716 0.0
24,000 Halliburton Company......................... 1,132,500 0.4
51,555 Schlumberger Limited........................ 3,847,292 1.4
------------ -----
7,139,412 2.6
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 15,000 Merck & Co., Inc. .......................... 1,149,375 0.4
45,486 Pfizer Inc. ................................ 2,183,328 0.8
------------ -----
3,332,703 1.2
------------------------------------------------------------------------------------------------------
RESTAURANTS 14,273 McDonald's Corporation...................... 470,117 0.2
------------------------------------------------------------------------------------------------------
RETAIL 44,000 +Amazon.com, Inc. .......................... 1,597,750 0.6
42,000 +eBay Inc. ................................. 2,278,500 0.8
------------ -----
3,876,250 1.4
------------------------------------------------------------------------------------------------------
</TABLE>
98
<PAGE> 100
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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 42,000 +Applied Materials, Inc. ................... $ 3,806,250 1.4%
(CONCLUDED)
------------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 152,000 +BEA Systems, Inc. ......................... 7,505,000 2.8
84,000 +Commerce One, Inc. ........................ 3,827,250 1.4
10,000 +Rational Software Corporation.............. 928,750 0.3
------------ -----
12,261,000 4.5
------------------------------------------------------------------------------------------------------
SPECIALTY 13,000 +Staples, Inc. ............................. 199,875 0.1
RETAILING
------------------------------------------------------------------------------------------------------
WIRELESS 2,198 +Sprint Corp. (PCS Group)................... 130,781 0.1
COMMUNICATIONS 25,000 +Western Wireless Corporation (Class A)..... 1,360,937 0.5
------------ -----
1,491,718 0.6
------------------------------------------------------------------------------------------------------
WIRELINE 27,312 AT&T Corp. ................................. 863,742 0.3
COMMUNICATIONS 3,100 +Infonet Services Corporation (Class B)..... 37,006 0.0
64,000 +NorthPoint Communications Group, Inc. ..... 712,000 0.3
78,420 +WorldCom, Inc. ............................ 3,597,517 1.3
------------ -----
5,210,265 1.9
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED STATES 116,722,501 43.1
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH AMERICA
(COST--$111,850,637) 131,580,266 48.6
-------------------------------------------------------------------------------------------------------------------------
PACIFIC
BASIN
-------------------------------------------------------------------------------------------------------------------------
AUSTRALIA WIRELESS 275,000 +Cable & Wireless Optus Limited............. 822,248 0.3
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AUSTRALIA 822,248 0.3
-------------------------------------------------------------------------------------------------------------------------
CHINA INFORMATION 40,000 +China.Com Corporation 'A'.................. 815,000 0.3
PROCESSING
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CHINA 815,000 0.3
-------------------------------------------------------------------------------------------------------------------------
JAPAN AUTOMOBILES 2,000 Honda Motor Co., Ltd. ...................... 68,239 0.0
60,000 Toyota Motor Corporation.................... 2,739,001 1.0
------------ -----
2,807,240 1.0
------------------------------------------------------------------------------------------------------
COMPUTERS 75,000 Fujitsu Limited............................. 2,601,484 1.0
------------------------------------------------------------------------------------------------------
LEISURE 28,600 Sony Corporation............................ 2,676,055 1.0
------------------------------------------------------------------------------------------------------
PHOTOGRAPHY 1,000 Fuji Photo Film............................. 41,019 0.0
------------------------------------------------------------------------------------------------------
RETAIL STORES 67,000 Ito-Yokado Co., Ltd. ....................... 4,040,074 1.5
------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 4,000 Tokyo Electron Limited...................... 548,934 0.2
------------------------------------------------------------------------------------------------------
TRANSPORT SERVICES 500 East Japan Railway Company.................. 2,911,016 1.1
------------------------------------------------------------------------------------------------------
WIRELESS 290 NTT Mobile Communications
COMMUNICATIONS Network, Inc. .............................. 7,866,358 2.9
------------------------------------------------------------------------------------------------------
WIRELINE 280 Nippon Telegraph & Telephone
COMMUNICATIONS Corporation (NTT)........................... 3,731,393 1.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 27,223,573 10.1
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PACIFIC BASIN
(COST--$29,723,948) 28,860,821 10.7
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
WESTERN
EUROPE
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DENMARK WIRELINE 20,880 Tele Danmark A/S............................ 1,411,246 0.5
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN DENMARK 1,411,246 0.5
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
99
<PAGE> 101
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINLAND COMMUNICATIONS 200,160 Nokia Oyj................................... $ 10,255,632 3.8%
EQUIPMENT
------------------------------------------------------------------------------------------------------
WIRELESS 14,000 Sonera Oyj.................................. 640,824 0.2
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FINLAND 10,896,456 4.0
-------------------------------------------------------------------------------------------------------------------------
FRANCE BANKING & 8,900 Credit Lyonnais............................. 424,871 0.1
FINANCIAL
------------------------------------------------------------------------------------------------------
BROADCASTING & 25,740 Societe Television Francaise 1.............. 1,801,229 0.7
PUBLISHING
------------------------------------------------------------------------------------------------------
CHEMICALS 21,717 Aventis SA.................................. 1,563,426 0.6
------------------------------------------------------------------------------------------------------
COSMETICS 130 +L'Oreal SA................................. 113,029 0.0
------------------------------------------------------------------------------------------------------
ELECTRICAL 20,000 Alstom...................................... 542,759 0.2
EQUIPMENT
------------------------------------------------------------------------------------------------------
ELECTRONICS 111,000 STMicroelectronics NV....................... 7,022,704 2.6
------------------------------------------------------------------------------------------------------
FOOD 2,296 Groupe Danone............................... 305,931 0.1
------------------------------------------------------------------------------------------------------
INSURANCE 2,946 Axa......................................... 465,966 0.2
------------------------------------------------------------------------------------------------------
OIL/INTEGRATED-- 15,000 Total Fina SA 'B'........................... 2,309,267 0.8
INTERNATIONAL
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 3,060 Aventis SA.................................. 224,252 0.1
------------------------------------------------------------------------------------------------------
RETAIL STORES 6,648 Carrefour SA................................ 456,291 0.2
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 15,229,725 5.6
-------------------------------------------------------------------------------------------------------------------------
GERMANY AUTOMOBILES 17,529 DaimlerChrysler AG.......................... 923,341 0.3
------------------------------------------------------------------------------------------------------
CHEMICALS 7,187 BASF AG..................................... 292,458 0.1
17,155 Bayer AG.................................... 670,947 0.3
1,588 Celanese AG................................. 30,902 0.0
------------ -----
994,307 0.4
------------------------------------------------------------------------------------------------------
ELECTRONICS 26,000 Siemens AG.................................. 3,925,467 1.5
------------------------------------------------------------------------------------------------------
INSURANCE 1,646 Allianz AG (Registered Shares).............. 599,585 0.2
------------------------------------------------------------------------------------------------------
RETAIL STORES 55,000 Metro AG.................................... 1,940,206 0.7
------------------------------------------------------------------------------------------------------
SOFTWARE--COMPUTER 2,800 +Brokat Infosystems AG...................... 218,753 0.1
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 8,601,659 3.2
-------------------------------------------------------------------------------------------------------------------------
ITALY BANKING & 120,000 +Banca di Roma SpA.......................... 147,931 0.1
FINANCIAL 54,750 Unicredito Italiano SpA..................... 262,942 0.1
------------ -----
410,873 0.2
------------------------------------------------------------------------------------------------------
INSURANCE 7,500 Assicurazioni Generali...................... 258,103 0.1
228,725 Istituto Nazionale delle Assicurazioni (INA)
SpA....................................... 565,680 0.2
------------ -----
823,783 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 1,234,656 0.5
-------------------------------------------------------------------------------------------------------------------------
NETHERLANDS CHEMICALS 18,000 Akzo Nobel NV............................... 767,839 0.3
36,000 DSM NV...................................... 1,159,523 0.4
------------ -----
1,927,362 0.7
------------------------------------------------------------------------------------------------------
ENERGY 55,000 Royal Dutch Petroleum Company............... 3,432,267 1.3
------------------------------------------------------------------------------------------------------
INSURANCE 8,784 Aegon NV.................................... 313,826 0.1
16,282 ING Groep NV................................ 1,105,041 0.4
------------ -----
1,418,867 0.5
------------------------------------------------------------------------------------------------------
</TABLE>
100
<PAGE> 102
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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 LEISURE 31,584 Koninklijke (Royal) Philips
(CONCLUDED) Electronics NV.............................. $ 1,495,655 0.6%
------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 75,000 +ASM Lithography Holding NV................. 3,236,713 1.2
21,000 +ASM Lithography Holding NV (ADR)(a)........ 925,313 0.3
------------ -----
4,162,026 1.5
------------------------------------------------------------------------------------------------------
WIRELINE 33,195 +Equant..................................... 1,354,290 0.5
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE NETHERLANDS 13,790,467 5.1
-------------------------------------------------------------------------------------------------------------------------
PORTUGAL WIRELINE 93,500 Portugal Telecom SA (Registered Shares)..... 1,054,038 0.4
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PORTUGAL 1,054,038 0.4
-------------------------------------------------------------------------------------------------------------------------
SPAIN BANKING & 16,929 +Banco Bilbao Vizcaya, SA................... 253,970 0.1
FINANCIAL
55,530 Banco Santander Central Hispano, SA......... 588,203 0.2
------------ -----
842,173 0.3
------------------------------------------------------------------------------------------------------
INFORMATION 132,000 Telefonica Publicidad e
PROCESSING Informacion, SA............................. 1,251,433 0.5
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 2,093,606 0.8
-------------------------------------------------------------------------------------------------------------------------
SWEDEN COMMUNICATIONS 183,060 Telefonaktiebolaget LM Ericsson AB 'B'...... 3,641,999 1.3
EQUIPMENT
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 3,641,999 1.3
-------------------------------------------------------------------------------------------------------------------------
SWITZERLAND FOOD 300 Nestle SA (Registered Shares)............... 602,361 0.2
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 520 Novartis AG (Registered Shares)............. 826,321 0.3
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWITZERLAND 1,428,682 0.5
-------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM BANKING & 20,655 HSBC Holdings PLC........................... 236,242 0.1
FINANCIAL
------------------------------------------------------------------------------------------------------
ENERGY 400,000 BP Amoco PLC................................ 3,839,250 1.4
------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 18,892 Unilever PLC................................ 114,402 0.0
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 8,500 AstraZeneca Group PLC....................... 396,982 0.1
23,550 Glaxo Wellcome PLC.......................... 687,021 0.3
43,776 SmithKline Beecham PLC...................... 573,257 0.2
------------ -----
1,657,260 0.6
------------------------------------------------------------------------------------------------------
PUBLISHING 20,000 EMAP PLC.................................... 321,855 0.2
11,160 Pearson PLC................................. 354,798 0.1
------------ -----
676,653 0.3
------------------------------------------------------------------------------------------------------
WIRELESS 1,813,433 Vodafone AirTouch PLC....................... 7,330,101 2.7
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
WIRELINE 185,071 +COLT Telecom Group PLC..................... 6,163,938 2.3
COMMUNICATIONS 81,000 +Energis PLC................................ 3,038,670 1.1
------------ -----
9,202,608 3.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED KINGDOM 23,056,516 8.5
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN EUROPE
(COST--$70,529,008) 82,439,050 30.4
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
101
<PAGE> 103
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM FACE PERCENT OF
SECURITIES AMOUNT ISSUE VALUE NET ASSETS
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL $ 8,511,000 General Motors Acceptance Corp., 7.13% due
PAPER* 7/03/2000................................. $ 8,505,943 3.1%
10,000,000 Goldman Sachs Group, Inc., 6.75% due
7/06/2000................................. 9,988,750 3.7
------------ -----
18,494,693 6.8
-------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT Federal Home Loan Mortgage Corporation:
AGENCY OBLIGATIONS*
3,180,000 6.48% due 7/14/2000......................... 3,171,986 1.2
6,030,000 6.46% due 7/18/2000......................... 6,010,523 2.2
------------ -----
9,182,509 3.4
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST--$27,677,202)......................... 27,677,202 10.2
-------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$239,780,795)...... 270,557,339 99.9
OTHER ASSETS LESS LIABILITIES............... 249,425 0.1
------------ -----
NET ASSETS.................................. $270,806,764 100.0%
============ =====
-------------------------------------------------------------------------------------------------------------------------
</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.
+ Non-income producing security.
(a) American Depositary Receipts (ADR).
See Notes to Financial Statements.
102
<PAGE> 104
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$239,780,795)....... $270,557,339
Cash........................................................ 111,300
Receivables:
Capital shares sold....................................... $ 529,170
Securities sold........................................... 388,951
Dividends................................................. 129,702 1,047,823
----------
Prepaid expenses and other assets........................... 1,156,349
------------
Total assets................................................ 272,872,811
------------
---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Custodian bank............................................ 1,107,461
Securities purchased...................................... 628,484
Investment adviser........................................ 155,114
Capital shares redeemed................................... 105,791 1,996,850
----------
Accrued expenses and other liabilities...................... 69,197
------------
Total liabilities........................................... 2,066,047
------------
---------------------------------------------------------------------------------------
NET ASSETS.................................................. $270,806,764
============
---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 1,862,681
Paid-in capital in excess of par............................ 229,931,078
Undistributed investment income--net........................ 173,633
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 8,058,592
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 30,780,780
------------
NET ASSETS.................................................. $270,806,764
============
---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $270,806,764 and 18,626,806
shares outstanding........................................ $ 14.54
============
---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
103
<PAGE> 105
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 592,995
Dividends (net of $69,098 foreign withholding tax).......... 589,068
------------
Total income................................................ 1,182,063
------------
-----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 896,636
Custodian fees.............................................. 38,897
Accounting services......................................... 20,074
Registration fees........................................... 19,797
Professional fees........................................... 13,343
Printing and shareholder reports............................ 9,276
Transfer agent fees......................................... 2,007
Directors' fees and expenses................................ 1,753
Pricing services............................................ 927
Other....................................................... 1,618
------------
Total expenses.............................................. 1,004,328
------------
Investment income--net...................................... 177,735
------------
-----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain (loss) from:
Investments--net.......................................... 8,151,397
Foreign currency transactions--net........................ (57,092) 8,094,305
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (16,043,032)
Foreign currency transactions--net........................ 7,743 (16,035,289)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (7,763,249)
============
-----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
104
<PAGE> 106
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 177,735 $ 1,268,598
Realized gain on investments and foreign currency
transactions--net......................................... 8,094,305 2,090,153
Change in unrealized appreciation on investments and foreign
currency transactions--net................................ (16,035,289) 45,178,580
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (7,763,249) 48,537,331
------------ ------------
--------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (4,102) (1,171,390)
Realized gain on investments--net:
Class A................................................... (1,153,439) (1,105,991)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (1,157,541) (2,277,381)
------------ ------------
--------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 99,319,780 114,490,492
------------ ------------
--------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 90,398,990 160,750,442
Beginning of period......................................... 180,407,774 19,657,332
------------ ------------
End of period*.............................................. $270,806,764 $180,407,774
============ ============
--------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 173,633 $ --
============ ============
--------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
105
<PAGE> 107
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL GROWTH FOCUS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A++
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN ----------------------------------------------------------
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL FOR THE SIX FOR THE FOR THE PERIOD
STATEMENTS. MONTHS ENDED YEAR ENDED JUNE 5, 1998+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 DECEMBER 31, 1999 TO DECEMBER 31, 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 14.78 $ 10.82 $ 10.00
-------- -------- -------
Investment income--net.................................... .01 .11 .03
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net...................... (.18) 4.06 .79
-------- -------- -------
Total from investment operations.......................... (.17) 4.17 .82
-------- -------- -------
Less dividends and distributions:
Investment income--net.................................. --++++ (.12) --
Realized gain on investments--net....................... (.07) (.09) --
-------- -------- -------
Total dividends and distributions......................... (.07) (.21) --
-------- -------- -------
Net asset value, end of period............................ $ 14.54 $ 14.78 $ 10.82
======== ======== =======
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................ (1.19%)++ 38.69% 8.20%++
======== ======== =======
----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................. .84%* .87% 1.03%*
======== ======== =======
Investment income--net.................................... .15%* .97% .63%*
======== ======== =======
----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................. $270,807 $180,408 $19,657
======== ======== =======
Portfolio turnover........................................ 24.34% 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.
++++Amount is less than $.01 per share.
See Notes to Financial Statements.
106
<PAGE> 108
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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 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 accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Short-term securities are valued at
amortized cost, which approximates market value. Futures contracts are valued at
the settlement price at the close of the applicable exchange. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
107
<PAGE> 109
--------------------------------------------------------------------------------
amount of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
- Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets and liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of premium and discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(g) Custodian Bank--The Fund recorded an amount payable to the Custodian Bank
reflecting an overnight overdraft which resulted from a failed trade which
settled the next day.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $25,501 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's Distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $133,822,384 and $52,760,365, respectively.
108
<PAGE> 110
--------------------------------------------------------------------------------
Net realized gains (losses) for the six months ended June 30, 2000 and net
unrealized gains as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $8,151,464 $30,776,544
Short-term investments.............. (67) --
Foreign currency transactions....... (57,092) 4,236
---------- -----------
Total............................... $8,094,305 $30,780,780
========== ===========
---------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $30,776,544, of which $54,194,075 related to appreciated securities
and $23,417,531 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $239,780,795.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Class A for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-----------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 6,765,461 $104,423,985
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 69,522 1,157,541
--------- ------------
Total issued.......................... 6,834,983 105,581,526
Shares redeemed....................... (415,822) (6,261,746)
--------- ------------
Net increase.......................... 6,419,161 $ 99,319,780
========= ============
-----------------------------------------------------------------
</TABLE>
<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>
5. COMMITMENTS:
At June 30, 2000, the Fund had entered into foreign exchange contracts, under
which it had agreed to purchase and sell various foreign currencies with
approximate values of $113,000 and $394,000, respectively.
109
<PAGE> 111
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Economic slowing has finally arrived in the United States. As a result,
significant increases in inflation and interest rates appear less likely, which
is usually good news for financial assets. On the other hand, profit growth is
likely to decelerate from unsustainably high levels.
Investor sentiment changed significantly during the first half of 2000. In
general, concerns centered on economic growth being too strong. A recent
inflection could indicate healthy, but slower economic and profit growth in the
second half of the year. Following potential uncertainty during the adjustment
period, the sustainability of the economic expansion could buoy investor
expectations.
During the first half of the year, equity investors switched gears from an
excessive focus on momentum, which was prevalent during most of 1999. This
transition to a more balanced focus on both valuation and earnings growth, which
began in March, can provide a healthier investment backdrop. However, this
change has caused deterioration in many extremely highly valued securities with
speculative fundamentals and improvement in previously neglected, solidly
performing companies.
In the coming months, we believe investors are likely to focus on continuing
cyclical economic developments as well as the presidential election campaign.
Cyclical concerns remain, increasing labor costs as well as volatile, but
rising, commodity prices. Federal budget policy, social security funding options
and trade policy are likely to shape investor interest in the outcome of the
election. Generally, financial markets have tended to do better under divided
governments, preferring legislative gridlock. In part, US markets historically
have done well as a result of fiscal policy restraint and could react poorly to
any significant reversal of that trend.
Despite near-term uncertainties surrounding economic slowdown, earnings growth
and valuation levels, long-term forces supporting US economic and financial
market leadership seem to remain in place. Chief among these are continued heavy
investments in technology, telecommunications and other efficiency-enhancing
projects, thus potentially enabling productivity-led growth.
PORTFOLIO MATTERS
As of June 30, 2000, the Fund's asset allocation was: US stocks, 27% of net
assets; foreign stocks, 48%; US bonds, 10%; foreign bonds, 10%; and cash
reserves, 5%.
We increased the Fund's position in US bonds from 3% of net assets to 10%
during the first half of 2000. The majority of funds added to the position in US
fixed-income securities was raised through the reduction of our 16% weighting in
foreign bonds to 10%. The appeal of US bonds seemed enhanced in an environment
of more aggressive tightening by the Federal Reserve Board and since there was
evidence of beginning in the slowdown of US economic activity. However, we
believe a significant decline in US interest rates will likely hinge on
expectations that the Federal Reserve Board will actually reverse its
restrictive monetary policy. Given this outlook, the average duration of the
Fund's US bond holdings is currently maintained at a defensive average of 4.3
years.
In the foreign bond sector, we partially reduced the Fund's position in
Germany in favor of Sweden, given what we view as the latter market's superior
total return potential. We maintained a commitment in the United Kingdom, and
established a position in Canadian bonds in response to its favorable total
return potential relative to the United States.
Within the equity sector, we reduced the Fund's exposure to foreign issues
from 54% of net assets to 48% during the first half of 2000, with most of the
cutback taking place in June. At the same time, we expanded the Fund's
commitment to US equities from 25% of net assets to 27%. The most significant
reduction within the equity sector was in Japanese equities, which we believe
are sensitive to the domestic economy. Equities of this type could be vulnerable
to earning disappointments resulting from the sluggish pace of Japanese consumer
spending. The remaining Japanese equity positions remain hedged back into US
dollars since we expect the yen to weaken in coming months. We modestly
increased the Fund's commitment to Europe. Overall, we continue to allocate
substantial assets to "new economy" equities worldwide. Companies in technology-
oriented areas such as telecommunications equipment, computers, and software and
services should be relatively immune to an economic slowdown of modest
proportions, in our view. Representation in old economy sectors was maintained
on a selective basis in order to maintain diversification consistent with the
Fund's objectives. Areas with significant repre-
110
<PAGE> 112
--------------------------------------------------------------------------------
sentation included financial services, consumer staples and health care.
IN CONCLUSION
We appreciate your investment in Global Strategy Focus Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
[/s/ Thomas R. Robinson]
Thomas R. Robinson
Senior Vice President and Portfolio Manager
July 26, 2000
111
<PAGE> 113
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +15.26%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +12.03
--------------------------------------------------------------------------------
Inception (2/28/92) to 6/30/00 +10.23
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 -0.63% +15.26%
</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.
112
<PAGE> 114
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA PRINTING & 60,900 The News Corporation Limited (Convertible
PUBLISHING Preferred) (ADR)*......................... $ 2,892,750 0.4%
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN AUSTRALIA 2,892,750 0.4
------------------------------------------------------------------------------------------------------------------------
AUSTRIA PAPER & FOREST 13,500 Mayr-Melnhof Karton AG...................... 641,232 0.1
PRODUCTS
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN AUSTRIA 641,232 0.1
------------------------------------------------------------------------------------------------------------------------
BRAZIL OIL--INTEGRATED 103,200 Petroleo Brasileiro SA...................... 3,030,785 0.5
------------------------------------------------------------------------------------------------------
PAPER & FOREST 39,900 Aracruz Celulose SA (ADR)*.................. 770,569 0.1
PRODUCTS
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 136,500 Embratel Participacoes SA (ADR)*............ 3,224,813 0.5
1,615 Tele Norte Leste Participacoes SA (ADR)*.... 38,154 0.0
------------ -----
3,262,967 0.5
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN BRAZIL 7,064,321 1.1
------------------------------------------------------------------------------------------------------------------------
CANADA COMMUNICATION 96,728 Nortel Networks Corporation................. 6,601,686 1.0
EQUIPMENT
------------------------------------------------------------------------------------------------------
MACHINERY 98,900 +ATS Automation Tooling Systems, Inc........ 2,152,612 0.3
------------------------------------------------------------------------------------------------------
MISCELLANEOUS 140,000 +ATI Technologies Inc....................... 1,181,076 0.1
MATERIALS &
COMMODITIES
------------------------------------------------------------------------------------------------------
OIL & RELATED 46,000 Alberta Energy Company Ltd.................. 1,856,516 0.3
------------------------------------------------------------------------------------------------------
PAPER & FOREST 71,900 Domtar, Inc................................. 667,223 0.1
PRODUCTS
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 138,100 BCE Inc..................................... 3,288,506 0.5
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN CANADA 15,747,619 2.3
------------------------------------------------------------------------------------------------------------------------
CHINA INTERNET CONTENT 27,600 +China.Com Corporation 'A'.................. 562,350 0.1
------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 121,600 +PetroChina Company Limited (ADR)*.......... 2,546,000 0.4
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN CHINA 3,108,350 0.5
------------------------------------------------------------------------------------------------------------------------
DENMARK INDUSTRIAL--SERVICES 12,900 +ISS A/S.................................... 986,264 0.1
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN DENMARK 986,264 0.1
------------------------------------------------------------------------------------------------------------------------
FINLAND COMMUNICATION 79,000 Nokia Oyj................................... 4,047,736 0.6
EQUIPMENT
------------------------------------------------------------------------------------------------------
DIVERSIFIED 106,500 Amer Group Ltd.............................. 2,940,218 0.5
------------------------------------------------------------------------------------------------------
INSURANCE 69,500 Sampo Insurance Company Ltd. 'A'............ 2,831,465 0.4
------------------------------------------------------------------------------------------------------
SOFTWARE 41,800 +Stonesoft Oyj.............................. 665,153 0.1
19,100 Tietoenator Oyj............................. 639,909 0.1
------------ -----
1,305,062 0.2
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN FINLAND 11,124,481 1.7
------------------------------------------------------------------------------------------------------------------------
FRANCE CHEMICALS 56,400 Aventis SA.................................. 4,133,272 0.6
------------------------------------------------------------------------------------------------------
CONSUMER-- 12,500 Christian Dior SA........................... 2,845,844 0.4
MISCELLANEOUS
------------------------------------------------------------------------------------------------------
ELECTRICAL 57,000 Thomson CSF................................. 2,254,455 0.3
EQUIPMENT
------------------------------------------------------------------------------------------------------
ELECTRONICS 59,800 +Thomson Multimedia......................... 3,886,586 0.6
------------------------------------------------------------------------------------------------------
FOOD 15,200 Groupe Danone............................... 2,025,330 0.3
------------------------------------------------------------------------------------------------------
INFORMATION 9,150 Cap Gemini SA............................... 1,618,285 0.2
PROCESSING
------------------------------------------------------------------------------------------------------
INSURANCE 27,800 Axa......................................... 4,397,098 0.7
43,500 Scor........................................ 1,901,896 0.3
------------ -----
6,298,994 1.0
------------------------------------------------------------------------------------------------------
OIL & RELATED 29,200 Total Fina SA 'B'........................... 4,495,374 0.7
------------------------------------------------------------------------------------------------------
</TABLE>
113
<PAGE> 115
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FRANCE SEMICONDUCTOR 81,000 STMicroelectronics NV (NY Registered
(CONCLUDED) CAPITAL EQUIPMENT Shares)................................... $ 5,199,188 0.8%
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 32,800 France Telecom SA........................... 4,603,121 0.7
------------------------------------------------------------------------------------------------------
UTILITIES--WATER 30,900 Vivendi..................................... 2,738,437 0.4
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN FRANCE 40,098,886 6.0
------------------------------------------------------------------------------------------------------------------------
GERMANY BANKING 54,000 Deutsche Bank AG (Registered Shares)........ 4,472,444 0.7
------------------------------------------------------------------------------------------------------
CHEMICALS 28,200 Henkel KGaA (Preferred)..................... 1,635,467 0.2
------------------------------------------------------------------------------------------------------
DIVERSIFIED 17,500 RWE AG...................................... 590,498 0.1
------------------------------------------------------------------------------------------------------
ELECTRONIC 22,789 +Epcos AG................................... 2,302,519 0.3
COMPONENTS
------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 13,300 Veba AG..................................... 655,318 0.1
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN GERMANY 9,656,246 1.4
------------------------------------------------------------------------------------------------------------------------
HONG KONG ELECTRONICS 8,900 +Gemstar International Group Limited........ 546,794 0.1
------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY 160,380 Hutchison Whampoa Limited................... 2,016,246 0.3
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN HONG KONG 2,563,040 0.4
------------------------------------------------------------------------------------------------------------------------
IRELAND BANKING 262,000 Bank of Ireland............................. 1,646,309 0.2
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN IRELAND 1,646,309 0.2
------------------------------------------------------------------------------------------------------------------------
ITALY AEROSPACE & 1,350,000 +Finmeccanica SpA........................... 1,863,518 0.3
DEFENSE
------------------------------------------------------------------------------------------------------
OIL & RELATED 462,000 ENI SpA..................................... 2,679,383 0.4
------------------------------------------------------------------------------------------------------
PRINTING & 94,250 Mondadori (Arnoldo) Editore SpA............. 2,159,318 0.3
PUBLISHING
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN ITALY 6,702,219 1.0
------------------------------------------------------------------------------------------------------------------------
JAPAN APPLIANCES 40,400 Sony Corporation (ADR)*..................... 3,810,225 0.6
------------------------------------------------------------------------------------------------------
AUTOMOBILE 39,000 Honda Motor Co., Ltd........................ 1,330,655 0.2
29,000 Toyota Motor Corporation.................... 1,323,850 0.2
------------ -----
2,654,505 0.4
------------------------------------------------------------------------------------------------------
CHEMICALS 52,000 Shin-Etsu Chemical Co., Ltd................. 2,644,109 0.4
------------------------------------------------------------------------------------------------------
COMPUTERS 308,000 NEC Corporation............................. 9,693,682 1.4
------------------------------------------------------------------------------------------------------
DISTRIBUTION 7,400 Softbank Corp............................... 1,007,136 0.2
------------------------------------------------------------------------------------------------------
DIVERSIFIED 77,000 Olympus Optical Co., Ltd.................... 1,383,460 0.2
------------------------------------------------------------------------------------------------------
ELECTRONICS 115,000 Fujitsu Limited............................. 3,988,942 0.6
280,000 Hitachi Ltd................................. 4,048,958 0.6
12,600 +Internet Initiative Japan Inc. (ADR)*...... 744,975 0.1
5,150 Keyence Corporation......................... 1,703,606 0.3
25,000 Kyocera Corporation......................... 4,250,744 0.6
107,000 Matsushita Electric Industrial Company,
Ltd....................................... 2,781,060 0.4
4,000 Murata Manufacturing Co.,
Ltd....................................... 575,398 0.1
243 Nippon Telegraph & Telephone Corporation
(NTT)..................................... 3,238,316 0.5
10,000 Rohm Company Ltd............................ 2,929,918 0.4
14,000 TDK Corporation............................. 2,016,540 0.3
------------ -----
26,278,457 3.9
------------------------------------------------------------------------------------------------------
FINANCE 309,000 The Nikko Securities Co., Ltd............... 3,066,490 0.5
25,800 Orix Corporation............................ 3,816,171 0.6
------------ -----
6,882,661 1.1
------------------------------------------------------------------------------------------------------
INSURANCE 187,000 The Tokio Marine & Fire Insurance Co.
Ltd....................................... 2,163,300 0.3
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 46,000 Takeda Chemical Industries, Ltd. ........... 3,025,944 0.5
62,000 Yamanouchi Pharmaceutical Co., Ltd. ........ 3,392,845 0.5
------------ -----
6,418,789 1.0
------------------------------------------------------------------------------------------------------
</TABLE>
114
<PAGE> 116
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JAPAN REAL ESTATE 311,000 Mitsubishi Estate Company, Limited.......... $ 3,668,333 0.5%
(CONCLUDED) 358,000 Mitsui Fudosan Co., Ltd. ................... 3,891,120 0.6
------------ -----
7,559,453 1.1
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 180 +NTT Mobile Communications Network, Inc. ... 4,882,567 0.7
------------------------------------------------------------------------------------------------------
TRANSPORT SERVICES 507 East Japan Railway Company.................. 2,951,770 0.4
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 139,000 Tokyo Electric Power........................ 3,396,012 0.5
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN JAPAN 81,726,126 12.2
------------------------------------------------------------------------------------------------------------------------
MEXICO BEVERAGES 109,900 Panamerican Beverages, Inc. 'A' (US
Registered Shares)........................ 1,641,631 0.2
------------------------------------------------------------------------------------------------------
CEMENT 42,700 Cemex SA de CV (ADR)*....................... 998,112 0.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 70,300 Telefonos de Mexico SA (ADR)*............... 4,015,888 0.6
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN MEXICO 6,655,631 1.0
------------------------------------------------------------------------------------------------------------------------
NETHERLANDS BROADCASTING & 75,600 Wolters Kluwer NV 'A'....................... 2,021,917 0.3
PUBLISHING
------------------------------------------------------------------------------------------------------
ELECTRONIC 73,900 +ASM Lithography Holding NV................. 3,189,241 0.5
COMPONENTS
------------------------------------------------------------------------------------------------------
ELECTRONICS 88,032 Koninklijke (Royal) Philips Electronics NV
(NY Registered Shares).................... 4,181,520 0.6
------------------------------------------------------------------------------------------------------
FOOD 150,900 CSM NV...................................... 2,979,846 0.4
101,626 Koninklijke Ahold NV........................ 3,003,418 0.5
------------ -----
5,983,264 0.9
------------------------------------------------------------------------------------------------------
HUMAN RESOURCES 39,200 Vedior NV 'A'............................... 486,624 0.1
------------------------------------------------------------------------------------------------------
PRINTING & 55,200 VNU NV...................................... 2,862,686 0.4
PUBLISHING
------------------------------------------------------------------------------------------------------
RETAIL STORES 47,800 Vendex KBB NV............................... 815,157 0.1
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN THE NETHERLANDS 19,540,409 2.9
------------------------------------------------------------------------------------------------------------------------
NORWAY CHEMICALS 42,000 Norsk Hydro ASA............................. 1,768,897 0.3
------------------------------------------------------------------------------------------------------
SOFTWARE 197,800 +Merkantildata ASA.......................... 1,020,506 0.1
------------------------------------------------------------------------------------------------------
TRANSPORT SERVICES 33,900 Bergesen d.y. ASA 'B'....................... 652,404 0.1
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN NORWAY 3,441,807 0.5
------------------------------------------------------------------------------------------------------------------------
SINGAPORE AIRLINES 153,700 +Singapore Airlines Limited................. 1,520,110 0.2
------------------------------------------------------------------------------------------------------
BANKING & 82,573 DBS Group Holdings Limited.................. 1,060,220 0.1
FINANCIAL
------------------------------------------------------------------------------------------------------
CONSTRUCTION 298,000 City Developments Limited................... 1,154,772 0.2
------------------------------------------------------------------------------------------------------
ELECTRONIC 7,800 +Flextronics International Ltd. ............ 535,762 0.1
COMPONENTS
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN SINGAPORE 4,270,864 0.6
------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA ELECTRONICS 10,600 Samsung Electronics......................... 3,507,903 0.5
------------------------------------------------------------------------------------------------------
INTERNET CONTENT 15,400 +Daum Communications Corporation............ 1,457,097 0.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 3,600 SK Telecom Co., Ltd. ....................... 1,178,449 0.2
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN SOUTH KOREA 6,143,449 0.9
------------------------------------------------------------------------------------------------------------------------
SPAIN BANKING 264,400 Banco Bilbao Vizcaya, SA.................... 3,966,553 0.6
------------------------------------------------------------------------------------------------------
PETROLEUM 134,400 Repsol-YPF, SA.............................. 2,686,227 0.4
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 203,400 +Telefonica SA.............................. 4,387,033 0.7
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 119,000 Endesa SA................................... 2,314,549 0.3
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN SPAIN 13,354,362 2.0
------------------------------------------------------------------------------------------------------------------------
SWEDEN APPLIANCES 149,700 Electrolux AB 'B'........................... 2,329,729 0.3
------------------------------------------------------------------------------------------------------
AUTO--PARTS 58,100 Autoliv, Inc. .............................. 1,430,806 0.2
------------------------------------------------------------------------------------------------------
</TABLE>
115
<PAGE> 117
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SWEDEN COMMUNICATIONS 143,500 Telefonaktiebolaget LM Ericsson AB 'B'...... $ 2,854,948 0.4%
(CONCLUDED) EQUIPMENT 79,400 +Telia AB................................... 751,362 0.1
------------ -----
3,606,310 0.5
------------------------------------------------------------------------------------------------------
DIVERSIFIED 16,400 Custos AB 'A'............................... 448,752 0.1
51,500 Custos AB 'B'............................... 1,432,676 0.2
------------ -----
1,881,428 0.3
------------------------------------------------------------------------------------------------------
INVESTMENT 415,982 Investment AB Bure.......................... 3,130,180 0.5
MANAGEMENT
------------------------------------------------------------------------------------------------------
REAL ESTATE 90,200 Castellum AB................................ 976,970 0.2
151,200 Fastighets AB Tornet........................ 1,991,061 0.3
------------ -----
2,968,031 0.5
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN SWEDEN 15,346,484 2.3
------------------------------------------------------------------------------------------------------------------------
SWITZERLAND BANKING 20,200 Credit Suisse Group (Registered Shares)..... 4,031,056 0.6
------------------------------------------------------------------------------------------------------
BANKING & 30,400 UBS AG (Registered)......................... 4,468,114 0.7
FINANCIAL
------------------------------------------------------------------------------------------------------
FOOD 1,100 Nestle SA (Registered Shares)............... 2,208,659 0.3
------------------------------------------------------------------------------------------------------
HUMAN RESOURCES 1,302 Adecco SA (Registered
Shares)..................................... 1,109,755 0.2
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 239 +Givaudan (Registered)...................... 72,974 0.0
1,000 Novartis AG (Registered Shares)............. 1,589,078 0.2
239 Roche Holding AG (Genuss)................... 2,334,002 0.3
------------ -----
3,996,054 0.5
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN SWITZERLAND 15,813,638 2.3
------------------------------------------------------------------------------------------------------------------------
TAIWAN SEMICONDUCTORS 195,840 +Taiwan Semiconductor Manufacturing
Company................................... 928,332 0.1
------------------------------------------------------------------------------------------------------
TEXTILES 34,800 +Far Eastern Textile Ltd. (GDR)**........... 426,300 0.1
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN TAIWAN 1,354,632 0.2
------------------------------------------------------------------------------------------------------------------------
UNITED BANKING 151,000 Barclays PLC................................ 3,755,880 0.6
KINGDOM 215,300 HSBC Holdings PLC........................... 2,462,497 0.4
------------ -----
6,218,377 1.0
------------------------------------------------------------------------------------------------------
BEVERAGES 559,186 Diageo PLC.................................. 5,020,051 0.7
------------------------------------------------------------------------------------------------------
BUILDING & 535,000 Hanson PLC.................................. 3,782,403 0.6
CONSTRUCTION
------------------------------------------------------------------------------------------------------
CABLE TELEVISION 296,300 +Telewest Communications PLC................ 1,022,736 0.2
SERVICES
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 264,000 +Marconi PLC................................ 3,437,159 0.5
EQUIPMENT
------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 33,800 Logica PLC.................................. 800,296 0.1
------------------------------------------------------------------------------------------------------
HARDWARE PRODUCTS 324,400 +Reckitt Benckiser PLC...................... 3,634,208 0.5
------------------------------------------------------------------------------------------------------
INSURANCE--LIFE 783,000 +Old Mutual PLC............................. 1,721,770 0.3
------------------------------------------------------------------------------------------------------
MANUFACTURING 975,000 Invensys PLC................................ 3,660,610 0.5
------------------------------------------------------------------------------------------------------
OIL & RELATED 382,000 BP Amoco PLC................................ 3,666,484 0.5
------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 84,250 Shell Transport & Trading Company (ADR)*.... 4,207,234 0.6
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 56,600 AstraZeneca Group PLC....................... 2,643,436 0.4
67,900 +Glaxo Wellcome PLC......................... 1,980,837 0.3
183,500 SmithKline Beecham PLC...................... 2,402,976 0.4
------------ -----
7,027,249 1.1
------------------------------------------------------------------------------------------------------
</TABLE>
116
<PAGE> 118
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED TELECOMMUNICATIONS 137,300 +Cable & Wireless PLC....................... $ 2,325,936 0.4%
KINGDOM 41,500 +Energis PLC................................ 1,556,849 0.2
(CONCLUDED) 1,664,292 Vodafone AirTouch PLC....................... 6,727,256 1.0
------------ -----
10,610,041 1.6
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN THE
UNITED KINGDOM 54,808,618 8.2
------------------------------------------------------------------------------------------------------------------------
UNITED STATES AEROSPACE 19,400 The Boeing Company.......................... 811,162 0.1
------------------------------------------------------------------------------------------------------
AEROSPACE & 34,302 United Technologies Corporation............. 2,019,530 0.3
DEFENSE
------------------------------------------------------------------------------------------------------
APPAREL 19,600 The Gap, Inc. .............................. 612,500 0.1
------------------------------------------------------------------------------------------------------
APPLICATION 8,780 +Siebel Systems, Inc. ...................... 1,436,079 0.2
DEVELOPMENT
SOFTWARE
------------------------------------------------------------------------------------------------------
AUTOMOBILE 4,000 +General Motors
Corporation (Class H)....................... 351,000 0.1
------------------------------------------------------------------------------------------------------
BANKING 33,128 Bank of America Corporation................. 1,424,504 0.2
78,330 The Bank of New York Company, Inc. ......... 3,642,345 0.5
23,575 The Chase Manhattan Corporation............. 1,085,923 0.2
54,000 Citigroup Inc. ............................. 3,253,500 0.5
54,660 Wells Fargo Company......................... 2,118,075 0.3
------------ -----
11,524,347 1.7
------------------------------------------------------------------------------------------------------
BEVERAGES 50,700 The Coca-Cola Company....................... 2,912,081 0.4
------------------------------------------------------------------------------------------------------
BROADCASTING & 27,200 +TV Guide, Inc. (Class A)................... 931,600 0.1
PUBLISHING
------------------------------------------------------------------------------------------------------
BROADCASTING/CABLE 148,700 +AT&T Corp.-Liberty Media Group (Class A)... 3,605,975 0.5
------------------------------------------------------------------------------------------------------
BROADCASTING/MEDIA 4,000 +Univision Communications Inc. (Class A).... 414,000 0.1
------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS 11,000 +American Tower Corporation (Class A)....... 458,562 0.1
------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 29,500 +Oracle Corporation......................... 2,478,000 0.4
------------------------------------------------------------------------------------------------------
CABLE 68,100 +Charter Communications, Inc. (Class A)..... 1,119,394 0.2
------------------------------------------------------------------------------------------------------
CAPITAL EQUIPMENT 19,070 +Agilent Technologies, Inc. ................ 1,406,412 0.2
50,000 Hewlett-Packard Company..................... 6,243,750 0.9
------------ -----
7,650,162 1.1
------------------------------------------------------------------------------------------------------
CAPITAL GOODS 4,900 Minnesota Mining and Manufacturing Company
(3M)...................................... 404,250 0.1
------------------------------------------------------------------------------------------------------
CELLULAR 14,800 +Dobson Communications Corporation (Class
TELECOMMUNICATIONS A)........................................ 284,900 0.0
------------------------------------------------------------------------------------------------------
CHEMICALS 29,446 Rohm and Haas Company....................... 1,015,887 0.2
------------------------------------------------------------------------------------------------------
COMMERCIAL 35,100 +Convergys Corporation...................... 1,820,813 0.3
SERVICES
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 1,900 +CIENA Corporation.......................... 316,587 0.0
EQUIPMENT 76,100 Lucent Technologies Inc. ................... 4,508,925 0.7
41,385 +WorldCom, Inc. ............................ 1,898,537 0.3
------------ -----
6,724,049 1.0
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 15,400 +Pegasus Communications Corporation......... 753,638 0.1
------------------------------------------------------------------------------------------------------
COMPUTER RELATED 8,800 +VERITAS Software Corporation............... 994,400 0.1
PRODUCTS
------------------------------------------------------------------------------------------------------
</TABLE>
117
<PAGE> 119
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES COMPUTER SERVICES 41,400 +America Online, Inc. ...................... $ 2,183,850 0.3%
(CONTINUED) 150,660 +Cisco Systems, Inc. ....................... 9,576,326 1.4
12,700 Electronic Data Systems Corporation......... 523,875 0.1
24,900 International Business Machines
Corporation............................... 2,728,106 0.4
1,400 +StorageNetworks, Inc. ..................... 126,350 0.0
------------ -----
15,138,507 2.2
------------------------------------------------------------------------------------------------------
COMPUTER 24,000 +Solectron Corporation...................... 1,005,000 0.2
TECHNOLOGY
------------------------------------------------------------------------------------------------------
COMPUTERS 32,900 Compaq Computer
Corporation................................. 841,006 0.1
17,600 +Dell Computer Corporation.................. 867,900 0.1
50,260 +EMC Corporation............................ 3,866,879 0.6
20,100 RadioShack Corporation...................... 952,238 0.1
44,150 +Sun Microsystems, Inc. .................... 4,014,891 0.6
------------ -----
10,542,914 1.5
------------------------------------------------------------------------------------------------------
COMPUTERS & 4,700 +Ariba, Inc. ............................... 460,600 0.1
COMPUTER SERVICES
------------------------------------------------------------------------------------------------------
CONGLOMERATES 26,900 Honeywell International Inc. ............... 906,194 0.1
------------------------------------------------------------------------------------------------------
DIVERSIFIED 9,900 +Conexant Systems, Inc. .................... 480,769 0.1
COMPANIES 6,900 Corning Incorporated........................ 1,862,138 0.3
------------ -----
2,342,907 0.4
------------------------------------------------------------------------------------------------------
ELECTRIC & GAS 62,400 +Calpine Corporation........................ 4,102,800 0.6
------------------------------------------------------------------------------------------------------
ELECTRICAL 1,200 +Capstone Turbine Corporation............... 54,225 0.0
27,900 DPL Inc. ................................... 612,056 0.1
------------ -----
666,281 0.1
------------------------------------------------------------------------------------------------------
ELECTRICAL & 16,000 +The AES Corporation........................ 730,000 0.1
ELECTRONICS
------------------------------------------------------------------------------------------------------
ELECTRONIC 120,000 General Electric
COMPONENTS Company..................................... 6,360,000 0.9
6,400 +LSI Logic Corporation...................... 346,400 0.1
------------ -----
6,706,400 1.0
------------------------------------------------------------------------------------------------------
ELECTRONICS 2,800 +Analog Devices, Inc. ...................... 212,800 0.0
6,700 +Broadcom Corporation (Class A)............. 1,466,881 0.2
68,700 Intel Corporation........................... 9,180,038 1.4
30,400 Texas Instruments Incorporated.............. 2,088,100 0.3
------------ -----
12,947,819 1.9
------------------------------------------------------------------------------------------------------
FIBER OPTICS 600 +Exfo Electro-Optical Engineering Inc. ..... 26,325 0.0
------------------------------------------------------------------------------------------------------
FINANCE 20,000 Federal Home Loan
Mortgage Association........................ 810,000 0.1
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 29,550 Associates First Capital Corporation (Class
A)........................................ 659,334 0.1
22,500 The Charles Schwab Corporation.............. 756,563 0.1
------------ -----
1,415,897 0.2
------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 40,350 Colgate-Palmolive Company................... 2,415,956 0.4
6,700 The Procter & Gamble Company................ 383,575 0.1
------------ -----
2,799,531 0.5
------------------------------------------------------------------------------------------------------
INSURANCE 30,840 AXA Financial, Inc. ........................ 1,048,560 0.2
17,187 American International Group, Inc. ......... 2,019,472 0.3
8,300 ITT Industries, Inc. ....................... 252,113 0.0
------------ -----
3,320,145 0.5
------------------------------------------------------------------------------------------------------
INTERNET CONTENT 4,762 +VeriSign, Inc. ............................ 839,600 0.1
------------------------------------------------------------------------------------------------------
INTERNET SOFTWARE 8,900 +IntraNet Solutions, Inc. .................. 341,538 0.1
------------------------------------------------------------------------------------------------------
</TABLE>
118
<PAGE> 120
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES INTERNETWORKING 700 +Alamosa PCS Holdings, Inc. ................ $ 14,612 0.0%
(CONTINUED) 6,000 +InfoSpace.com, Inc. ....................... 331,500 0.1
5,500 +Inktomi Corporation........................ 650,375 0.1
------------ -----
996,487 0.2
------------------------------------------------------------------------------------------------------
LASER SYSTEMS & 27,180 +JDS Uniphase Corporation................... 3,256,504 0.5
COMPONENTS
------------------------------------------------------------------------------------------------------
MANUFACTURING 11,520 Millipore Corporation....................... 868,320 0.1
7,000 Textron, Inc. .............................. 380,188 0.1
48,550 Tyco International Ltd. .................... 2,300,056 0.3
------------ -----
3,548,564 0.5
------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 10,700 +Boston Scientific Corporation.............. 234,731 0.0
27,500 Johnson & Johnson........................... 2,801,563 0.4
------------ -----
3,036,294 0.4
------------------------------------------------------------------------------------------------------
METALS 35,030 Alcoa Inc. ................................. 1,015,870 0.2
------------------------------------------------------------------------------------------------------
MULTIMEDIA 8,900 Time Warner Inc. ........................... 676,400 0.1
------------------------------------------------------------------------------------------------------
NATURAL GAS 66,600 Enron Corp. ................................ 4,295,700 0.6
------------------------------------------------------------------------------------------------------
NATURAL RESOURCES 38,800 Burlington Resources Inc. .................. 1,484,100 0.2
------------------------------------------------------------------------------------------------------
NETWORKING 3,900 +ONI Systems Corp. ......................... 457,031 0.1
PRODUCTS
------------------------------------------------------------------------------------------------------
OIL & GAS 10,000 +Nabors Industries, Inc. ................... 415,625 0.1
PRODUCERS
------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 58,037 Exxon Mobil Corporation..................... 4,555,905 0.7
------------------------------------------------------------------------------------------------------
OIL SERVICES 15,300 Schlumberger Limited........................ 1,141,763 0.2
------------------------------------------------------------------------------------------------------
PHARMACEUTICAL-- 30,310 American Home Products Corporation.......... 1,780,712 0.3
DIVERSIFIED
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 36,640 Cardinal Health, Inc. ...................... 2,711,360 0.4
11,600 Eli Lilly and Company....................... 1,158,550 0.2
52,070 Merck & Co., Inc. .......................... 3,989,864 0.6
74,510 Pfizer Inc. ................................ 3,576,480 0.5
13,200 Schering-Plough Corporation................. 666,600 0.1
------------ -----
12,102,854 1.8
------------------------------------------------------------------------------------------------------
RADIO & TELEVISION 42,300 +AMFM Inc. ................................. 2,918,700 0.4
------------------------------------------------------------------------------------------------------
RETAIL 35,840 Lowe's Companies, Inc. ..................... 1,471,680 0.2
30,450 +Safeway Inc. .............................. 1,374,056 0.2
34,900 Wal-Mart Stores, Inc. ...................... 2,011,113 0.3
------------ -----
4,856,849 0.7
------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 30,300 Motorola, Inc. ............................. 880,594 0.1
------------------------------------------------------------------------------------------------------
SOFTWARE 25,700 +Amdocs Limited............................. 1,972,475 0.3
1,800 +Macromedia, Inc. .......................... 173,925 0.0
39,850 +Microsoft Corporation...................... 3,185,509 0.5
26,100 +Network Associates, Inc. .................. 531,788 0.1
7,600 +RSA Security Inc. ......................... 528,200 0.1
7,200 +Wind River Systems, Inc. .................. 272,700 0.0
8,400 +Yahoo! Inc. ............................... 1,040,550 0.2
------------ -----
7,705,147 1.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 10,600 +Adelphia Business Solutions, Inc. ......... 245,125 0.0
60,100 GTE Corporation............................. 3,741,225 0.6
5,800 +Level 3 Communications, Inc. .............. 510,038 0.1
9,500 +Qwest Communications International Inc. ... 472,031 0.1
38,300 SBC Communications Inc. .................... 1,656,475 0.2
4,000 Sprint Corp. (FON Group).................... 204,000 0.0
------------ -----
6,828,894 1.0
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 18,800 Constellation Energy Group.................. 612,175 0.1
------------------------------------------------------------------------------------------------------
</TABLE>
119
<PAGE> 121
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES UTILITIES--GAS 13,500 Dynegy Inc. (Class A)....................... $ 922,219 0.1%
(CONCLUDED) PIPELINE
------------------------------------------------------------------------------------------------------
WIRELESS 1,400 +Telaxis Communications Corporation......... 43,663 0.0
COMMUNICATIONS
------------------------------------------------------------------------------------------------------
WIRELESS 33,000 +Nextel Communications, Inc. (Class A)...... 2,019,188 0.3
COMMUNICATIONS--
DOMESTIC PAGING &
CELLULAR
27,600 +Sprint Corp. (PCS Group)................... 1,642,200 0.2
------------ -----
3,661,388 0.5
------------------------------------------------------------------------------------------------------
WIRELESS 7,000 Symbol Technologies, Inc. .................. 378,000 0.1
TELECOMMUNI-
CATIONS SERVICES
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN THE UNITED STATES 180,996,225 27.0
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN STOCKS
(COST--$411,666,017) 505,683,962 75.3
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT FIXED-INCOME SECURITIES
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CANADA C$ 7,750,000 Canadian Government Bond, 5.50% due
6/01/2010................................. 5,096,024 0.8
------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME SECURITIES IN CANADA 5,096,024 0.8
------------------------------------------------------------------------------------------------------------------------
GERMANY E 32,210,000 BundesObligation, 4.75% due 11/20/2001...... 30,793,448 4.6
Bundesrepublic Deutschland:
3,040,000 6.50% due 10/14/2005........................ 3,094,812 0.5
9,300,000 4.75% due 7/04/2028......................... 7,950,638 1.2
------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME SECURITIES IN GERMANY 41,838,898 6.3
------------------------------------------------------------------------------------------------------------------------
SWEDEN SEK 60,000,000 Swedish Government Bond, 5% due 1/15/2004... 6,780,458 1.0
------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME SECURITIES IN SWEDEN 6,780,458 1.0
------------------------------------------------------------------------------------------------------------------------
UNITED L 3,100,000 United Kingdom Gilt, 7% due 11/06/2001...... 4,750,937 0.7
KINGDOM 2,860,000 United Kingdom Treasury Gilt, 7.25% due
12/07/2007................................ 4,780,945 0.7
------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME SECURITIES IN THE UNITED
KINGDOM 9,531,882 1.4
------------------------------------------------------------------------------------------------------------------------
UNITED STATES US$ 3,900,000 Federal National Mortgage Association, 5.25%
due 1/15/2009............................. 3,437,499 0.5
US Treasury Bonds:
7,100,000 6.25% due 8/15/2023......................... 7,157,652 1.0
11,000,000 6.125% due 8/15/2029........................ 11,110,000 1.7
US Treasury Notes:
32,300,000 5.75% due 6/30/2001......................... 32,062,918 4.8
6,700,000 5.50% due 7/31/2001......................... 6,631,928 1.0
9,800,000 5.50% due 8/31/2001......................... 9,691,318 1.4
------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED-INCOME SECURITIES IN THE UNITED
STATES 70,091,315 10.4
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FIXED-INCOME SECURITIES
(COST--$136,110,817) 133,338,577 19.9
------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
------------------------------------------------------------------------------------------------------------------------
COMMERCIAL US$ 30,288,000 General Motors Acceptance Corp., 7.13% due
PAPER*** 7/03/2000................................. 30,276,003 4.5
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST--$30,276,003) 30,276,003 4.5
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$578,052,837)...... 669,298,542 99.7
UNREALIZED APPRECIATION ON FORWARD FOREIGN
EXCHANGE CONTRACTS****.................... 194,311 0.0
OTHER ASSETS LESS LIABILITIES............... 1,708,040 0.3
------------ -----
NET ASSETS.................................. $671,200,893 100.0%
============ =====
------------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Fund.
E=euro
L=pound sterling
120
<PAGE> 122
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
**** Forward foreign exchange contracts as of June 30, 2000 were as follows:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
FOREIGN CURRENCY SOLD EXPIRATION DATE (DEPRECIATION)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A$ 4,300,000 July 2000 $ 5,332
E 38,000,000 August 2000 (100,890)
L 9,950,000 August 2000 448
Y 8,550,000,000 July 2000 289,421
---------------------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION ON FORWARD FOREIGN EXCHANGE CONTRACTS--NET (US
COMMITMENT--$135,276,674) $ 194,311
=========
---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
E=euro
L=pound sterling
Y=yen
See Notes to Financial Statements.
121
<PAGE> 123
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$578,052,837)....... $669,298,542
Unrealized appreciation on forward foreign exchange
contracts................................................. 194,311
Cash........................................................ 1,560
Foreign cash................................................ 189,613
Receivables:
Securities sold........................................... $7,247,416
Interest.................................................. 2,650,617
Forward foreign exchange contracts........................ 706,054
Dividends................................................. 680,222
Capital shares sold....................................... 13,977 11,298,286
----------
Prepaid expenses and other assets........................... 49,909
------------
Total assets................................................ 681,032,221
------------
-----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 7,725,330
Forward foreign exchange contracts........................ 1,110,670
Capital shares redeemed................................... 453,979
Investment adviser........................................ 335,334 9,625,313
----------
Accrued expenses and other liabilities...................... 206,015
------------
Total liabilities........................................... 9,831,328
------------
-----------------------------------------------------------------------------------------
NET ASSETS.................................................. $671,200,893
============
-----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 200,000,000
shares authorized+........................................ $ 4,821,172
Paid-in capital in excess of par............................ 539,926,278
Undistributed investment income--net........................ 4,028,539
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 30,992,788
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 91,432,116
------------
NET ASSETS.................................................. $671,200,893
============
-----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $671,200,893 and 48,211,721
shares outstanding........................................ $ 13.92
============
-----------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
122
<PAGE> 124
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $473,174 foreign withholding tax)......... $ 7,262,184
Interest and discount earned................................ 4,016,035
Other income................................................ 19,841
------------
Total income................................................ 11,298,060
------------
------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 2,234,494
Custodian fees.............................................. 122,110
Accounting services......................................... 69,000
Printing and shareholder reports............................ 33,129
Professional fees........................................... 31,662
Directors' fees and expenses................................ 7,467
Pricing services............................................ 4,285
Transfer agent fees......................................... 2,811
Other....................................................... 13,887
------------
Total expenses.............................................. 2,518,845
------------
Investment income--net...................................... 8,779,215
------------
------------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN CURRENCY
TRANSACTIONS--NET:
Realized gain (loss) from:
Investments--net.......................................... 39,949,952
Foreign currency transactions--net........................ (8,709,361) 31,240,591
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (45,126,646)
Foreign currency transactions--net........................ 223,901 (44,902,745)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (4,882,939)
============
------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
123
<PAGE> 125
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GLOBAL STRATEGY FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 8,779,215 $ 10,396,006
Realized gain on investments and foreign currency
transactions--net......................................... 31,240,591 78,389,425
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (44,902,745) 45,767,171
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (4,882,939) 134,552,602
------------ ------------
---------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (2,263,352) (14,746,772)
In excess of investment income--net:
Class A................................................... -- (2,747,792)
Realized gain on investments--net:
Class A................................................... (3,866,585) (78,043,311)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (6,129,937) (95,537,875)
------------ ------------
---------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (44,826,548) (78,000,222)
------------ ------------
---------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (55,839,424) (38,985,495)
Beginning of period......................................... 727,040,317 766,025,812
------------ ------------
End of period*.............................................. $671,200,893 $727,040,317
============ ============
---------------------------------------------------------------------------------------------------
* Undistributed (accumulated distributions in excess of)
investment income--net.................................... $ 4,028,539 $ (2,487,324)
============ ============
---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
124
<PAGE> 126
--------------------------------------------------------------------------------
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 FOR THE SIX
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL MONTHS ENDED
STATEMENTS.
FOR THE YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 2000+ 1999+ 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 14.13 $ 13.41 $ 14.71 $ 13.87 $ 12.55
-------- -------- -------- -------- --------
Investment income--net.............................. .18 .20 .34 .35 .28
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............ (.26) 2.58 .76 1.21 1.33
-------- -------- -------- -------- --------
Total from investment operations.................... (.08) 2.78 1.10 1.56 1.61
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.05) (.30) (.55) (.30) (.29)
In excess of investment income--net............... -- (.05) -- -- --
Realized gain on investments--net................. (.08) (1.71) (1.70) (.42) --
In excess of realized gain on investments--net.... -- -- (.15) -- --
-------- -------- -------- -------- --------
Total dividends and distributions................... (.13) (2.06) (2.40) (.72) (.29)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 13.92 $ 14.13 $ 13.41 $ 14.71 $ 13.87
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. (.63%)++ 21.37% 8.87% 11.94% 13.17%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .73%* .73% .72% .73% .71%
======== ======== ======== ======== ========
Investment income--net.............................. 2.55%* 1.49% 2.40% 2.33% 2.68%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $671,201 $727,040 $766,026 $869,647 $870,203
======== ======== ======== ======== ========
Portfolio turnover.................................. 59.44% 103.76% 120.59% 108.66% 173.44%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
125
<PAGE> 127
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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 accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Short-term securities are valued at
amortized cost, which approximates market value. Futures contracts are valued at
the settlement price at the close of the applicable exchange. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
126
<PAGE> 128
--------------------------------------------------------------------------------
agrees to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
- Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered,
or committed or anticipated to be purchased by
the Fund.
(c) Foreign currency transactions--
Transactions denominated in foreign currencies are recorded at the exchange rate
prevailing when recognized. Assets and liabilities denominated in foreign
currencies are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or valuing
(unrealized) assets and liabilities expressed in foreign currencies into US
dollars. Realized and unrealized gains or losses from investments include the
effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of premium and discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates. Distributions in excess of net investment
income and net realized capital gains are due primarily to differing tax
treatments for foreign currency transactions.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $111,914 in
commissions on the execution of portfolio security transactions
For the six months ended June 30, 2000, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $222 for providing security price
quotations to compute the Fund's net asset value.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Company's transfer agent.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
127
<PAGE> 129
--------------------------------------------------------------------------------
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $390,316,799 and $443,380,952, respectively.
Net realized gains (losses) for the six months ended June 30, 2000 and net
unrealized gains (losses) as of June 30, 2000 were as follows:
---------------------------------------------------------
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains
(Losses) (Losses)
----------------------------------------------------------------------------
<S> <C> <C>
Long-term investments.......................... $ 39,949,952 $91,245,705
Forward foreign exchange contracts............. 2,822,471 194,311
Foreign currency transactions.................. (11,531,832) (7,900)
------------ -----------
Total.......................................... $ 31,240,591 $91,432,116
============ ===========
----------------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $91,245,705, of which $123,301,996 related to appreciated securities
and $32,056,291 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $578,052,837.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
----------------------------------------------------------------------------
<S> <C> <C>
Shares sold..................................... 105,316 $ 1,465,215
Shares issued to shareholders in reinvestment of
dividends and distributions.................... 436,294 6,129,937
---------- ------------
Total issued.................................... 541,610 7,595,152
Shares redeemed................................. (3,782,877) (52,421,700)
---------- ------------
Net decrease.................................... (3,241,267) $(44,826,548)
========== ============
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Class A Shares 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>
5. LOANED SECURITIES:
At June 30, 2000, the Fund held US Treasury Bonds having an aggregate value of
approximately $5,742,000 as collateral for portfolio securities loaned having a
market value of approximately $4,773,000.
6. COMMITMENTS:
At June 30, 2000, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
had agreed to purchase and sell various foreign currencies with approximate
values of $6,942,000 and $7,251,000, respectively.
128
<PAGE> 130
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six-month period ended June 30, 2000, fixed-income markets remained
volatile as interest rates moved in a manner that produced an inversion of the
yield curve. The front end of the Treasury yield curve suffered as price
movement in that portion of the curve remained under pressure when investors
demanded greater premiums to account for expected increases in the Federal
Reserve Board's overnight rates. Throughout much of the period, the forward
Federal funds market continually reflected 50 basis points-75 basis points
(0.50%-0.75%) of expected tightening in the six-month rolling contract. (The
forward Federal funds market provides an indication to buyers and sellers of
Federal funds what the Federal funds rate is expected to be at some point in the
future, while a six-month rolling contract is an indication of what investors
expect the Federal funds level to be in six months.) On the other hand,
long-term interest rates were favorably influenced by two separate sets of
events. Inflationary fears, which greatly influence yields on the long end of
the curve have, for the most part, been contained as a result of the Federal
Reserve Board's restrictive monetary policy. Second, a supply imbalance, brought
on by the combination of reduced new issuance and a Treasury buy-back program,
produced a strong bid for securities in the 20-year-30-year sector.
Federal Reserve Board monetary policy remained focused on the need to provide
for a slowing in the US economy, which grew at an alarming 7.3% in the fourth
quarter of 1999. Although first quarter growth slowed to 5.5%, the rate is still
well above the Federal Reserve Board's comfort range of 3%-3.5%. Consumer
spending continues to fuel the economic fires, although recent reports such as
new housing sales and auto purchases could arguably point to the beginning of a
higher interest rate induced slowdown. Consumers have clearly benefited from low
unemployment rates and the wealth effect generated from a strong stock market,
although if stock market trends mirror the uninspired results reported during
the first half of 2000, consumers may slow spending. Additionally, consumer
confidence was impacted by the dot.com sector sell-off, given the implications
that high levels of leverage (for example, margin on their brokerage accounts
and credit card debt) has on their balance sheets. If the Federal Reserve
Board's monetary policy were to produce something greater than a soft landing,
or should financial assets experience a sustained correction in value, this
would translate into a weakening of the economic landscape.
Although inflation has been well contained for the most part, the scope of the
global recovery has led to fears of rekindling inflation. Commodity pressures,
as measured by the Commodities Research Bureau Index, have been building since
the beginning of the year. Of prime concern has been a surge in the price of
oil, spurred on not only by the Organization of Petroleum Exporting Countries,
production limitations but also on expectations of increased demand by
recovering economies. With respect to wage inflation, whether one evaluates wage
pressures via hourly earnings, real earnings or employment cost measures, the
results currently point to minimal inflation. The ability to export
manufacturing capacity, combined with the high levels of productivity, has
served to limit the impact of low unemployment. Furthermore, inflation as
measured by both the producer price index and consumer price index remains well
within acceptable levels and clearly points to a lack of pricing pressures.
Notwithstanding the inflation outlook, we expect the Federal Reserve Board to
remain focused on the need to slow economic momentum. The Federal Reserve Board
raised the Federal funds rate by a more aggressive 0.50% at its May Federal Open
Market Committee (FOMC) meeting. This move now puts the overnight rate at 6.50%,
up 175 basis points in the past year. Given this, and combined with a clear
slowing of economic momentum, the Federal Reserve Board kept interest rates the
same at its June FOMC meeting, although future increases are still a
possibility.
PORTFOLIO MATTERS
As we entered the six-month period ended June 30, 2000, the Fund held an
overweighted 6% position in mortgage-backed securities, a 10% overweighting in
Federal agency debentures and a 16% underweighting in Treasury securities,
relative to the unmanaged Salomon Smith Barney Government/Mortgage Index. It was
our belief that the yield advantage would work in our favor within the context
of a Federal Reserve Board tightening bias. With respect to mortgages, we
focused on the collateralized mortgage obligation market with particular
interest in higher-quality sequentials and prepayment protected planned
amortization classes. Also, we kept current with respect to coupon. As for
Federal agency issues with a spread to US Treasury issues, we reduced our
holdings in
129
<PAGE> 131
--------------------------------------------------------------------------------
two-year-seven-year callable securities in favor of longer-dated bulleted issues
(bonds with a single maturity date, unlike serial bonds) given favorable
prevailing spread relationships in the longer end of the curve.
Unfortunately, the Treasury sector caught a technical bid as the Treasury
Department, riding the wave of a Federal budget surplus, announced that it would
be strong buyers of existing Treasury debt, with primary focus on longer dated,
higher coupon issues. In fact, President Clinton went so far as to predict the
elimination of the Federal debt by the year 2013. Instantly, long maturity
Treasury issues had a perceived scarcity value, which led to the outperformance
of this sector during the first half of 2000. The yield on the 30-year Treasury
note rallied sharply from a high of 6.75% in late January to its period low of
5.67% in mid-April. With respect to the Federal agency sector, this market came
under greater pressure by the second quarter, following comments by Treasury
officials supporting the removal of credit lines made available by the Treasury
to agencies such as the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association. As a result, the yield spread relationship
compared to Treasury issues widened dramatically, as investors demanded greater
yield premiums to hold agency debt. We believe the market has overreacted and
thereby produced a unique buying opportunity for agency issues with a spread to
US Treasury issues.
Assuming the Federal Reserve Board will not raise interest rates at its August
FOMC meeting, the backdrop for a stabilization of the Treasury markets will be
provided. If this occurs, we believe the current yield levels available on
agency debentures and mortgage-backed securities are attractive. Over long
periods of time, agency debentures could perform better than Treasury debt given
their yield advantage and very similar credit quality. Therefore, we intend to
continue to overweight the portfolio in agency debentures, preferably in
maturities in the 30-year area where the spread differential is the greatest.
With respect to mortgages, we expect to continue to maintain our overweighting
relative to the benchmark Index, given our current belief that a low prepayment
environment will translate into outperformance for this sector.
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 C. Ayoub
Christopher G. Ayoub
Senior Vice President and Portfolio Manager
July 26, 2000
130
<PAGE> 132
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +4.51%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +5.67
--------------------------------------------------------------------------------
Inception (5/02/94) through 6/30/00 +6.27
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 +4.01% +4.51%
</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.
131
<PAGE> 133
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT ISSUE VALUE
---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL FARM CREDIT $18,500,000 Federal Farm Credit Bank,
BANK--5.3% 6.875% due 5/01/2002.................................. $ 18,476,875
---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL FARM CREDIT BANK (COST--$18,488,960) 18,476,875
---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Federal Home Loan Bank:
BANK--7.5% 2,500,000 6.75% due 2/01/2002................................... 2,492,175
10,000,000 6.75% due 5/01/2002................................... 9,964,100
4,800,000 6.625% due 8/27/2007.................................. 4,668,000
4,635,000 6.175% due 4/17/2008.................................. 4,296,784
5,000,000 6.50% due 8/14/2009................................... 4,758,600
---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN BANK (COST--$26,700,315) 26,179,659
---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Federal Home Loan Mortgage Corporation+:
MORTGAGE CORPORATION--26.3% 4,500,000 6.56% due 3/25/2016................................... 4,379,063
4,547,657 7% due 12/15/2020..................................... 4,424,734
5,786,866 7.251% due 11/20/2023................................. 5,800,847
5,507,458 6.30% due 5/15/2026................................... 5,254,556
10,746,331 7.351% due 10/15/2027................................. 10,775,970
12,568,024 Series 2212, 7% due 10/15/2027........................ 12,304,724
Federal Home Loan Mortgage Corporation Participation
Certificates+:
5,500,000 6% due 4/14/2004........................................ 5,270,540
5,000,000 5.50% due 2/15/2028..................................... 4,487,500
Federal Home Loan Mortgage Corporation--Gold Program+:
10,000,000 6% due 8/15/2007...................................... 9,662,200
380,962 7.50% due 2/01/2023................................... 378,358
86,932 7.50% due 5/01/2024................................... 86,242
1,974,745 7.50% due 6/01/2024................................... 1,959,065
1,296,268 7.50% due 7/01/2024................................... 1,285,974
1,840,939 7.50% due 8/01/2024................................... 1,826,319
507,571 7.50% due 9/01/2024................................... 503,540
298,009 7.50% due 12/01/2024.................................. 295,932
578,333 7.50% due 4/01/2025................................... 574,303
1,008,627 7.50% due 8/01/2025................................... 999,150
313,276 7.50% due 11/01/2025.................................. 310,333
513,043 7.50% due 2/01/2026................................... 509,468
29,824 7.50% due 4/01/2026................................... 29,532
28,550 7.50% due 5/01/2026................................... 28,282
157,531 7.50% due 7/01/2026................................... 155,989
741,753 7.50% due 8/01/2026................................... 734,496
1,116,860 7.50% due 2/01/2027................................... 1,106,366
577,279 7.50% due 4/01/2027................................... 571,631
48,792 7.50% due 6/01/2027................................... 48,246
225,538 7.50% due 10/01/2027.................................. 223,017
26,049 7.50% due 11/01/2027.................................. 25,757
25,510 7.50% due 12/01/2027.................................. 25,225
156,585 7.50% due 1/01/2028................................... 154,835
10,968 7.50% due 2/01/2028................................... 10,833
54,080 7.50% due 4/01/2028................................... 53,412
239,491 7.50% due 5/01/2028................................... 236,533
36,584 7.50% due 1/01/2029................................... 36,106
819,403 7.50% due 3/01/2029................................... 808,696
1,023,010 7.50% due 4/01/2029................................... 1,009,892
16,656,767 7% due 7/01/2029...................................... 16,096,783
---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION
(COST--$94,333,306) 92,444,449
---------------------------------------------------------------------------------------------------------------------
</TABLE>
132
<PAGE> 134
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT ISSUE VALUE
---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL NATIONAL MORTGAGE Federal National Mortgage Association+:
ASSOCIATION--25.9% $ 5,500,000 6.366% due 3/25/2007.................................. $ 5,248,645
4,630,417 8% due 4/01/2008...................................... 4,664,057
7,165,000 5.83% due 12/10/2008.................................. 6,504,602
553,816 7% due 6/01/2028...................................... 534,873
836,923 7% due 10/01/2028..................................... 808,297
1,050,034 7% due 12/01/2028..................................... 1,014,119
2,408,897 7% due 2/01/2029...................................... 2,325,664
4,543,818 7% due 3/01/2029...................................... 4,386,820
8,145,496 7% due 5/01/2029...................................... 7,865,187
12,118,319 6.50% due 6/01/2029................................... 11,429,841
14,158,668 7% due 6/01/2029...................................... 13,670,343
6,843,818 6.50% due 7/01/2029................................... 6,455,000
2,996,141 7% due 7/01/2029...................................... 2,892,618
963,719 7% due 8/01/2029...................................... 930,421
155,219 6.50% due 9/01/2029................................... 146,401
401,265 7% due 9/01/2029...................................... 387,401
776,085 7% due 10/01/2029..................................... 749,269
1,302,509 7% due 11/01/2029..................................... 1,257,504
579,161 7% due 12/01/2029..................................... 559,149
218,899 7% due 1/01/2030...................................... 211,335
5,000,000 7.125% due 1/15/2030.................................. 5,036,700
1,298,815 7% due 2/01/2030...................................... 1,253,526
2,491,104 7% due 3/01/2030...................................... 2,404,414
2,212,134 7% due 4/01/2030...................................... 2,135,000
8,000,000 Federal National Mortgage Association REMICS, 6.85% due
10/25/2020+++......................................... 7,936,480
---------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(COST--$93,659,112) 90,807,666
---------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL Government National Mortgage Association+:
MORTGAGE 13,666,562 6.50% due 2/15/2028................................... 12,972,738
ASSOCIATION--4.2% 1,694,766 6.50% due 5/15/2028................................... 1,608,726
---------------------------------------------------------------------------------------------------------------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(COST--$15,320,524) 14,581,464
---------------------------------------------------------------------------------------------------------------------
PRIVATE EXPORT Private Export Funding Corporation:
FUNDING CORPORATION--2.6% 3,895,000 5.50% due 3/15/2001................................... 3,858,971
3,335,000 7.01% due 4/30/2004................................... 3,365,148
2,000,000 7.11% due 4/15/2007................................... 1,993,740
---------------------------------------------------------------------------------------------------------------------
TOTAL PRIVATE EXPORT FUNDING CORPORATION
(COST--$9,636,334) 9,217,859
---------------------------------------------------------------------------------------------------------------------
TENNESSEE VALLEY Tennessee Valley Authority, Series E:
AUTHORITY--3.2% 5,000,000 6.25% due 12/15/2017.................................... 4,531,250
7,000,000 6.75% due 11/01/2025.................................. 6,764,730
---------------------------------------------------------------------------------------------------------------------
TOTAL TENNESSEE VALLEY AUTHORITY (COST--$11,694,520) 11,295,980
---------------------------------------------------------------------------------------------------------------------
US TREASURY BONDS & US Treasury Bonds:
NOTES--18.8% 4,000,000 11.875% due 11/15/2003................................ 4,653,760
2,000,000 10.625% due 8/15/2015................................. 2,848,440
1,500,000 9.25% due 2/15/2016................................... 1,946,490
2,500,000 7.50% due 11/15/2016.................................. 2,823,425
7,500,000 8.875% due 8/15/2017.................................. 9,560,175
1,000,000 8.75% due 5/15/2020................................... 1,283,590
1,500,000 8.125% due 5/15/2021.................................. 1,830,240
9,500,000 8.125% due 8/15/2021.................................. 11,606,340
6,000,000 7.50% due 11/15/2024.................................. 6,991,860
500,000 6.25% due 5/15/2030................................... 524,610
</TABLE>
133
<PAGE> 135
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT ISSUE VALUE
---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT & AGENCY OBLIGATIONS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
US TREASURY BONDS &
NOTES (CONCLUDED)
US Treasury Notes:
$10,000,000 8.50% due 11/15/2000.................................. $ 10,078,100
3,000,000 7.875% due 8/15/2001.................................. 3,044,070
7,000,000 7% due 7/15/2006...................................... 7,253,750
1,500,000 6% due 8/15/2009...................................... 1,488,045
---------------------------------------------------------------------------------------------------------------------
TOTAL US TREASURY BONDS & NOTES (COST--$66,072,503) 65,932,895
---------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT & AGENCY OBLIGATIONS
(COST--$335,905,574)--93.8% 328,936,847
---------------------------------------------------------------------------------------------------------------------
SHORT-TERM SECURITIES
---------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS*--4.8% 17,000,000 Warburg Dillon Read LLC, purchased on 6/30/2000 to yield
6.55% to 7/03/2000.................................... 17,000,000
---------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 1,352,000 Federal Home Loan Mortgage Corporation, 6.57% due
OBLIGATIONS**--0.4% 7/03/2000............................................. 1,351,260
---------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES (COST--$18,351,260)--5.2% 18,351,260
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$354,256,834)--99.0%........... 347,288,107
OTHER ASSETS LESS LIABILITIES--1.0%..................... 3,418,256
------------
NET ASSETS--100.0%...................................... $350,706,363
============
</TABLE>
--------------------------------------------------------------------------------
* Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.
** Certain US Government Agency Obligations are traded on a discount basis; the
interest rate shown reflects the discount rate paid at the time of purchase by
the Fund.
+ 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.
++ Real Estate Mortgage Investment Conduits (REMICS).
See Notes to Financial Statements.
134
<PAGE> 136
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$354,256,834)....... $347,288,107
Cash........................................................ 835
Receivables:
Interest.................................................. $3,453,015
Paydowns.................................................. 93,990
Capital shares sold....................................... 45,587 3,592,592
----------
Prepaid expenses and other assets........................... 25,286
------------
Total assets................................................ 350,906,820
------------
-----------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser........................................ 133,664
Capital shares redeemed................................... 898 134,562
----------
Accrued expenses and other liabilities...................... 65,895
------------
Total liabilities........................................... 200,457
------------
-----------------------------------------------------------------------------------------
NET ASSETS.................................................. $350,706,363
============
-----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 3,455,940
Paid-in capital in excess of par............................ 361,291,519
Undistributed investment income--net........................ 1,852,236
Accumulated realized capital losses on investments--net..... (8,924,605)
Unrealized depreciation on investments--net................. (6,968,727)
------------
NET ASSETS.................................................. $350,706,363
============
-----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $350,706,363 and 34,559,403
shares outstanding........................................ $ 10.15
============
-----------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
135
<PAGE> 137
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $12,042,247
Other income................................................ 7,246
-----------
Total income................................................ 12,049,493
-----------
------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $872,350
Accounting services......................................... 35,801
Custodian fees.............................................. 22,883
Professional fees........................................... 18,369
Printing and shareholder reports............................ 16,242
Pricing services............................................ 6,415
Directors' fees and expenses................................ 3,792
Transfer agent fees......................................... 2,641
Other....................................................... 1,072
--------
Total expenses.............................................. 979,565
-----------
Investment income--net...................................... 11,069,928
-----------
------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET:
Realized loss on investments--net........................... (7,268,570)
Change in unrealized depreciation on investments--net....... 9,903,429
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $13,704,787
===========
------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
136
<PAGE> 138
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DEC. 31, 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 11,069,928 $ 21,322,510
Realized loss on investments--net........................... (7,268,570) (1,609,613)
Change in unrealized appreciation/depreciation on
investments--net.......................................... 9,903,429 (26,034,501)
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ 13,704,787 (6,321,604)
------------ ------------
-------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (9,604,482) (22,902,351)
In excess of investment income -- net:
Class A................................................... -- (68)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (9,604,482) (22,902,419)
------------ ------------
-------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital
share transactions........................................ (15,787,813) 41,202,248
------------ ------------
-------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (11,687,508) 11,978,225
Beginning of period......................................... 362,393,871 350,415,646
------------ ------------
End of period*.............................................. $350,706,363 $362,393,871
============ ============
-------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 1,852,236 $ 386,790
============ ============
-------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
137
<PAGE> 139
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE -------------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000++ 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 10.03 $ 10.88 $ 10.60 $ 10.40 $ 10.79
-------- -------- -------- -------- -------
Investment income--net.......................... .32 .61 .59 .63 .65
Realized and unrealized gain (loss) on
investments--net.............................. .08 (.80) .31 .25 (.36)
-------- -------- -------- -------- -------
Total from investment operations................ .40 (.19) .90 .88 .29
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net........................ (.28) (.66) (.60) (.63) (.64)
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............... (.28) (.66) (.62) (.68) (.68)
-------- -------- -------- -------- -------
Net asset value, end of period.................. $ 10.15 $ 10.03 $ 10.88 $ 10.60 $ 10.40
======== ======== ======== ======== =======
-----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............. 4.01%++ (1.80%) 8.76% 8.88% 2.86%
======== ======== ======== ======== =======
-----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................. .56%* .55% .56% .51% .15%
======== ======== ======== ======== =======
Expenses........................................ .56%* .55% .56% .57% .59%
======== ======== ======== ======== =======
Investment income--net.......................... 6.33%* 5.86% 5.66% 6.26% 6.39%
======== ======== ======== ======== =======
-----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $350,706 $362,394 $350,416 $179,820 $89,581
======== ======== ======== ======== =======
Portfolio turnover.............................. 42.86% 116.59% 43.10% 117.65% 21.23%
======== ======== ======== ======== =======
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses. If
applicable, the Fund's Investment Adviser voluntarily waived a portion of its
management fee. Without such waiver, the Fund's performance would have been
lower.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
138
<PAGE> 140
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most repre-
sentative 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.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM and Merrill Lynch Life Agency, Inc. ("MLLA") have entered into an
agreement
139
<PAGE> 141
--------------------------------------------------------------------------------
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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch Security Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a
subsidiary of ML & Co., earned $1,661 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $141,957,096 and $158,502,462, respectively.
Net realized losses for the six months ended June 30, 2000 and net unrealized
losses as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Realized Unrealized
Losses Losses
-----------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $(7,268,570) $(6,968,727)
----------- -----------
Total................................ $(7,268,570) $(6,968,727)
=========== ===========
-----------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized depreciation for Federal income tax purposes
aggregated $6,968,727, of which $2,596,524 related to appreciated securities and
$9,565,251 related to depreciated securities. At June 30, 2000, the aggregate
cost of investments for Federal income tax purposes was $354,256,834.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 512,456 $ 5,150,975
Shares issued to shareholders in
reinvestment of dividends............ 958,425 9,604,481
---------- ------------
Total issued.......................... 1,470,881 14,755,456
Shares redeemed....................... (3,047,294) (30,543,269)
---------- ------------
Net decrease.......................... (1,576,413) $(15,787,813)
========== ============
-------------------------------------------------------------------
</TABLE>
<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>
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. SUBSEQUENT EVENT:
On July 3, 2000, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.053595 per Class A Share payable on July 3, 2000 to
shareholders of record as of July 3, 2000.
140
<PAGE> 142
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUND, INC.--HIGH CURRENT INCOME FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
PORTFOLIO MATTERS
The first half of 2000 was a difficult period for the high-yield market, owing
to several Federal funds interest rate increases, relentless mutual fund
outflows, jittery equity markets, limited dealer market making and a high level
of credit distress. In this environment, the unmanaged CS First Boston Global
High Yield Index registered a total return of -0.84% for the six months ended
June 30, 2000, which lagged the ten-year US Treasury return of +5.39%. The
spread between the Index and US Treasury securities of similar maturity widened
to 728 basis points (7.28%) at June 30, 2000, compared to 573 basis points at
year-end 1999.
As a consequence of these bear market conditions, investors showed a clear
preference toward larger and better-quality credits--such as those in the
telecommunications and packaging industries, where the few new issues are, or in
the more stable utility/independent power producer area. Many small, illiquid
issues have languished, while other credits that have reported weak earnings
have seen their bond prices plunge.
In that regard, despite the robust North American economy, the number of
credits in default or near default climbed in the first half of the year.
According to data compiled by Edward Altman of New York University's Stern
School, the default rate for the six months ended June 30, 2000 equaled 2.61%.
If annualized, the rate would be over 5.0%, which would be the highest level
since 1991. Merrill Lynch High Yield Research Chief Martin Fridson notes that
the distress ratio (defined as the percentage of bonds in a sample of 1,295
issues yielding 1,000 basis points or more above the ten-year Treasury rate)
equaled 18.0% on June 15, 2000. This is the highest distress ratio since the
22.3% figure recorded in January 1992.
Against this backdrop, the Fund's Class A Shares had a total return of -1.07%,
slightly behind that of our benchmark, the CS First Boston Global High Yield
Index. The Fund's results were boosted by our relatively high exposure to the
emerging markets sector, which had a solid +5.65% return for the period. An
overweighted position in the more stable utility/ independent power sector also
proved beneficial, as this sector also registered a positive return for the
period. Our lack of exposure to the motion picture exhibitors industry was a
return enhancer as well, as many bonds in this sector fell sharply in price.
Individual credit selection plays an important role, particularly in today's
unforgiving high-yield market. Positive event risk affecting several credits in
the Fund had a favorable impact on Fund performance. Among these were premium
tenders by Grupo Televisa SA and Tekni-Plex Inc. (a global manufacturer of
packaging products). (The latter was one of the Fund's ten largest holdings.) In
addition, takeovers by stronger credits buoyed two Fund holdings, Dictaphone
Corp. (acquired by Lernout & Hauspie in May) and Hadco Corp. (acquired by
Sanmina Corp. in June). The successful completion of an initial public offering
by Universal Compression caused its bonds to be strong performers during the
six-month period. Finally, ICN Pharmaceuticals Inc.'s announcement that it
planned to split itself into three companies caused its bonds to rebound nicely
since such a transaction would most likely trigger the change of control
provision in the bond indenture.
Unfortunately, several credits in the Fund, none of which were a large
holding, entered distressed territory during the period. Factors included
management miscues, severe price competition and, in one case, accounting fraud.
Given the overall weakness in the high-yield market, which was exacerbated by
mutual fund outflows, portfolio managers were forced to sell bonds to raise
cash. Many credits with reasonably good fundamentals saw their bonds drift
lower. As such, we were able to find what we believe to be some excellent
relative values in the secondary market. Among our larger purchases were the
bonds of Trench Electric SA and Trench Inc. (a manufacturer of equipment for the
electric utility industry) and Federal-Mogul Corp. (an automotive parts
manufacturer). We acquired both of these bonds at substantial discounts to par.
Other secondary market purchases included the bonds of Owens-Illinois Inc. (a
manufacturer of plastic and glass packaging products), Vicap SA (a subsidiary of
Grupo Vitro SA, Mexico's largest producer of flat glass and glass containers)
and Corning Consumer Products (a leading maker of kitchen hardware).
In the new-issue market, our largest purchases were the bonds of Tekni-Plex
and the units (bonds plus warrants for 3% of the company's equity) of Huntsman
Packaging Corporation (a leading producer of film and flexible packaging
products). Both securities have traded well in the secondary market. We like the
141
<PAGE> 143
--------------------------------------------------------------------------------
recession-resistant nature of the packaging industry.
Our major sales included the bonds of Antenna TV SA (a television broadcast
network in Greece) and FM 1993A Corp. (a restaurant company), both of which are
rather illiquid bonds that seemed fairly valued. We also disposed of our entire
positions in Ball Corp. (a major can manufacturer), Exodus Communications Inc.
(an operator of Internet data centers) and TNP Enterprises (parent of an
electric utility), largely for relative value reasons. Our largest sale was our
entire bond position in wireless company, Nextel Communications. These bonds,
which would soon be called, were a long-time holding and had been excellent
performers.
Prospectively, we are guardedly optimistic about the total return outlook for
the high-yield market in the latter half of 2000. While the high level of credit
distress is a concern, we would note that the number of credit rating agency
downgrades slowed considerably in the second quarter of the year. We also
believe that the current wide spread to Treasury securities amply compensates
investors for default risk. If the Federal Reserve Board is finished with its
interest rate hikes, that could be the catalyst for a strong second half, as the
high-yield market has historically done quite well in stable rate environments.
At June 30, 2000, communications and media remained our largest broad industry
category, equaling 26.2% of the Fund's total market value. Of the more narrowly
classified sectors, the largest industries were: communications, 12.8%;
utilities/independent power producers, 12.0%; cable (domestic & international),
10.5%; and paper/packaging, 10.2%. Foreign bonds totaled 24.6% of the Fund's
market value, with emerging market issues (primarily Latin American corporate
bonds) accounting for 12.4% of market value. At June 30, 2000, the average
maturity of the Fund was 6.5 years, and cash and cash equivalents amounted to
7.3% of net assets.
IN CONCLUSION
We appreciate your investment in High Current Income Fund of Merrill Lynch
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President
/s/ Robert F. Murray
Robert F. Murray
Vice President and Portfolio Manager
July 26, 2000
142
<PAGE> 144
--------------------------------------------------------------------------------
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 6/30/00 +1.07%
----------------------------------------------------------------------
Five Years Ended 6/30/00 +5.87
----------------------------------------------------------------------
Ten Years Ended 6/30/00 +9.73
----------------------------------------------------------------------
</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 -1.07% +1.07%
------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the 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.
143
<PAGE> 145
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS VALUE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AEROSPACE & DEFENSE--0.7% B B2 $ 3,000,000 L-3 Communications Corp., 10.375% due
5/01/2007................................... $ 3,052,500
----------------------------------------------------------------------------------------------------------------------------
AIRLINES--0.8% BB- Ba3 4,000,000 USAir Inc., 10.375% due 3/01/2013............. 3,638,952
----------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE--0.7% NR* NR* 5,000,000 Breed Technologies Inc., 9.25% due
4/15/2008(c)................................ 31,250
B B2 750,000 Dura Operating Corporation, 9% due
5/01/2009................................... 652,500
B B2 3,000,000 Venture Holdings Trust, 11% due 6/01/2007..... 2,310,000
------------
2,993,750
----------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE & BB Ba2 3,000,000 Federal--Mogul Corporation, 7.50% due
EQUIPMENT--0.5% 1/15/2009................................... 2,057,559
----------------------------------------------------------------------------------------------------------------------------
BROADCASTING-- B B1 3,000,000 Chancellor Media Corp., 9% due 10/01/2008..... 3,090,000
RADIO & TV--1.5%
B- B3 2,000,000 Cumulus Media, Inc., 10.375% due 7/01/2008.... 1,690,000
B B2 2,000,000 Sinclair Broadcasting Group Inc., 10% due
9/30/2005................................... 1,910,000
------------
6,690,000
----------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS--1.2% B B2 2,500,000 NCI Building Systems Inc., 9.25% due
5/01/2009................................... 2,350,000
B- B3 3,000,000 Tapco International Corporation, 12.50% due
8/01/2009(e)................................ 3,045,000
------------
5,395,000
----------------------------------------------------------------------------------------------------------------------------
CABLE--2.5% Century Communications Corporation:
BB- B1 3,000,000 9.50% due 3/01/2005......................... 2,872,500
BB- B1 2,500,000 8.375% due 12/15/2007....................... 2,200,000
B+ B2 2,500,000 Charter Communications Holdings, 10% due
4/01/2009................................... 2,412,500
B+ B1 4,000,000 Olympus Communications LP/Capital Corp.,
10.625% due 11/15/2006...................... 3,960,000
------------
11,445,000
----------------------------------------------------------------------------------------------------------------------------
CABLE-- Australis Media Ltd.(c):
INTERNATIONAL--4.2% D NR* 136,859 15.75% due 5/15/2003........................ 1,368
D NR* 8,000,000 15.75% due 5/15/2003 (j).................... 80,000
BB B1 2,000,000 Cablevision SA, 13.75% due 5/01/2009.......... 1,820,000
B+ B2 5,000,000 Globo Comunicacoes e Participacoes, Ltd.,
10.50% due 12/20/2006(e).................... 4,293,750
B- B3 3,500,000 International Cabletel, Inc., 11.108% due
2/01/2006(d)................................ 3,228,750
B- B3 2,000,000 NTL Incorporated, 10% due 2/15/2007........... 1,890,000
B+ B1 3,500,000 TeleWest Communications PLC, 11.37% due
10/01/2007(d)............................... 3,333,750
B- B3 5,000,000 United International Holdings, Inc., 10.75%
due 2/15/2008(d)(i)......................... 3,500,000
B B2 2,000,000 United Pan-Europe Communications, 13.75% due
2/01/2010(d)................................ 940,000
------------
19,087,618
----------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--2.2% B+ B1 4,000,000 Bucyrus International, 9.75% due 9/15/2007.... 795,000
B B2 4,000,000 Columbus McKinnon Corp., 8.50% due
4/01/2008................................... 3,440,000
B- B3 4,500,000 International Wire Group, Inc., 11.75% due
6/01/2005................................... 4,522,500
B- B3 2,000,000 Trench Electric SA and Trench Inc., 10.25% due
12/15/2007.................................. 1,402,500
------------
10,160,000
----------------------------------------------------------------------------------------------------------------------------
CHEMICALS--1.8% BB- Ba3 3,500,000 ISP Holdings Inc., 9.75% due 2/15/2002........ 3,403,750
Lyondell Chemical Company:
BB Ba3 3,000,000 9.875% due 5/01/2007(e)....................... 2,962,500
B+ B2 2,000,000 10.875% due 5/01/2009......................... 1,990,000
------------
8,356,250
----------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--0.4% B- B3 2,500,000 Satelites Mexicanos SA, 10.125% due
11/01/2004.................................. 1,675,000
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
144
<PAGE> 146
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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--2.4% 5/01/2006................................... $ 3,945,000
CCC Caa1 3,000,000 Dictaphone Corp., 11.75% due 8/01/2005........ 3,045,000
B B2 4,000,000 Hadco Corporation, 9.50% due 6/15/2008........ 4,030,000
------------
11,020,000
----------------------------------------------------------------------------------------------------------------------------
CONGLOMERATES--0.6% B- B3 3,000,000 Eagle-Picher Industries, 9.375% due
3/01/2008................................... 2,550,000
----------------------------------------------------------------------------------------------------------------------------
CONSUMER--SERVICES--0.3% B- Caa1 2,000,000 Protection One Alarm Monitoring, 8.125% due
1/15/2009(e)................................ 1,240,000
----------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS--0.6% B B3 3,000,000 Corning Consumer Products,
9.625% due 5/01/2008........................ 1,950,000
CCC+ Caa1 1,500,000 Syratech Corp., 11% due 4/15/2007............. 840,000
------------
2,790,000
----------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED--1.9% B B1 500,000 Applied Power Inc., 8.75% due 4/01/2009....... 517,500
B- B3 5,000,000 Blount Inc., 13% due 8/01/2009................ 5,100,000
B- B2 1,000,000 Koppers Industries, Inc., 9.875% due
12/01/2007.................................. 922,500
NR* Caa1 4,000,000 RBX Corp, 12% due 1/15/2003................... 2,200,000
------------
8,740,000
----------------------------------------------------------------------------------------------------------------------------
ENERGY--5.8% B- B3 2,000,000 Bellwether Exploration, 10.875% due
4/01/2007................................... 1,792,500
B B3 4,500,000 Benton Oil and Gas Co., 11.625% due
5/01/2003................................... 3,262,500
B B2 1,000,000 Chesapeake Energy Corp., 9.125% due
4/15/2006................................... 920,000
B B3 2,500,000 Clark USA Inc., 10.875% due 12/01/2005........ 1,375,000
B- Caa1 4,000,000 Energy Corp. of America, 9.50% due
5/15/2007................................... 2,560,000
B- Caa2 5,000,000 Northern Offshore ASA, 10% due 5/15/2005...... 3,100,000
B+ B1 3,500,000 Parker Drilling Co., 9.75% due 11/15/2006..... 3,386,250
NR* B2 2,000,000 Petroleo Brasileiro SA, 10% due
10/17/2006(e)............................... 1,965,000
BB Ba3 300,000 Port Arthur Finance Corporation, 12.50% due
1/15/2009................................... 291,000
CCC- Caa2 3,500,000 Southwest Royalties Inc., 10.50% due
10/15/2004.................................. 2,240,000
BB- B1 3,000,000 Tesoro Petroleum Corp., 9% due 7/01/2008...... 2,850,000
B- B3 1,500,000 United Refining Co., 10.75% due 6/15/2007..... 900,000
B B2 2,500,000 Universal Compression Inc., 9.875% due
2/15/2008(d)................................ 1,800,000
------------
26,442,250
----------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--1.2% B+ B1 1,500,000 Intrawest Corporation, 10.50% due 2/01/2010... 1,530,000
B- B3 4,000,000 Premier Parks Inc., 9.75% due 6/15/2007....... 3,850,000
------------
5,380,000
----------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.2% CCC- Caa3 2,000,000 Amresco Inc., 9.875% due 3/15/2005............ 1,010,000
----------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--1.0% BB Ba2 1,000,000 Canandaigua Brands, 8.625% due 8/01/2006...... 987,500
B B1 4,500,000 Chiquita Brands International Inc., 9.125% due
3/01/2004................................... 3,532,500
------------
4,520,000
----------------------------------------------------------------------------------------------------------------------------
GAMING--1.7% D Caa1 4,000,000 GB Property Funding Corp., 10.875% due
1/15/2004(c)................................ 2,440,000
Jazz Casino Co. LLC:
NR* NR* 2,122,118 1.459% due 11/15/2009(a)(g)................... 360,760
NR* NR* 189,000 Contingent Notes due 11/15/2009(h).......... 0
B- B3 5,000,000 Trump Atlantic City Associates/Funding Inc.,
11.25% due 5/01/2006........................ 3,525,000
B- Caa1 1,500,000 Venetian Casino/LV Sands, 12.25% due
11/15/2004.................................. 1,515,000
------------
7,840,760
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
145
<PAGE> 147
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS VALUE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEALTH SERVICES--4.3% B+ B1 $ 4,000,000 Beverly Enterprises Inc., 9% due 2/15/2006.... $ 3,300,000
BB+ Ba2 2,000,000 Columbia HCA/Healthcare Corp., 7.15% due
3/30/2004................................... 1,860,000
CCC+ B3 3,000,000 Extendicare Health Services, 9.35% due
12/15/2007.................................. 1,260,000
B+ ba3 3,000,000 Fresenius Medical Capital Trust II, 7.875% due
2/01/2008................................... 2,670,000
BB Ba3 4,000,000 ICN Pharmaceuticals Inc., 8.75% due
11/15/2008(e)............................... 3,940,000
B- Caa1 2,000,000 Magellan Health Services, 9% due 2/15/2008.... 1,010,000
D C 2,500,000 Mariner Post - Acute Network, 9.50% due
11/01/2007(c)............................... 25,000
B+ B2 3,000,000 Quest Diagnostic Inc., 10.75%
due 12/15/2006.............................. 3,112,500
BB- Ba3 2,500,000 Tenet Healthcare Corp., 8.625% due
1/15/2007................................... 2,387,500
------------
19,565,000
----------------------------------------------------------------------------------------------------------------------------
HOTELS--0.4% BB Ba2 2,000,000 HMH Properties, Inc., 8.45% due 12/01/2008.... 1,852,500
----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT POWER AES Corporation:
PRODUCERS--5.5%
B+ Ba3 5,000,000 10.25% due 7/15/2006.......................... 4,987,500
BB Ba1 3,000,000 9.50% due 6/01/2009........................... 2,940,000
BBB- Ba1 2,000,000 AES Eastern Energy, 9% due 1/02/2017.......... 1,874,800
BB Ba2 6,000,000 Caithness Coso Fund Corp., 9.05% due
12/15/2009.................................. 5,925,000
BB+ Ba1 1,500,000 Calpine Corporation, 8.75% due 7/15/2007...... 1,456,875
BB+ Ba1 2,500,000 Cogentrix Energy Inc., 8.75% due 10/15/2008... 2,390,625
BB Ba1 2,700,000 ESI Tractebel Acquisition Corp., 7.99% due
12/30/2011.................................. 2,390,391
BB Ba3 250,000 Midland Funding II, 11.75% due 7/23/2005...... 279,855
BB+ Ba1 3,000,000 Monterrey Power, SA de CV, 9.625% due
11/15/2009(e)............................... 2,760,000
------------
25,005,046
----------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- B NR* 10,000,000 Anthony Crane Rentals, 13.375% due
SERVICES--2.3% 8/01/2003(d)................................ 4,225,000
B B3 1,000,000 Anthony Crane Rental LP, 10.375% due
8/01/2008................................... 642,500
B B3 4,000,000 Neff Corp., 10.25% due 6/01/2008.............. 2,480,000
CCC+ Caa1 8,000,000 Thermadyne Holdings Corp., 12.50% due
6/01/2008(d)................................ 2,880,000
------------
10,227,500
----------------------------------------------------------------------------------------------------------------------------
INTERNET TRANSPORT--0.8% B- B3 4,000,000 PSINet, Inc., 10% due 2/15/2005............... 3,680,000
----------------------------------------------------------------------------------------------------------------------------
MACHINERY--0.7% CCC+ B3 4,000,000 Numatics Inc., 9.625% due 4/01/2008........... 3,200,000
----------------------------------------------------------------------------------------------------------------------------
METALS & MINING--3.0% CC Ca 3,000,000 AEI Resources Inc., 11.50% due
12/15/2006(e)............................... 300,000
B- B3 5,000,000 Great Lakes Carbon Corp., 11.75% due
5/15/2008(a)................................ 4,350,000
CCC+ B3 4,500,000 Kaiser Aluminum & Chemical Corp., 12.75% due
2/01/2003................................... 4,128,750
B B2 5,000,000 P & L Coal Holdings Corp., 9.625% due
5/15/2008................................... 4,637,500
------------
13,416,250
----------------------------------------------------------------------------------------------------------------------------
PACKAGING--6.4% B B2 7,000,000 Consolidated Container Company, 10.125% due
7/15/2009................................... 6,930,000
B B3 3,500,000 Huntsman Packaging Corporation, 13% due
6/01/2010(e)................................ 3,605,000
CCC+ Caa2 4,500,000 Indesco International, 9.75% due 4/15/2008.... 1,665,000
BB+ Ba1 2,000,000 Owens-Illinois Inc., 8.10% due 5/15/2007...... 1,847,656
B B3 4,000,000 Portola Packaging Inc., 10.75% due
10/01/2005.................................. 3,500,000
Silgan Holdings, Inc.:
B NR* 2,810,000 13.25% due 7/15/2006(a)....................... 2,999,675
B B1 1,000,000 9% due 6/01/2009.............................. 945,000
</TABLE>
146
<PAGE> 148
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS VALUE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PACKAGING B- B3 $ 6,500,000 Tekni-Plex Inc., 12.75% due 6/15/2010(e)...... $ 6,500,000
(CONCLUDED) B+ Ba3 1,000,000 Vicap SA, 11.375% due 5/15/2007............... 880,000
------------
28,872,331
----------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST B B2 3,000,000 Ainsworth Lumber Company, 12.50% due
PRODUCTS--2.8% 7/15/2007(a)................................ 2,977,500
B B2 2,000,000 Container Corp. of America, 10.75% due
5/01/2002................................... 2,000,000
Doman Industries Limited:
B+ B3 1,700,000 12% due 7/01/2004............................. 1,700,000
B Caa1 5,000,000 9.25% due 11/15/2007.......................... 3,650,000
CCC+ B3 4,000,000 Pindo Deli Financial Mauritius, 10.75% due
10/01/2007.................................. 2,400,000
------------
12,727,500
----------------------------------------------------------------------------------------------------------------------------
PRINTING & BB- Ba3 2,000,000 Primedia, Inc., 7.625% due 4/01/2008.......... 1,780,000
PUBLISHING--0.4%
----------------------------------------------------------------------------------------------------------------------------
RESTAURANTS--0.2% BB NR* 1,000,000 FM 1993A Corp., 9.75% due 11/01/2003.......... 1,000,000
----------------------------------------------------------------------------------------------------------------------------
STEEL--2.3% NR* B2 5,000,000 CSN Iron SA, 9.125% due 6/01/2007(e).......... 4,037,500
CC Caa3 750,000 Republic Technologies, 13.75% due
7/15/2009(c)................................ 132,187
B B2 3,500,000 Weirton Steel Corp., 10.75% due 6/01/2005..... 3,325,000
B+ B2 3,500,000 Wheeling Pittsburgh Corp., 9.25% due
11/15/2007.................................. 2,677,500
------------
10,172,187
----------------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.4% BB B1 2,000,000 Disco SA, 9.875% due 5/15/2008................ 1,685,000
----------------------------------------------------------------------------------------------------------------------------
TELEPHONY-- NR* NR* 3,000,000 Comtel Brasileira Ltd., 10.75%
COMPETITIVE LOCAL due 9/26/2004(e).............................. 2,850,000
EXCHANGE CARRIERS-- B+ B1 4,000,000 Energis PLC, 9.75% due 6/15/2009.............. 3,920,000
4.5%
CCC+ Caa1 7,750,000 GT Group Telecom, 0% due 2/01/2005(e)......... 4,301,250
B B2 2,000,000 Intermedia Communications Inc., 8.60% due
6/01/2008................................... 1,850,000
B B3 3,000,000 Level 3 Communications Inc., 9.125% due
5/01/2008................................... 2,692,500
B- B3 3,000,000 Metricom Inc., 13% due 2/15/2010.............. 2,055,000
NR* B2 3,000,000 Nextlink Communications, 9.45% due
4/15/2008(d)................................ 1,830,000
BBB- B1 1,000,000 Telefonica de Argentina, 11.875% due
11/01/2004.................................. 1,050,000
------------
20,548,750
----------------------------------------------------------------------------------------------------------------------------
TEXTILES--0.9% B- B3 2,800,000 Anvil Knitwear Inc., 10.875% due 3/15/2007.... 2,464,000
B Ca 2,000,000 Galey & Lord, Inc., 9.125% due 3/01/2008...... 890,000
D Ca 4,000,000 Polysindo International Finance Company BV,
9.375% due 7/30/2007(c)..................... 600,000
------------
3,954,000
----------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--4.7% BB- NR* 6,000,000 Autopistas del Sol SA, 10.25% due
8/01/2009(e)................................ 4,620,000
BB- B1 6,000,000 GS Superhighway Holdings, 10.25% due
8/15/2007................................... 4,080,000
B NR* 4,500,000 MRS Logistica SA, 10.625% due 8/15/2005(e).... 3,532,500
BB- B1 4,000,000 Sea Containers Ltd., 12.50% due 12/01/2004.... 3,150,000
B- B2 5,700,000 Transtar Holdings LP, 13.375% due
12/15/2003(d)............................... 5,650,125
------------
21,032,625
----------------------------------------------------------------------------------------------------------------------------
UTILITIES--5.2% Azurix Corporation(e):
BB Ba3 1,000,000 10.375% due 2/15/2007......................... 965,000
BB Ba3 2,000,000 10.75% due 2/15/2010.......................... 1,925,000
NR* NR* 2,500,000 CIA Saneamento Basico, 10% due 7/28/2005(e)... 2,150,000
BB Ba3 2,000,000 CMS Energy Corp., 7.50% due 1/15/2009......... 1,789,074
B B1 1,000,000 Empresa Electricidad del Norte, 10.50% due
6/15/2005(e).................................. 400,000
</TABLE>
147
<PAGE> 149
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS VALUE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UTILITIES B+ B2 $ 3,500,000 Espirito Santo-Escelsa, 10% due 7/15/2007..... $ 2,730,000
(CONCLUDED) B+ NR* 3,000,000 Inversora de Electrica, 9% due 9/16/2004(e)... 1,200,000
BBB- B1 4,000,000 MetroGas SA, 12% due 8/15/2000................ 4,000,000
BBB Baa3 2,400,000 Niagara Mohawk Power Corp., 8.77% due
1/01/2018................................... 2,472,144
BB Ba2 2,911,800 TransGas de Occidente SA, 9.79% due
11/01/2010(e)(f)............................ 2,103,775
+Tucson Electric & Power Co.(f):
NR* NR* 3,375,689 10.211% due 1/01/2009......................... 3,457,989
NR* NR* 500,000 10.732% due 1/01/2013......................... 520,320
------------
23,713,302
----------------------------------------------------------------------------------------------------------------------------
WASTE Allied Waste North America:
MANAGEMENT--1.4% BB- Ba3 4,000,000 7.375% due 1/01/2004.......................... 3,625,000
B+ B2 2,500,000 10% due 8/01/2009............................. 2,087,500
NR* Ca 3,500,000 Mid-American Waste Systems, Inc., 12.25% due
2/15/2003(c)................................ 105,000
D Ca 4,000,000 Safety-Kleen Services, 9.25% due 6/01/2008.... 320,000
------------
6,137,500
----------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- B- B3 2,000,000 Spectrasite Holdings Inc.,
DOMESTIC PAGING &
CELLULAR--0.6%
10.75% due 3/15/2010.......................... 1,995,000
B- B2 650,000 Voicestream Wireless Company, 10.375% due
11/15/2009.................................. 672,750
------------
2,667,750
----------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- NR* B3 4,050,000 ClearNet Communications, Inc., 11.24% due
INTERNATIONAL PAGING &
CELLULAR--3.8%
5/01/2009(d).................................. 2,430,000
B- Caa1 7,505,000 McCaw International Ltd., 12.484% due
4/15/2007(d)................................ 5,703,800
B- Caa1 8,000,000 Millicom International Cellular SA, 13.31% due
6/01/2006(d)................................ 6,880,000
BBB Ba3 2,000,000 Orange PLC, 9% due 6/01/2009.................. 2,040,000
------------
17,053,800
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE BONDS--82.8%
(COST--$460,130,266) 374,375,680
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES
HELD PREFERRED STOCKS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BROADCASTING--RADIO & TV--0.3% 1,754 Cumulus Media, Inc. (Series A), 13.75%(a)..... $ 1,429,510
----------------------------------------------------------------------------------------------------------------------------
CABLE--DOMESTIC--1.7% 73,408 CSC Holdings Inc., (Series A)(a).............. 7,726,192
----------------------------------------------------------------------------------------------------------------------------
CABLE--INTERNATIONAL--1.0% 4,547 NTL Incorporated (Series B)(a)................ 4,547,000
----------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--0.0% 2,419 Clark Material Handling(a).................... 3,024
----------------------------------------------------------------------------------------------------------------------------
ENERGY--0.1% 2,642 +Clark USA Inc.(a)............................ 528,400
----------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--0.6% 120,000 California Federal Bank (Series A)............ 2,542,500
----------------------------------------------------------------------------------------------------------------------------
PRINTING & PUBLISHING--0.4% 20,000 Primedia, Inc. (Series H)..................... 1,720,000
----------------------------------------------------------------------------------------------------------------------------
STEEL--0.6% 120,000 USX Capital LLC (Series A).................... 2,790,000
----------------------------------------------------------------------------------------------------------------------------
TELEPHONY--COMPETITIVE LOCAL EXCHANGE 4,656 Intermedia Communications Inc.
CARRIERS--1.5% (Convertible)(a)............................ 4,469,760
41,400 Nextlink Communications(a).................... 2,132,100
------------
6,601,860
----------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS--DOMESTIC PAGING & 2,834 Nextel Communications, Inc. (Series D)(a)..... 3,032,380
CELLULAR--0.7%
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PREFERRED STOCKS--6.9%
(COST--$35,371,145) 30,920,866
----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS
----------------------------------------------------------------------------------------------------------------------------
ENERGY--0.2% 86,526 CHI Energy, Inc.(c)........................... 951,786
----------------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT--0.3% 83,974 On Command Corporation(c)..................... 1,159,891
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
148
<PAGE> 150
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
INDUSTRY HELD COMMON STOCKS VALUE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GAMING--0.0% 54,802 JCC Holding Company (Series A)(c)............. $ 44,526
----------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--0.1% 65,333 HMI(c)........................................ 387,915
----------------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS--DOMESTIC PAGING & 9,190 Nextel Communications, Inc. (Class A)(c)...... 562,313
CELLULAR--0.1%
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS--0.7%
(COST--$6,045,998) 3,106,431
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
WARRANTS(B)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENTERTAINMENT--0.0% 29,830 On Command Corporation........................ 121,184
----------------------------------------------------------------------------------------------------------------------------
HIGH TECHNOLOGY--0.0% 750 Republic Technologies......................... 8
----------------------------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY--0.0% 17,307 Bradlees Inc.................................. 21,634
----------------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.0% 2,809 Grand Union Co................................ 351
----------------------------------------------------------------------------------------------------------------------------
TELEPHONY--COMPETITIVE LOCAL 3,000 Metricom Inc.................................. 6,000
EXCHANGE CARRIERS--0.0%
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WARRANTS--0.0%
(COST--$5,425,381) 149,177
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL PAPER**--4.3% $19,438,000 General Motors Acceptance Corp., 7.13% due
7/03/2000................................... 19,426,451
----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 6,170,000 Federal Farm Credit Bank, 6.42% due
OBLIGATIONS**--2.8% 7/13/2000................................... 6,155,696
6,500,000 Federal Home Loan Mortgage Corporation, 6.45%
due 7/11/2000............................... 6,487,190
------------
12,642,886
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES--7.1% (COST--$32,069,337).......... 32,069,337
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--97.5%
(COST--$539,042,127).......................... 440,621,491
OTHER ASSETS LESS LIABILITIES--2.5%........... 11,371,450
------------
NET ASSETS--100.0%............................ $451,992,941
============
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*
Not Rated.
**
Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown reflect the discount rates paid at the
time of purchase by the Fund.
(a)
Represents a pay-in-kind security which may pay interest/dividends in additional
face amount/shares.
(b)
Warrants entitle the Fund to purchase a predetermined number of shares of common
stock and are non-income producing. The purchase price and number of shares are
subject to adjustment under certain conditions until the expiration date.
(c)
Non-income producing security.
(d)
Represents a zero coupon or step bond; the interest rate shown reflects the
effective yield at the time of purchase by the Fund.
(e)
The security may be offered and sold to "qualified institutional buyers" under
Rule 144A of the Securities Act of 1933.
(f)
Subject to principal paydowns.
(g)
Floating rate note.
(h)
Represents an obligation by Jazz Casino Co. LLC to pay a semi-annual amount to
the Fund through 11/15/2009. The payments are based upon varying interest rates
and the amounts, which may be paid-in-kind, are contingent upon the earnings
before income taxes, depreciation and amortization of Jazz Casino Co. LLC on a
fiscal year basis.
(i)
Each $1,000 face amount contains one warrant of United International Holdings,
Inc.
(j)
Each $1,000 face amount contains one warrant of Australis Media Ltd.
+
Restricted securities as to resale. The value of the Fund's investments in
restricted securities was approximately $3,981,000, representing 0.9% of net
assets.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ISSUE ACQUISITION DATE(S) COST VALUE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Clark USA Inc............................................... 9/26/1997-3/20/2000 $2,420,916 $ 528,400
Tucson Electric & Power Co.:
10.211% due 1/01/2009..................................... 6/16/1993-6/01/1998 3,263,607 3,457,989
10.732% due 1/01/2013..................................... 3/01/1993 461,050 520,320
----------------------------------------------------------------------------------------------------------------
TOTAL $6,145,573 $4,506,709
========== ==========
----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
149
<PAGE> 151
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$539,042,127)....... $440,621,491
Cash........................................................ 312
Receivables:
Interest.................................................. $9,671,435
Securities sold........................................... 4,513,958
Dividends................................................. 43,125
Capital shares sold....................................... 41,497 14,270,015
----------
Prepaid expenses and other assets........................... 42,736
------------
Total assets................................................ 454,934,554
------------
---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 2,500,000
Capital shares redeemed................................... 195,071
Investment adviser........................................ 164,615 2,859,686
----------
Accrued expenses............................................ 81,927
------------
Total liabilities........................................... 2,941,613
------------
---------------------------------------------------------------------------------------
NET ASSETS.................................................. $451,992,941
============
---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 200,000,000
shares authorized+.......................................... $ 4,984,825
Paid-in capital in excess of par............................ 571,126,737
Undistributed investment income--net........................ 4,068,241
Accumulated realized capital losses on investments--net..... (29,766,226)
Unrealized depreciation on investments--net................. (98,420,636)
------------
NET ASSETS.................................................. $451,992,941
============
---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $451,992,941 and 49,848,254
shares outstanding.......................................... $ 9.07
============
---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
150
<PAGE> 152
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 24,120,190
Dividends................................................... 1,780,065
Other income................................................ 155,002
------------
Total income................................................ 26,055,257
------------
----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $1,112,843
Accounting services......................................... 44,267
Professional fees........................................... 26,268
Custodian fees.............................................. 22,750
Printing and shareholder reports............................ 21,074
Pricing services............................................ 6,409
Directors' fees and expenses................................ 4,992
Transfer agent fees......................................... 2,591
Registration fees........................................... 24
Other....................................................... 3,719
----------
Total expenses.............................................. 1,244,937
------------
Investment income--net...................................... 24,810,320
------------
----------------------------------------------------------------------------------------
REALIZED & UNREALIZED LOSS ON INVESTMENTS--NET:
Realized loss on investments--net........................... (16,892,630)
Change in unrealized depreciation on investments--net....... (13,323,683)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (5,405,993)
============
----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
151
<PAGE> 153
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 24,810,320 $ 51,573,430
Realized gain (loss) on investments--net.................... (16,892,630) 2,376,311
Change in unrealized depreciation on investments--net....... (13,323,683) (24,647,862)
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (5,405,993) 29,301,879
------------ ------------
-----------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (21,036,723) (56,071,974)
In excess of investment income--net:
Class A................................................... -- (156,872)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (21,036,723) (56,228,846)
------------ ------------
-----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital
share transactions........................................ (19,955,923) 3,418,926
------------ ------------
-----------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (46,398,639) (23,508,041)
Beginning of period......................................... 498,391,580 521,899,621
------------ ------------
End of period*.............................................. $451,992,941 $498,391,580
============ ============
-----------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 4,068,241 $ 294,644
============ ============
-----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
152
<PAGE> 154
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HIGH CURRENT INCOME FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN CLASS A+
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL ---------------------------------------------------------------
STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 9.59 $ 10.11 $ 11.52 $ 11.39 $ 11.25
-------- -------- -------- -------- --------
Investment income--net.............................. .49 1.00 1.05 1.05 1.08
Realized and unrealized gain (loss) on
investments--net.................................. (.59) (.43) (1.40) .14 .12
-------- -------- -------- -------- --------
Total from investment operations.................... (.10) .57 (.35) 1.19 1.20
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net............................ (.42) (1.09) (1.02) (1.04) (1.06)
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................... (.42) (1.09) (1.06) (1.06) (1.06)
-------- -------- -------- -------- --------
Net asset value, end of period...................... $ 9.07 $ 9.59 $ 10.11 $ 11.52 $ 11.39
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................. (1.07%)++ 5.95% (3.09%) 11.00% 11.27%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ .53%* .52% .53% .54% .54%
======== ======== ======== ======== ========
Investment income--net.............................. 10.55%* 10.10% 9.52% 9.11% 9.50%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............ $451,993 $498,392 $521,900 $553,946 $414,615
======== ======== ======== ======== ========
Portfolio turnover.................................. 13.05% 23.14% 33.63% 53.63% 48.92%
======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Amount is less than $.01 per share.
++ Aggregate total investment return.
See Notes to Financial Statements.
153
<PAGE> 155
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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 accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Short-term securities are valued at amortized cost, which approximates
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company.
(b) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(c) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Interest income (including
amortization of premium and discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(d) Dividends and distributions to shareholders--Dividends from net investment
income are declared and paid monthly. Distributions from capital gains are
recorded on the ex-dividend dates. Dividends 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
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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 six
months ended June 30, 2000, the aggregate average daily net assets of the Fund
and Prime Bond Fund was approximately $1,004,392,000.
MLIM 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
154
<PAGE> 156
--------------------------------------------------------------------------------
net assets. Any such expenses in excess of 1.25% of average daily net assets
will be reimbursed to the Fund by MLIM which, in turn, will be reimbursed by
MLLA.
For the six months ended June 30, 2000, Merrill Lynch Security Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a
subsidiary of ML & Co., earned $1,289 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $55,391,779 and $65,528,341, respectively.
Net realized losses for the six months ended June 30, 2000 and net unrealized
losses as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Realized Unrealized
Losses Losses
------------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $(16,892,630) $(98,420,636)
------------ ------------
Total................................ $(16,892,630) $(98,420,636)
============ ============
------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized depreciation for Federal income tax purposes
aggregated $98,420,636, of which $3,765,601 related to appreciated securities
and $102,186,237 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $539,042,127.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 408,014 $ 3,805,789
Shares issued to shareholders in
reinvestment of dividends............ 2,290,276 21,036,723
---------- ------------
Total issued.......................... 2,698,290 24,842,512
Shares redeemed....................... (4,834,518) (44,798,435)
---------- ------------
Net decrease.......................... (2,136,228) $(19,955,923)
========== ============
-------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Class A Shares 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>
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.
6. SUBSEQUENT EVENT:
On July 3, 2000, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.085624 per Class A Share, payable on July 3, 2000 to
shareholders of record as of July 3, 2000.
155
<PAGE> 157
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six months ended June 30, 2000, Index 500 Fund's Class A Shares had a
total return of -0.59%. Since inception (December 13, 1996) through June 30,
2000, the Fund's Class A Shares produced a total return of +107.53%. The Fund's
benchmark, the unmanaged Standard & Poor's 500 Composite (S&P 500) Index,
produced a total return of +0.42% for the first six months of 2000, and +110.27%
from December 13, 1996 to June 30, 2000.
THE ENVIRONMENT
One of the most prominent features of the US equity market during the first
half of 2000 was the continued heightened level of volatility. Inflationary
fears combined with several rounds of interest rate increases by the Federal
Reserve Board kept investors wary of the market's ability to sustain the
year-end rally of 1999. Having closed 1999 at an all-time high of 1469.25, the
S&P 500 Index drifted lower for much of January and February. The Index then
surged during the last half of March, and managed to post a positive total
return for the year's first quarter. Between March 14, 2000 and the end of the
month, the S&P 500 Index added nearly 140 points (a nearly 10% advance) to close
March at 1498.58, after briefly passing the 1500 level for the first time. In
the first quarter overall, strong returns in the S&P 500 Index's technology
sector, and to a lesser extent its energy group, powered this first-quarter
advance and allowed the S&P 500 Index to overcome weakness in nearly all other
sectors.
Although the technology group posted strong returns during the first quarter,
the period ended on a note of weakness, which turned into a full-blown
correction for this sector in early April. This dragged the entire market down
with it, and by April 14 the S&P 500 Index had dropped more than 170 points off
its all-time high. Although the market staged a recovery in the last two weeks
of April, the S&P 500 Index posted a loss of more than 3% during the month.
Despite several days of 2% gains and losses during the next two months, the S&P
500 Index ended the first half of the year little changed from the level at
which it ended the month of April. On June 30, the S&P 500 Index stood at
1454.60, about 1% below its level on December 31, 1999.
PORTFOLIO MATTERS
The Fund finished 1999 with record net assets of $586.4 million. By the end of
June 2000, the Fund's net assets had increased modestly to $594.3 million. This
growth resulted from the net inflow of new cash into the Fund, which was
sufficient to overcome the slight decline in the market during this period.
The principal investments of the Fund are a fully replicating portfolio of all
500 stocks in the S&P 500 Index and a long position in S&P 500 Index futures
contracts. At the end of June, the Fund's equity portfolio was valued at $590.0
million, representing more than 99% of the Fund's net assets. In addition, the
Fund held a long position of S&P 500 September 2000 futures contracts with an
underlying value of $5.1 million. Through its holdings of equities and futures
contracts, it is the Fund's goal to be 100% invested in the S&P 500 Index at all
times.
Composition activity continued at a rapid pace during the first half of 2000.
During the first quarter of the year, we added the following equities to the
portfolio in response to their addition to the S&P 500 Index: NCR Corporation,
Young & Rubicam Inc., Biogen, Inc., Harley-Davidson, Inc., Conexant Systems,
Inc., Sabre Holdings Corporation and Linear Technology Corp. The second quarter
of the year was even more active in terms of composition changes to the S&P 500
Index. During this period, we added the following securities to the Fund's
equity portfolio as a result of their inclusion in the Index: VERITAS Software
Corporation, Altera Corporation, Siebel Systems, Inc., Sapient Corporation,
Maxim Integrated Products, Inc., American Power Conversion Corporation, Agilent
Technologies, Inc., Starbucks Corporation, Convergys Corporation, MedImmune,
Inc., Charter One Financial, Inc., Novellus Systems, Inc., Sanmina Corporation,
Tiffany & Co., Mercury Interactive Corporation, Visteon Corporation and Broadcom
Corporation.
156
<PAGE> 158
--------------------------------------------------------------------------------
IN CONCLUSION
We appreciate your investment in Index 500 Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our investment outlook and
strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Eric S. Mitofsky
Eric S. Mitofsky
Senior Vice President and Portfolio Manager
July 26, 2000
157
<PAGE> 159
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 + 6.89%
--------------------------------------------------------------------------------
Inception (12/13/96) to 6/30/00 +22.85
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 -0.59% +6.89%
------------------------------------------------------------------------------------------
</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.
158
<PAGE> 160
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
+3Com Corporation.............. 16,500 $ 950,813
+ADC Telecommunications,
Inc. ........................ 15,866 1,330,761
+The AES Corporation........... 20,092 916,697
AFLAC Incorporated............. 12,523 575,275
ALLTEL Corporation............. 14,835 918,843
+ALZA Corporation.............. 4,780 282,617
+AMR Corporation............... 7,058 186,596
AT&T Corp. .................... 176,496 5,581,688
Abbott Laboratories............ 72,884 3,247,893
+Adaptec, Inc. ................ 4,902 111,520
Adobe Systems Incorporated..... 5,590 726,001
Adolph Coors Company (Class
B)........................... 1,720 104,060
+Advanced Micro Devices,
Inc. ........................ 7,213 557,204
Aetna Inc. .................... 6,628 425,435
+Agilent Technologies, Inc. ... 21,368 1,575,890
Air Products and Chemicals,
Inc. ........................ 10,812 333,145
Alberto-Culver Company (Class
B)........................... 2,641 80,716
Albertson's, Inc. ............. 19,963 663,770
Alcan Aluminium Ltd. .......... 10,349 320,819
Alcoa Inc. .................... 40,631 1,178,299
Allegheny Technologies
Incorporated................. 3,932 70,776
Allergan Inc. ................. 6,107 454,971
+Allied Waste Industries,
Inc. ........................ 8,906 89,060
The Allstate Corporation....... 35,024 779,284
+Altera Corporation............ 9,447 963,004
Amerada Hess Corporation....... 4,306 265,895
Ameren Corporation............. 6,490 219,037
+America Online, Inc. ......... 108,063 5,700,323
American Electric Power
Company, Inc. ............... 15,094 447,160
American Express Company....... 62,964 3,281,998
American General Corporation... 11,677 712,297
American Greetings Corporation
(Class A).................... 3,049 57,931
American Home Products
Corporation.................. 61,352 3,604,430
American International Group,
Inc. ........................ 72,501 8,518,867
+American Power Conversion
Corporation.................. 9,093 371,108
+Amgen Inc. ................... 48,295 3,392,724
AmSouth Bancorporation......... 18,480 291,060
Anadarko Petroleum
Corporation.................. 6,032 297,453
+Analog Devices, Inc. ......... 16,640 1,264,640
+Andrew Corporation............ 3,798 127,470
Anheuser-Busch Companies,
Inc. ........................ 21,296 1,590,545
Aon Corporation................ 12,073 375,018
Apache Corporation............. 5,391 317,058
+Apple Computer, Inc. ......... 15,234 797,881
+Applied Materials, Inc. ...... 37,982 3,442,119
Archer-Daniels-Midland
Company...................... 28,319 277,880
Armstrong Holdings, Inc. ...... 1,897 29,048
Ashland Inc. .................. 3,349 117,424
Associates First Capital
Corporation (Class A)........ 34,261 764,449
Autodesk, Inc. ................ 2,721 94,385
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
Automatic Data Processing,
Inc. ........................ 29,499 $ 1,580,040
+AutoZone, Inc. ............... 6,293 138,446
Avery Dennison Corporation..... 5,324 357,373
Avon Products, Inc. ........... 11,192 498,044
BB&T Corporation............... 16,419 392,004
The B.F. Goodrich Company...... 5,052 172,084
+BMC Software, Inc. ........... 11,515 420,118
Baker Hughes Incorporated...... 15,567 498,144
Ball Corporation............... 1,438 46,286
Bank of America Corporation.... 77,946 3,351,678
The Bank of New York Company,
Inc. ........................ 34,725 1,614,712
Bank One Corporation........... 53,947 1,432,967
Barrick Gold Corporation....... 18,631 338,851
Bausch & Lomb Incorporated..... 2,487 192,432
Baxter International Inc. ..... 13,673 961,383
The Bear Stearns Companies
Inc. ........................ 5,203 216,575
Becton, Dickinson and
Company...................... 11,863 340,320
+Bed Bath & Beyond Inc. ....... 6,608 239,540
Bell Atlantic Corporation...... 72,702 3,694,170
BellSouth Corporation.......... 88,507 3,772,611
Bemis Company, Inc. ........... 2,491 83,760
+Best Buy Co., Inc. ........... 9,639 609,667
Bestfoods...................... 12,941 896,164
+Bethlehem Steel Corporation... 6,197 22,077
+Biogen, Inc. ................. 6,940 447,630
Biomet, Inc. .................. 5,566 213,943
The Black & Decker
Corporation.................. 4,014 157,800
The Boeing Company............. 42,672 1,784,223
Boise Cascade Corporation...... 2,701 69,888
+Boston Scientific
Corporation.................. 19,200 421,200
Briggs & Stratton
Corporation.................. 1,083 37,093
Bristol-Myers Squibb Company... 92,785 5,404,726
+Broadcom Corporation (Class
A)........................... 9,430 2,079,610
Brown-Forman Corporation (Class
B)........................... 3,255 174,956
Brunswick Corporation.......... 4,162 68,933
Burlington Northern Santa Fe
Corp. ....................... 20,188 463,062
Burlington Resources Inc. ..... 10,128 387,396
CIGNA Corporation.............. 7,661 716,303
CMS Energy Corporation......... 5,174 114,475
CP&L, Inc. .................... 7,535 240,649
C.R. Bard, Inc. ............... 2,435 117,184
CSX Corporation................ 10,337 219,015
CVS Corporation................ 18,396 735,840
+Cabletron Systems, Inc. ...... 8,595 217,024
Campbell Soup Company.......... 19,872 578,772
Capital One Financial
Corporation.................. 9,251 412,826
Cardinal Health, Inc. ......... 12,927 956,598
Carnival Corporation........... 28,440 554,580
Caterpillar Inc. .............. 16,432 556,634
+Cendant Corporation........... 33,921 474,894
Centex Corporation............. 2,812 66,082
CenturyTel, Inc. .............. 6,602 189,807
+Ceridian Corporation.......... 6,844 164,684
</TABLE>
159
<PAGE> 161
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
The Charles Schwab
Corporation.................. 64,063 $ 2,154,118
Charter One Financial, Inc. ... 9,860 226,780
The Chase Manhattan
Corporation.................. 58,170 2,679,456
Chevron Corporation............ 30,671 2,601,284
The Chubb Corporation.......... 8,272 508,728
Cincinnati Financial
Corporation.................. 7,579 238,265
Cinergy Corp. ................. 7,512 191,086
Circuit City Stores -- Circuit
City Group................... 9,608 318,865
+Cisco Systems, Inc. .......... 327,199 20,797,586
Citigroup Inc. ................ 158,724 9,563,121
+Citrix Systems, Inc. ......... 8,724 165,211
+Clear Channel Communications,
Inc. ........................ 15,983 1,198,725
The Clorox Company............. 11,074 496,254
The Coastal Corporation........ 10,074 613,255
The Coca-Cola Company.......... 116,469 6,689,688
Coca-Cola Enterprises Inc. .... 19,783 322,710
Colgate-Palmolive Company...... 27,130 1,624,409
Columbia Energy Group.......... 3,840 252,000
+Comcast Corporation (Class
A)........................... 42,251 1,711,165
Comerica Incorporated.......... 7,365 330,504
Compaq Computer Corporation.... 79,880 2,041,932
Computer Associates
International, Inc. ......... 27,690 1,417,382
+Computer Sciences
Corporation.................. 7,868 587,641
+Compuware Corporation......... 16,998 176,354
+Comverse Technology, Inc. .... 7,219 671,367
ConAgra, Inc. ................. 23,191 442,078
+Conexant Systems, Inc. ....... 10,225 497,191
Conoco Inc. (Class B).......... 29,369 721,376
Conseco, Inc. ................. 15,299 149,165
Consolidated Edison, Inc. ..... 10,011 296,576
+Consolidated Stores
Corporation.................. 5,186 62,232
Constellation Energy Group..... 7,049 229,533
+Convergys Corporation......... 7,190 372,981
Cooper Industries, Inc. ....... 4,415 143,763
Cooper Tire & Rubber Company... 3,484 38,760
Corning Incorporated........... 13,009 3,510,804
+Costco Wholesale
Corporation.................. 20,965 691,845
Countrywide Credit Industries,
Inc. ........................ 5,339 161,838
Crane Co. ..................... 2,855 69,412
Crown Cork & Seal Company,
Inc. ........................ 6,028 90,420
Cummins Engine Company, Inc. .. 1,983 54,037
DTE Energy Company............. 6,737 205,900
Dana Corporation............... 7,182 152,169
Danaher Corporation............ 6,737 333,060
Darden Restaurants, Inc. ...... 5,820 94,575
Deere & Company................ 11,063 409,331
+Dell Computer Corporation..... 121,123 5,972,878
Delphi Automotive Systems
Corporation.................. 26,486 385,702
Delta Air Lines, Inc. ......... 5,762 291,341
Deluxe Corporation............. 3,403 80,183
Dillard's, Inc. (Class A)...... 4,402 53,925
Dollar General Corporation..... 15,480 301,860
Dominion Resources, Inc. ...... 11,223 481,186
Dover Corporation.............. 9,568 388,102
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
The Dow Chemical Company....... 31,866 $ 961,955
Dow Jones & Company, Inc. ..... 4,162 304,866
Duke Energy Corporation........ 17,263 973,202
The Dun & Bradstreet
Corporation.................. 7,623 218,208
E.I. du Pont de Nemours and
Company...................... 49,254 2,154,862
+EMC Corporation............... 102,058 7,852,087
Eastern Enterprises............ 1,258 79,254
Eastman Chemical Company....... 3,622 172,950
Eastman Kodak Company.......... 14,602 868,819
Eaton Corporation.............. 3,423 229,341
Ecolab Inc. ................... 6,111 238,711
Edison International........... 15,629 320,394
El Paso Energy Corporation..... 10,895 554,964
Electronic Data Systems
Corporation.................. 21,958 905,767
Eli Lilly and Company.......... 53,131 5,306,459
Emerson Electric Co. .......... 20,073 1,211,907
Engelhard Corporation.......... 6,025 102,802
Enron Corp. ................... 34,482 2,224,089
Entergy Corporation............ 10,851 295,012
Equifax Inc. .................. 6,684 175,455
Exxon Mobil Corporation++...... 163,762 12,855,317
+FMC Corporation............... 1,446 83,868
FPL Group, Inc. ............... 8,414 416,493
+FedEx Corp. .................. 13,673 519,574
Federal Home Loan Mortgage
Association.................. 32,695 1,324,147
Federal National Mortgage
Association.................. 47,380 2,472,644
+Federated Department Stores,
Inc. ........................ 10,050 339,187
Fifth Third Bancorp............ 14,587 922,628
First Data Corporation......... 19,434 964,412
First Union Corporation........ 46,127 1,144,526
FirstEnergy Corp. ............. 10,884 254,413
Firstar Corporation............ 45,621 960,892
FleetBoston Financial
Corporation.................. 42,384 1,441,056
Florida Progress Corporation... 4,650 217,969
Fluor Corporation.............. 3,591 113,565
Ford Motor Company............. 56,698 2,438,014
Fort James Corporation......... 9,698 224,266
Fortune Brands, Inc. .......... 7,464 172,138
Franklin Resources, Inc. ...... 11,456 347,976
+Freeport-McMoRan Copper &
Gold, Inc. (Class B)......... 7,565 69,976
GPU, Inc. ..................... 5,719 154,770
GTE Corporation................ 45,284 2,818,929
Gannett Co., Inc. ............. 12,563 751,424
The Gap, Inc. ................. 40,025 1,250,781
+Gateway Inc. ................. 15,169 860,841
General Dynamics Corporation... 9,496 496,166
General Electric Company++..... 465,374 24,664,822
General Mills, Inc. ........... 13,712 524,484
General Motors Corporation..... 25,031 1,453,362
Genuine Parts Company.......... 8,336 166,720
Georgia-Pacific Group.......... 8,080 212,100
The Gillette Company........... 49,102 1,715,501
+Global Crossing Ltd. ......... 41,469 1,091,153
</TABLE>
160
<PAGE> 162
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
Golden West Financial
Corporation.................. 7,438 $ 303,563
The Goodyear Tire & Rubber
Company...................... 7,372 147,440
The Great Atlantic & Pacific
Tea Company, Inc. ........... 1,807 30,041
Great Lakes Chemical
Corporation.................. 2,576 81,144
+Guidant Corporation........... 14,447 715,126
H & R Block, Inc. ............. 4,634 150,026
HCA-The Healthcare
Corporation.................. 26,230 796,736
H.J. Heinz Company............. 16,571 724,981
+HEALTHSOUTH Corporation....... 18,169 130,590
Halliburton Company............ 20,892 985,841
Harcourt General, Inc. ........ 3,353 182,319
Harley-Davidson, Inc. ......... 14,284 549,934
+Harrah's Entertainment,
Inc. ........................ 5,736 120,097
The Hartford Financial Services
Group, Inc. ................. 10,130 566,647
Hasbro, Inc. .................. 8,114 122,217
Hercules Incorporated.......... 5,006 70,397
Hershey Foods Corporation...... 6,466 313,601
Hewlett-Packard Company........ 47,042 5,874,370
Hilton Hotels Corporation...... 17,325 162,422
The Home Depot, Inc. .......... 108,809 5,433,649
Homestake Mining Company....... 12,289 84,487
Honeywell International
Inc. ........................ 37,576 1,265,841
Household International,
Inc. ........................ 22,302 926,927
+Humana Inc. .................. 7,941 38,712
Huntington Bancshares
Incorporated................. 10,441 165,098
IKON Office Solutions, Inc. ... 1,907 7,390
IMS Health Incorporated........ 14,006 252,108
ITT Industries, Inc. .......... 4,166 126,542
Illinois Tool Works Inc. ...... 14,214 810,198
+Inco Limited.................. 8,591 132,087
Ingersoll-Rand Company......... 7,630 307,108
Intel Corporation.............. 157,542 21,061,396
International Business Machines
Corporation.................. 83,394 9,136,855
International Flavors &
Fragrances Inc. ............. 4,847 146,319
International Paper Company.... 22,729 677,610
The Interpublic Group of
Companies, Inc. ............. 14,219 611,417
J.C. Penney Company, Inc. ..... 12,296 226,708
J.P. Morgan & Co.,
Incorporated................. 7,652 842,677
Jefferson-Pilot Corporation.... 4,860 274,286
Johnson & Johnson.............. 65,427 6,665,376
Johnson Controls, Inc. ........ 4,008 205,660
+KLA-Tencor Corporation........ 8,749 512,363
Kansas City Southern
Industries, Inc. ............ 5,187 460,022
Kaufman and Broad Home
Corporation.................. 2,271 44,994
Kellogg Company................ 19,156 569,891
Kerr-McGee Corporation......... 4,396 259,089
KeyCorp........................ 20,494 361,207
Kimberly-Clark Corporation..... 26,134 1,499,438
+Kmart Corporation............. 22,627 154,146
Knight Ridder, Inc. ........... 3,672 195,304
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
+Kohl's Corporation............ 15,421 $ 857,793
+The Kroger Co. ............... 39,272 866,438
+LSI Logic Corporation......... 14,470 783,189
Leggett & Platt,
Incorporated................. 9,275 153,038
Lehman Brothers Holdings,
Inc. ........................ 5,634 532,765
+Lexmark International Group,
Inc. (Class A)............... 6,080 408,880
The Limited, Inc. ............. 20,187 436,544
Lincoln National Corporation... 9,036 326,425
Linear Technology
Corporation.................. 14,654 936,940
Liz Claiborne, Inc. ........... 2,566 90,452
Lockheed Martin Corporation.... 18,845 467,592
Loews Corporation.............. 4,649 278,940
Longs Drug Stores Corporation.. 1,837 39,955
Louisiana-Pacific
Corporation.................. 4,910 53,396
Lowe's Companies, Inc. ........ 18,056 741,424
Lucent Technologies Inc. ...... 153,178 9,075,796
MBIA, Inc. .................... 4,636 223,397
MBNA Corporation............... 37,710 1,022,884
MGIC Investment Corporation.... 4,995 227,272
Mallinckrodt Inc. ............. 3,162 137,349
+Manor Care, Inc. ............. 4,869 34,083
Marriott International, Inc.
(Class A).................... 11,293 407,254
Marsh & McLennan Companies,
Inc. ........................ 12,707 1,327,087
Masco Corporation.............. 21,123 381,534
Mattel, Inc. .................. 20,023 264,053
+Maxim Integrated Products,
Inc. ........................ 13,278 902,074
The May Department Stores
Company...................... 15,680 376,320
Maytag Corporation............. 3,696 136,290
McDermott International,
Inc. ........................ 2,806 24,728
McDonald's Corporation......... 62,854 2,070,254
The McGraw-Hill Companies,
Inc. ........................ 9,169 495,126
McKesson HBOC, Inc. ........... 13,315 278,783
The Mead Corporation........... 4,834 122,059
+MedImmune, Inc. .............. 9,811 726,014
Medtronic, Inc. ............... 56,320 2,805,440
Mellon Financial Corporation... 23,153 843,637
Merck & Co., Inc. ............. 108,159 8,287,683
+Mercury Interactive
Corporation ................. 3,740 361,845
Meredith Corporation........... 2,439 82,316
Merrill Lynch & Co., Inc.**.... 18,260 2,099,900
+Micron Technology, Inc. ...... 26,110 2,299,312
+Microsoft Corporation++....... 247,538 19,803,040
Millipore Corporation.......... 2,131 160,624
Minnesota Mining and
Manufacturing Company (3M)... 18,619 1,536,068
Molex Incorporated............. 9,260 445,638
Morgan Stanley Dean Witter &
Co. ......................... 53,223 4,430,815
Motorola, Inc. ................ 101,272 2,943,218
+NCR Corporation............... 4,475 174,245
NICOR, Inc. ................... 2,262 73,798
Nabisco Group Holdings Corp. .. 15,391 399,204
National City Corporation...... 28,514 486,520
+National Semiconductor
Corporation.................. 8,320 472,160
</TABLE>
161
<PAGE> 163
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
National Service Industries,
Inc. ........................ 1,963 $ 38,279
+Navistar International
Corporation.................. 2,936 91,200
+Network Appliance, Inc. ...... 14,361 1,156,061
New Century Energies, Inc. .... 5,417 162,510
The New York Times Company
(Class A).................... 8,012 316,474
Newell Rubbermaid Inc. ........ 12,537 322,828
Newmont Mining Corporation..... 7,900 170,838
+Nextel Communications, Inc.
(Class A).................... 35,643 2,180,906
+Niagara Mohawk Holdings
Inc. ........................ 8,133 113,354
Nike, Inc. (Class B)........... 12,865 512,188
Nordstrom, Inc. ............... 6,347 153,121
Norfolk Southern Corporation... 18,007 267,854
Nortel Networks Corporation.... 139,334 9,509,546
Northern States Power
Company...................... 7,373 148,842
Northern Trust Corporation..... 10,539 685,694
Northrop Grumman Corporation... 3,263 216,174
+Novell, Inc. ................. 15,497 143,347
+Novellus Systems, Inc. ....... 6,145 347,577
Nucor Corporation.............. 4,043 134,177
ONEOK, Inc. ................... 1,378 35,742
Occidental Petroleum
Corporation.................. 17,370 365,856
+Office Depot, Inc. ........... 14,907 93,169
Old Kent Financial
Corporation.................. 6,458 172,766
Omnicom Group Inc. ............ 8,402 748,303
+Oracle Corporation............ 133,523 11,224,277
Owens Corning.................. 2,556 23,643
+Owens-Illinois, Inc. ......... 6,909 80,749
PACCAR Inc. ................... 3,607 143,153
PE Corp.-PE Biosystems Group... 9,801 645,641
PECO Energy Company............ 7,995 322,298
PG&E Corporation............... 18,108 445,910
PNC Bank Corp. ................ 13,688 641,625
PPG Industries, Inc. .......... 8,233 364,825
PPL Corporation................ 6,790 148,956
+Pactiv Corporation............ 7,964 62,717
Paine Webber Group Inc. ....... 6,864 312,312
Pall Corporation............... 5,872 108,632
+Parametric Technology
Corporation.................. 12,967 142,637
Parker-Hannifin Corporation.... 5,292 181,251
Paychex, Inc. ................. 17,434 732,228
Peoples Energy Corporation..... 1,660 53,743
+PeopleSoft, Inc. ............. 13,006 217,851
PepsiCo, Inc. ................. 67,789 3,012,374
PerkinElmer, Inc. ............. 2,312 152,881
Pfizer Inc. ................... 296,099 14,212,752
Pharmacia Corporation.......... 59,711 3,086,312
Phelps Dodge Corporation....... 3,712 138,040
Philip Morris Companies
Inc.++....................... 107,572 2,857,381
Phillips Petroleum Company..... 11,969 606,679
Pinnacle West Capital
Corporation.................. 4,005 135,669
Pitney Bowes Inc. ............. 12,154 486,160
Placer Dome Inc. .............. 15,408 147,339
Polaroid Corporation........... 2,086 37,678
Potlatch Corporation........... 1,365 45,216
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
Praxair, Inc. ................. 7,419 $ 277,749
The Procter & Gamble Company... 61,530 3,522,593
The Progressive Corporation.... 3,455 255,670
Providian Financial
Corporation.................. 6,695 602,550
Public Service Enterprise Group
Incorporated................. 10,199 353,140
Pulte Corporation.............. 1,935 41,844
+QUALCOMM Incorporated......... 34,856 2,091,360
The Quaker Oats Company........ 6,183 464,498
+Quintiles Transnational
Corp. ....................... 5,457 77,080
R.R. Donnelley & Sons
Company...................... 5,746 129,644
RadioShack Corporation......... 8,779 415,905
Ralston-Ralston Purina Group... 14,431 287,718
Raytheon Company (Class B)..... 15,982 307,654
+Reebok International Ltd. .... 2,648 42,203
Regions Financial
Corporation.................. 10,399 206,680
Reliant Energy, Inc. .......... 13,971 413,018
Rite Aid Corporation........... 12,210 80,128
Rockwell International
Corporation.................. 8,886 279,909
Rohm and Haas Company.......... 10,222 352,659
+Rowan Companies, Inc. ........ 4,415 134,106
Royal Dutch Petroleum Company
(NY Registered Shares)....... 100,874 6,210,056
Russell Corporation............ 1,562 31,240
Ryder System, Inc. ............ 2,812 53,252
SAFECO Corporation............. 6,016 119,568
SBC Communications Inc. ....... 160,001 6,920,043
SLM Holding Corporation........ 7,381 276,326
SUPERVALU INC.................. 6,175 117,711
SYSCO Corporation.............. 15,671 660,141
Sabre Holdings Corporation..... 6,113 174,221
+Safeway Inc. ................. 23,400 1,055,925
+Sanmina Corporation........... 6,963 595,337
+Sapient Corporation........... 2,704 289,159
Sara Lee Corporation........... 40,894 789,765
Schering-Plough Corporation.... 68,879 3,478,390
Schlumberger Limited........... 26,770 1,997,711
Scientific-Atlanta, Inc. ...... 7,426 553,237
+Seagate Technology, Inc. ..... 10,715 589,325
The Seagram Company Ltd. ...... 20,563 1,192,654
+Sealed Air Corporation........ 3,939 206,305
Sears, Roebuck & Co. .......... 16,619 542,195
Sempra Energy.................. 9,658 164,186
The Sherwin-Williams Company... 7,719 163,546
+Siebel Systems, Inc. ......... 9,393 1,536,343
Sigma-Aldrich Corporation...... 4,016 117,468
Snap-On Incorporated........... 2,765 73,618
+Solectron Corporation......... 28,045 1,174,384
SouthTrust Corporation......... 7,931 179,439
The Southern Company........... 30,512 711,311
Southwest Airlines Co. ........ 23,345 442,096
Springs Industries, Inc. (Class
A)........................... 871 28,035
Sprint Corp. (FON Group)....... 41,235 2,102,985
+Sprint Corp. (PCS Group)...... 43,056 2,561,832
+St. Jude Medical, Inc. ....... 3,979 182,537
The St. Paul Companies,
Inc. ........................ 9,982 340,636
</TABLE>
162
<PAGE> 164
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
The Stanley Works.............. 4,105 $ 97,494
+Staples, Inc. ................ 22,780 350,243
+Starbucks Corporation......... 8,627 329,444
State Street Corporation....... 7,544 800,136
Summit Bancorp................. 8,258 203,353
+Sun Microsystems, Inc. ....... 74,618 6,785,574
Sunoco, Inc. .................. 4,187 123,255
SunTrust Banks, Inc. .......... 14,257 651,367
Synovus Financial Corp. ....... 13,309 234,571
T. Rowe Price Associates,
Inc. ........................ 5,655 240,338
The TJX Companies, Inc. ....... 14,139 265,106
TRW Inc. ...................... 5,806 251,835
TXU Corp. ..................... 12,403 365,889
Target Corporation............. 21,448 1,243,984
Tektronix, Inc. ............... 2,216 163,984
+Tellabs, Inc. ................ 19,301 1,320,912
Temple-Inland, Inc. ........... 2,460 103,320
+Tenet Healthcare
Corporation.................. 14,677 396,279
+Teradyne, Inc. ............... 8,185 601,598
Texaco Inc. ................... 25,967 1,382,743
Texas Instruments
Incorporated................. 76,959 5,286,121
Textron, Inc. ................. 6,797 369,162
+Thermo Electron Corporation... 7,354 154,894
Thomas & Betts Corporation..... 2,689 51,427
Tiffany & Co. ................. 3,429 231,458
Time Warner Inc. .............. 61,889 4,703,564
The Timken Company............. 2,901 54,031
Torchmark Corporation.......... 6,041 149,137
Tosco Corporation.............. 6,802 192,582
+Toys 'R' Us, Inc. ............ 10,170 148,101
Transocean Sedco Forex Inc. ... 9,856 526,680
Tribune Company................ 14,505 507,675
+Tricon Global Restaurants,
Inc. ........................ 6,934 195,886
Tupperware Corporation......... 2,735 60,170
Tyco International Ltd. ....... 79,404 3,761,765
U S WEST, Inc. ................ 23,882 2,047,882
U.S. Bancorp................... 35,363 680,738
+US Airways Group, Inc. ....... 3,146 122,694
UST Inc. ...................... 7,647 112,315
USX-Marathon Group............. 14,682 367,968
USX-U.S. Steel Group........... 4,178 77,554
Unicom Corporation............. 8,381 324,240
Unilever NV (NY Registered
Shares)...................... 26,885 1,156,055
Union Carbide Corporation...... 6,300 311,850
Union Pacific Corporation...... 11,637 432,751
Union Pacific Resources Group
Inc. ........................ 11,886 261,492
Union Planters Corporation..... 6,379 178,213
+Unisys Corporation............ 14,644 213,253
UnitedHealth Group
Incorporated................. 7,657 656,588
United Technologies
Corporation.................. 22,134 1,303,139
</TABLE>
<TABLE>
<CAPTION>
SHARES
COMMON STOCKS HELD VALUE
------------------------------------------------------
<S> <C> <C>
Unocal Corporation............. 11,430 $ 378,619
UnumProvident Corporation...... 11,305 226,807
V. F. Corporation.............. 5,372 127,921
+VERITAS Software
Corporation.................. 18,464 2,086,721
+Viacom, Inc. (Class B)........ 71,730 4,891,089
+Visteon Corporation........... 6,804 82,494
Vulcan Materials Company....... 4,766 203,449
+W.R. Grace & Co. ............. 3,153 38,230
W. W. Grainger, Inc. .......... 4,423 136,284
Wachovia Corporation........... 9,607 521,180
Wal-Mart Stores, Inc. ......... 209,633 12,080,102
Walgreen Co. .................. 47,417 1,526,235
The Walt Disney Company........ 97,735 3,793,340
Washington Mutual, Inc. ....... 25,767 744,022
Waste Management, Inc. ........ 29,219 555,161
+Watson Pharmaceuticals,
Inc. ........................ 4,535 243,756
+Wellpoint Health Networks
Inc. ........................ 2,927 212,025
Wells Fargo Company............ 75,783 2,936,591
Wendy's International, Inc. ... 5,362 95,511
Westvaco Corporation........... 4,747 117,785
Weyerhaeuser Company........... 10,958 471,194
Whirlpool Corporation.......... 3,440 160,390
Willamette Industries, Inc. ... 5,198 141,646
The Williams Companies,
Inc. ........................ 20,783 866,391
Winn-Dixie Stores, Inc. ....... 6,796 97,268
Wm. Wrigley Jr. Company........ 5,400 433,013
+WorldCom, Inc. ............... 134,686 6,178,720
Worthington Industries,
Inc. ........................ 4,055 42,578
Xerox Corporation.............. 31,345 650,409
+Xilinx, Inc. ................. 15,150 1,250,822
+Yahoo! Inc. .................. 25,554 3,165,502
Young & Rubicam Inc. .......... 3,405 194,723
------------------------------------------------------
TOTAL COMMON STOCKS
(COST--$417,456,171)--99.3% 589,953,533
------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
SHORT-TERM OBLIGATIONS-- FACE
COMMERCIAL PAPER* AMOUNT
-------------------------------------------------------
General Motors Acceptance
Corp., 7.13% due
7/03/2000.................. $6,179,000 6,176,552
-------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(COST--$6,176,552)--1.0% 6,176,552
-------------------------------------------------------
TOTAL INVESTMENTS
(COST--$423,632,723)--100.3%.. 596,130,085
VARIATION MARGIN ON FINANCIAL
FUTURES
CONTRACTS***--0.0%......... 50,320
LIABILITIES IN EXCESS OF
OTHER ASSETS--(0.3%)....... (1,880,796)
------------
NET ASSETS--100.0%........... $594,299,609
============
</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.
163
<PAGE> 165
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
*** Financial futures contracts purchased as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
NUMBER OF EXPIRATION
CONTRACTS ISSUE DATE VALUE
----------------------------------------------------------------------------
<S> <C> <C> <C>
14 S&P 500 Financial Futures Index September 2000 $5,138,350
----------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS PURCHASED (CONTRACT
PRICE--$5,226,512) $5,138,350
==========
----------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
++ Portion of holdings pledged as collateral for financial futures contracts.
See Notes to Financial Statements.
164
<PAGE> 166
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$423,632,723)....... $596,130,085
Cash........................................................ 49,632
Receivables:
Securities sold........................................... $1,597,155
Dividends................................................. 488,585
Variation margin.......................................... 50,320
Capital shares sold....................................... 24,033 2,160,093
----------
Deferred organization expenses.............................. 3,997
Prepaid expenses and other assets........................... 32,029
------------
Total assets................................................ 598,375,836
------------
---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 3,024,971
Capital shares redeemed................................... 774,488
Investment adviser........................................ 136,840 3,936,299
----------
Accrued expenses............................................ 139,928
------------
Total liabilities........................................... 4,076,227
------------
---------------------------------------------------------------------------------------
NET ASSETS.................................................. $594,299,609
============
---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 3,196,521
Paid-in capital in excess of par............................ 423,328,960
Undistributed investment income--net........................ 2,567,053
Accumulated realized capital losses on investments--net..... (1,966,226)
Accumulated distributions in excess of realized capital
gains on investments--net................................. (5,235,899)
Unrealized appreciation on investments--net................. 172,409,200
------------
NET ASSETS.................................................. $594,299,609
============
---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $594,299,609 and 31,965,209
shares outstanding........................................ $ 18.59
============
---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
165
<PAGE> 167
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $17,174 foreign withholding tax).......... $ 3,259,242
Interest and discount earned................................ 342,839
-----------
Total income................................................ 3,602,081
-----------
-------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $864,855
Accounting services......................................... 57,588
Registration fees........................................... 27,365
Printing and shareholder reports............................ 25,986
Professional fees........................................... 23,145
Custodian fees.............................................. 20,646
Directors' fees and expenses................................ 5,611
Transfer agent fees......................................... 2,574
Amortization of organization expenses....................... 2,032
Pricing services............................................ 785
Other....................................................... 4,448
--------
Total expenses.............................................. 1,035,035
-----------
Investment income--net...................................... 2,567,046
-----------
-------------------------------------------------------------------------------------
REALIZED & UNREALIZED LOSS ON INVESTMENTS--NET:
Realized loss on investments--net........................... (1,125,989)
Change in unrealized appreciation on investments--net....... (4,873,162)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(3,432,105)
===========
-------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
166
<PAGE> 168
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INDEX 500 FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 2,567,046 $ 5,911,403
Realized gain (loss) on investments--net.................... (1,125,989) 71,595
Change in unrealized appreciation on investments--net....... (4,873,162) 91,802,534
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (3,432,105) 97,785,532
------------ ------------
--------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (12,141) (10,285,110)
Realized gain on investments--net:
Class A................................................... (840,237) (4,848,855)
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............................. (852,378) (20,369,864)
------------ ------------
--------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 12,189,770 105,761,241
------------ ------------
--------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 7,905,287 183,176,909
Beginning of period......................................... 586,394,322 403,217,413
------------ ------------
End of period*.............................................. $594,299,609 $586,394,322
============ ============
--------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 2,567,053 $ 12,148
============ ============
--------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
167
<PAGE> 169
--------------------------------------------------------------------------------
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 PERIOD
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31, DEC. 13, 1996+
MONTHS ENDED ------------------------------------ TO
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 1997 DEC. 31, 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 18.73 $ 16.23 $ 13.48 $ 10.17 $ 10.00
-------- -------- -------- -------- -------
Investment income--net........................ .08 .19 .18 .17 .02
Realized and unrealized gain (loss) on
investments--net............................ (.19) 3.05 3.40 3.16 .15
-------- -------- -------- -------- -------
Total from investment operations.............. (.11) 3.24 3.58 3.33 .17
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net...................... --++ (.37) (.17) (.02) --
Realized gain on investments--net........... (.03) (.18) (.66) --++ --
In excess of realized gain on
investments--net.......................... -- (.19) -- -- --
-------- -------- -------- -------- -------
Total dividends and distributions............. (.03) (.74) (.83) (.02) --
-------- -------- -------- -------- -------
Net asset value, end of period................ $ 18.59 $ 18.73 $ 16.23 $ 13.48 $ 10.17
======== ======== ======== ======== =======
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............ (.59%)++++ 20.50% 28.28% 32.81% 1.68%++++
======== ======== ======== ======== =======
---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement................ .36%* .35% .36% .34% .00%*
======== ======== ======== ======== =======
Expenses...................................... .36%* .35% .36% .40% .60%*
======== ======== ======== ======== =======
Investment income--net........................ .89%* 1.13% 1.36% 2.01% 3.08%*
======== ======== ======== ======== =======
---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...... $594,300 $586,394 $403,217 $215,234 $10,752
======== ======== ======== ======== =======
Portfolio turnover............................ 2.71% 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. If
applicable, the Company's Investment Adviser voluntarily waived a portion of
its management fee. Without such waiver, the Fund's performance would have
been lower.
See Notes to Financial Statements.
168
<PAGE> 170
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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 accounting
principles generally accepted in the United States of America, which may require
the use of management accruals and estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim period presented.
All such adjustments are of a normal, recurring nature. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
sale price prior to the time of valuation. Securities traded in the NASDAQ
National Market System are valued at the last sale price prior to the time of
valuation. Portfolio securities that are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at the last sale
price in the case of exchange-traded options. In the case of options traded in
the over-the-counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). Futures contracts are valued at the
settlement price at the close of the applicable exchange. Short-term securities
are valued at amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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.
169
<PAGE> 171
--------------------------------------------------------------------------------
(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. 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
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM 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 MLIM 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $31,443,333 and $14,799,704, respectively.
Net realized losses for the six months ended June 30, 2000 and net unrealized
gains (losses) as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Unrealized
Realized Gains
Losses (Losses)
------------------------------------------------------------------
<S> <C> <C>
Long-term investments................. $ (794,849) $172,497,362
Financial futures contracts........... (331,140) (88,162)
----------- ------------
Total................................. $(1,125,989) $172,409,200
=========== ============
------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $172,497,362, of which $213,212,819 related to appreciated securities
and $40,715,457 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $423,632,723.
170
<PAGE> 172
--------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
------------------------------------------------------------------
<S> <C> <C>
Shares sold............................ 2,415,708 $ 44,106,018
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... 48,920 852,378
---------- ------------
Total issued........................... 2,464,628 44,958,396
Shares redeemed........................ (1,808,178) (32,768,626)
---------- ------------
Net increase........................... 656,450 $ 12,189,770
========== ============
------------------------------------------------------------------
</TABLE>
<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>
171
<PAGE> 173
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The six-month period ended June 30, 2000 was a period of high volatility in
world equity markets. In stark contrast to the final six months of 1999, returns
to dollar investors from international equity markets were almost universally
negative during the six months ended June 30, 2000. During this period, the
unmanaged Morgan Stanley Capital International (MSCI) World (Ex-US) Index fell
by 3.0% in US dollar terms, as compared to the rise of 22.4% for the six months
ended December 31, 1999.
Positive returns seen in the run-up to the new millennium flowed over into
January and February, when investor enthusiasm for "TMT" (technology, media and
telecommunications) stocks was at its height. Notwithstanding a sharp decline
since the peak in early March, at June 30, 2000 the information technology
sector within the MSCI World (Ex-US) Index was still more than double its level
12 months earlier. However, the gain during the last six months was a far more
modest 2.5%, and all of this gain was generated in hardware and communications
equipment manufacturers. Other sectors that rose in the first half of 2000 were
largely defensive in nature (including food, beverages and tobacco, as well as
health care), although the energy sector also gained as oil prices strengthened.
Several other broad sector groupings saw negligible or slightly negative
returns. These included telecommunications and basic materials. This was
somewhat surprising for the basic materials sector against a backdrop of
stronger world economic growth and evidence of pricing power re-emerging in many
industries. Fears that the gradual tightening of monetary policy by many central
banks could lead to a sharp downturn in global growth appeared to be a growing
factor dampening sentiment toward basic industries as the period progressed.
Not including Canada (+23.2%), all broad regions in the MSCI World (Ex-US)
Index produced negative returns. The best of the regions (in US dollar terms)
was the European Monetary Union bloc, which returned -0.3%. The weakest region
was the Pacific Basin (ex-Japan), which returned -9.3%, having suffered from a
peak in some countries' economic growth rates, the tightening of US monetary
policy and a relative lack of high-profile information technology (IT) stocks
relative to other regions.
Within regions, sharp differences in country index performance had more to do
with sector composition than country fundamentals. For instance, largely as a
result of continued strength in Telefonaktiebolaget LM Ericsson AB, the leader
in Europe was Sweden (+9.6%). Markets such as Austria and Belgium, with little
technology representation, actually produced negative returns.
In aggregate, emerging markets underperformed developed markets, returning
-5.0% as measured by the MSCI World (Ex-US) Index. Having risen strongly in the
early weeks of 2000 when optimism about the world economy was at its peak,
emerging markets subsequently fell sharply as investors' risk appetites waned
with US Federal Reserve Board tightening and the decline in the NASDAQ.
PORTFOLIO MATTERS
International Equity Focus Fund's Class A Shares returned -4.52% for the six
months ended June 30, 2000 compared to the return of -3.0% (in US dollars) for
the MSCI World (Ex-US) Index during the same period.
The Fund started the six-month period underweight relative to the benchmark in
Japan, the United Kingdom and the Pacific Basin and broadly neutral in developed
Continental European markets. The offsets to these underweighted positions were
principally holdings of emerging markets and to a lesser extent, cash. Early in
the first quarter the Japanese exposure was increased to a neutral stance,
largely at the expense of Continental Europe, which had had a strong run up to
the calendar year end. Japan was expected to outperform as economic growth
looked to be supported by increased corporate investment, in turn assisted by
the Bank of Japan's zero interest rate policy. Another regional beneficiary from
the reduction in European equities was the United Kingdom, for which we
anticipated a peak in interest rate expectations ahead of many other developed
economies. Toward the latter part of the six-month period ended June 30, 2000,
the UK exposure was again reduced to underweighted as earnings trends turned
less favorable in both absolute and relative terms. At the same time, the view
was forming that while UK interest rates might not rise much further, any
reduction may still be some way off. These changes did not add value over the
whole period, as the European region outperformed both Japan and the United
Kingdom in dollar terms.
Other changes included a reduction in exposure to emerging markets from about
5.7% of net assets to 2.7%. Throughout the six-month period, the Fund also held
a small exposure to
172
<PAGE> 174
--------------------------------------------------------------------------------
Canadian equities that proved particularly beneficial as Canada was the
strongest market over the period. The holding of modest amounts of cash was also
beneficial in generally softer markets.
The six months ended June 30, 2000 also saw the portfolio change in a number
of ways that reflect the fact that over the same period global equity markets
have been driven by sector themes, more so than by country or regional factors.
At the beginning of the new year, the bias in the Fund was switched back into
a more value style of investing after four months of a dominant growth style, as
global economic growth continued to surprise on the upside. In particular, the
portfolio was overweighted in oils and basic materials (notably steel
companies), although the latter have been cut back in recent weeks. At that time
the US Federal Reserve Board started to raise interest rates significantly in an
attempt to rein in what it viewed as excessive strength in the US economy. In
addition, an agreement among the oil exporting countries of Organization of
Petroleum Exporting Countries had pushed oil prices sharply higher. With the
prospect of higher interest rates in the United States and elsewhere, the
portfolio was underweighted in financials. We continued to hold wireless
telecommunication companies and IT hardware stocks, but had reduced our
fixed-line telecommunication, media and IT software holdings on valuation
concerns. This move proved a couple of months too early, but paid off as the TMT
rally reversed sharply in March and April.
IN CONCLUSION
We continue to manage the Fund in a manner that seeks to provide a relatively
low volatility exposure to international equities, as we strive to avoid much of
the extremes in performance witnessed in some less diversified funds.
Looking ahead, we believe that global economic growth could continue at a firm
pace, albeit slightly below that seen over the last year. Assuming the growth
rate eases, interest rates may begin to peak in many developed countries.
Meanwhile, any shortage of government bond issuance in the United States and
Europe could underpin bonds. We believe this view of a relatively benign
economic backdrop, coupled with a continued effort to restructure companies in
many countries, could provide ample opportunity for international equity
investors.
We thank you for your interest in International Equity Focus Fund of Merrill
Lynch Variable Series Funds, Inc., and we look forward to reporting to you in
our next shareholder report.
Sincerely,
/s/ Terry K. Glenn
Terry Glenn
President and Director
/s/ Clive Lang
Clive Lang
Vice President and Senior Portfolio Manager
July 26, 2000
173
<PAGE> 175
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +18.84%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 + 9.47
--------------------------------------------------------------------------------
Inception (7/01/93) through 6/30/00 + 7.75
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 -4.52% +18.84%
</TABLE>
--------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
174
<PAGE> 176
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES HELD/ PERCENT OF
AFRICA INDUSTRY FACE AMOUNT INVESTMENTS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SOUTH AFRICA BANKS 170,000 FirstRand Limited............................ $ 175,265 0.1%
-----------------------------------------------------------------------------------------------------
INDUSTRIAL 32,000 Barlow Limited............................... 191,150 0.1
CONGLOMERATES
-----------------------------------------------------------------------------------------------------
METALS & MINING 7,800 De Beers..................................... 189,823 0.1
5,000 AngloGold Limited (ADR)(a)................... 102,813 0.1
------------ -----
292,636 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AFRICA
(COST--$818,342) 659,051 0.4
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
LATIN AMERICA
----------------------------------------------------------------------------------------------------------------------------
BRAZIL EQUITY BASKET 15,400 MSCI Brazil OPALS(f)......................... 818,356 0.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN BRAZIL 818,356 0.5
----------------------------------------------------------------------------------------------------------------------------
MEXICO FOREIGN 1,538,000 Mexican Par Bond (Rights)(g)................. 15 0.0
GOVERNMENT
OBLIGATIONS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MEXICO 15 0.0
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LATIN
AMERICA (COST--$846,098) 818,371 0.5
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NORTH AMERICA
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CANADA AEROSPACE & 12,750 Bombardier Inc. 'B'.......................... 345,920 0.2
DEFENSE
15,730 CAE, Inc. ................................... 159,243 0.1
------------ -----
505,163 0.3
-----------------------------------------------------------------------------------------------------
BANKS 5,900 Royal Bank of Canada......................... 301,630 0.2
7,420 The Toronto-Dominion Bank.................... 180,279 0.1
------------ -----
481,909 0.3
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS 31,396 Nortel Networks Corporation.................. 2,176,128 1.2
EQUIPMENT
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS 1,470 JDS Uniphase Corporation(d).................. 175,702 0.1
EQUIPMENT
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 8,130 BCE Inc ..................................... 192,592 0.1
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRONIC 2,430 C-MAC Industries Inc.(d)..................... 114,801 0.1
EQUIPMENT &
INSTRUMENTS
4,210 Celestica Inc.(d)............................ 204,860 0.1
------------ -----
319,661 0.2
-----------------------------------------------------------------------------------------------------
HEALTH INSURANCE 9,420 Sun Life Financial Services of Canada(d)..... 158,621 0.1
-----------------------------------------------------------------------------------------------------
MEDIA 5,950 Rogers Communications, Inc. 'B'(d)........... 168,457 0.1
2,990 Seagram Company.............................. 175,562 0.1
5,820 The Thomson Corporation...................... 198,949 0.1
------------ -----
542,968 0.3
-----------------------------------------------------------------------------------------------------
OIL & GAS 11,810 Anderson Exploration Ltd.(d)................. 214,408 0.1
4,760 Canadian Natural Resources Ltd.(d)........... 138,139 0.1
10,370 Petro-Canada................................. 193,515 0.1
------------ -----
546,062 0.3
-----------------------------------------------------------------------------------------------------
ROAD & RAIL 6,520 Canadian Pacific Limited..................... 168,973 0.1
-----------------------------------------------------------------------------------------------------
SOFTWARE 30,140 Certicom Corporation(d)...................... 1,025,212 0.6
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CANADA 6,292,991 3.6
----------------------------------------------------------------------------------------------------------------------------
UNITED STATES MEDIA US$1,900,000 MediaOne Group Inc., 3.0401% due
11/15/2002................................. 779,000 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE
UNITED STATES 779,000 0.4
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NORTH AMERICA
(COST--$6,028,367) 7,071,991 4.0
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
175
<PAGE> 177
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
PACIFIC BASIN INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA BANKS 29,785 Commonwealth Bank of Australia............... $ 495,178 0.3%
13,000 Macquarie Bank Limited....................... 203,560 0.1
21,500 National Australia Bank Limited.............. 360,124 0.2
32,000 Westpac Banking Corporation Limited.......... 231,514 0.1
------------ -----
1,290,376 0.7
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 22,000 Lend Lease Corporation Limited............... 281,453 0.2
FINANCIALS
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 70,000 Telstra Corporation Limited.................. 284,950 0.2
TELECOMMUNICATION
SERVICES
36,000 Telstra Corporation Limited Installment
Receipts(b)(d)............................. 82,135 0.0
------------ -----
367,085 0.2
-----------------------------------------------------------------------------------------------------
HOTELS 90,000 Aristocrat Leisure Limited................... 305,303 0.2
RESTAURANTS &
LEISURE
-----------------------------------------------------------------------------------------------------
INDUSTRIAL 15,000 Brambles Industries Limited.................. 462,332 0.3
CONGLOMERATES
-----------------------------------------------------------------------------------------------------
INSURANCE 43,000 AMP Limited(d)............................... 438,892 0.2
-----------------------------------------------------------------------------------------------------
MEDIA 24,000 The News Corporation Limited................. 331,421 0.2
75,000 The News Corporation Limited (Preferred)..... 908,030 0.5
------------ -----
1,239,451 0.7
-----------------------------------------------------------------------------------------------------
METALS & MINING 35,000 Broken Hill Proprietary Company Limited...... 415,027 0.2
75,000 WMC Limited.................................. 336,509 0.2
------------ -----
751,536 0.4
-----------------------------------------------------------------------------------------------------
OIL & GAS 50,000 Santos Limited............................... 152,802 0.1
25,000 Woodside Petroleum Limited................... 195,130 0.1
------------ -----
347,932 0.2
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 8,000 CSL Limited.................................. 158,674 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AUSTRALIA 5,643,034 3.2
----------------------------------------------------------------------------------------------------------------------------
HONG KONG WIRELESS 4,000 China Telecom (Hong Kong) Limited (ADR)(a)... 711,250 0.4
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN HONG KONG 711,250 0.4
----------------------------------------------------------------------------------------------------------------------------
JAPAN AUTO COMPONENTS 50,000 Futaba Industrial Co., Ltd. ................. 659,232 0.4
107,000 Sanden Corporation........................... 833,307 0.5
------------ -----
1,492,539 0.9
-----------------------------------------------------------------------------------------------------
AUTOMOBILES 149,000 Fuji Heavy Industries, Ltd. ................. 1,084,353 0.6
28,000 Honda Motor Co., Ltd. ....................... 955,342 0.6
------------ -----
2,039,695 1.2
-----------------------------------------------------------------------------------------------------
BANKS 77,000 The 77 Bank, Ltd. ........................... 617,135 0.4
9,800 Aiful Corporation............................ 905,855 0.5
71,000 The Gunma Bank Ltd. ......................... 367,062 0.2
155,000 The Tokai Bank Ltd. ......................... 766,174 0.4
115,000 The Toyo Trust & Banking Co., Ltd. .......... 389,112 0.2
------------ -----
3,045,338 1.7
-----------------------------------------------------------------------------------------------------
BUILDING 60,000 Tostem Corporation........................... 981,050 0.6
PRODUCTS
-----------------------------------------------------------------------------------------------------
CHEMICALS 126,000 Asahi Chemical Industry Co., Ltd. ........... 893,153 0.5
63,000 Kaneka Corporation........................... 696,064 0.4
21,000 Shin-Etsu Chemical Co., Ltd. ................ 1,067,813 0.6
------------ -----
2,657,030 1.5
-----------------------------------------------------------------------------------------------------
CLOSED END 78,000 Atlantis Japan Growth Fund................... 932,100 0.5
INVESTMENT FUND
-----------------------------------------------------------------------------------------------------
</TABLE>
176
<PAGE> 178
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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 COMMERCIAL 11,000 Secom Co., Ltd. ............................. $ 805,728 0.5%
(CONTINUED) SERVICES &
SUPPLIES
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS 6,000 Matsushita Communication
EQUIPMENT
Industrial Co., Ltd. ........................ 702,046 0.4
-----------------------------------------------------------------------------------------------------
COMPUTERS & 32,000 Fujitsu Limited.............................. 1,109,966 0.6
PERIPHERALS
89,000 Toshiba Corporation.......................... 1,006,881 0.6
------------ -----
2,116,847 1.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 35,000 Kokusai Securities Co., Ltd. ................ 485,941 0.3
FINANCIALS
8,700 Takefuji Corporation......................... 1,053,325 0.6
------------ -----
1,539,266 0.9
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 148 Nippon Telegraph & Telephone Corporation
TELECOMMUNICATION (NTT)...................................... 1,972,308 1.1
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRIC 38,000 Tokyo Electric Power......................... 928,406 0.5
UTILITIES
-----------------------------------------------------------------------------------------------------
ELECTRICAL 16,000 Honda Tsushin Kogyo Co., Ltd. ............... 718,303 0.4
EQUIPMENT
123,000 Mitsubishi Electric Corporation.............. 1,334,568 0.8
------------ -----
2,052,871 1.2
-----------------------------------------------------------------------------------------------------
ELECTRONIC 85 Hakuto Company Ltd. ......................... 2,844 0.0
EQUIPMENT &
INSTRUMENTS
55,000 Ibiden Co., Ltd. ............................ 1,076,036 0.6
20 Keyence Corporation.......................... 6,616 0.0
8,000 TDK Corporation.............................. 1,152,308 0.6
84,000 Toko, Inc. .................................. 635,925 0.4
------------ -----
2,873,729 1.6
-----------------------------------------------------------------------------------------------------
FOOD & DRUG 15,000 FamilyMart Co., Ltd. ........................ 578,423 0.3
RETAILING
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 49,000 Katokichi Co., Ltd. ......................... 1,243,467 0.7
-----------------------------------------------------------------------------------------------------
HOUSEHOLD 158,000 Sekisui Chemical Co., Ltd. .................. 609,272 0.4
DURABLES
19,200 Sony Corporation............................. 1,796,512 1.0
------------ -----
2,405,784 1.4
-----------------------------------------------------------------------------------------------------
MACHINERY 9,500 Fanuc Ltd. .................................. 968,811 0.6
66,000 Minebea Company Ltd. ........................ 829,639 0.5
74,000 Nippon Thompson Co., Ltd. ................... 1,126,034 0.6
------------ -----
2,924,484 1.7
-----------------------------------------------------------------------------------------------------
MEDIA 34,700 Aoi Advertising Promotion Inc. .............. 524,739 0.3
13,000 Asatsu-Dk Inc. .............................. 534,474 0.3
42 Fuji Television Network, Incorporated........ 658,948 0.4
15,000 Nippon Broadcasting System, Incorporated..... 925,760 0.5
620 Nippon Television Network Corp. ............. 404,329 0.2
620 Nippon Television Network Corp.(d)........... 405,501 0.2
------------ -----
3,453,751 1.9
-----------------------------------------------------------------------------------------------------
METALS & MINING 340,000 Nippon Steel Corporation..................... 716,601 0.4
-----------------------------------------------------------------------------------------------------
MULTILINE RETAIL 10,000 Ito-Yokado Co., Ltd. ........................ 602,996 0.3
-----------------------------------------------------------------------------------------------------
OFFICE 23,000 Canon, Inc. ................................. 1,147,772 0.7
ELECTRONICS
51,000 Ricoh Co., Ltd. ............................. 1,082,132 0.6
------------ -----
2,229,904 1.3
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 67,000 Kissei Pharmaceutical Co., Ltd. ............. 1,298,143 0.7
18,000 Takeda Chemical Industries, Ltd. ............ 1,184,065 0.7
------------ -----
2,482,208 1.4
-----------------------------------------------------------------------------------------------------
REAL ESTATE 104,000 Mitsui Fudosan Co., Ltd. .................... 1,130,381 0.6
-----------------------------------------------------------------------------------------------------
SEMICONDUCTOR 3,000 Rohm Company Ltd. ........................... 878,975 0.5
EQUIPMENT &
PRODUCTS
-----------------------------------------------------------------------------------------------------
</TABLE>
177
<PAGE> 179
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC BASIN SHARES PERCENT OF
(CONCLUDED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JAPAN SOFTWARE 470 Miroku Jyoho Service Co., Ltd. .............. $ 5,108 0.0%
(CONCLUDED)
25,900 Square Co., Ltd. ............................ 1,914,257 1.1
------------ -----
1,919,365 1.1
-----------------------------------------------------------------------------------------------------
TEXTILES & 23,000 HIMIKO Co., Ltd. ............................ 278,248 0.2
APPAREL
-----------------------------------------------------------------------------------------------------
TRADING 125,000 Mitsubishi Corporation....................... 1,132,980 0.6
COMPANIES &
DISTRIBUTORS
-----------------------------------------------------------------------------------------------------
WIRELESS 70 NTT Mobile Communications Network,
TELECOMMUNICATION Inc.(d)(e)................................. 1,898,776 1.1
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN JAPAN 48,015,296 27.3
----------------------------------------------------------------------------------------------------------------------------
MALAYSIA BANKS 285 Rashid Hussain BHD (Warrants)(c)............. 71 0.0
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 4,300 MSCI Malaysia OPALS 'B'(f)................... 226,524 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN MALAYSIA 226,595 0.1
----------------------------------------------------------------------------------------------------------------------------
SINGAPORE EQUITY BASKET 21,400 MSCI Singapore OPALS 'B'(f).................. 997,668 0.6
-----------------------------------------------------------------------------------------------------
SEMICONDUCTOR 1,100 ST Assembly Test Services Limited
EQUIPMENT & (ADR)(a)(d)................................ 28,188 0.0
PRODUCTS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SINGAPORE 1,025,856 0.6
----------------------------------------------------------------------------------------------------------------------------
SOUTH KOREA SEMICONDUCTOR 1,300 Samsung Electronics.......................... 430,215 0.3
EQUIPMENT &
PRODUCTS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH KOREA 430,215 0.3
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE PACIFIC BASIN
(COST--$47,055,493) 56,052,246 31.9
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SOUTHEAST
ASIA
----------------------------------------------------------------------------------------------------------------------------
INDIA CLOSED END 20,000 India Fund(d)................................ 283,750 0.2
INVESTMENT FUND
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SOUTH EAST ASIA
(COST--$308,375) 283,750 0.2
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
WESTERN
EUROPE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRIA EQUITY BASKET 10,500 MSCI Austria OPALS 'B'(e)(f)................. 396,900 0.2
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN AUSTRIA 396,900 0.2
----------------------------------------------------------------------------------------------------------------------------
DENMARK MARINE 90 D/S 1912 'B'................................. 959,858 0.5
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN DENMARK 959,858 0.5
----------------------------------------------------------------------------------------------------------------------------
FINLAND COMMUNICATIONS 102,000 Nokia Oyj.................................... 5,226,191 3.0
EQUIPMENT
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FINLAND 5,226,191 3.0
----------------------------------------------------------------------------------------------------------------------------
FRANCE BANKS 7,200 Banque Nationale de Paris (B.N.P.)........... 695,714 0.4
14,000 Societe Generale 'A'......................... 845,485 0.5
------------ -----
1,541,199 0.9
-----------------------------------------------------------------------------------------------------
BUILDING 2,400 Compagnie de Saint Gobain.................... 325,771 0.2
PRODUCTS
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS 9,500 Alcatel...................................... 625,630 0.4
EQUIPMENT
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 7,300 France Telecom SA............................ 1,024,475 0.6
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRICAL 10,700 Schneider SA................................. 748,762 0.4
EQUIPMENT
-----------------------------------------------------------------------------------------------------
</TABLE>
178
<PAGE> 180
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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 ENERGY EQUIPMENT 2,900 Coflexip..................................... $ 353,052 0.2%
(CONCLUDED) & SERVICES
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 5,800 MSCI France OPALS 'B'(f)..................... 1,547,498 0.9
-----------------------------------------------------------------------------------------------------
FOOD & DRUG 11,700 Carrefour SA................................. 803,038 0.5
RETAILING
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 5,700 Groupe Danone................................ 759,499 0.4
-----------------------------------------------------------------------------------------------------
HOTELS 2,800 Sodexho Alliance............................. 509,975 0.3
RESTAURANTS &
LEISURE
-----------------------------------------------------------------------------------------------------
IT CONSULTING & 5,000 Cap Gemini SA................................ 884,309 0.5
SERVICES
-----------------------------------------------------------------------------------------------------
INSURANCE 6,000 Axa.......................................... 949,014 0.5
-----------------------------------------------------------------------------------------------------
MEDIA 4,600 Lagardere S.C.A. ............................ 352,765 0.2
-----------------------------------------------------------------------------------------------------
METALS & MINING 70,000 Usinor SA.................................... 857,564 0.5
-----------------------------------------------------------------------------------------------------
MULTI-UTILITIES 5,500 Suez Lyonnaise des Eaux SA................... 967,467 0.5
10,500 Vivendi...................................... 930,537 0.5
------------ -----
1,898,004 1.0
-----------------------------------------------------------------------------------------------------
OIL & GAS 14,000 Total Fina SA 'B'(d)......................... 2,155,316 1.2
-----------------------------------------------------------------------------------------------------
PERSONAL 900 L'Oreal SA(d)................................ 782,505 0.4
PRODUCTS
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 8,750 Aventis SA................................... 641,243 0.4
11,500 Sanofi-Synthelabo SA(d)...................... 550,093 0.3
------------ -----
1,191,336 0.7
-----------------------------------------------------------------------------------------------------
SEMICONDUCTOR 7,000 STMicroelectronics NV........................ 442,873 0.3
EQUIPMENT &
PRODUCTS
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FRANCE 17,752,585 10.1
----------------------------------------------------------------------------------------------------------------------------
GERMANY AIRLINES 36,550 Deutsche Lufthansa AG (Registered Shares).... 858,402 0.5
-----------------------------------------------------------------------------------------------------
AUTOMOBILES 11,500 DaimlerChrysler AG (Registered Shares)(d).... 605,763 0.3
7,000 Volkswagen AG................................ 267,737 0.2
------------ -----
873,500 0.5
-----------------------------------------------------------------------------------------------------
BANKS 6,300 Deutsche Bank AG (Registered Shares)......... 521,785 0.3
7,200 Dresdner Bank AG............................. 299,543 0.2
10,350 HypoVereinsbank.............................. 675,655 0.4
------------ -----
1,496,983 0.9
-----------------------------------------------------------------------------------------------------
CHEMICALS 5,000 BASF AG...................................... 203,463 0.1
25,000 Bayer AG..................................... 977,772 0.6
------------ -----
1,181,235 0.7
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 37,500 Deutsche Telekom AG (Registered Shares)...... 2,142,471 1.2
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRIC 23,000 RWE AG....................................... 776,083 0.4
UTILITIES
-----------------------------------------------------------------------------------------------------
INDUSTRIAL 9,000 Siemens AG................................... 1,358,816 0.8
CONGLOMERATES
-----------------------------------------------------------------------------------------------------
INSURANCE 4,200 Allianz AG (Registered Shares)............... 1,529,926 0.9
2,050 Muenchener Rueckversicherungs-Gesellschaft AG
(Registered Shares)........................ 653,406 0.4
------------ -----
2,183,332 1.3
-----------------------------------------------------------------------------------------------------
MEDIA 4,500 EM.TV & Merchandising AG..................... 266,155 0.1
-----------------------------------------------------------------------------------------------------
</TABLE>
179
<PAGE> 181
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GERMANY METALS & MINING 40,000 Salzgitter AG................................ $ 285,663 0.2%
(CONCLUDED)
16,500 Thyssen Krupp AG(d).......................... 268,413 0.2
------------ -----
554,076 0.4
-----------------------------------------------------------------------------------------------------
MULTI-UTILITIES 11,000 Veba AG...................................... 541,992 0.3
-----------------------------------------------------------------------------------------------------
SEMICONDUCTOR 3,600 Infineon Technologies AG(d).................. 286,430 0.2
EQUIPMENT &
PRODUCTS
-----------------------------------------------------------------------------------------------------
SOFTWARE 1,800 SAP AG (Systeme, Anwendungen, Produkte in der
Datenverarbeitung)......................... 270,038 0.2
2,250 SAP AG (Systeme, Anwendungen, Produkte in der
Datenverarbeitung) (Preferred)............. 417,350 0.2
------------ -----
687,388 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN GERMANY 13,206,863 7.7
----------------------------------------------------------------------------------------------------------------------------
ITALY BANKS 58,000 San Paolo-IMI SpA............................ 1,033,582 0.6
130,000 Unicredito Italiano SpA...................... 624,336 0.4
------------ -----
1,657,918 1.0
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 50,000 Telecom Italia SpA........................... 690,192 0.4
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT 82,000 Saipem SpA................................... 487,352 0.3
& SERVICES
-----------------------------------------------------------------------------------------------------
INSURANCE 28,000 Assicurazioni Generali....................... 963,585 0.5
-----------------------------------------------------------------------------------------------------
OIL & GAS 307,000 ENI SpA...................................... 1,780,456 1.0
-----------------------------------------------------------------------------------------------------
WIRELESS 165,000 Telecom Italia Mobile (TIM) SpA.............. 1,692,408 1.0
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ITALY 7,271,911 4.2
----------------------------------------------------------------------------------------------------------------------------
NETHERLANDS BANKS 39,500 ABN AMRO Holding NV.......................... 971,608 0.6
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 17,600 ING Groep NV................................. 1,194,492 0.7
FINANCIALS
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 13,600 KPN NV....................................... 610,782 0.3
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRONIC 17,600 Koninklijke (Royal) Philips Electronics NV... 833,445 0.5
EQUIPMENT &
INSTRUMENTS
-----------------------------------------------------------------------------------------------------
EQUITY BASKET 5,700 MSCI Netherlands OPALS(f).................... 1,487,928 0.8
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 9,100 Unilever NV 'A'.............................. 419,153 0.2
-----------------------------------------------------------------------------------------------------
IT CONSULTING & 27,000 Getronics NV................................. 417,998 0.2
SERVICES
-----------------------------------------------------------------------------------------------------
INSURANCE 23,800 Aegon NV..................................... 850,303 0.5
-----------------------------------------------------------------------------------------------------
MARINE 16,800 Koninklijke Nedlloyd NV(d)................... 326,760 0.2
-----------------------------------------------------------------------------------------------------
OIL & GAS 39,300 Royal Dutch Petroleum Company................ 2,452,511 1.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE NETHERLANDS 9,564,980 5.4
----------------------------------------------------------------------------------------------------------------------------
PAN-EUROPE EQUITY BASKET 8,900 MSCI Euro Insurance OPALS 'B'(f)............. 1,735,945 1.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN PAN-EUROPE 1,735,945 1.0
----------------------------------------------------------------------------------------------------------------------------
RUSSIA CLOSED END 12,000 Fleming Russia Securities Fund Limited(d).... 114,000 0.1
INVESTMENT FUND
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN RUSSIA 114,000 0.1
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
180
<PAGE> 182
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SPAIN BANKS 85,000 Banco Santander Central Hispano, SA.......... $ 900,365 0.5%
-----------------------------------------------------------------------------------------------------
CONSTRUCTION & 19,000 Grupo Dragados SA............................ 136,783 0.1
ENGINEERING
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 57,000 Telefonica SA(d)............................. 1,229,405 0.7
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
ELECTRIC 10,500 Endesa SA.................................... 204,225 0.1
UTILITIES
-----------------------------------------------------------------------------------------------------
METALS & MINING 3,600 Acerinox SA.................................. 104,564 0.1
-----------------------------------------------------------------------------------------------------
OIL & GAS 13,000 Repsol-YPF, SA............................... 259,829 0.1
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SPAIN 2,835,171 1.6
----------------------------------------------------------------------------------------------------------------------------
SWEDEN BANKS 43,000 Skandinaviska Enskilda Banken (SEB) 'A'...... 512,313 0.3
62,000 Svenska Handelsbanken AB..................... 904,800 0.5
------------ -----
1,417,113 0.8
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS 112,000 Telefonaktiebolaget LM Ericsson AB 'B'....... 2,228,252 1.3
EQUIPMENT
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 47,500 Investor AB 'B'.............................. 652,577 0.4
FINANCIALS
-----------------------------------------------------------------------------------------------------
PAPER & FOREST 21,500 Svenska Cellulosa AB (SCA) 'B'............... 410,586 0.2
PRODUCTS
-----------------------------------------------------------------------------------------------------
TOBACCO 250,000 Swedish Match AB............................. 775,282 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWEDEN 5,483,810 3.1
----------------------------------------------------------------------------------------------------------------------------
SWITZERLAND BANKS 10,500 Credit Suisse Group (Registered Shares)...... 2,095,351 1.2
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 1,700 Swisscom AG (Registered Shares).............. 590,677 0.3
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
EQUITY BASKET... 5,200 MSCI Switerland OPALS 'B'(f)................. 1,766,544 1.0
-----------------------------------------------------------------------------------------------------
FOOD PRODUCTS 850 Nestle SA (Registered Shares)................ 1,706,691 1.0
-----------------------------------------------------------------------------------------------------
INSURANCE 1,900 Zurich Allied AG............................. 941,763 0.5
-----------------------------------------------------------------------------------------------------
PERSONAL 155 Givaudan (Registered)(d)..................... 47,326 0.0
PRODUCTS
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS 570 Novartis AG (Registered Shares).............. 905,775 0.5
130 Roche Holding AG (Genuss).................... 1,269,541 0.7
------------ -----
2,175,316 1.2
-----------------------------------------------------------------------------------------------------
TEXTILES & 4,200 Charles Voegele Holding AG(d)................ 829,100 0.5
APPAREL
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SWITZERLAND 10,152,768 5.7
----------------------------------------------------------------------------------------------------------------------------
TURKEY EQUITY BASKET 3,900 MSCI Turkey OPALS 'B'(e)(f).................. 763,269 0.4
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN TURKEY 763,269 0.4
----------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM AEROSPACE & 105,000 British Aerospace PLC........................ 654,913 0.4
DEFENSE
130,000 Rolls-Royce PLC.............................. 461,512 0.3
------------ -----
1,116,425 0.7
-----------------------------------------------------------------------------------------------------
BANKS 22,500 Abbey National PLC........................... 269,096 0.1
78,000 Bank of Scotland............................. 742,159 0.4
20,000 Barclays PLC................................. 497,468 0.3
150,000 HSBC Holdings PLC............................ 1,715,627 1.0
73,000 Lloyds TSB Group PLC......................... 689,611 0.4
------------ -----
3,913,961 2.2
-----------------------------------------------------------------------------------------------------
BEVERAGES 55,000 Diageo PLC................................... 493,758 0.3
-----------------------------------------------------------------------------------------------------
BIOTECHNOLOGY 17,000 Celltech Group PLC(d)........................ 329,425 0.2
-----------------------------------------------------------------------------------------------------
</TABLE>
181
<PAGE> 183
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WESTERN
EUROPE SHARES PERCENT OF
(CONTINUED) INDUSTRY HELD INVESTMENTS VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED KINGDOM COMMERCIAL 170,000 Shanks & McEwan Group PLC.................... $ 460,680 0.3%
(CONTINUED) SERVICES &
SUPPLIES
-----------------------------------------------------------------------------------------------------
COMMUNICATIONS 48,000 Marconi PLC(d)............................... 624,938 0.4
EQUIPMENT
-----------------------------------------------------------------------------------------------------
CONSTRUCTION 18,000 RMC Group PLC................................ 234,352 0.1
MATERIALS
-----------------------------------------------------------------------------------------------------
CONTAINERS & 125,000 Rexam PLC.................................... 486,340 0.3
PACKAGING
-----------------------------------------------------------------------------------------------------
DIVERSIFIED 52,000 British Telecommunications PLC............... 672,293 0.4
TELECOMMUNICATION
SERVICES
43,000 Cable & Wireless PLC(d)...................... 728,443 0.4
------------ -----
1,400,736 0.8
-----------------------------------------------------------------------------------------------------
ELECTRIC 54,000 British Energy PLC (Deferred Shares)......... 1 0.0
UTILITIES
-----------------------------------------------------------------------------------------------------
ELECTRONIC 90,000 Williams PLC................................. 524,566 0.3
EQUIPMENT &
INSTRUMENTS
-----------------------------------------------------------------------------------------------------
FOOD & DRUG 80,000 Boots Company PLC(d)......................... 609,193 0.3
RETAILING
260,000 Tesco PLC.................................... 808,877 0.5
------------ -----
1,418,070 0.8
-----------------------------------------------------------------------------------------------------
GAS UTILITIES 40,000 BG Group PLC................................. 258,574 0.1
150,000 Centrica PLC................................. 500,722 0.3
------------ -----
759,296 0.4
-----------------------------------------------------------------------------------------------------
HOTELS 70,000 Granada Group PLC............................ 699,422 0.4
RESTAURANTS &
LEISURE
-----------------------------------------------------------------------------------------------------
HOUSEHOLD 27,000 Reckitt Benckiser PLC(d)..................... 302,477 0.2
PRODUCTS
-----------------------------------------------------------------------------------------------------
IT CONSULTING & 25,000 Computacenter PLC............................ 144,577 0.1
SERVICES
15,000 SEMA Group PLC............................... 213,460 0.1
------------ -----
358,037 0.2
-----------------------------------------------------------------------------------------------------
INDUSTRIAL 95,000 Tomkins PLC.................................. 308,854 0.2
CONGLOMERATES
-----------------------------------------------------------------------------------------------------
INSURANCE 35,000 CGU PLC...................................... 582,851 0.3
175,000 Legal & General Group PLC.................... 423,529 0.2
28,500 Prudential Corporation PLC................... 417,655 0.3
------------ -----
1,424,035 0.8
-----------------------------------------------------------------------------------------------------
INTERNET & 37,500 The Great Universal Stores PLC............... 241,278 0.1
CATALOG RETAIL
-----------------------------------------------------------------------------------------------------
INTERNET 80,000 Egg PLC(d)................................... 208,312 0.1
SOFTWARE &
SERVICES
-----------------------------------------------------------------------------------------------------
MEDIA 10,000 Pearson PLC.................................. 317,919 0.2
39,000 Reuters Group PLC............................ 665,404 0.4
25,000 WPP Group PLC................................ 365,228 0.2
------------ -----
1,348,551 0.8
-----------------------------------------------------------------------------------------------------
METALS & MINING 18,000 Rio Tinto PLC (Registered Shares)............ 294,302 0.2
-----------------------------------------------------------------------------------------------------
MULTI-UTILITIES 55,000 United Utilities PLC......................... 544,550 0.3
-----------------------------------------------------------------------------------------------------
MULTILINE RETAIL 100,000 Kingfisher PLC............................... 910,611 0.5
-----------------------------------------------------------------------------------------------------
OIL & GAS 290,000 BP Amoco PLC................................. 2,783,456 1.6
70,000 Enterprise Oil PLC........................... 583,911 0.3
30,000 Shell Transport & Trading Company............ 250,475 0.1
------------ -----
3,617,842 2.0
-----------------------------------------------------------------------------------------------------
</TABLE>
182
<PAGE> 184
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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 KINGDOM PHARMACEUTICALS 29,000 AstraZeneca Group PLC........................ $ 1,354,410 0.8%
(CONCLUDED)
20,000 Glaxo Wellcome PLC(d)........................ 583,457 0.3
54,000 SmithKline Beecham PLC....................... 707,143 0.4
------------ -----
2,645,010 1.5
-----------------------------------------------------------------------------------------------------
REAL ESTATE 160,000 The British Land Company PLC................. 981,007 0.6
60,000 Canary Wharf Finance PLC(d).................. 336,540 0.2
------------ -----
1,317,547 0.8
-----------------------------------------------------------------------------------------------------
SEMICONDUCTOR 23,000 ARM Holdings PLC(d).......................... 246,523 0.1
EQUIPMENT &
PRODUCTS
-----------------------------------------------------------------------------------------------------
SPECIALTY RETAIL 43,000 Wolseley PLC................................. 231,097 0.1
-----------------------------------------------------------------------------------------------------
TOBACCO 40,000 British American Tobacco PLC................. 267,052 0.2
60,000 Imperial Tobacco Group PLC................... 574,979 0.3
------------ -----
842,031 0.5
-----------------------------------------------------------------------------------------------------
WIRELESS 820,000 Vodafone AirTouch PLC........................ 3,314,532 1.9
TELECOMMUNICATION
SERVICES
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN THE UNITED KINGDOM 30,617,559 17.5
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN WESTERN EUROPE
(COST--$99,997,499) 106,081,810 60.5
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHORT-TERM FACE
SECURITIES AMOUNT
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL US$1,889,000
PAPER*
General Motors Acceptance Corp., 7.13% due
7/03/2000.................................. 1,887,878 1.0
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMERCIAL PAPER 1,887,878 1.0
----------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT
US Treasury Bills(h):
OBLIGATIONS* 500,000
5.78% due 8/24/2000.......................... 495,950 0.3
500,000 5.74% due 9/14/2000.......................... 494,230 0.3
-----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN US GOVERNMENT
OBLIGATIONS 990,180 0.6
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST--$2,877,403) 2,878,058 1.6
----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$157,931,577)....................... 173,845,277 99.1
VARIATION MARGIN ON FINANCIAL FUTURES
CONTRACTS**................................ (45,330) (0.0)
UNREALIZED APPRECIATION ON FORWARD FOREIGN
EXCHANGE CONTRACTS***...................... 249,772 0.1
OTHER ASSETS LESS LIABILITIES................ 1,428,143 0.8
------------ -----
NET ASSETS................................... $175,477,862 100.0%
============ =====
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) American Depositary Receipts (ADR).
(b) 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 $63,000 over the next year.
(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.
* 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.
183
<PAGE> 185
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED) (IN US DOLLARS)
--------------------------------------------------------------------------------
** Financial futures contracts purchased as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
NUMBER OF EXPIRATION
CONTRACTS ISSUE EXCHANGE DATE VALUE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
28 US Dollar Index FINEX September 2000 $2,984,240
20 Taiwan MSCI SIMEX July 2000 726,600
5 DAX Index DTB September 2000 832,784
13 CAC 40 MATIF July 2000 806,029
-----------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS PURCHASED (TOTAL CONTRACT
PRICE--$5,405,050) $5,349,653
==========
-----------------------------------------------------------------------------
Financial futures contracts sold as of June 30, 2000 were as follows:
<CAPTION>
NUMBER OF EXPIRATION
CONTRACTS ISSUE EXCHANGE DATE VALUE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9 FT-SE 100 LIFFE September 2000 $ 866,148
12 TSE 35 Index Toronto SE September 2000 1,018,830
2 FIB 30 Index MIB September 2000 451,155
9 IBEX 35 MEFF July 2000 905,661
20 All Ordinaries Index Sydney FE September 2000 1,004,169
-----------------------------------------------------------------------------
TOTAL FINANCIAL FUTURES CONTRACTS SOLD (TOTAL CONTRACT
PRICE--$4,185,773) $4,245,963
==========
-----------------------------------------------------------------------------
</TABLE>
*** Forward foreign exchange contracts as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
--------------------------------------------
FOREIGN CURRENCY EXPIRATION UNREALIZED
PURCHASED DATE APPRECIATION
--------------------------------------------
<S> <C> <C> <C>
CHF 6,888,000 July 2000 $222,182
E 1,630,641 July 2000 27,590
--------------------------------------------
TOTAL UNREALIZED APPRECIATION
ON FORWARD FOREIGN EXCHANGE
CONTRACTS-NET (US$
COMMITMENT--$5,559,762) $249,772
========
--------------------------------------------
</TABLE>
E=euro
See Notes to Financial Statements.
184
<PAGE> 186
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$157,931,577)....... $173,845,277
Unrealized appreciation on forward foreign exchange
contracts................................................. 249,772
Foreign cash................................................ 363,751
Receivables:
Securities sold........................................... $3,116,339
Dividends................................................. 480,980
Forward foreign exchange contracts........................ 143,570
Interest.................................................. 13,610
Capital shares sold....................................... 1,264 3,755,763
----------
Prepaid expenses and other assets........................... 11,731
------------
Total assets................................................ 178,226,294
------------
---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,898,950
Capital shares redeemed................................... 325,447
Forward foreign exchange contracts........................ 174,808
Investment adviser........................................ 101,291
Variation margin.......................................... 45,330 2,545,826
----------
Accrued expenses and other liabilities...................... 202,606
------------
Total liabilities........................................... 2,748,432
------------
---------------------------------------------------------------------------------------
NET ASSETS.................................................. $175,477,862
============
---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 1,314,819
Paid-in capital in excess of par............................ 152,162,508
Undistributed investment income--net........................ 1,056,228
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 4,855,528
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 16,088,779
------------
NET ASSETS.................................................. $175,477,862
============
---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $175,477,862 and 13,148,190
shares outstanding........................................ $ 13.35
============
---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
185
<PAGE> 187
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $197,706 foreign withholding tax)......... $ 2,093,714
Interest and discount earned................................ 354,166
------------
Total income................................................ 2,447,880
------------
-----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 686,675
Custodian fees.............................................. 63,967
Interest rate swap expense.................................. 14,965
Professional fees........................................... 13,285
Accounting services......................................... 9,180
Printing and shareholder reports............................ 7,946
Transfer agent fees......................................... 2,498
Directors fees and expenses................................. 1,820
Other....................................................... 1,363
------------
Total expenses.............................................. 801,699
------------
Investment income--net...................................... 1,646,181
------------
-----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain (loss) from:
Investments--net.......................................... 9,061,998
Foreign currency transactions--net........................ (608,239) 8,453,759
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (19,518,190)
Foreign currency transactions--net........................ 408,317 (19,109,873)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (9,009,933)
============
-----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
186
<PAGE> 188
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 1,646,181 $ 2,466,795
Realized gain on investments and foreign currency
transactions--net......................................... 8,453,759 27,762,316
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (19,109,873) 28,190,034
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (9,009,933) 58,419,145
------------ ------------
------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (116,806) (9,348,952)
In excess of investment income--net:
Class A................................................... -- (211,899)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders.............................................. (116,806) (9,560,851)
------------ ------------
------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (14,314,742) (43,395,754)
------------ ------------
------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (23,441,481) 5,462,540
Beginning of period......................................... 198,919,343 193,456,803
------------ ------------
End of period*.............................................. $175,477,862 $198,919,343
============ ============
------------------------------------------------------------------------------------------------
* Undistributed (accumulated distributions in excess of)
investment income--net.................................... $ 1,056,228 $ (473,147)
============ ============
------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
187
<PAGE> 189
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--INTERNATIONAL EQUITY FOCUS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A+
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ---------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 13.99 $ 10.68 $ 10.80 $ 11.63 $ 11.06
-------- -------- -------- -------- --------
Investment income--net............................. .12 .16 .21 .20 .23
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net........... (.75) 3.71 .56 (.71) .49
-------- -------- -------- -------- --------
Total from investment operations................... (.63) 3.87 .77 (.51) .72
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net........................... (.01) (.55) (.09) (.23) (.15)
In excess of investment income--net.............. -- (.01) -- -- --
Realized gain on investments--net................ -- -- (.03) (.09) --
In excess of realized gain on investments--net... -- -- (.77) -- --
-------- -------- -------- -------- --------
Total dividends and distributions.................. (.01) (.56) (.89) (.32) (.15)
-------- -------- -------- -------- --------
Net asset value, end of period..................... $ 13.35 $ 13.99 $ 10.68 $ 10.80 $ 11.63
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. (4.52%)++ 37.63% 7.80% (4.55%) 6.62%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... .87%* .92% .89% .90% .89%
======== ======== ======== ======== ========
Investment income--net............................. 1.79%* 1.36% 2.03% 1.69% 1.96%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........... $175,478 $198,919 $193,457 $425,223 $349,080
======== ======== ======== ======== ========
Portfolio turnover................................. 80.28% 154.72% 126.23% 127.96% 49.87%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
188
<PAGE> 190
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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 accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Futures contracts are valued at the
settlement price at the close of the applicable exchange. Short-term securities
are valued at amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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.
- Equity swaps--The Fund is authorized to enter into equity swap agreements,
which are over-the-counter contracts in which one party agrees to make periodic
payments based on the change in market value of a specified equity security,
basket of equity securities or equity index in return for periodic payments
based on a fixed or variable interest rate of the change in market value of a
different equity security, basket of equity securities or equity index. Swap
agreements may be used to obtain exposure to an equity or market without owning
or taking physical custody of securities in circumstances in which direct
investment is restricted by local law or is otherwise impractical.
- Options--The Fund may write and purchase call and put options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked to market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid or received is added to (or deducted from) the
basis of the security acquired or deducted from (or added to) the proceeds of
the security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
189
<PAGE> 191
--------------------------------------------------------------------------------
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 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 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
Investment Managers, L.P. ("MLIM").The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $23,020 in commissions
on the execution of portfolio security transactions.
For the six months ended June 30, 2000, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, earned $55 for providing security price
quotations to complete the Fund's net asset value.
190
<PAGE> 192
--------------------------------------------------------------------------------
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Company's transfer agent.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for six
months ended June 30, 2000 were $141,398,736 and $154,104,578, respectively.
Net realized gains (losses) for the six months ended June 30, 2000 and net
unrealized gains (losses) as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
---------------------------------------------------------------------
<S> <C> <C>
Investments:
Long-term.......................... $9,147,401 $15,913,045
Short-term......................... (38) 655
Financial futures contracts........ (620,454) (115,587)
Options written.................... 7,353 --
Options purchased.................. 527,736 --
---------- -----------
Total investments................... 9,061,998 15,798,113
---------- -----------
Currency transactions:
Foreign currency transactions...... (222,872) 40,894
Forward foreign exchange
contracts........................ (385,367) 249,772
---------- -----------
Total currency transactions......... (608,239) 290,666
---------- -----------
Total............................... $8,453,759 $16,088,779
========== ===========
---------------------------------------------------------------------
Transactions in options written for the six months ended June 30,
2000, were as follows:
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
Nominal Value
Covered by Premiums
Call Options Written Written Options Received
---------------------------------------------------------------
<S> <C> <C>
Outstanding call options written,
beginning of period............. -- --
Options written.................. 362,001 $ 196,150
Options expired.................. (362,001) (196,150)
-------- ---------
Outstanding call options written,
end of period................... -- $ --
======== =========
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
Nominal Value
Covered by Premiums
Put Options Written Written Options Received
---------------------------------------------------------------
<S> <C> <C>
Outstanding put options written,
beginning of period............. -- --
Options written.................. 362,001 $ 169,488
Options closed................... (362,001) (169,488)
-------- ---------
Outstanding put options written,
end of period................... -- $ --
======== =========
---------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $15,913,700, of which $24,929,703 related to appreciated securities
and $9,016,003 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $157,931,577.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 209,031 $ 2,832,538
Shares issued to shareholders in
reinvestment of dividends............ 8,601 116,806
---------- ------------
Total issued.......................... 217,632 2,949,344
Shares redeemed....................... (1,286,239) (17,264,086)
---------- ------------
Net decrease.......................... (1,068,607) $(14,314,742)
========== ============
-------------------------------------------------------------------
</TABLE>
<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>
5. COMMITMENTS:
At June 30, 2000, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed in the Schedule of Investments, under which it
had agreed to purchase and sell various foreign currencies with approximate
values of $56,000 and $6,000, respectively.
6. 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.
191
<PAGE> 193
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six-month period ended June 30, 2000, Natural Resources Focus Fund's
Class A Shares had a total return of +19.09%. The Fund performed significantly
better than the -3.48% total return of the unmanaged Morgan Stanley Capital
International Natural Resource Index, and the +13.34 return of the Lipper
Natural Resources Fund Average. The Fund initially retreated in January after
our investments in gas-leveraged production companies faced selling pressures
based on fears of falling natural gas prices after the past winter's record warm
temperatures. However, the arrival of more seasonal winter weather in late
January, combined with declining domestic production, led to ending storage
levels in line with normal seasonal levels. This provided a catalyst for a
strong recovery in our investments in North American gas production companies.
During the production decline, we increased our holdings in natural gas exposed
production companies, as well as oil service and drilling companies exposed to
natural gas activity in North America. Our increased investments in these
sectors at the expense of investments in other basic industry stocks helped
account for our improved total return.
We continue to have a constructive outlook for stocks exposed to natural gas
exploration and production in North America. Average depletion rates in North
America have accelerated as many older gas basins have reached maturity.
Therefore, we have not seen an increase in natural gas availability despite gas-
directed drilling activity that is near the highest levels in more than a
decade. This constraint on gas supply has confronted rising demand for gas to
fuel electrical generation facilities, and prices rose to over the $4.00 per
million cubic feet level. Given that season injections into storage basis are
sharply lagging year-earlier levels, prices could spike to yet higher levels on
an intermittent basis in the event that the upcoming winter heating season is
incrementally cooler than the recent string of record warm winters.
Also contributing to the Fund's improved performance was the strong oil
pricing environment brought about by the combination of improving world economic
growth and greater cohesion on production policies by the members of the
Organization of Petroleum Exporting Countries (OPEC). In February, we traveled
to the Middle East nations of Saudi Arabia, Qatar and Kuwait, meeting with the
Oil Ministers of Saudi Arabia and Qatar, as well as other senior energy
officials and oil company executives. The visit affirmed that relations among
OPEC members are the best they have been in years, and that OPEC members believe
that a higher price range for oil is justified. The rationale for a higher
sustainable range was based upon the smaller proportion that oil contributes to
Western World gross domestic product, as well as the high rate of taxation that
is levied on oil consumption in European nations. Therefore, the potential for
higher oil prices leading to an acceleration of overall inflation from the pass-
through of higher energy costs seems to have been reduced. The potential for
economic stagnation resulting from inflation fighting efforts appears to be a
key variable that OPEC wants to avoid. In addition, both the oil ministers of
Saudi Arabia and Qatar stated that they would be uncomfortable with $30 per
barrel of oil, which could lead to fuel substitution and conservation. The
recent announcements by Saudi Arabia to increase production appear to be
consistent with this earlier viewpoint, and do not alter the investment case
upon which our focus on energy stocks has been made. Given the recent OPEC
actions, we believe that the potential for oil prices to be sustained in the low
$20 per barrel range is highly probable, although far from certain. This could
lead to a very positive fundamental environment for oil and oil service
companies.
PORTFOLIO MATTERS
As mentioned previously, we continued to add to our holdings in production
companies exposed to North American natural gas production. Many of our new
holdings are in Canada, where new export pipeline capacity has allowed Canadian
gas prices to achieve parity to gas produced in the lower 48 United States, less
transportation differentials. In addition, we have purchased new holdings in
land drilling companies based in the United States and Canada. We have also
added oil service holdings that benefit from rising activity in deep-water
drilling and production. The backlog of projects in West Africa, Brazil and
North America continues to build, which could lead to strong earnings as
available capacity in these areas is absorbed.
The funds for our increased energy holdings were derived from sales in our
holdings of basic industry companies. This proved to be a positive move for Fund
performance, as first-half performance in these sectors was universally
negative. Concerns over rising interest rates
192
<PAGE> 194
--------------------------------------------------------------------------------
contributed to the lagging investment performance of these sectors during the
first half of 2000. In addition, many basic material companies had earnings that
were adversely affected by rising energy feedstock costs. Despite apparent
inexpensive valuations in selected basic materials, we continue to believe that
energy fundamentals are more concrete, and thereby offer more compelling
potential investment returns. Therefore, we intend to maintain our focus on
natural gas and service stocks as we enter the upcoming 2000-2001 winter heating
season.
IN CONCLUSION
While the share prices of energy stocks have rallied sharply off of near
historically low valuation levels, we still believe that significant
appreciation potential remains in our holdings. Earnings comparisons could be
strong off last year's poor oil price environment for our oil and gas production
companies, which could also fund increased spending in our holdings in the
equities of oil service stocks. Absent the onset of a recession, we believe that
fundamentals will continue to be robust for the foreseeable future. Energy
investment returns have exceeded returns of the unmanaged Standard & Poor's 500
Composite Index, and we believe that relatively inexpensive valuation levels can
result in continued positive returns over the near-term investment horizon. We
look to emphasize the role that investments in energy and related resources can
play in hedging the effects of rising transportation and home-heating costs.
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
July 26, 2000
193
<PAGE> 195
--------------------------------------------------------------------------------
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 6/30/00 +20.02%
----------------------------------------------------------------------
Five Years Ended 6/30/00 + 5.75
----------------------------------------------------------------------
Ten Years Ended 6/30/00 + 4.87
----------------------------------------------------------------------
</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 +19.09% +20.02%
------------------------------------------------------------------------------------------
</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.
194
<PAGE> 196
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALUMINUM 5,956 Alcoa Inc. ....................................... $ 172,724 1.1%
------------------------------------------------------------------------------------------------------------------------
CANADIAN INDEPENDENTS 11,000 Alberta Energy Company Ltd. ...................... 443,950 2.9
4,400 +Anderson Exploration Ltd. ....................... 79,881 0.5
19,300 +Baytex Energy Ltd. .............................. 182,358 1.2
24,500 +Canadian Hunter Exploration Ltd. ................ 520,028 3.4
3,900 +Canadian Natural Resources Ltd. ................. 113,181 0.8
6,900 Canadian Occidental Petroleum Ltd. ............... 186,971 1.2
15,900 +Crestar Energy, Inc. ............................ 241,982 1.6
8,000 +Cypress Energy Inc. (Class A).................... 36,175 0.2
24,100 +Genesis Exploration Ltd. ........................ 178,916 1.2
14,300 Paramount Resources Ltd. ......................... 146,214 1.0
7,600 +Rio Alto Exploration Ltd. ....................... 139,003 0.9
6,800 +Talisman Energy Inc. ............................ 225,106 1.5
13,800 +Tesco Corporation................................ 140,636 0.9
----------- -----
2,634,401 17.3
------------------------------------------------------------------------------------------------------------------------
CHEMICALS 4,700 Air Products and Chemicals, Inc. ................. 144,819 0.9
------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED RESOURCES 3,800 Ashland Inc. ..................................... 133,237 0.9
COMPANIES
------------------------------------------------------------------------------------------------------------------------
INTEGRATED OIL COMPANIES 5,000 Amerada Hess Corporation.......................... 308,750 2.0
5,200 Chevron Corporation............................... 441,025 2.9
3,100 Conoco Inc. (Class A)............................. 68,200 0.5
5,200 Conoco Inc. (Class B)............................. 127,725 0.8
1,400 ENI SpA (ADR)*.................................... 81,463 0.5
5,400 Exxon Mobil Corporation........................... 423,900 2.8
7,400 Murphy Oil Corporation............................ 439,837 2.9
2,000 Phillips Petroleum Company........................ 101,375 0.7
2,800 Royal Dutch Petroleum Company (NY Registered
Shares)......................................... 172,375 1.1
2,800 Texaco Inc. ...................................... 149,100 1.0
8,200 USX-Marathon Group................................ 205,512 1.3
----------- -----
2,519,262 16.5
------------------------------------------------------------------------------------------------------------------------
METALS & MINING 215,200 M.I.M. Holdings Limited........................... 116,285 0.8
2,100 Phelps Dodge Corporation.......................... 78,094 0.5
12,650 +Stillwater Mining Company........................ 352,619 2.3
44,300 WMC Limited....................................... 198,765 1.3
26,300 +Zimbabwe Platinum Mines Limited.................. 3,205 0.0
----------- -----
748,968 4.9
------------------------------------------------------------------------------------------------------------------------
OIL & GAS PRODUCERS 5,500 Anadarko Petroleum Corporation.................... 271,219 1.8
7,100 Apache Corporation................................ 417,569 2.7
4,400 +Barrett Resources Corporation.................... 133,925 0.9
3,112 Burlington Resources Inc. ........................ 119,034 0.8
4,250 +Chieftain International, Inc. ................... 81,016 0.5
10,325 Devon Energy Corporation.......................... 580,136 3.8
21,700 EOG Resources, Inc. .............................. 726,950 4.8
4,266 Kerr-McGee Corporation............................ 251,427 1.6
400 Noble Affiliates, Inc. ........................... 14,900 0.1
6,600 +Noble Drilling Corporation....................... 271,838 1.8
1,600 +Stone Energy Corporation......................... 95,600 0.6
5,900 Unocal Corporation................................ 195,438 1.3
----------- -----
3,159,052 20.7
------------------------------------------------------------------------------------------------------------------------
OIL SERVICES 5,200 +BJ Services Company.............................. 325,000 2.1
8,100 Baker Hughes Incorporated......................... 259,200 1.7
4,100 Coflexip SA (ADR)*................................ 247,025 1.6
4,600 +Cooper Cameron Corporation....................... 303,600 2.0
45,900 +Drillers Technology Corp. ....................... 49,565 0.3
6,700 Ensign Resource Service Group, Inc. .............. 220,665 1.4
600 +Global Marine Inc. .............................. 16,912 0.1
</TABLE>
195
<PAGE> 197
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OIL SERVICES 7,700 +Grant Prideco, Inc. ............................. $ 192,500 1.3%
(CONCLUDED) 33,000 +Gulf Canada Resources Limited (Ordinary)......... 158,812 1.0
6,900 Helmerich & Payne, Inc. .......................... 257,887 1.7
4,700 +Nabors Industries, Inc. ......................... 195,344 1.3
5,700 +National-Oilwell, Inc. .......................... 187,387 1.2
9,700 +Precision Drilling Corporation................... 374,462 2.5
10,900 +R&B Falcon Corporation........................... 256,831 1.7
28,300 Saipem SpA........................................ 168,196 1.1
6,200 Santa Fe International Corporation................ 216,612 1.4
8,200 +Stolt Offshore, SA............................... 115,825 0.8
3,800 +Stolt Offshore, SA (ADR)*........................ 45,125 0.3
7,500 +Weatherford International, Inc. ................. 298,594 2.0
----------- -----
3,889,542 25.5
------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 7,700 Fort James Corporation............................ 178,062 1.1
6,500 International Paper Company....................... 193,781 1.3
----------- -----
371,843 2.4
------------------------------------------------------------------------------------------------------------------------
PIPELINES 4,400 The Coastal Corporation........................... 267,850 1.8
3,900 Equitable Resources, Inc. ........................ 188,175 1.2
1,800 The Williams Companies, Inc. ..................... 75,038 0.5
----------- -----
531,063 3.5
------------------------------------------------------------------------------------------------------------------------
REFINING 3,600 Sunoco, Inc. ..................................... 105,975 0.7
------------------------------------------------------------------------------------------------------------------------
STEEL 17,300 The LTV Corporation............................... 49,738 0.3
------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST--$11,461,991) 14,460,624 94.7
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER** $400,000 CSW Credit Inc., 6.70% due 7/13/2000.............. 399,032 2.6
493,000 General Motors Acceptance Corp., 7.13% due
7/03/2000....................................... 492,707 3.2
------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES (COST--$891,739) 891,739 5.8
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$12,353,730)............. 15,352,363 100.5
LIABILITIES IN EXCESS OF OTHER ASSETS............. (84,015) (0.5)
----------- -----
NET ASSETS........................................ $15,268,348 100.0%
=========== =====
------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
196
<PAGE> 198
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$12,353,730)........ $15,352,363
Cash........................................................ 1,115
Foreign cash................................................ 72
Dividends receivable........................................ 11,470
Prepaid expenses and other assets........................... 1,170
-----------
Total assets................................................ 15,366,190
-----------
-------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... $73,266
Capital shares redeemed................................... 10,593
Investment adviser........................................ 7,808 91,667
-------
Accrued expenses and other liabilities...................... 6,175
-----------
Total liabilities........................................... 97,842
-----------
-------------------------------------------------------------------------------------
NET ASSETS.................................................. $15,268,348
===========
-------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 135,214
Paid-in capital in excess of par............................ 15,603,409
Undistributed investment income--net........................ 40,985
Accumulated realized capital losses on investments and
foreign currency transactions--net........................ (1,200,952)
Accumulated distributions in excess of realized gains on
investments and foreign currency transactions--net........ (2,308,824)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 2,998,516
-----------
NET ASSETS.................................................. $15,268,348
===========
-------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $15,268,348 and 1,352,139
shares outstanding........................................ $ 11.29
===========
-------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
197
<PAGE> 199
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $3,190 foreign withholding tax)........... $ 94,304
Interest and discount earned................................ 10,851
----------
Total income................................................ 105,155
----------
-------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 47,993
Custodian fees.............................................. 5,125
Accounting services......................................... 3,558
Professional fees........................................... 3,413
Transfer agent fees......................................... 2,589
Printing and shareholder reports............................ 707
Directors' fees and expenses................................ 157
Other....................................................... 628
----------
Total expenses.............................................. 64,170
----------
Investment income--net...................................... 40,985
----------
-------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain from:
Investments--net.......................................... 609,511
Foreign currency transactions--net........................ 151 609,662
----------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... 1,939,043
Foreign currency transactions--net........................ (152) 1,938,891
---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $2,589,538
==========
-------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
198
<PAGE> 200
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 40,985 $ 112,815
Realized gain (loss) on investments and foreign currency
transactions--net......................................... 609,662 (1,814,051)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ 1,938,891 5,295,902
----------- -----------
Net increase in net assets resulting from operations........ 2,589,538 3,594,666
----------- -----------
-----------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Dividends to Class A shareholders from investment
income--net............................................... -- (341,600)
----------- -----------
-----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (1,856,493) (4,257,841)
----------- -----------
-----------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... 733,045 (1,004,775)
Beginning of period......................................... 14,535,303 15,540,078
----------- -----------
End of period*.............................................. $15,268,348 $14,535,303
=========== ===========
-----------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 40,985 $ --
=========== ===========
-----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
199
<PAGE> 201
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--NATURAL RESOURCES FOCUS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN CLASS A
DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL --------------------------------------------------------------
STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ---------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000+ 1999+ 1998+ 1997 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 9.48 $ 7.65 $ 10.66 $ 13.12 $ 11.95
------- ------- -------- -------- -------
Investment income--net............................... .03 .07 .12 .14 .18
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net............. 1.78 1.95 (1.50) (1.68) 1.40
------- ------- -------- -------- -------
Total from investment operations..................... 1.81 2.02 (1.38) (1.54) 1.58
------- ------- -------- -------- -------
Less dividends and distributions:
Investment income--net............................. -- (.19) (.18) (.06) (.20)
Realized gain on investments--net.................. -- -- (.55) (.86) (.21)
In excess of realized gain on investments--net..... -- -- (.90) -- --
------- ------- -------- -------- -------
Total dividends and distributions.................... -- (.19) (1.63) (.92) (.41)
------- ------- -------- -------- -------
Net asset value, end of period....................... $ 11.29 $ 9.48 $ 7.65 $ 10.66 $ 13.12
======= ======= ======== ======== =======
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 19.09%++ 26.77% (15.30%) (12.52%) 13.52%
======= ======= ======== ======== =======
---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .87%* .91% .88% .81% .78%
======= ======= ======== ======== =======
Investment income--net............................... .55%* .74% 1.36% .99% 1.43%
======= ======= ======== ======== =======
---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $15,268 $14,535 $ 15,540 $ 26,979 $45,197
======= ======= ======== ======== =======
Portfolio turnover................................... 23.96% 60.83% 29.65% 20.93% 31.11%
======= ======= ======== ======== =======
---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
200
<PAGE> 202
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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 accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments, which are, in the
opinion of management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal, recurring
nature. The following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Futures contracts are valued at the
settlement price at the close of the applicable exchange. Short-term investments
are valued at amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
201
<PAGE> 203
--------------------------------------------------------------------------------
value of the contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the time it
was closed.
- Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets and liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of premium and discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates. Distributions in excess of realized
capital gains are due primarily to differing tax treatments for post-October
losses.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $2,134 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $3,428,024 and $4,875,866, respectively.
Net realized gains for the six months ended June 30, 2000 and net unrealized
gains (losses) as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Realized Unrealized
Gains Gains(Losses)
-------------------------------------------------------------------
<S> <C> <C>
Long-term investments................... $609,511 $2,998,633
Foreign currency transactions........... 151 (117)
-------- ----------
Total................................... $609,662 $2,998,516
======== ==========
-------------------------------------------------------------------
</TABLE>
202
<PAGE> 204
--------------------------------------------------------------------------------
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $2,998,633, of which $3,669,468 related to appreciated securities and
$670,835 related to depreciated securities. At June 30, 2000, the aggregate cost
of investments for Federal income tax purposes was $12,353,730.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-----------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 4,600 $ 46,637
Shares redeemed......................... (186,177) (1,903,130)
-------- -----------
Net decrease............................ (181,577) $(1,856,493)
======== ===========
-----------------------------------------------------------------
</TABLE>
<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>
5. COMMITMENTS:
At June 30, 2000, the Fund had entered into foreign exchange contracts, under
which it had agreed to purchase foreign currency with an approximate value of
$73,000.
6. 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.
203
<PAGE> 205
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six-month period ended June 30, 2000, fixed-income markets remained
volatile as interest rates moved in a manner that produced an inversion of the
yield curve. The front end of the Treasury yield curve suffered as price
movement in that portion of the curve remained under pressure when investors
demanded greater premiums to account for expected increases in the Federal
Reserve Board's overnight rates. Throughout much of the period, the forward
Federal funds market continually reflected 50 basis points--75 basis points
(0.50%--0.75%) of expected tightening in the six-month rolling contract. (The
forward Federal funds market provides an indication to buyers and sellers of
Federal funds what the Federal funds rate is expected to be at some point in the
future, while a six-month rolling contract is an indication of what investors
expect the Federal funds level to be in six months.) On the other hand,
long-term interest rates were favorably influenced by two separate sets of
events. Inflationary fears, which greatly influence yields on the long end of
the curve have, for the most part, been contained as a result of the Federal
Reserve Board's restrictive monetary policy. Second, a supply imbalance, brought
on by the combination of reduced new issuance and a Treasury buy-back program,
produced a strong bid for securities in the 20-year--30-year sector.
Federal Reserve Board monetary policy remained focused on the need to provide
for a slowing in the US economy, which grew at an alarming 7.3% in the fourth
quarter of 1999. Although first quarter growth slowed to 5.5%, the rate is still
well above the Federal Reserve Board's comfort range of 3%--3.5%. Consumer
spending continues to fuel the economic fires, although recent reports such as
new housing sales and auto purchases could arguably point to the beginning of a
higher interest rate-induced slowdown. Consumers have benefited from low
unemployment rates and the wealth effect generated from a strong stock market,
although if stock market trends mirror the uninspired results reported during
the first half of 2000, consumers may slow spending. Additionally, consumer
confidence was impacted by the dot.com sector sell-off, given the implications
that high levels of leverage (for example, margin on their brokerage accounts
and credit card debt) have on their balance sheets. If the Federal Reserve
Board's monetary policy were to produce something greater than a soft landing,
or should financial assets experience a sustained correction in value, this
would probably translate into a weakening of the economic landscape.
Although inflation has been well contained for the most part, the scope of the
global recovery has led to fears of a rekindling of inflation. Commodity
pressures, as measured by the Commodities Research Bureau Index, have been
building since the beginning of the year. Of prime concern has been a surge in
the price of oil, spurred on not only by the Organization of Petroleum Exporting
Countries' production limitations but also on expectations of increased demand
by recovering economies. With respect to wage inflation, whether one evaluates
wage pressures via hourly earnings, real earnings or employment cost measures,
the results have pointed to minimal inflation. The ability to export
manufacturing capacity, combined with the high levels of productivity, has
served to limit the impact of low unemployment. Furthermore, inflation as
measured by both the producer price index and consumer price index remained well
within acceptable levels and points to a lack of pricing pressures.
Notwithstanding the inflation outlook, we expect the Federal Reserve Board to
remain focused on the need to slow economic momentum. The Federal Reserve Board
raised the Federal funds rate by a more aggressive 0.50% at its May Federal Open
Market Committee (FOMC) meeting. This move now puts the overnight rate at 6.50%,
up 175 basis points in the past year. Given this, and combined with a clear
slowing of economic momentum, the Federal Reserve Board kept interest rates the
same at its June FOMC meeting, although future hikes are still a possibility.
On the corporate bond front, new issuance, which was minimal as the new year
started, began to pick up during the second quarter, although aggregate levels
are still below forecast expectations. Investor appetite for investment-grade
corporate bonds was somewhat uninspired, given the intent of Federal Reserve
Board policy and the lack of liquidity being provided by the market makers. As a
result, yield spreads trended toward historical highs during this period,
despite a strong business environment and record levels of corporate
profitability. Toward the end of the six-month period, and led by the
compression in swap spreads (that is, the difference in basis points at which an
AA-rated bank could issue debt relative to a similar maturity Treasury
security), corporate bond spreads narrowed as investors perceived the Federal
Reserve Board may be
204
<PAGE> 206
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT (CONTINUED)
--------------------------------------------------------------------------------
nearing the end of the push to raise short-term interest rates. This, combined
with the very attractive absolute yields, has encouraged some new money to flow
into this sector, a trend we believe may continue as we move into the second
half of the year. As a result, yield spreads on corporate securities have
narrowed.
PORTFOLIO MATTERS
With respect to investment strategy, we remained committed to the bigger, more
liquid issues and emphasized higher coupon bonds. As part of our liquidity
strategy, we attempted to consolidate industry holdings into the benchmark
issues. Although this came at modest yield concessions, this strategy seems to
have worked as the smaller, less liquid transactions significantly
underperformed global transactions. During the first quarter of 2000, our
investment strategy shifted to incorporate a more barbelled approach rather than
a bulleted approach, given prevailing Federal Reserve Board monetary policy and
the technical factors influencing the longer end of the curve. We reduced the
Fund's exposure in the two-year--five-year sector in favor of short-term
floating rate securities and cash. Additionally, we increased the Fund's
exposure at the longer end of the curve, although corporate exposure was focused
in the ten-year sector, with 30-year exposure emphasizing Treasury securities
and agency issues with a spread to US Treasury issues. With regard to our
corporate strategy, we believed the 10-year sector offered greater relative
value given the flatness of the 10-year--30-year corporate credit curve.
However, by the middle of the second quarter, we shifted investment strategy to
incorporate a more bulleted portfolio approach. Looking forward, we recommitted
some assets out of cash and the 30-year sector and back into the
two-year--10-year sector of the yield curve.
With respect to security specific issues, the Fund held an overweighted
position in airlines (equipment trust notes), electric utilities, auto
manufacturers, electronic manufacturers, information and data processing
companies and energy-related industries, primarily integrated oil and gas
producers. During the later part of the period, we began to reduce the Fund's
holdings in retailers, finance companies and airlines. We looked to add to
positions in defense companies (spreads are at historical wide levels), life
insurers, energy-related industries (high oil prices), money center banks and
benchmark telecommunication and technology companies. We continue to underweight
the Fund in finance companies (personal bankruptcies have been on the rise),
paper and forest product producers (unfavorable outlook) and auto parts makers.
With respect to auto parts makers, we are specifically concerned about the
implications a consolidation of that industry could have on bond prices. Going
forward, we intend to continue to look to reverse an overweighting we had in the
overall finance sector, with reallocation back to the industrial sector. Spreads
for industrial have become very attractive to us, and we want to be in a
position to benefit from any cyclical upswing that may occur in that sector.
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
July 26, 2000
205
<PAGE> 207
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +2.16%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +5.04
--------------------------------------------------------------------------------
Ten Years Ended 6/30/00 +7.24
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 +2.04% +2.16%
</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.
206
<PAGE> 208
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<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% due 9/15/2028... $ 2,956,020
SECURITIES+--14.7%
AAA Aaa 5,000,000 Bear Stearns Commercial Mortgage Securities,
1999-WF2-A2, 7.08% due 6/15/2009........... 4,881,410
NR* Baa2 6,000,000 Bistro Trust 1998-1000, 6.58% due
3/26/2001(b)............................... 5,871,240
NR* Aaa 5,500,000 Federal Home Loan Banks, 6.75% due
5/01/2002.................................. 5,480,255
AAA Aaa 5,507,458 Federal Home Loan Mortgage Corporation, 6.30%
due 5/15/2026.............................. 5,254,556
AAA Aaa 6,581,700 Federal National Mortgage Association, 7% due
11/18/2027................................. 6,489,095
A A3 6,000,000 First Dominion Funding I, 6.841% due
7/10/2013(a)(b)............................ 5,749,687
AAA Aaa 5,000,000 First Union-Chase Commercial Mortgage,
1999-C2 A2, 6.645% due 4/15/2009........... 4,732,715
AAA Aaa 5,500,000 IMC Home Equity Loan Trust, 6.36% due
8/20/2022.................................. 5,398,360
Morgan Stanley Capital I:
NR* NR* 6,000,000 Series 1998-HF2, Class A2, 6.48% due
11/15/2030................................. 5,652,480
AAA Aaa 7,000,000 Series 1999-WF1, 6.21% due 9/15/2008......... 6,491,450
Nationslink Funding Corporation:
AAA Aaa 3,000,000 6.476% due 7/20/2008......................... 2,823,888
AAA Aaa 7,000,000 6.316% due 11/20/2008........................ 6,521,879
AAA Aaa 5,000,000 Series 1999-2, Class A3, 7.181% due
12/20/2006................................. 4,935,000
AAA Aaa 4,000,000 Saxon Asset Securities Trust, Series 1999-3,
Class AF-4, 7.55% due 10/25/2026........... 3,941,720
------------
77,179,755
---------------------------------------------------------------------------------------------------------------------------
BANKS & THRIFTS--7.3% A+ Aa2 5,000,000 Bank of America Corp., 7.875% due
5/16/2005.................................. 5,078,350
The Bank of New York Company, Inc.:
A A1 4,000,000 7.625% due 7/15/2002......................... 4,026,560
A A1 2,000,000 7.875% due 11/15/2002........................ 2,023,280
A Aa3 500,000 Boatman's Bancshares, 9.25% due 11/01/2001... 512,095
A+ Aa3 2,000,000 First Interstate, 11.25% due 3/27/2001....... 2,051,780
A A2 3,500,000 Firstar Bank NA, 7.125% due 12/01/2009....... 3,320,870
BBB+ a2 8,000,000 Fleet Capital Trust II, 7.92% due
12/11/2026................................. 6,953,040
BBB+ A3 3,000,000 Great Western Bank, 9.875% due 6/15/2001..... 3,062,880
A- a1 1,000,000 HSBC Americas Capital Trust, 7.808% due
12/15/2026(b).............................. 851,755
A A2 3,000,000 HSBC USA Inc., 7% due 11/01/2006............. 2,865,630
A- a1 3,000,000 Mellon Capital II, 7.995% due 1/15/2027...... 2,710,590
A Aa3 5,000,000 NationsBank Corp., 6.50% due 8/15/2003....... 4,876,900
------------
38,333,730
---------------------------------------------------------------------------------------------------------------------------
FINANCE--6.2% BBB+ Baa1 2,500,000 Comdisco Inc., 6% due 1/30/2002.............. 2,389,700
AA- Aa3 4,350,000 Commercial Credit Co., 10% due 5/15/2009..... 4,960,000
Ford Motor Credit Company:
A A2 7,600,000 7.50% due 3/15/2005.......................... 7,562,380
A A2 8,500,000 7.875% due 6/15/2010......................... 8,498,470
A A2 2,000,000 General Motors Acceptance Corp., 6.85% due
6/17/2004.................................. 1,951,980
A A2 1,500,000 Household Finance Corp., 7.875% due
3/01/2007.................................. 1,494,180
A+ Aa2 6,000,000 Norwest Corp., 6.50% due 6/01/2005........... 5,719,080
------------
32,575,790
---------------------------------------------------------------------------------------------------------------------------
FINANCE-- Bear Stearns Companies, Inc.:
OTHER--10.7% A A2 4,250,000 7.625% due 2/01/2005......................... 4,203,760
A A2 3,000,000 7.625% due 12/07/2009........................ 2,855,880
A aa2 2,000,000 Citigroup Capital II, 7.75% due 12/01/2036... 1,761,400
</TABLE>
207
<PAGE> 209
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES VALUE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCE--OTHER AA- Aa2 $ 1,000,000 Citigroup Inc., 9.50% due 3/01/2002.......... $ 1,032,960
(CONCLUDED)
A- A3 4,500,000 Donaldson, Lufkin & Jenrette Inc., 6.875% due
11/01/2005................................. 4,328,235
BBB+ A3 1,000,000 ERP Operating LP, 7.125% due 10/15/2017...... 860,200
Goldman Sachs Group Inc.:
A+ A1 500,000 7.50% due 1/28/2005.......................... 496,215
A+ A1 8,000,000 7.80% due 1/28/2010.......................... 7,917,440
Lehman Brothers Holdings, Inc.:
A A3 1,000,000 6.625% due 2/05/2006......................... 934,390
A A3 8,800,000 8.25% due 6/15/2007.......................... 8,793,928
AA- Aa3 3,000,000 Morgan Stanley, Dean Witter Corp., 7.75% due
6/15/2005.................................. 3,020,730
AA- Aa3 3,500,000 Morgan Stanley Group, 8.875% due
10/15/2001................................. 3,562,545
Paine Webber Group Inc.:
BBB+ Baa1 3,000,000 9.25% due 12/15/2001......................... 3,051,150
BBB+ Baa1 2,000,000 8.875% due 3/15/2005......................... 2,058,160
Salomon Smith Barney Holdings, Inc.:
A Aa3 2,000,000 5.875% due 2/01/2001......................... 1,985,160
A Aa3 2,000,000 6.625% due 11/15/2003........................ 1,946,160
BBB+ Baa1 4,000,000 Simon Debartolo, 6.75% due 6/15/2005......... 3,747,440
BBB Baa2 3,200,000 Spieker Properties LP, 7.35% due
12/01/2017................................. 2,789,632
BBB Baa3 1,000,000 Susa Partnership LP, 7.45% due 7/01/2018..... 852,520
------------
56,197,905
---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL--CONSUMER A+ A1 5,000,000 Anheuser-Busch Companies Inc., 7.375% due
GOODS--3.0% 7/01/2023.................................. 4,747,900
BBB- Ba1 4,000,000 Flowers Industries Inc., 7.15% due
4/15/2028.................................. 2,827,920
A+ A1 3,500,000 Hershey Foods Co., 8.80% due 2/15/2021....... 3,823,120
A A2 4,000,000 Phillip Morris Companies, Inc., 9% due
1/01/2001.................................. 4,010,440
------------
15,409,380
---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- Amerada Hess Corporation:
ENERGY--4.4% BBB Baa1 1,500,000 7.375% due 10/01/2009........................ 1,457,835
BBB Baa1 2,000,000 7.875% due 10/01/2029........................ 1,955,620
AA+ Aa1 2,000,000 BP America Inc., 9.375% due 11/01/2000....... 2,014,620
A- A3 5,000,000 Burlington Resources, 7.375% due 3/01/2029... 4,638,300
BBB Baa2 2,500,000 Coastal Corp., 6.375% due 2/01/2009.......... 2,264,225
A- A3 2,000,000 Conoco Inc., 6.95% due 4/15/2029............. 1,818,080
BBB+ Baa1 2,000,000 Enron Corporation, 9.875% due 6/15/2003...... 2,116,480
BBB- Baa3 2,000,000 Occidental Petroleum Corp. (MOPPRS), 6.40%
due 4/01/2013(a)........................... 1,931,560
BBB- Baa2 5,000,000 Williams Companies, Inc., 7.625% due
7/15/2019.................................. 4,775,050
------------
22,971,770
---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- A+ A1 2,000,000 DaimlerChrysler NA Holdings, 7.20% due
MANUFACTURING--6.7% 9/01/2009.................................. 1,925,380
A A2 2,000,000 Ford Motor Company, 8.90% due 1/15/2032...... 2,187,120
A A2 4,000,000 General Motors Corporation, 8.80% due
3/01/2021.................................. 4,317,120
AA- Aa2 4,125,000 Hewlett-Packard Company, 7.15% due
6/15/2005.................................. 4,132,549
A A2 4,500,000 Honeywell International, 7.50% due
3/01/2010.................................. 4,497,795
A+ A1 3,000,000 International Business Machines Corporation,
6.50% due 1/15/2028........................ 2,704,680
BBB- Baa3 5,000,000 Lockheed Martin Corporation, 7.95% due
12/01/2005................................. 5,028,500
BBB- Baa3 500,000 Northrop-Grumman Corp., 8.625% due
10/15/2004................................. 515,170
Raytheon Company:
BBB- Baa2 2,500,000 7.90% due 3/01/2003(b)....................... 2,511,890
BBB- Baa2 4,000,000 6.75% due 3/15/2018.......................... 3,458,720
</TABLE>
208
<PAGE> 210
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES VALUE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDUSTRIAL-- BBB+ Baa1 $ 2,000,000 Sun Microsystems Inc., 7.50% due 8/15/2006... $ 1,995,720
MANUFACTURING (CONCLUDED)
BBB Baa2 2,000,000 Union Carbide Corp., 6.25% due 6/15/2003..... 1,942,980
------------
35,217,624
---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- Comcast Cable Communications:
SERVICES--10.3%
BBB Baa2 3,000,000 6.20% due 11/15/2008......................... 2,708,190
BBB Baa2 2,000,000 8.875% due 5/01/2017......................... 2,165,560
BBB+ Baa1 8,000,000 Computer Associates International, 6.25% due
4/15/2003.................................. 7,629,280
BBB Baa1 1,500,000 Dillard's Inc., 7.85% due 10/01/2012......... 1,143,045
A A2 1,546,081 +Disney Custom Repackaged Asset Vehicle-403,
6.85% due 1/10/2007(b)..................... 1,527,992
BBB- Baa3 5,500,000 Fred Meyer Inc., 7.45% due 3/01/2008......... 5,245,625
AAA Aaa 3,000,000 Johnson & Johnson, 8.72% due 11/01/2024...... 3,227,670
A+ A1 615,000 May Department Stores Co., 8.30% due
7/15/2026.................................. 583,629
BBB- Baa3 4,000,000 News America Holdings, Inc., 8.625% due
2/01/2003.................................. 4,102,240
A- A3 7,000,000 Sears Roebuck Acceptance Corp., 6.82% due
10/17/2002................................. 6,890,870
AA- A2 2,500,000 TCI Communications Inc., 8.75% due
8/01/2015.................................. 2,673,150
AA- A2 1,977,000 Tele-Communications Inc., 8.25% due
1/15/2003.................................. 2,032,336
BBB Baa2 4,000,000 Time Warner Entertainment Co., 8.375% due
3/15/2023.................................. 4,049,320
BBB Ba1 1,000,000 USA Waste Services, 6.50% due 12/15/2002..... 927,700
AA Aa2 7,000,000 Wal-Mart Stores, Inc., 8.50% due 9/15/2024... 7,370,720
A A2 1,875,000 Walt Disney Company, 7.30% due 2/08/2005..... 1,889,306
------------
54,166,633
---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL-- BBB+ Baa2 2,750,000 Burlington Northern Santa Fe, 6.75% due
TRANSPORTATION--5.3% 3/15/2029.................................. 2,329,690
BBB Baa2 5,500,000 CSX Corp., 7.90% due 5/01/2017............... 5,224,230
AA+ Aa3 5,000,000 Continental Airlines, 7.056% due 3/15/2011... 4,688,350
BBB- Baa3 3,500,000 Delta Airlines, 9.75% due 5/15/2021.......... 3,488,345
Southwest Airlines Co.:
A- A3 3,000,000 9.40% due 7/01/2001.......................... 3,041,370
A- A3 4,000,000 8% due 3/01/2005............................. 3,978,840
A- A3 1,000,000 7.875% due 9/01/2007......................... 1,000,070
BBB- Baa3 5,000,000 Union Pacific Corporation, 6.625% due
2/01/2029.................................. 4,132,245
------------
27,883,140
---------------------------------------------------------------------------------------------------------------------------
UTILITIES-- AA- Aa3 2,450,000 Ameritech Capital Funding, 6.45% due
COMMUNICATIONS--7.5% 1/15/2018.................................. 2,105,995
BB Ba2 7,725,000 Frontier Corp., 6% due 10/15/2013(a)......... 6,906,614
A+ Aa3 6,000,000 GTE California, Inc., 8.07% due 4/15/2024.... 5,624,880
GTE Corp.:
A+ A2 1,500,000 9.375% due 12/01/2000........................ 1,514,025
A+ A2 1,500,000 6.84% due 4/15/2018.......................... 1,335,930
A- A3 5,300,000 MCI WorldCom Inc., 6.125% due 4/15/2012(a)... 5,180,114
Southwestern Bell Telecommunications Corp.:
AA- Aa2 1,000,000 6.625% due 4/01/2005......................... 964,650
AA- Aa2 2,000,000 6.375% due 11/15/2007........................ 1,849,680
Sprint Capital Corporation:
BBB+ Baa1 1,500,000 5.70% due 11/15/2003......................... 1,414,920
BBB+ Baa1 2,500,000 6.125% due 11/15/2008........................ 2,228,425
Vodafone Airtouch PLC(b):
A- A2 3,000,000 7.625% due 2/15/2005......................... 3,004,149
A- A2 7,500,000 7.875% due 2/15/2030......................... 7,340,453
------------
39,469,835
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
209
<PAGE> 211
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P MOODY'S FACE
INDUSTRY RATINGS RATINGS AMOUNT CORPORATE BONDS & NOTES VALUE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UTILITIES-- AAA Aaa $ 8,000,000 Cleveland Electric/Toledo Edison, 7.13% due
ELECTRIC--8.2% 7/01/2007.................................. $ 7,686,080
BBB+ Baa1 2,000,000 Commonwealth Edison, Inc., 7% due
7/01/2005.................................. 1,926,080
BBB+ Baa1 2,000,000 Conectiv Inc., 6.73% due 6/01/2006........... 1,926,420
BBB+ Baa1 2,000,000 Dominion Resources Inc., 8.125% due
6/15/2010.................................. 2,013,520
A A3 2,500,000 Duke Capital Corp., 7.50% due 10/01/2009..... 2,462,900
A- A2 3,000,000 Edison International Inc., 6.875% due
9/15/2004.................................. 2,911,470
A A1 3,000,000 Mississippi Power, 6.05% due 5/01/2003....... 2,897,730
AA- A1 1,500,000 PG&E Corp., 6.25% due 8/01/2003.............. 1,449,720
BBB- Ba1 3,000,000 PSE&G Energy Holdings, 9.125% due
2/10/2004.................................. 3,034,935
A- A3 2,000,000 Pennsylvania Power & Light Co., 6.125% due
5/01/2006(a)............................... 1,979,280
A A1 2,000,000 South Carolina Electric & Gas, 7.50% due
6/15/2005.................................. 2,005,480
A A2 5,000,000 Southern California Edison, 7.625% due
1/15/2010.................................. 4,984,000
A A2 7,500,000 Virginia Electric & Power Co., 8.625% due
10/01/2024................................. 7,358,925
------------
42,636,540
---------------------------------------------------------------------------------------------------------------------------
YANKEE CORPORATES**--6.4% A+ A1 6,000,000 Australia & New Zealand Banking Group, NY,
7.55% due 9/15/2006(1)..................... 5,908,860
A- A3 5,000,000 BHP Finance USA, 8.50% due 12/01/2012(1)..... 5,174,050
BBB Baa2 1,500,000 Canadian National Railway Co., 6.90% due
7/15/2028(3)............................... 1,265,505
A A2 2,000,000 Ford Capital BV, 9.50% due 6/01/2010(1)...... 2,191,880
A- A3 4,000,000 Israel Electric Corp. Ltd., 7.75% due
3/01/2009(3)(b)............................ 3,870,896
Merita Bank Ltd.(1):
A- A1 1,500,000 6.50% due 1/15/2006.......................... 1,416,135
A- A1 2,500,000 6.50% due 4/01/2009.......................... 2,270,725
A A2 5,000,000 Norsk Hydro A/S, 6.70% due 1/15/2018(3)...... 4,382,150
BBB Baa3 5,000,000 Petro Geo-Services ASA, 7.125% due
3/30/2028(3)............................... 4,170,250
Telecom de Puerto Rico(3):
BBB Baa2 1,000,000 6.15% due 5/15/2002.......................... 971,692
BBB Baa2 1,000,000 6.65% due 5/15/2006.......................... 946,294
A- A2 1,000,000 Trans-Canada Pipelines, 6.43% due
3/15/2029(3)............................... 950,720
------------
33,519,157
---------------------------------------------------------------------------------------------------------------------------
YANKEE Korea Development Bank(1):
SOVEREIGN**--2.4% BBB Baa2 3,000,000 7.125% due 4/22/2004......................... 2,902,170
BBB Baa2 2,500,000 7.375% due 9/17/2004......................... 2,429,350
BBB Baa2 5,000,000 Republic of Korea, 8.875% due 4/15/2008(2)... 5,168,750
BB+ Baa3 2,000,000 United Mexican States, 9.875% due
2/01/2010(2)............................... 2,070,000
------------
12,570,270
---------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES
(COST--$508,375,884)--93.1% 488,131,529
---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS
---------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT US Treasury Bonds & Notes:
OBLIGATIONS--2.8% 7,875,000 6.50% due 2/15/2010.......................... 8,144,483
1,500,000 5.25% due 2/15/2029.......................... 1,331,250
5,200,000 6.125% due 8/15/2029......................... 5,252,000
---------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT OBLIGATIONS
(COST--$14,503,040)--2.8% 14,727,733
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
210
<PAGE> 212
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES VALUE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE $12,826,000 Warburg Dillon Read LLC, purchased on
AGREEMENTS***--2.5% 6/30/2000 to yield 6.55% to 7/03/2000...... $ 12,826,000
---------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$12,826,000)--2.5%.................... 12,826,000
---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$535,704,924)--98.4%.................. 515,685,262
OTHER ASSETS LESS LIABILITIES--1.6%.......... 8,620,480
------------
NET ASSETS--100.0%........................... $524,305,742
============
---------------------------------------------------------------------------------------------------------------------------
</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.
See Notes to Financial Statements.
211
<PAGE> 213
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$535,704,924)....... $515,685,262
Cash........................................................ 1,784
Receivables:
Interest.................................................. $9,003,123
Loaned securities......................................... 2,660 9,005,783
----------
Prepaid expenses............................................ 42,029
------------
Total assets................................................ 524,734,858
------------
---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Investment adviser........................................ 170,817
Capital shares redeemed................................... 162,482 333,299
----------
Accrued expenses............................................ 95,817
------------
Total liabilities........................................... 429,116
------------
---------------------------------------------------------------------------------------
NET ASSETS.................................................. $524,305,742
============
---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 200,000,000
shares authorized+........................................ $ 4,749,293
Paid-in capital in excess of par............................ 572,988,232
Undistributed investment income--net........................ 3,033,985
Accumulated realized capital losses on investments--net..... (36,446,106)
Unrealized depreciation on investments--net................. (20,019,662)
------------
NET ASSETS.................................................. $524,305,742
============
---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $524,305,742 and 47,492,930
shares outstanding........................................ $ 11.04
============
---------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
212
<PAGE> 214
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $ 19,746,832
Other....................................................... 38,054
------------
Total income................................................ 19,784,886
------------
---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $1,125,415
Accounting services......................................... 51,535
Professional fees........................................... 25,564
Custodian fees.............................................. 25,055
Printing and shareholder reports............................ 23,811
Pricing services............................................ 6,891
Directors' fees and expenses................................ 5,592
Transfer agent fees......................................... 2,604
Registration fees........................................... 435
Other....................................................... 4,158
----------
Total expenses.............................................. 1,271,060
------------
Investment income--net...................................... 18,513,826
------------
---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET:
Realized loss on investments--net........................... (11,969,017)
Change in unrealized depreciation on investments--net....... 4,249,290
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 10,794,099
============
---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
213
<PAGE> 215
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 18,513,826 $ 37,462,306
Realized loss on investments--net........................... (11,969,017) (15,646,836)
Change in unrealized appreciation/depreciation on
investments--net.......................................... 4,249,290 (35,545,222)
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ 10,794,099 (13,729,752)
------------ ------------
--------------------------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS:
Dividends to Class A shareholders from investment
income--net............................................... (15,479,873) (40,541,994)
------------ ------------
--------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital
share transactions........................................ (14,585,990) 3,548,694
------------ ------------
--------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (19,271,764) (50,723,052)
Beginning of period......................................... 543,577,506 594,300,558
------------ ------------
End of period*.............................................. $524,305,742 $543,577,506
============ ============
--------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 3,033,985 $ 32
============ ============
--------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
214
<PAGE> 216
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 11.14 $ 12.25 $ 12.11 $ 11.91 $ 12.45
-------- -------- -------- -------- --------
Investment income--net........................... .38 .77 .77 .78 .80
Realized and unrealized gain (loss) on
investments--net............................... (.16) (1.05) .15 .20 (.55)
-------- -------- -------- -------- --------
Total from investment operations................. .22 (.28) .92 .98 .25
-------- -------- -------- -------- --------
Less dividends from investment income--net....... (.32) (.83) (.78) (.78) (.79)
-------- -------- -------- -------- --------
Net asset value, end of period................... $ 11.04 $ 11.14 $ 12.25 $ 12.11 $ 11.91
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............... 2.04%+ (2.35%) 7.85% 8.64% 2.21%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................... .48%* .47% .48% .47% .49%
======== ======== ======== ======== ========
Investment income--net........................... 6.97%* 6.53% 6.35% 6.62% 6.67%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)......... $524,306 $543,578 $594,301 $527,770 $538,394
======== ======== ======== ======== ========
Portfolio turnover............................... 63.69% 97.14% 103.24% 89.22% 91.88%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Aggregate total investment return.
See Notes to Financial Statements.
215
<PAGE> 217
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--PRIME BOND FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that as of June 30, 2000 was comprised of 19
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 accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Short-term securities are valued at amortized cost, which approximates
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company.
(b) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements. Under such agreements, the counterparty
agrees to repurchase the security at a mutually agreed upon time and price. The
Fund takes possession of the underlying securities, marks to market such
securities and, if necessary, receives additional securities daily to ensure
that the contract is fully collateralized. If the seller 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
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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 average daily net assets not exceeding $250 million; .45% of average
daily net assets in excess of $250 million but not exceeding $500 million; .40%
of average daily net assets in excess of $500 million but not exceeding $750
million; and .35% of average daily net assets in excess of $750 million. For the
six months
216
<PAGE> 218
--------------------------------------------------------------------------------
ended June 30, 2000, the aggregate average daily net assets of the Fund and the
Company's High Current Income Fund was approximately $1,004,392,000.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, the Fund paid Merrill Lynch Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith, Incorporated,
$5,985 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $319,271,767 and $326,059,764, respectively.
Net realized losses for the six months ended June 30, 2000 and net unrealized
losses as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Realized Unrealized
Losses Losses
------------------------------------------------------------------
<S> <C> <C>
Long-term investments................ $(11,969,017) $(20,019,662)
------------ ------------
Total................................ $(11,969,017) $(20,019,662)
============ ============
------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized depreciation for Federal income tax purposes
aggregated $20,019,662, of which $2,308,783 related to appreciated securities
and $22,328,445 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $535,704,924.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 1,837,283 $ 20,242,004
Shares issued to shareholders in
reinvestment of dividends............ 1,407,243 15,479,873
---------- ------------
Total issued.......................... 3,244,526 35,721,877
Shares redeemed....................... (4,556,496) (50,307,867)
---------- ------------
Net decrease.......................... (1,311,970) $(14,585,990)
========== ============
-------------------------------------------------------------------
</TABLE>
<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>
5. LOANED SECURITIES:
At June 30, 2000, the Fund held US Treasury Bonds having an aggregate value of
approximately $8,585,000 as collateral for portfolio securities loaned having a
market value of approximately $8,144,000.
6. 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.
7. SUBSEQUENT EVENT:
On July 3, 2000, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.063882 per Class A share payable on July 3, 2000 to
shareholders of record as of July 3, 2000.
217
<PAGE> 219
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Economic slowing has finally arrived in the United States. As a result,
significant increases in inflation and interest rates appear less likely, which
is usually good news for financial assets. On the other hand, profit growth is
likely to decelerate from unsustainably high levels.
Investor sentiment changed significantly during the first half of 2000. In
general, concerns centered on economic growth being too strong. A recent
inflection could indicate healthy, but slower economic and profit growth in the
second half of the year. Following potential uncertainty during the adjustment
period, the sustainability of the economic expansion could buoy investor
expectations.
During the first half of the year, equity investors switched gears from an
excessive focus on momentum, which was prevalent during most of 1999. This
transition to a more balanced focus on both valuation and earnings growth, which
began in March, can provide a healthier investment backdrop. However, this
change has caused deterioration in many extremely highly valued securities with
speculative fundamentals and improvement in previously neglected, solidly
performing companies.
In the coming months, we believe investors are likely to focus on continuing
cyclical economic developments as well as the presidential election campaign.
Cyclical concerns remain increasing labor costs as well as volatile, but rising,
commodity prices. Federal budget policy, social security funding options and
trade policy are likely to shape investor interest in the outcome of the
election. Generally, financial markets have tended to do better under divided
governments, preferring legislative gridlock. In part, US markets historically
have done well as a result of fiscal policy restraint and could react poorly to
any significant reversal of that trend.
Despite near-term uncertainties surrounding economic slowdown, earnings growth
and valuation levels, long-term forces supporting US economic and financial
market leadership seem to remain in place. Chief among these are continued heavy
investments in technology, telecommunications and other efficiency-enhancing
projects, thus potentially enabling productivity-led growth.
PORTFOLIO MATTERS
As of June 30, 2000, the Fund's asset allocation was: US equities, 80% of net
assets; foreign equities, 14%; and cash reserves, 6%.
We reduced the Fund's position in foreign equities from 21% of net assets to
14% during the first half of 2000. We utilized the proceeds to expand the Fund's
US equity representation from 74% of net assets to 80%. This shift reflected our
perception of increased near-term risk in equity markets in an environment of
extreme volatility. However, this reduction does not change our positive
longer-term view toward US and foreign equities.
In our opinion, the most likely economic scenario is a slowdown in the United
States that would reduce inflationary pressures but that would not be
sufficiently intense to adversely impact the rest of the world's economies. The
modest reduction in US and foreign equities has not altered the allocation of
significant assets to "new economy" equities in the United States and the
majority of assets in foreign markets to technology-related sectors. Companies
in technology-oriented areas such as telecommunications equipment, computers,
and software and services could be relatively immune to an economic slowdown of
modest proportions, in our view. Representation in old economy sectors was
maintained on a selective basis in order to maintain diversification consistent
with the Fund's objectives. Areas with significant representation included
financial services, consumer staples and health care.
IN CONCLUSION
We appreciate your investment in Quality Equity Fund of Merrill Lynch Variable
Series Funds, Inc., and we look forward to sharing our investment outlook and
strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Thomas R. Robinson
Thomas R. Robinson
Senior Vice President and Portfolio Manager
July 26, 2000
218
<PAGE> 220
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +20.25%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +20.51
--------------------------------------------------------------------------------
Ten Years Ended 6/30/00 +14.94
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 +3.57% +20.25%
------------------------------------------------------------------------------------------
</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.
219
<PAGE> 221
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA BROADCASTING--MEDIA 286,400 The News Corporation Limited (Convertible
Preferred) (ADR)*......................... $ 13,604,000 1.5%
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN AUSTRALIA 13,604,000 1.5
-----------------------------------------------------------------------------------------------------------------------
CANADA COMMUNICATIONS 426,266 Nortel Networks Corporation................. 29,092,655 3.1
EQUIPMENT
------------------------------------------------------------------------------------------------------
MACHINERY 148,300 +ATS Automation Tooling Systems, Inc. ...... 3,227,830 0.3
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 59,900 BCE Inc. ................................... 1,426,369 0.2
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN CANADA 33,746,854 3.6
-----------------------------------------------------------------------------------------------------------------------
FINLAND COMMUNICATIONS 270,600 Nokia Oyj................................... 13,864,778 1.5
EQUIPMENT
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN FINLAND 13,864,778 1.5
-----------------------------------------------------------------------------------------------------------------------
FRANCE SEMICONDUCTORS 202,800 STMicroelectronics NV (NY Registered
Shares)................................... 13,017,225 1.4
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN FRANCE 13,017,225 1.4
-----------------------------------------------------------------------------------------------------------------------
HONG KONG ELECTRONICS 36,500 +Gemstar International Group Limited........ 2,242,469 0.2
COMPONENTS
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN HONG KONG 2,242,469 0.2
-----------------------------------------------------------------------------------------------------------------------
JAPAN APPLIANCES 89,000 Sony Corporation (ADR)*..................... 8,393,813 0.9
------------------------------------------------------------------------------------------------------
COMPUTERS 40,000 NEC Corporation............................. 1,258,920 0.2
------------------------------------------------------------------------------------------------------
ELECTRONICS 68,000 Hitachi Ltd. ............................... 983,318 0.1
COMPONENTS 21,000 Kyocera Corporation......................... 3,570,625 0.4
------------ -----
4,553,943 0.5
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 75,000 Yamanouchi Pharmaceutical Co., Ltd. ........ 4,104,248 0.4
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN JAPAN 18,310,924 2.0
-----------------------------------------------------------------------------------------------------------------------
NETHERLANDS ELECTRONIC 157,800 +ASM Lithography Holdings NV................ 6,810,044 0.7
COMPONENTS
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN THE NETHERLANDS 6,810,044 0.7
-----------------------------------------------------------------------------------------------------------------------
SINGAPORE ELECTRONIC 32,200 +Flextronics International Ltd. ............ 2,211,738 0.2
COMPONENTS
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN SINGAPORE 2,211,738 0.2
-----------------------------------------------------------------------------------------------------------------------
SWEDEN COMMUNICATIONS 436,400 Telefonaktiebolaget LM Ericsson AB 'B'...... 8,682,226 0.9
EQUIPMENT
37,000 +Telia AB................................... 350,131 0.1
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN SWEDEN 9,032,357 1.0
-----------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM BUILDING & 332,000 Hanson PLC.................................. 2,347,211 0.3
CONSTRUCTION
------------------------------------------------------------------------------------------------------
DRUGS 320,000 SmithKline Beecham PLC...................... 4,190,475 0.4
------------------------------------------------------------------------------------------------------
MANUFACTURING 505,000 Invensys PLC................................ 1,896,008 0.2
------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 146,200 Shell Transport & Trading Company (ADR)*.... 7,300,863 0.8
------------------------------------------------------------------------------------------------------
OIL--RELATED 236,000 BP Amoco PLC................................ 2,265,158 0.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 414,000 Vodafone AirTouch PLC....................... 1,673,435 0.2
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN THE UNITED KINGDOM 19,673,150 2.1
-----------------------------------------------------------------------------------------------------------------------
UNITED STATES AEROSPACE & 76,000 The Boeing Company.......................... 3,177,750 0.3
DEFENSE
110,525 United Technologies Corporation............. 6,507,159 0.7
------------ -----
9,684,909 1.0
------------------------------------------------------------------------------------------------------
APPAREL 54,800 The Gap, Inc. .............................. 1,712,500 0.2
------------------------------------------------------------------------------------------------------
APPLICATION 36,000 +Siebel Systems, Inc. ...................... 5,888,250 0.6
DEVELOPMENT
SOFTWARE
------------------------------------------------------------------------------------------------------
AUTOMOTIVE 15,700 +General Motors Corporation (Class H)....... 1,377,675 0.1
PRODUCTS
------------------------------------------------------------------------------------------------------
BANKING 141,736 Bank of America Corporation................. 6,094,648 0.7
209,700 The Bank of New York Company, Inc. ......... 9,751,050 1.0
98,450 The Chase Manhattan Corporation............. 4,534,853 0.5
------------ -----
20,380,551 2.2
------------------------------------------------------------------------------------------------------
</TABLE>
220
<PAGE> 222
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES BEVERAGES 234,000 The Coca-Cola Company....................... $ 13,440,375 1.4%
(CONTINUED)
251,500 PepsiCo, Inc. .............................. 11,176,031 1.2
------------ -----
24,616,406 2.6
------------------------------------------------------------------------------------------------------
BROADCASTING & 106,200 +TV Guide, Inc. (Class A)................... 3,637,350 0.4
PUBLISHING
------------------------------------------------------------------------------------------------------
BROADCASTING-- 501,200 +AT&T Corp.-Liberty Media Group (Class A)... 12,154,100 1.3
CABLE
224,900 +Charter Communications, Inc. (Class A)..... 3,696,794 0.4
------------ -----
15,850,894 1.7
------------------------------------------------------------------------------------------------------
BROADCASTING--MEDIA 19,000 +Univision Communications Inc. (Class A).... 1,966,500 0.2
------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 117,050 +Oracle Corporation......................... 9,832,200 1.0
------------------------------------------------------------------------------------------------------
CAPITAL EQUIPMENT 42,068 +Agilent Technologies, Inc. ................ 3,102,515 0.3
110,300 Hewlett-Packard Company..................... 13,773,712 1.5
------------ -----
16,876,227 1.8
------------------------------------------------------------------------------------------------------
CAPITAL GOODS 24,800 Minnesota Mining and Manufacturing Company
(3M)...................................... 2,046,000 0.2
------------------------------------------------------------------------------------------------------
CELLULAR 58,400 +Dobson Communications Corporation (Class
TELEPHONES A)........................................ 1,124,200 0.1
------------------------------------------------------------------------------------------------------
CHEMICALS 210,700 Rohm and Haas Company....................... 7,269,150 0.8
------------------------------------------------------------------------------------------------------
COMMERCIAL 136,600 +Convergys Corporation...................... 7,086,125 0.8
SERVICES
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 82,000 +Network Associates, Inc. .................. 1,670,750 0.2
66,600 +Pegasus Communications Corporation......... 3,259,238 0.3
------------ -----
4,929,988 0.5
------------------------------------------------------------------------------------------------------
COMMUNICATIONS 7,800 +CIENA Corporation.......................... 1,299,675 0.1
EQUIPMENT
311,200 Lucent Technologies Inc. ................... 18,438,600 2.0
124,050 +WorldCom, Inc. ............................ 5,690,794 0.6
------------ -----
25,429,069 2.7
------------------------------------------------------------------------------------------------------
COMPUTER RELATED 35,200 +VERITAS Software Corporation............... 3,977,600 0.4
PRODUCTS
------------------------------------------------------------------------------------------------------
COMPUTER SERVICES 165,200 +America Online, Inc. ...................... 8,714,300 0.9
19,200 +Ariba, Inc. ............................... 1,881,600 0.2
508,295 +Cisco Systems, Inc. ....................... 32,308,493 3.4
104,000 Electronic Data Systems Corporation......... 4,290,000 0.5
6,600 +StorageNetworks, Inc. ..................... 595,650 0.1
28,000 Symbol Technologies, Inc. .................. 1,512,000 0.2
------------ -----
49,302,043 5.3
------------------------------------------------------------------------------------------------------
COMPUTERS 103,800 Compaq Computer Corporation................. 2,653,387 0.3
177,000 +Dell Computer Corporation.................. 8,728,312 0.9
149,200 +EMC Corporation............................ 11,479,075 1.2
101,165 International Business Machines
Corporation............................... 11,083,890 1.2
74,100 RadioShack Corporation...................... 3,510,488 0.4
147,400 +Sun Microsystems, Inc. .................... 13,404,188 1.4
------------ -----
50,859,340 5.4
------------------------------------------------------------------------------------------------------
CONGLOMERATES 105,300 Honeywell International Inc. ............... 3,547,294 0.4
------------------------------------------------------------------------------------------------------
DIVERSIFIED 40,600 +Conexant Systems, Inc. .................... 1,971,637 0.2
COMPANIES 32,300 Corning Incorporated........................ 8,716,962 0.9
------------ -----
10,688,599 1.1
------------------------------------------------------------------------------------------------------
ELECTRICAL & 59,000 +The AES Corporation........................ 2,691,875 0.3
ELECTRONICS 4,900 +Capstone Turbine Corporation............... 221,419 0.0
------------ -----
2,913,294 0.3
------------------------------------------------------------------------------------------------------
ELECTRICAL 487,700 General Electric Company.................... 25,848,100 2.8
EQUIPMENT
------------------------------------------------------------------------------------------------------
ELECTRONICS 11,500 +Analog Devices, Inc. ...................... 874,000 0.1
30,800 +Broadcom Corporation (Class A)............. 6,743,275 0.7
295,000 Intel Corporation........................... 39,419,375 4.2
117,200 Texas Instruments Incorporated.............. 8,050,175 0.9
------------ -----
55,086,825 5.9
------------------------------------------------------------------------------------------------------
</TABLE>
221
<PAGE> 223
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES ELECTRONIC 112,100 DPL Inc. ................................... $ 2,459,194 0.3%
(CONTINUED)
COMPONENTS 37,900 +LSI Logic Corporation...................... 2,051,338 0.2
110,500 +Solectron Corporation...................... 4,627,188 0.5
------------ -----
9,137,720 1.0
------------------------------------------------------------------------------------------------------
ENTERTAINMENT 34,700 Time Warner Inc. ........................... 2,637,200 0.3
------------------------------------------------------------------------------------------------------
FIBER OPTICS 2,700 +Exfo Electro-Optical Engineering Inc. ..... 118,462 0.0
------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 88,350 Associates First Capital Corporation (Class
A)........................................ 1,971,309 0.2
87,000 The Charles Schwab Corporation.............. 2,925,375 0.3
245,800 Citigroup Inc. ............................. 14,809,450 1.6
78,100 Federal Home Loan Mortgage Association...... 3,163,050 0.3
206,200 Wells Fargo Company......................... 7,990,250 0.9
------------ -----
30,859,434 3.3
------------------------------------------------------------------------------------------------------
HEALTHCARE-- 114,900 HCA-The Healthcare Corporation.............. 3,490,087 0.4
PRODUCTS &
SERVICES
------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 207,850 Colgate-Palmolive Company................... 12,445,019 1.3
28,300 The Procter & Gamble Company................ 1,620,175 0.2
------------ -----
14,065,194 1.5
------------------------------------------------------------------------------------------------------
INSTRUMENTS-- 48,700 Millipore Corporation....................... 3,670,763 0.4
SCIENTIFIC
------------------------------------------------------------------------------------------------------
INSURANCE 111,600 AXA Financial, Inc. ........................ 3,794,400 0.4
115,875 American International Group, Inc. ......... 13,615,312 1.5
33,900 ITT Industries, Inc. ....................... 1,029,713 0.1
------------ -----
18,439,425 2.0
------------------------------------------------------------------------------------------------------
INTERNET SOFTWARE 34,800 +IntraNet Solutions, Inc. .................. 1,335,450 0.1
19,506 +VeriSign, Inc. ............................ 3,439,152 0.4
------------ -----
4,774,602 0.5
------------------------------------------------------------------------------------------------------
INTERNETWORKING 2,500 +Alamosa PCS Holdings, Inc. ................ 52,187 0.0
23,800 +InfoSpace.com, Inc. ....................... 1,314,950 0.1
21,600 +Inktomi Corporation........................ 2,554,200 0.3
------------ -----
3,921,337 0.4
------------------------------------------------------------------------------------------------------
LASER SYSTEMS & 141,400 +JDS Uniphase Corporation................... 16,941,488 1.8
COMPONENTS
------------------------------------------------------------------------------------------------------
MANUFACTURING 29,300 Textron, Inc. .............................. 1,591,356 0.2
198,150 Tyco International Ltd. .................... 9,387,356 1.0
------------ -----
10,978,712 1.2
------------------------------------------------------------------------------------------------------
MEDICAL TECHNOLOGY 44,000 +Boston Scientific Corporation.............. 965,250 0.1
61,450 Johnson & Johnson........................... 6,260,219 0.7
------------ -----
7,225,469 0.8
------------------------------------------------------------------------------------------------------
METALS 138,000 Alcoa Inc. ................................. 4,002,000 0.4
------------------------------------------------------------------------------------------------------
NATURAL RESOURCES 209,300 Burlington Resources Inc. .................. 8,005,725 0.9
------------------------------------------------------------------------------------------------------
NETWORKING 16,400 +ONI Systems Corp. ......................... 1,921,875 0.2
PRODUCTS
------------------------------------------------------------------------------------------------------
OIL & GAS 261,450 Enron Corp. ................................ 16,863,525 1.8
PRODUCERS
40,000 +Nabors Industries, Inc. ................... 1,662,500 0.2
------------ -----
18,526,025 2.0
------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 232,393 Exxon Mobil Corporation..................... 18,242,850 1.9
------------------------------------------------------------------------------------------------------
OIL SERVICES 62,200 Schlumberger Limited........................ 4,641,675 0.5
------------------------------------------------------------------------------------------------------
PETROLEUM 63,800 Unocal Corporation.......................... 2,113,375 0.2
------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 140,050 American Home Products Corporation.......... 8,227,937 0.9
119,750 Cardinal Health, Inc. ...................... 8,861,500 0.9
45,600 Eli Lilly and Company....................... 4,554,300 0.5
181,310 Merck & Co., Inc. .......................... 13,892,879 1.5
311,300 Pfizer Inc. ................................ 14,942,400 1.6
53,400 Schering-Plough Corporation................. 2,696,700 0.3
------------ -----
53,175,716 5.7
------------------------------------------------------------------------------------------------------
</TABLE>
222
<PAGE> 224
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD STOCKS VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED STATES RADIO & TELEVISION 192,400 +AMFM Inc. ................................. $ 13,275,600 1.4%
(CONCLUDED)
------------------------------------------------------------------------------------------------------
RETAIL 111,600 +Safeway Inc. .............................. 5,035,950 0.5
146,450 Wal-Mart Stores, Inc. ...................... 8,439,181 0.9
------------ -----
13,475,131 1.4
------------------------------------------------------------------------------------------------------
RETAIL SPECIALTY 137,300 Lowe's Companies, Inc. ..................... 5,637,881 0.6
------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 222,600 Motorola, Inc. ............................. 6,469,313 0.7
------------------------------------------------------------------------------------------------------
SOFTWARE 102,000 +Amdocs Limited............................. 7,828,500 0.8
7,200 +Macromedia, Inc. .......................... 695,700 0.1
186,500 +Microsoft Corporation...................... 14,908,344 1.6
30,000 +RSA Security Inc. ......................... 2,085,000 0.2
29,500 +Wind River Systems, Inc. .................. 1,117,313 0.1
33,200 +Yahoo! Inc. ............................... 4,112,650 0.4
------------ -----
30,747,507 3.2
------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 143,700 +AT&T Wireless Group........................ 4,005,637 0.4
80,100 +Adelphia Business Solutions, Inc. ......... 1,852,312 0.2
40,300 +American Tower Corporation (Class A)....... 1,680,006 0.2
232,400 GTE Corporation............................. 14,466,900 1.5
24,300 +Level 3 Communications, Inc. .............. 2,136,881 0.3
190,000 +McLeodUSA Incorporated (Class A)........... 3,930,625 0.4
40,100 +Qwest Communications International Inc. ... 1,992,469 0.2
237,700 SBC Communications Inc. .................... 10,280,525 1.1
------------ -----
40,345,355 4.3
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 249,200 +Calpine Corporation........................ 16,384,900 1.7
& GAS
75,300 Constellation Energy Group.................. 2,451,956 0.3
52,500 Dynegy Inc. (Class A)....................... 3,586,406 0.4
------------ -----
22,423,262 2.4
------------------------------------------------------------------------------------------------------
WIRELESS 130,400 +Nextel Communications, Inc. (Class A)...... 7,978,850 0.9
COMMUNICATIONS--
DOMESTIC PAGING &
CELLULAR
34,500 Sprint Corp. (FON Group).................... 1,759,500 0.2
108,600 Sprint Corp. (PCS Group).................... 6,461,700 0.7
5,600 +Telaxis Communications Corporation......... 174,650 0.0
------------ -----
16,374,700 1.8
------------------------------------------------------------------------------------------------------
TOTAL STOCKS IN THE UNITED STATES 747,568,972 79.7
-----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKS (COST--$668,779,152) 880,082,511 93.9
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL $18,112,000 General Motors Acceptance Corp., 7.13%
PAPER** due 7/03/2000......................... 18,101,238 1.9
------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT Federal Home Loan Mortgage Corporation:
AGENCY
OBLIGATIONS**
10,000,000 6.37% due 7/05/2000..................... 9,991,153 1.1
20,000,000 6.41% due 7/11/2000..................... 19,960,828 2.1
------------ -----
29,951,981 3.2
------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$48,053,219)..................... 48,053,219 5.1
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$716,832,371).................... 928,135,730 99.0
UNREALIZED DEPRECIATION ON FORWARD
FOREIGN EXCHANGE CONTRACTS--NET***...... (7,918) 0.0
OTHER ASSETS LESS LIABILITIES........... 9,419,572 1.0
------------ -----
NET ASSETS.............................. $937,547,384 100.0%
============ =====
------------------------------------------------------------------------------------------------------------------------
</TABLE>
223
<PAGE> 225
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED) (IN US DOLLARS)
--------------------------------------------------------------------------------
* American Depositary Receipts (ADR).
** Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown reflect the discount rates paid at the
time of purchase by the Fund.
*** Forward foreign exchange contracts as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------
UNREALIZED
FOREIGN APPRECIATION
CURRENCY SOLD EXPIRATION DATE (DEPRECIATION)
-------------------------------------------------
<S> <C> <C>
A$ 20,300,000 July 2000 $ 25,172
E 8,400,000 August 2000 (22,302)
L 2,000,000 August 2000 90
Y 2,075,000,000 July 2000 (10,878)
-------------------------------------------------
TOTAL UNREALIZED DEPRECIATION ON
FORWARD
FOREIGN EXCHANGE CONTRACTS--NET
(US$ COMMITMENT--$42,921,399) $ (7,918)
========
-------------------------------------------------
</TABLE>
+ Non-income producing security.
E = euro
L = pound sterling
Y = yen
See Notes to Financial Statements.
224
<PAGE> 226
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$716,832,371)....... $928,135,730
Foreign cash................................................ 11,400
Cash........................................................ 65,794
Receivables:
Securities sold........................................... $13,630,458
Dividends................................................. 369,984
Forward foreign exchange contracts........................ 50,814
Capital shares sold....................................... 558 14,051,814
-----------
Prepaid expenses and other assets........................... 55,038
------------
Total assets................................................ 942,319,776
------------
----------------------------------------------------------------------------------------
LIABILITIES:
Unrealized depreciation on forward foreign exchange
contracts................................................. 7,918
Payables:
Securities purchased...................................... 2,992,574
Capital shares redeemed................................... 1,008,809
Investment adviser........................................ 310,437
Forward foreign exchange contracts........................ 307,600 4,619,420
-----------
Accrued expenses and other liabilities...................... 145,054
------------
Total liabilities........................................... 4,772,392
------------
----------------------------------------------------------------------------------------
NET ASSETS.................................................. $937,547,384
============
----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 2,313,963
Paid-in capital in excess of par............................ 601,929,157
Undistributed investment income--net........................ 7,709,297
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 114,365,505
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 211,229,462
------------
NET ASSETS.................................................. $937,547,384
============
----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $937,547,384 and 23,139,633
shares outstanding........................................ $ 40.52
============
----------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
225
<PAGE> 227
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $91,419 foreign withholding tax).......... $ 8,573,698
Interest and discount earned................................ 1,304,977
Other....................................................... 104,284
------------
Total income................................................ 9,982,959
------------
-----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 2,029,663
Accounting services......................................... 88,405
Custodian fees.............................................. 59,156
Printing and shareholder reports............................ 40,181
Professional fees........................................... 34,315
Directors' fees and expenses................................ 8,832
Pricing services............................................ 4,422
Transfer agent fees......................................... 2,468
Other....................................................... 6,224
------------
Total expenses.............................................. 2,273,666
------------
Investment income--net...................................... 7,709,293
------------
-----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain from:
Investments--net.......................................... 113,483,917
Foreign currency transactions--net........................ 1,049,850 114,533,767
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (89,154,630)
Foreign currency transactions--net........................ (73,588) (89,228,218)
------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 33,014,842
============
-----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
226
<PAGE> 228
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 7,709,293 $ 4,460,386
Realized gain on investments and foreign currency
transactions--net......................................... 114,533,767 121,021,290
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (89,228,218) 114,882,961
------------ -------------
Net increase in net assets resulting from operations........ 33,014,842 240,364,637
------------ -------------
-----------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (23,990) (12,176,029)
In excess of investment income--net:
Class A................................................... -- (546,276)
Realized gain on investments--net:
Class A................................................... (19,613,138) (181,024,012)
------------ -------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (19,637,128) (193,746,317)
------------ -------------
-----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets derived from capital
share transactions........................................ (34,143,441) 48,797,714
------------ -------------
-----------------------------------------------------------------------------------------------
NET ASSETS:
Total increase (decrease) in net assets..................... (20,765,727) 95,416,034
Beginning of period......................................... 958,313,111 862,897,077
------------ -------------
End of period*.............................................. $937,547,384 $ 958,313,111
============ =============
-----------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 7,709,297 $ 23,994
============ =============
-----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
227
<PAGE> 229
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--QUALITY EQUITY FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A++
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 39.93 $ 38.12 $ 38.42 $ 32.83 $ 32.76
-------- -------- -------- -------- --------
Investment income--net................................ .33 .19 .34 .41 .58
Realized and unrealized gain on investments and
foreign currency transactions--net.................. 1.10 10.46 4.80 6.94 4.44
-------- -------- -------- -------- --------
Total from investment operations...................... 1.43 10.65 5.14 7.35 5.02
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.............................. --+ (.56) (.35) (.22) (.66)
In excess of investment income--net................. -- (.02) -- -- --
Realized gain on investments--net................... (.84) (8.26) (5.09) (1.54) (4.29)
-------- -------- -------- -------- --------
Total dividends and distributions..................... (.84) (8.84) (5.44) (1.76) (4.95)
-------- -------- -------- -------- --------
Net asset value, end of period........................ $ 40.52 $ 39.93 $ 38.12 $ 38.42 $ 32.83
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................... 3.57%++ 31.43% 15.58% 23.70% 17.90%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................. .48%* .49% .49% .48% .49%
======== ======== ======== ======== ========
Investment income--net................................ 1.64%* .52% .95% 1.16% 1.89%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).............. $937,547 $958,313 $862,897 $875,064 $794,275
======== ======== ======== ======== ========
Portfolio turnover.................................... 43.49% 77.73% 100.29% 100.08% 88.30%
======== ======== ======== ======== ========
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
228
<PAGE> 230
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price. Short-term securities are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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 paid or 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
229
<PAGE> 231
--------------------------------------------------------------------------------
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 investment
income are due primarily to differing tax treatments for foreign currency
transactions.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner. MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $48,865 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $387,708,845 and $447,269,372, respectively.
Net realized gains (losses) for the six months ended June 30, 2000 and net
unrealized gains (losses) as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $113,483,917 $211,303,359
Forward foreign exchange
contracts.......................... 1,307,993 (7,918)
Foreign currency transactions....... (258,143) (65,979)
------------ ------------
Total............................... $114,533,767 $211,229,462
============ ============
---------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $211,303,359, of which $248,761,941 related to appreciated securities
and $37,458,582 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $716,832,371.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
---------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 83,805 $ 3,330,709
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 484,150 19,637,128
---------- ------------
Total issued.......................... 567,955 22,967,837
Shares redeemed....................... (1,426,624) (57,111,278)
---------- ------------
Net decrease.......................... (858,669) $(34,143,441)
========== ============
------------------------------------------------------------------
</TABLE>
---------------------------------------------------------
<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>
230
<PAGE> 232
--------------------------------------------------------------------------------
5. COMMITMENTS:
At June 30, 2000, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
had agreed to sell foreign currency with an approximate value of $13,879,000.
231
<PAGE> 233
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
For the six-month period ended June 30, 2000, Reserve Assets Fund's net
annualized yield for Class A Shares was 5.58%. The Fund's Class A Shares' 7-day
yield as of June 30, 2000 was 5.95%. The average portfolio maturity was 59 days
at June 30, 2000, compared to 55 days at December 31, 1999.
THE ENVIRONMENT
During the first quarter of 2000, economic growth remained strong, resulting
in two additional 25 basis point (0.25%) interest rate increases that were
implemented in February and March. At that time, the Treasury also announced
anticipated changes to the auction schedule. The Federal budget surplus has made
it necessary to reduce the number of securities sold by the Treasury, therefore
the changes will include reduced auctions, reduced auction sizes and a buy-back
program (the Treasury intends to buy back old off-the-run less liquid issues in
order to keep current issues liquid). The announcement caused unintended results
as the yield curve inverted dramatically as investors rushed to buy longer-term
issues.
At this time, it is unclear when this technical inversion will be unwound, as
it seems likely that further short-term interest rate increases could be
forthcoming as long as the current economic momentum continues. Although
Treasury yields moved sharply lower as a result of this reduction of supply,
other fixed-income asset classes did not participate to the fullest extent. In
addition, the business practices of Government-sponsored agencies were placed
under scrutiny by Congress, which pressured quality spreads across the yield
curve.
In early May, investors began to price in an additional 50 basis point move
and a greater probability of more increases later in the summer. New home sales
grew by an alarming 966,000 pace and the unemployment rate fell to 3.9%. Citing
the risk of accelerating inflation, the Federal Reserve Board tightened interest
rates by 50 basis points at its May meeting. As the Federal Reserve Board's bias
toward tightening continued, the US markets remained fixated on the next Federal
Open Market Committee meeting on June 28, 2000. At that meeting, the Federal
Reserve Board moved to keep monetary policy on hold, as was widely expected by
investors. However, the Federal Reserve Board's accompanying statement suggested
that while there were tentative signs of economic cooling, the underlying price
pressures were accelerating. Therefore, the Federal Reserve Board believed that
the risks remained tilted toward conditions that could foster higher inflation.
PORTFOLIO MATTERS
During the six-month period ended June 30, 2000, we maintained a conservative
approach because of the rising interest rate environment. We adopted a barbell
strategy incorporating one-month and two-month commercial paper with one-year
bank certificates of deposit. While domestic securities in the one-year area
were attractively priced, they were trading at a premium to foreign issues. We
also looked to replace maturing floating rate notes since we believe that they
will continue to provide protection for the Fund against rising interest rates.
The Fund's composition at the end of June and as of our last report to
shareholders is detailed below:
<TABLE>
<CAPTION>
------------------------------------------------------
6/30/00 12/31/99
------------------------------------------------------
<S> <C> <C>
Bank Notes....................... -- 10.0%
Certificates of Deposit.......... 1.2% 1.2
Certificates of
Deposit--Yankee................ 3.5 2.9
Commercial Paper................. 50.0 40.4
Corporate Notes.................. 29.1 33.4
Funding Agreements............... 4.9 4.8
Repurchase Agreements............ -- 1.0
US Government, Agency &
Instrumentality Obligations--
Non-Discount................... 10.7 5.6
Other Assets Less Liabilities.... 0.6 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/ Jacqueline Rogers
Jacqueline Rogers
Vice President and Portfolio Manager
July 26, 2000
--------------------------------------------------------
We are pleased to announce that Jacqueline Rogers is responsible for the
day-to-day management of Reserve Assets Fund of Merrill Lynch Variable Series
Funds, Inc. Ms. Rogers has been employed by Merrill Lynch Investment Managers,
L.P. since 1985 as Vice President.
--------------------------------------------------------
232
<PAGE> 234
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CERTIFICATES OF $ 250,000 SouthTrust Bank, N.A.+................ 6.86 % 12/19/2000 $ 249,902
DEPOSIT--1.2%
------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT (COST--$250,011) 249,902
------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF 200,000 Bayerische Landesbank Girozentrale,
DEPOSIT--YANKEE--3.5% NY.................................. 6.61 3/07/2001 199,268
250,000 Commerzbank AG, NY.................... 6.76 3/27/2001 249,299
250,000 Unibank A/S, NY....................... 6.81 4/17/2001 249,357
------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT--YANKEE (COST--$699,732) 697,924
------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--50.0% 250,000 Amsterdam Funding Corp. .............. 6.60 7/21/2000 249,175
454,000 Apreco, Inc. ......................... 6.59 7/27/2000 452,005
250,000 Bell South Capital Funding Corp. ..... 6.60 9/20/2000 246,249
436,000 CIT Group Holdings, Inc. (The)........ 6.60 7/25/2000 434,241
200,000 CSW Credit, Inc. ..................... 6.55 7/05/2000 199,927
300,000 Caterpillar Financial Services
Corp. .............................. 6.10 8/17/2000 297,547
500,000 Centric Capital Corp. ................ 6.65 7/24/2000 498,060
250,000 Centric Capital Corp. ................ 6.60 9/08/2000 246,800
500,000 Credit Suisse First Boston, Inc. ..... 6.65 12/15/2000 484,565
650,000 Den Danske Corp. ..................... 6.60 7/18/2000 648,213
250,000 Formosa Plastics Corporation, USA..... 6.63 9/07/2000 246,846
265,000 General Electric Capital Corp. ....... 6.60 7/18/2000 264,268
200,000 General Electric Capital Corp. ....... 6.60 9/01/2000 197,697
250,000 General Electric Capital Corp......... 6.221 10/04/2000 249,900
400,000 General Motors Acceptance Corp. ...... 6.65 7/12/2000 399,335
500,000 Goldman Sachs Group, Inc. ............ 6.61 9/11/2000 493,324
300,000 Kitty Hawk Funding Corp. ............. 6.63 7/17/2000 299,226
637,000 Kitty Hawk Funding Corp. ............. 6.62 7/18/2000 635,243
800,000 Monte Rosa Capital Corp............... 6.63 7/10/2000 798,969
1,000,000 New Center Asset Trust................ 6.60 7/17/2000 997,433
100,000 Prudential Funding Corp. ............. 6.60 7/12/2000 99,835
500,000 Salomon, Smith Barney Holdings,
Inc. ............................... 6.60 9/21/2000 492,407
224,000 UBS Finance (Delaware), Inc. ......... 6.96 7/03/2000 224,000
1,000,000 Variable Funding Capital Corp. ....... 6.61 9/07/2000 987,383
------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST--$10,144,600) 10,142,648
------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES--29.1% 240,000 AT&T Capital Corp..................... 7.50 11/15/2000 240,371
250,000 American Honda Finance Corp.+ ........ 6.641 8/01/2000 249,994
250,000 American Honda Finance Corp.+ ........ 6.693 11/07/2000 249,988
575,000 Associates Corp. of North America+.... 5.60 1/15/2001 570,508
200,000 Associates Corp. of North America..... 6.55 3/16/2001 199,858
250,000 Bank of America, N.A.................. 7.10 6/21/2001 249,208
300,000 Beneficial Corp. ..................... 5.95 7/20/2000 299,964
250,000 CIT Group Holdings, Inc. (The)+....... 6.80 9/15/2000 249,951
250,000 CIT Group Holdings, Inc. (The)+....... 6.605 4/24/2001 249,862
250,000 Chase Manhattan Corp.+................ 7.04 12/08/2000 250,332
500,000 Citigroup+............................ 6.605 6/06/2001 500,011
250,000 Deutshe Pfandbriefbank, London........ 7.00 7/10/2000 249,996
250,000 Finova Capital Corp. ................. 6.84 8/08/2000 248,082
150,000 Ford Motor Credit Company............. 6.85 8/15/2000 149,972
150,000 General Motors Acceptance Corp.+...... 6.253 7/20/2000 149,998
100,000 General Motors Acceptance Corp.+...... 6.99 12/01/2000 100,051
100,000 General Motors Acceptance Corp.+...... 6.858 2/27/2001 99,978
250,000 Goldman Sachs Group, Inc. ............ 6.55 12/22/2000 250,000
100,000 Goldman Sachs Group, Inc.+............ 6.40 7/13/2001 99,972
500,000 Household Finance Corp.+.............. 6.715 7/20/2001 499,760
</TABLE>
233
<PAGE> 235
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
AMOUNT ISSUE RATE* DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORPORATE NOTES (CONCLUDED) $ 500,000 Morgan Stanley, Dean Witter & Co.+.... 6.43 % 1/22/2001 $ 500,272
250,000 New Court Credit Group Inc.+.......... 6.971 12/01/2000 250,620
------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES (COST--$5,913,573) 5,908,748
------------------------------------------------------------------------------------------------------------------------
FUNDING AGREEMENTS--4.9% 1,000,000 Jackson National Life Insurance
Co.+................................ 6.691 5/01/2001 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 99,179
OBLIGATIONS--
NON-DISCOUNT--10.7% 200,000 Federal National Mortgage
Association......................... 5.07 12/14/2000 198,517
75,000 Federal National Mortgage
Association......................... 5.21 1/26/2001 74,342
500,000 Federal National Mortgage
Association+........................ 6.144 9/17/2001 499,538
250,000 Federal National Mortgage
Association+........................ 6.354 4/19/2002 250,000
250,000 Student Loan Marketing Association+... 6.494 9/29/2000 249,989
500,000 Student Loan Marketing Association+... 6.364 8/23/2001 499,782
100,000 US Treasury Notes..................... 4.625 11/30/2000 99,281
100,000 US Treasury Notes..................... 4.625 12/31/2000 99,094
100,000 US Treasury Notes..................... 4.50 1/31/2001 98,875
------------------------------------------------------------------------------------------------------------------------
TOTAL US GOVERNMENT, AGENCY & INSTRUMENTALITY
OBLIGATIONS--NON-DISCOUNT (COST--$2,174,309) 2,168,597
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS
(COST--$20,182,225)--99.4%............ 20,167,819
OTHER ASSETS LESS LIABILITIES--0.6%... 122,866
-----------
NET ASSETS--100.0%.................... $20,290,685
===========
------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper and certain US Government, Agency & Instrumentality
Obligations are traded on a discount basis; the interest rates shown reflect the
discount rates paid at the time of purchase by the Fund. Other securities bear
interest at the rates shown, payable at fixed dates or upon maturity. The
interest rates on variable rate securities are adjusted periodically based upon
appropriate indexes; the interest rates shown are the rates in effect at June
30, 2000.
+ Variable rate notes.
See Notes to Financial Statements.
234
<PAGE> 236
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$20,182,225*)....... $20,167,819
Cash........................................................ 390
Receivables:
Interest.................................................. $120,130
Capital shares sold....................................... 25,302 145,432
--------
Prepaid expenses and other assets........................... 1,606
-----------
Total assets................................................ 20,315,247
-----------
-------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Capital shares redeemed................................... 12,809
Investment adviser........................................ 7,734 20,543
--------
Accrued expenses and other liabilities...................... 4,019
-----------
Total liabilities........................................... 24,562
-----------
-------------------------------------------------------------------------------------
NET ASSETS.................................................. $20,290,685
===========
-------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 500,000,000
shares authorized+........................................ $ 2,030,509
Paid-in capital in excess of par............................ 18,274,582
Unrealized depreciation on investments--net................. (14,406)
-----------
NET ASSETS.................................................. $20,290,685
===========
-------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $20,290,685 and 20,305,091
shares outstanding........................................ $ 1.00
===========
-------------------------------------------------------------------------------------
</TABLE>
* Cost for Federal income tax purposes. At June 30, 2000, net unrealized
depreciation for Federal income tax purposes amounted to $14,406, of which
$470 related to appreciated securities and $14,876 related to depreciated
securities.
+ The Fund is also authorized to issue 500,000,000 Class B Shares.
See Notes to Financial Statements.
235
<PAGE> 237
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest and discount earned................................ $636,723
---------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $51,385
Custodian fees.............................................. 4,983
Professional fees........................................... 4,288
Accounting services......................................... 3,426
Transfer agent fees......................................... 2,452
Printing and shareholder reports............................ 898
Directors' fees and expenses................................ 210
Pricing services............................................ 163
Other....................................................... 535
-------
Total expenses.............................................. 68,340
--------
Investment income--net...................................... 568,383
--------
---------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET:
Realized gain on investments--net........................... 88
Change in unrealized depreciation on investments--net....... 661
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $569,132
========
---------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
236
<PAGE> 238
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 568,383 $ 972,401
Realized gain on investments--net........................... 88 1,061
Change in unrealized appreciation/depreciation on
investments--net.......................................... 661 (15,102)
----------- ------------
Net increase in net assets resulting from operations........ 569,132 958,360
----------- ------------
--------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (568,383) (972,401)
Realized gain on investments--net:
Class A................................................... (88) (1,061)
----------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (568,471) (973,462)
----------- ------------
--------------------------------------------------------------------------------------------------
CLASS A CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares............................ 5,101,181 9,779,215
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions............... 568,308 973,472
----------- ------------
5,669,489 10,752,687
Cost of shares redeemed..................................... (6,312,313) (11,142,863)
----------- ------------
Net decrease in net assets derived from capital share
transactions.............................................. (642,824) (390,176)
----------- ------------
--------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (642,163) (405,278)
Beginning of period......................................... 20,932,848 21,338,126
----------- ------------
End of period............................................... $20,290,685 $ 20,932,848
=========== ============
--------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
237
<PAGE> 239
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--RESERVE ASSETS 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 SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ----------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Investment income--net..................................... .0275 .0464 .0496 .0506 .0501
Realized and unrealized gain (loss) on investments--net.... --+ (.0006) .0003 .0001 (.0005)
------- ------- ------- ------- -------
Total from investment operations........................... .0275 .0458 .0499 .0507 .0496
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net................................... (.0275) (.0464) (.0496) (.0506) (.0501)
Realized gain on investments--net........................ --+ (.0001) (.0003) (.0001) (.0001)
------- ------- ------- ------- -------
Total dividends and distributions.......................... (.0275) (.0465) (.0499) (.0507) (.0502)
------- ------- ------- ------- -------
Net asset value, end of period............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......................... 5.58%* 4.76% 5.10% 5.19% 5.13%
======= ======= ======= ======= =======
---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................... .66%* .65% .68% .62% .61%
======= ======= ======= ======= =======
Investment income and realized gain on investments--net.... 5.52%* 4.66% 4.96% 5.06% 4.96%
======= ======= ======= ======= =======
---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................... $20,291 $20,933 $21,338 $21,102 $22,885
======= ======= ======= ======= =======
---------------------------------------------------------------------------------------------------------------------
</TABLE>
+Amount is less than $.0001 per share.
* Annualized.
**Total investment returns exclude insurance-related fees and expenses.
See Notes to Financial Statements.
238
<PAGE> 240
--------------------------------------------------------------------------------
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 as of June 30, 2000 was comprised of 19
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
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The following
is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities with remaining maturities
of greater than sixty days, 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
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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 bil-
239
<PAGE> 241
--------------------------------------------------------------------------------
lion; .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.
MLIM 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 MLIM 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, 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.
240
<PAGE> 242
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Effective May 1, 2000, Special Value Focus Fund was renamed Small Cap Value
Focus Fund. The Fund's investment objective remains the same: to seek long-term
growth of capital through investing primarily in common stock of small companies
and emerging growth companies that we believe have special investment value.
THE ENVIRONMENT
Economic slowing has finally arrived in the United States. As a result,
significant increases in inflation and interest rates appear less likely, which
usually is good news for financial assets. On the other hand, profit growth is
likely to decelerate from unsustainably high levels.
Investor sentiment changed significantly during the first half of 2000. In
general, concerns centered around economic growth being too strong. A recent
inflection may indicate healthy, but slower economic and profit growth in the
second half of the year. Following potential uncertainty during the adjustment
period, the sustainability of the economic expansion could buoy investor
expectations.
During the first half of the year, equity investors switched gears from an
excessive focus on momentum, which was prevalent during most of 1999. This
transition to a more balanced focus on both valuation and earnings growth, which
began in March, can provide a healthier investment backdrop. However, this
change has caused deterioration in many extremely highly valued securities with
speculative fundamentals and improvement in previously neglected, solidly
performing companies.
In the coming months, we believe investors are likely to focus on continuing
cyclical economic developments as well as the presidential election campaign.
Cyclical concerns remain increasing labor costs as well as volatile, but rising,
commodity prices. Federal budget policy, social security funding options and
trade policy are likely to shape investor interest in the outcome of the
election. Generally, financial markets have tended to do better under divided
governments, preferring legislative gridlock. In part, US markets historically
have done well as a result of fiscal policy restraint and could react poorly to
any significant reversal of that trend.
Despite near-term uncertainties surrounding economic slowdown, earnings growth
and valuation levels, long-term forces supporting US economic and financial
market leadership seem to remain in place. Chief among these are continued heavy
investments in technology, telecommunications and other efficiency-enhancing
projects, thus potentially enabling productivity-led growth.
PORTFOLIO MATTERS
For the six-month period ended June 30, 2000, Small Cap Value Focus Fund
significantly outperformed the unmanaged Russell 2000 Index. Total returns for
the Fund's Class A and Class B Shares were +11.07% and +10.98%, respectively,
compared to the total return of +3.04% for the Russell 2000 Index.
The first half of the year 2000 was a very volatile period for the equity
markets and small cap stocks. Strength in small cap growth stocks and technology
and health-care issues carried over into 2000 from late 1999, driving the major
stock market indexes to record highs in the middle of the first quarter.
However, late in March, the prominent growth stocks faltered while many
previously underperforming value stocks staged a sharp recovery. A strong
economic backdrop and an exceptionally large valuation gap between growth and
value kept the value segment in favor for a two-month period. However, by late
May concern began to build over the impact of rising interest rates and the
determination of the Federal Reserve Board to slow economic growth.
Consequently, in the last five weeks of the first half of the year, "old
economy" value stocks lost ground to the "new economy" growth stocks, which
finished the period with a strong performance run. Small cap stocks overall were
the best-performing segment of the market in the first quarter of the year, and
managed to hold onto most of their lead over large cap stocks despite a modestly
greater decline in the second quarter compared to large caps.
Only four of 11 Russell 2000 economic sectors posted positive returns in the
first half of 2000, though those four accounted for about half of the Russell
2000 Index's total weight by market capitalization. Energy and health-care
stocks produced strong double-digit returns, followed by the producer durables
and technology sectors. The consumer discretionary and utility sectors provided
the weakest results for the Russell 2000 Index, with negative returns of -17%
and -10%, respectively. Small Cap Value Focus Fund benefited modestly from its
sector weightings, and had a somewhat more balanced contribution across economic
sectors; the Fund provided positive returns in eight of 11
241
<PAGE> 243
--------------------------------------------------------------------------------
economic sectors during the period. As has been typical in previous periods,
most of the Fund's performance in excess of the Russell 2000 Index was generated
from specific stock selection, as individual stocks sharply outperformed their
respective sectors in the benchmark index.
Individual stocks that most benefited the Fund's investment results included
one broadline food products distribution company and one medical device company.
The stock price of U.S. Foodservice, a large broadline foodservice distributor,
climbed sharply after the Fund's initial purchase in February 2000 on the
announcement of an agreement for the company to be acquired by the Dutch firm
Royal Ahold. The stock price of Novoste Corp., a manufacturer of radiation
treatment catheters for cardiovascular therapy, rose dramatically after the
company published favorable clinical trial research findings for an important
new product under development. Fund performance in the period was hindered by
weakness in two significant holdings, Danka Business Systems PLC and Midway
Games, Inc. Danka Business Systems PLC, a distributor of office copiers and
business equipment, suffered a decline in its stock price in response to
negative industry conditions that included a difficult transition to the next
generation of technology as well as severe price competition. We view these
conditions as temporary and believe that Danka Business System's stock is overly
depressed at the current level. The stock price of Midway Games, a developer and
distributor of video games, dropped sharply after disappointing earnings
resulting from the transition to next generation game platforms were announced.
Although the platform cycle is likely to extend into the 2001 calendar year,
anticipation of the recovery of sales in the video game industry from the
cyclical low point may drive investor interest in Midway Games within the next
12 months. Consequently, we have retained our position in Midway Games and added
to the position on the price decline.
The investment philosophy of Small Cap Value Fund is to invest in the stocks
of small companies that are currently out of favor with investors as a result of
a temporary interruption in an above-average long-term growth trend. This
approach led the Fund to be overweighted in technology stocks in early 1999.
Exceptionally positive performance in the Fund's technology holdings benefited
Fund shareholders significantly over the following 12 months. However, since
many of the Fund's technology holdings rose to levels where their valuation
statistics exceeded prior highs by a significant amount, we sold a number of
positions and lowered its overall technology sector exposure to an underweighted
level compared to the Russell 2000 Index in early 2000. Consumer discretionary,
consumer staples and financial services stocks in the Russell 2000 Index
performed poorly in late 1999 and early 2000. Consequently, we took advantage of
the depressed stock prices of several companies to increase the Fund's weight in
those out-of-favor sectors. At June 30, 2000, the Fund was most heavily weighted
in the consumer discretionary sector, followed by the technology sector and then
by the financial services sector. By contrast, the Russell 2000 Index was most
heavily weighted in technology, followed by financial services and then by
health care at June 30, 2000.
IN CONCLUSION
Despite the turbulent market environment during the first half of 2000, Small
Cap Value Focus Fund produced double-digit positive returns for shareholders.
This strong performance follows the Fund's excellent returns in 1999, achieved
during what seemed to be a difficult environment for value-oriented small cap
funds. Combined, we believe the two periods have validated the Fund's strategy
of searching for value in out-of-favor small cap stocks with a bottom up,
research intensive investment process. We thank you for your continued
investment in Small Cap Value Focus Fund of Merrill Lynch Variable Series Funds,
Inc., and we look forward to reviewing our outlook and strategy with you again
in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Daniel V. Szemis
Daniel V. Szemis
Senior Vice President and Co-Portfolio Manager
/s/ R. Elise Baum
R. Elise Baum
Senior Vice President and Co-Portfolio Manager
July 26, 2000
242
<PAGE> 244
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +24.59%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +14.73
--------------------------------------------------------------------------------
Ten Years Ended 6/30/00 +12.54
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS B SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 +24.46%
--------------------------------------------------------------------------------
Inception (10/23/97) through 6/30/00 + 8.16
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
RECENT PERFORMANCE RESULTS*
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares +11.07% +24.59%
------------------------------------------------------------------------------------------
Class B Shares +10.98 +24.46
------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
243
<PAGE> 245
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
SECTOR* HELD COMMON STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO & TRANSPORTATION
------------------------------------------------------------------------------------------------------------------------
188,000 CNF Transportation Inc. ............................ $ 4,277,000 0.7%
413,900 Circle International Group, Inc. ................... 10,373,369 1.7
487,900 +Fritz Companies, Inc. ............................. 5,000,975 0.8
89,100 +Gentex Corporation................................. 2,227,500 0.4
502,500 +Keystone Automotive Industries, Inc. .............. 3,486,094 0.6
135,400 Meritor Automotive, Inc. ........................... 1,489,400 0.3
765,000 +Miller Industries, Inc. ........................... 1,386,563 0.2
90,500 +Tower Automotive, Inc. ............................ 1,131,250 0.2
------------ -----
29,372,151 4.9
------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY
------------------------------------------------------------------------------------------------------------------------
1,299,200 +APAC Customer Services Inc. ....................... 14,372,400 2.4
271,400 +Ambassadors International, Inc. ................... 4,206,700 0.7
116,000 +BI Incorporated.................................... 623,500 0.1
265,000 +Boron, LePore & Associates, Inc. .................. 2,418,125 0.4
917,100 +Buffets, Inc. ..................................... 11,635,706 2.0
138,750 +The Cheesecake Factory Incorporated................ 3,798,281 0.6
244,200 Dover Downs Entertainment, Inc. .................... 3,418,800 0.6
103,000 Ethan Allen Interiors Inc. ......................... 2,472,000 0.4
67,900 G & K Services, Inc. (Class A)...................... 1,697,500 0.3
876,550 +HA-LO Industries, Inc. ............................ 4,930,594 0.8
34,000 Harte-Hanks, Inc. .................................. 850,000 0.1
1,005,100 Heilig-Meyers Company............................... 1,193,556 0.2
208,800 IKON Office Solutions, Inc. ........................ 809,100 0.1
55,680 +Interlogix Inc. ................................... 744,720 0.1
83,300 +Jack in the Box Inc. .............................. 2,051,263 0.4
107,000 +Linens N Things Co. ............................... 2,902,375 0.5
388,600 +The Men's Warehouse, Inc. ......................... 8,646,350 1.5
703,200 +Metromedia International Group, Inc. .............. 3,340,200 0.6
449,367 +Midway Games Inc. ................................. 3,623,021 0.6
139,000 +Mohawk Industries, Inc. ........................... 3,023,250 0.5
554,000 +PETsMART, Inc. .................................... 1,835,125 0.3
677,200 +Paxson Communications Corporation.................. 5,417,600 0.9
497,900 Pier 1 Imports, Inc. ............................... 4,854,525 0.8
20,800 +Rainforest Cafe, Inc. ............................. 61,750 0.0
328,600 +SITEL Corporation.................................. 1,622,463 0.3
210,800 Shaw Industries, Inc. .............................. 2,635,000 0.4
136,000 +Sinclair Broadcast Group, Inc. (Class A)........... 1,487,500 0.3
84,300 +Snyder Communications, Inc. ....................... 2,002,125 0.3
129,200 +Stein Mart, Inc. .................................. 1,283,925 0.2
249,500 Strayer Education, Inc. ............................ 5,941,219 1.0
334,900 +THQ Inc. .......................................... 4,018,800 0.7
347,000 +Tech Data Corporation.............................. 15,094,500 2.5
456,800 +TeleSpectrum Worldwide Inc. ....................... 2,069,875 0.3
549,000 +Veterinary Centers of America, Inc. ............... 7,514,438 1.3
1,045,400 +WMS Industries Inc. ............................... 16,138,363 2.7
68,800 +West TeleServices Corporation...................... 1,741,500 0.3
------------ -----
150,476,149 25.2
------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES
------------------------------------------------------------------------------------------------------------------------
124,000 Dean Foods Company.................................. 3,929,250 0.7
91,600 Longs Drug Stores Corporation....................... 1,992,300 0.3
182,000 +Suiza Foods Corporation............................ 8,895,250 1.5
------------ -----
14,816,800 2.5
------------------------------------------------------------------------------------------------------------------------
ENERGY
------------------------------------------------------------------------------------------------------------------------
57,500 +Barrett Resources Corporation...................... 1,750,156 0.3
309,100 +Basin Exploration, Inc. ........................... 5,505,844 0.9
95,700 Diamond Offshore Drilling, Inc. .................... 3,361,462 0.6
65,800 +Evergreen Resources, Inc. ......................... 1,936,987 0.3
</TABLE>
244
<PAGE> 246
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000(CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
SECTOR* HELD COMMON STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ENERGY (CONCLUDED)
------------------------------------------------------------------------------------------------------------------------
150,700 +Louis Dreyfus Natural Gas Corp. ................... $ 4,718,794 0.8%
73,600 +Nuevo Energy Company............................... 1,389,200 0.2
50,000 +Plains Resources Inc. ............................. 800,000 0.1
249,900 +Tom Brown, Inc. ................................... 5,763,319 1.0
------------ -----
25,225,762 4.2
------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES
------------------------------------------------------------------------------------------------------------------------
45,750 American National Insurance Company................. 2,333,250 0.4
554,000 Banknorth Group, Inc. .............................. 8,448,500 1.4
658,400 +Billing Concepts Corp. ............................ 2,839,350 0.5
196,200 Brandywine Reality Trust............................ 3,752,325 0.6
105,800 Camden Property Trust............................... 3,107,875 0.5
380,000 Capitol Federal Financial........................... 4,203,750 0.7
478,136 Charter One Financial, Inc. ........................ 10,997,128 1.8
53,025 Commerce Bancorp, Inc. ............................. 2,439,150 0.4
122,100 FelCor Lodging Trust Inc. .......................... 2,258,850 0.4
77,600 First Industrial Reality Trust, Inc. ............... 2,289,200 0.4
166,000 Frontier Insurance Group, Inc. ..................... 124,500 0.0
95,800 +Investment Technology Group, Inc. ................. 4,077,487 0.7
66,800 Kimco Realty Corporation............................ 2,738,800 0.5
723,600 Meditrust Companies................................. 2,713,500 0.5
203,800 National Data Corporation........................... 4,687,400 0.8
187,100 PXRE Group Limited.................................. 2,525,850 0.4
143,000 +Pegasystems Inc. .................................. 732,875 0.1
221,400 +Primark Corporation................................ 8,247,150 1.4
168,000 +The Profit Recovery Group International, Inc. ..... 2,782,500 0.5
153,000 Roslyn Bancorp, Inc. ............................... 2,543,625 0.4
251,300 Scottish Annuity & Life Holdings, Ltd. ............. 2,104,637 0.4
598,100 +United Rentals (North America), Inc. .............. 10,242,463 1.7
------------ -----
86,190,165 14.5
------------------------------------------------------------------------------------------------------------------------
HEALTHCARE
------------------------------------------------------------------------------------------------------------------------
909,400 +Caremark Rx, Inc. ................................. 6,195,287 1.0
110,000 +Closure Medical Corporation........................ 2,502,500 0.4
276,000 +Covance Inc. ...................................... 2,432,250 0.4
392,600 +EndoSonics Corporation............................. 2,208,375 0.4
64,000 +Isis Pharmaceuticals............................... 940,000 0.2
147,600 Mentor Corporation.................................. 4,003,650 0.7
291,000 +Nabi............................................... 2,118,844 0.4
106,700 +Novoste Corporation................................ 6,508,700 1.1
635,200 +Orthodontic Centers of America, Inc. .............. 14,371,400 2.4
77,500 +Pharmaceutical Product Development, Inc. .......... 1,622,656 0.3
96,500 +Quintiles Transnational Corp. ..................... 1,357,031 0.2
175,000 +Scios Inc. ........................................ 984,375 0.2
85,500 +Sierra Health Services, Inc. ...................... 272,531 0.0
79,000 +Vical Incorporated................................. 1,510,875 0.2
------------ -----
47,028,474 7.9
------------------------------------------------------------------------------------------------------------------------
MATERIALS & PROCESSING
------------------------------------------------------------------------------------------------------------------------
278,800 A.M. Castle & Company............................... 2,317,525 0.4
523,200 AK Steel Holding Corporation........................ 4,185,600 0.7
133,500 +Airgas, Inc. ...................................... 759,281 0.1
52,300 Boise Cascade Corporation........................... 1,353,262 0.2
59,700 Carpenter Technology Corporation.................... 1,261,162 0.2
238,600 Commonwealth Industries, Inc. ...................... 1,371,950 0.2
179,800 Corn Products International, Inc. .................. 4,764,700 0.8
274,100 Gibraltar Steel Corporation......................... 3,837,400 0.6
146,100 +Insituform Technologies, Inc. (Class A)............ 3,990,356 0.7
509,000 Intermet Corporation................................ 3,499,375 0.6
58,100 Kaydon Corp. ....................................... 1,220,100 0.2
</TABLE>
245
<PAGE> 247
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000(CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
SECTOR* HELD COMMON STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MATERIALS & PROCESSING
(CONCLUDED)
------------------------------------------------------------------------------------------------------------------------
124,800 +Novamerican Steel, Inc. ........................... $ 1,107,600 0.2%
306,100 +Paxar Corporation.................................. 3,654,069 0.6
224,000 Quanex Corporation.................................. 3,332,000 0.6
252,400 Rock-Tenn Company (Class A)......................... 2,161,175 0.4
848,576 Ryerson Tull, Inc. ................................. 8,803,976 1.5
483,800 +Shiloh Industries, Inc. ........................... 4,626,338 0.8
114,500 +Unifi, Inc. ....................................... 1,416,938 0.2
1,184,300 Watsco, Inc. ....................................... 14,803,750 2.5
310,400 +Wolverine Tube, Inc. .............................. 5,276,800 0.9
------------ -----
73,743,357 12.4
------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS
------------------------------------------------------------------------------------------------------------------------
3,500 +Exfo Electro-Optical Engineering Inc. ............. 153,562 0.0
7,500 +StorageNetworks, Inc. ............................. 676,875 0.1
------------ -----
830,437 0.1
------------------------------------------------------------------------------------------------------------------------
PRODUCER DURABLES
------------------------------------------------------------------------------------------------------------------------
53,000 +ANTEC Corporation.................................. 2,199,500 0.3
321,650 Applied Industrial Technologies, Inc. .............. 5,267,019 0.9
251,500 +BE Aerospace, Inc. ................................ 1,666,187 0.3
400,600 +Brown & Sharpe Manufacturing Company (Class A)..... 1,126,687 0.2
233,800 +DONCASTERS PLC (ADR)**............................. 2,542,575 0.4
1,134,300 +Danka Business Systems PLC (ADR)**................. 4,289,072 0.7
329,300 +ESCO Electronics Corporation....................... 5,598,100 0.9
251,700 Oakwood Homes Corporation........................... 456,206 0.1
101,000 The Ryland Group, Inc. ............................. 2,234,625 0.4
84,300 +Toll Brothers, Inc. ............................... 1,728,150 0.3
104,000 +Triumph Group, Inc. ............................... 2,899,000 0.5
------------ -----
30,007,121 5.0
------------------------------------------------------------------------------------------------------------------------
SERVICES
------------------------------------------------------------------------------------------------------------------------
274,500 +ACNielsen Corporation.............................. 6,039,000 1.0
------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY
------------------------------------------------------------------------------------------------------------------------
25,671 +ADC Telecommunications, Inc. ...................... 2,151,551 0.4
356,500 +Anixter International Inc. ........................ 9,447,250 1.6
68,200 +C.P. Clare Corporation............................. 477,400 0.1
128,300 +Cognos, Inc. ...................................... 5,292,375 0.9
258,000 +Electronics for Imaging, Inc. ..................... 6,514,500 1.1
301,500 +FileNET Corporation................................ 5,521,219 0.9
85,200 +II-VI Incorporated................................. 4,121,550 0.7
238,044 +InterVoice, Inc. .................................. 1,562,164 0.3
239,600 +JDA Software Group, Inc. .......................... 4,582,350 0.8
313,800 +Mentor Graphics Corporation........................ 6,197,550 1.0
580,000 +NetManage, Inc. ................................... 2,591,875 0.4
447,702 +PeopleSoft, Inc. .................................. 7,443,046 1.2
304,000 +Planar Systems Inc. ............................... 3,876,000 0.7
470,700 +Sensormatic Electronics Corporation................ 7,442,944 1.2
922,251 +Structural Dynamics Research Corporation........... 13,891,406 2.3
287,400 +Sybase, Inc. ...................................... 6,610,200 1.1
425,700 +Sykes Enterprises, Incorporated.................... 5,480,888 0.9
195,300 +Transaction Systems Architects, Inc. (Class A)..... 3,332,306 0.6
------------ -----
96,536,574 16.2
------------------------------------------------------------------------------------------------------------------------
UTILITIES
------------------------------------------------------------------------------------------------------------------------
82,500 +Boston Communications Group, Inc. ................. 1,139,531 0.2
------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST--$564,448,446) 561,405,521 94.1
------------------------------------------------------------------------------------------------------------------------
</TABLE>
246
<PAGE> 248
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE PERCENT OF
AMOUNT SHORT-TERM SECURITIES VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER*** $22,451,000 General Motors Acceptance Corp., 7.13% due
7/03/2000......................................... $ 22,437,660 3.8%
------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 5,000,000 Federal Home Loan Mortgage Corporation, 6.38% due
OBLIGATIONS*** 7/05/2000......................................... 4,995,570 0.8
------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES (COST--$27,433,230) 27,433,230 4.6
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$591,881,676).............. 588,838,751 98.7
OTHER ASSETS LESS LIABILITIES....................... 7,465,425 1.3
------------ -----
NET ASSETS.......................................... $596,304,176 100.0%
============ =====
------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Holdings are classified into the economic sectors found in the Russell 2000
Index.
** 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 rate paid at the
time of purchase by the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
247
<PAGE> 249
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$591,881,676)....... $588,838,751
Cash........................................................ 278,543
Receivables:
Securities sold........................................... $8,905,783
Capital shares sold....................................... 389,248
Dividends................................................. 156,354 9,451,385
----------
Prepaid expenses and other assets........................... 32,936
------------
Total assets................................................ 598,601,615
------------
---------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,707,742
Investment adviser........................................ 334,693
Capital shares redeemed................................... 168,632
Distributor............................................... 837 2,211,904
----------
Accrued expenses and other liabilities...................... 85,535
------------
Total liabilities........................................... 2,297,439
------------
---------------------------------------------------------------------------------------
NET ASSETS.................................................. $596,304,176
============
---------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized......................................... $ 2,390,701
Class B Shares of Common Stock, $.10 par value, 100,000,000
shares authorized......................................... 28,970
Paid-in capital in excess of par............................ 521,243,299
Undistributed investment income--net........................ 380,958
Undistributed realized capital gains on investments--net.... 75,303,173
Unrealized depreciation on investments--net................. (3,042,925)
------------
NET ASSETS.................................................. $596,304,176
============
---------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $589,171,123 and 23,907,007
shares outstanding........................................ $ 24.64
============
Class B--Based on net assets of $7,133,053 and 289,697
shares outstanding........................................ $ 24.62
============
---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
248
<PAGE> 250
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................... $ 1,825,998
Interest and discount earned................................ 896,534
------------
Total income................................................ 2,722,532
------------
---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $2,088,332
Accounting services......................................... 51,861
Custodian fees.............................................. 36,024
Printing and shareholder reports............................ 22,935
Professional fees........................................... 19,589
Directors' fees and expenses................................ 4,740
Registration fees........................................... 4,417
Distribution fees--Class B.................................. 4,388
Transfer agent fees......................................... 2,391
Pricing services............................................ 1,078
Other....................................................... 3,342
----------
Total expenses.............................................. 2,239,097
------------
Investment income--net...................................... 483,435
------------
---------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET:
Realized gain on investments--net........................... 76,043,142
Change in unrealized appreciation/depreciation on
investments--net.......................................... (17,567,405)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 58,959,172
============
---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
249
<PAGE> 251
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 483,435 $ 1,411,984
Realized gain on investments--net........................... 76,043,142 41,465,516
Change in unrealized appreciation/depreciation on
investments--net.......................................... (17,567,405) 93,096,217
------------ ------------
Net increase in net assets resulting from operations........ 58,959,172 135,973,717
------------ ------------
------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... -- (2,027,342)
Class B................................................... -- (10,062)
In excess of investment income--net:
Class A................................................... -- (101,971)
Class B................................................... -- (506)
Realized gain on investments--net:
Class A................................................... (27,900,002) (57,708,553)
Class B................................................... (294,280) (239,993)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (28,194,282) (60,088,427)
------------ ------------
------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 32,350,451 9,518,990
------------ ------------
------------------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 63,115,341 85,404,280
Beginning of period......................................... 533,188,835 447,784,555
------------ ------------
End of period*.............................................. $596,304,176 $533,188,835
============ ============
------------------------------------------------------------------------------------------------
* Undistributed (accumulated distributions in excess of)
investment income--net.................................... $ 380,958 $ (102,477)
============ ============
------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
250
<PAGE> 252
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP VALUE FOCUS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A+
BEEN DERIVED FROM INFORMATION PROVIDED IN THE -------------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 23.35 $ 19.95 $ 27.75 $ 26.22 $ 27.98
-------- -------- -------- -------- --------
Investment income--net...................... .02 .06 .03 .09 .13
Realized and unrealized gain (loss) on
investments--net.......................... 2.51 6.03 (1.41) 2.80 1.84
-------- -------- -------- -------- --------
Total from investment operations............ 2.53 6.09 (1.38) 2.89 1.97
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.................... -- (.09) (.09) (.08) (.14)
In excess of investment income--net....... -- (.01) -- -- --
Realized gain on investments--net......... (1.24) (2.59) (6.33) (1.28) (3.59)
-------- -------- -------- -------- --------
Total dividends and distributions........... (1.24) (2.69) (6.42) (1.36) (3.73)
-------- -------- -------- -------- --------
Net asset value, end of period.............. $ 24.64 $ 23.35 $ 19.95 $ 27.75 $ 26.22
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......... 11.07%++ 34.15% (6.50%) 11.72% 8.11%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... .80%* .81% .81% .80% .81%
======== ======== ======== ======== ========
Investment income--net...................... .17%* .32% .13% .32% .50%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $589,171 $528,571 $446,510 $481,614 $453,029
======== ======== ======== ======== ========
Portfolio turnover.......................... 43.19% 89.90% 56.29% 147.06% 80.84%
======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
**Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
251
<PAGE> 253
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP 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
FOR THE SIX DECEMBER 31, FOR THE PERIOD
MONTHS ENDED --------------------- OCT. 23, 1997+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000 1999 1998 TO DEC. 31, 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 23.35 $ 19.94 $ 27.74 $ 31.23
------- ------- ------- --------
Investment income (loss)--net........................ --+++ .03 --+++ (.01)
Realized and unrealized gain (loss) on
investments--net................................... 2.51 6.03 (1.39) (3.48)
------- ------- ------- --------
Total from investment operations..................... 2.51 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.................. (1.24) (2.59) (6.33) --
------- ------- ------- --------
Total dividends and distributions.................... (1.24) (2.65) (6.41) --
------- ------- ------- --------
Net asset value, end of period....................... $ 24.62 $ 23.35 $ 19.94 $ 27.74
======= ======= ======= ========
------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 10.98%++ 33.99% (6.52%) (11.18%)++
======= ======= ======= ========
------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses............................................. .95%* .96% .97% .96%*
======= ======= ======= ========
Investment income (loss)--net........................ .03%* .17% .02% (.24%)*
======= ======= ======= ========
------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $ 7,133 $ 4,618 $ 1,275 $ 248
======= ======= ======= ========
Portfolio turnover................................... 43.19% 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.
252
<PAGE> 254
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--SMALL CAP 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 as of June 30, 2000 was comprised of 19
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. Small Cap Value Focus Fund
(the "Fund") (formerly Special Value Focus Fund) is classified as "diversified,"
as defined in the Investment Company Act of 1940. The Fund's financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America, which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal recurring nature. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price. Short-term securities are valued at
amortized cost, which approximates market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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 are due primarily
to differing tax treatments for post-October losses.
253
<PAGE> 255
--------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM 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 FAM Distributors, Inc. ("FAMD" or the
"Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $51,596 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 MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $231,436,786 and $229,066,450, respectively.
Net realized gains for the six months ended June 30, 2000 and net unrealized
losses as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Realized Unrealized
Gains Losses
------------------------------------------------------------------
<S> <C> <C>
Long-term investments.................. $76,043,142 $(3,042,925)
----------- -----------
Total.................................. $76,043,142 $(3,042,925)
=========== ===========
------------------------------------------------------------------
</TABLE>
At June 30, 2000, net unrealized depreciation for Federal income tax purposes
aggregated $3,042,925, of which $104,159,179 related to appreciated securities
and $107,202,104 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $591,881,676.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions were
$32,350,451 and $9,518,990 for the six months ended June 30, 2000 and for the
year ended December 31, 1999, respectively.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-------------------------------------------------------------------
<S> <C> <C>
Shares sold............................. 900,293 $ 21,497,693
Shares issued to shareholders in
reinvestment of distributions.......... 1,181,703 27,900,002
--------- ------------
Total issued............................ 2,081,996 49,397,695
Shares redeemed......................... (810,289) (19,229,170)
--------- ------------
Net increase............................ 1,271,707 $ 30,168,525
========= ============
-------------------------------------------------------------------
</TABLE>
<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 B Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
--------------------------------------------------------------------
<S> <C> <C>
Shares sold................................. 93,056 $2,210,657
Shares issued to shareholders in
reinvestment of distributions.............. 12,470 294,280
------- ----------
Total issued................................ 105,526 2,504,937
Shares redeemed............................. (13,593) (323,011)
------- ----------
Net increase................................ 91,933 $2,181,926
======= ==========
--------------------------------------------------------------------
</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>
254
<PAGE> 256
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
JUNE 30, 2000--SEMI-ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
During the six-month period ended June 30, 2000, the Fund changed its name
from Global Utility Focus Fund to Utilities & Telecommunications Focus Fund. The
Fund's investment objective has remained the same.
PORTFOLIO MATTERS
During the same six-month period, we also changed the Fund's composition. For
example, at December 31, 1999, 54% of the Fund's net assets was invested in
foreign utility stocks and nearly 25% in domestic utility stocks. As of June 30,
2000, approximately 29% of the Fund's net assets was invested in foreign
utilities and over 60% in domestic utility stocks. The biggest change in terms
of sector weighting has been a reduction in foreign telecommunications and an
increase in domestic electric holdings.
This shift in allocation between foreign and domestic utilities was the result
of several factors. The domestic electric sector appeared to be attractive on a
valuation basis. The foreign telecommunications sector, Europe in particular,
became expensive relative to the US telecommunications sector. Moreover, the
prospect for significant share issuance from the European telecommunications
sector, and high prices paid for the initial auctions of spectrum to be used for
the next generation of wireless telecommunications, are potential negative
events for the sector.
In addition to some of these specific factors, currency movements and investor
sentiment also played a role in the performance of the utility sector in the
first half of 2000. For example, the euro relative to the US dollar began the
new year trading at 1.0243 and finished on June 30, 2000, at a value of 0.9525,
a decline of 7%. Overall investor sentiment turned cautious as investors
sold-off some of the higher risk NASDAQ stocks in favor of more defensive
sectors such as the domestic electrics. Furthermore, investors tended to move
away from the European technology/media/ telecommunications group during the
first half of 2000.
The Fund's performance in the early part of the six-month period was
negatively impacted by our ownership in several European utilities and the
accompanying weakness in the euro versus the US dollar. Although most of the
stocks held in this group had positive price activity for the six-month period
on a local currency basis, when translated back into US dollars, the values were
diminished. The extremely strong stock price activity of the domestic natural
gas and electric utility sectors over a short period of time was unexpected. The
fundamental outlook for the natural gas sector was thought to be favorable going
into the year, and we maintained a weighting that was above that of utility
indexes such as the unmanaged Standard & Poor's Utility Index. The weighting in
domestic electrics in the Fund at the start of 2000 was nearly 16%. As of June
30, 2000, nearly 31% of the Fund's net assets invested in this sector. Thus, the
Fund has participated in two of the strongest performing utility sectors.
PORTFOLIO ACTIVITY
We added several new names to the Fund's portfolio over the six-month period.
We purchased shares of two telecommunications equipment companies, Lucent
Technologies Inc. and Nokia Oyj 'A'. As a result of a purchase of the Canadian
telecom company BCE Inc., we received shares in telecommunication equipment
manufacturer Nortel Networks Corporation. The telecommunication equipment group
appears to be attractive as capital expenditures in the telecommunications arena
continue to grow. Moreover, we bought three new domestic telecommunication
companies that we believe will participate in the continuing demand for new and
faster services. We added Dynergy Inc., a play on the natural gas investment
theme as well as a beneficiary of electricity shortages here in the United
States. Finally, we started positions in seven holdings in the domestic electric
utility sector, which we believe offer good value and above average potential
growth.
255
<PAGE> 257
--------------------------------------------------------------------------------
IN CONCLUSION
We appreciate your investment in Utilities & Telecommunications Focus Fund of
Merrill Lynch Variable Series Funds, Inc., and we look forward to sharing our
investment outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Walter D. Rogers
Walter D. Rogers
Senior Vice President and Portfolio Manager
July 26, 2000
256
<PAGE> 258
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES
--------------------------------------------------------------------------------
PERIOD COVERED % RETURN
--------------------------------------------------------------------------------
Year Ended 6/30/00 + 6.39%
--------------------------------------------------------------------------------
Five Years Ended 6/30/00 +16.52
--------------------------------------------------------------------------------
Inception (7/01/93) through 6/30/00 +12.64
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
RECENT PERFORMANCE RESULTS*
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH
TOTAL RETURN TOTAL RETURN
------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares -4.74% +6.39%
</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.
257
<PAGE> 259
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (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............ $ 770,222 0.7%
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 303,329 Australian Gas Light Company Limited....... 1,812,081 1.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN AUSTRALIA 2,582,303 2.2
------------------------------------------------------------------------------------------------------------------------
BERMUDA TELECOMMUNICATIONS 86,100 +Global Crossing Ltd. ..................... 2,265,506 1.9
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN BERMUDA 2,265,506 1.9
------------------------------------------------------------------------------------------------------------------------
BRAZIL TELECOMMUNICATIONS 10,300 Embratel Participacoes SA (ADR)*........... 243,337 0.2
1,030 Tele Celular Sul Participacoes SA (ADR)*... 46,608 0.1
3,433 Tele Centro Oeste Celular Participacoes SA
(ADR)*................................... 41,196 0.1
2,060 +Tele Centro Sul Participacoes SA (ADR)*... 150,509 0.1
206 Tele Leste Celular Participacoes SA
(ADR)*................................... 9,116 0.0
515 Tele Nordeste Celular Participacoes SA
(ADR)*................................... 35,664 0.0
206 Tele Norte Celular Participacoes SA
(ADR)*................................... 10,455 0.0
11,506 Tele Norte Leste Participacoes SA (ADR)*... 271,829 0.2
10,300 +Telecomunicacoes Brasileiras
SA-Telebras (ADR)*....................... 161 0.0
515 Telemig Celular Participacoes SA (ADR)*.... 36,823 0.0
4,120 Telesp Celular Participacoes SA (ADR)*..... 184,885 0.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN BRAZIL 1,030,583 0.9
------------------------------------------------------------------------------------------------------------------------
CANADA TELECOMMUNICATIONS 11,000 BCE Inc. .................................. 261,937 0.2
17,274 Nortel Networks Corporation................ 1,178,951 1.0
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN CANADA 1,440,888 1.2
------------------------------------------------------------------------------------------------------------------------
DENMARK TELECOMMUNICATIONS 46,300 Tele Danmark A/S (ADR)*.................... 1,574,200 1.4
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN DENMARK 1,574,200 1.4
------------------------------------------------------------------------------------------------------------------------
FINLAND TELECOMMUNICATIONS 12,000 Nokia Oyj 'A' (ADR)*....................... 599,250 0.5
41,236 Sonera Oyj................................. 1,887,502 1.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN FINLAND 2,486,752 2.1
------------------------------------------------------------------------------------------------------------------------
GERMANY TELECOMMUNICATIONS 6,000 Mannesmann AG.............................. 1,466,658 1.2
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 15,600 E.ON AG.................................... 768,644 0.7
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN GERMANY 2,235,302 1.9
------------------------------------------------------------------------------------------------------------------------
HONG KONG TELECOMMUNICATIONS 7,300 +China Telecom (Hong Kong) Limited
(ADR)*................................... 1,298,031 1.1
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 70,000 CLP Holdings Limited....................... 325,966 0.3
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN HONG KONG 1,623,997 1.4
------------------------------------------------------------------------------------------------------------------------
ITALY TELECOMMUNICATIONS 86,000 Telecom Italia SpA......................... 1,187,130 1.0
361,900 Telecom Italia SpA (Registered Non-
Convertible)............................. 2,411,076 2.1
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN ITALY 3,598,206 3.1
------------------------------------------------------------------------------------------------------------------------
JAPAN TELECOMMUNICATIONS 110 Nippon Telegraph & Telephone
Corporation(NTT)......................... 1,465,904 1.3
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN JAPAN 1,465,904 1.3
------------------------------------------------------------------------------------------------------------------------
MEXICO TELECOMMUNICATIONS 24,000 Telefonos de Mexico SA (ADR)*.............. 1,371,000 1.2
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN MEXICO 1,371,000 1.2
------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND TELECOMMUNICATIONS 20,100 Telecom Corporation of New Zealand Limited
(ADR)*................................... 565,313 0.5
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN NEW ZEALAND 565,313 0.5
------------------------------------------------------------------------------------------------------------------------
PORTUGAL TELECOMMUNICATIONS 123,000 Portugal Telecom SA (ADR)*................. 1,383,750 1.2
------------------------------------------------------------------------------------------------------
</TABLE>
258
<PAGE> 260
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONTINUED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PORTUGAL UTILITIES--ELECTRIC 29,940 EDP-Electricidade de Portugal, SA (ADR)*... $ 1,032,930 0.9%
(CONCLUDED)
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN PORTUGAL 2,416,680 2.1
------------------------------------------------------------------------------------------------------------------------
SPAIN TELECOMMUNICATIONS 5,952 +Telefonica SA (ADR)*...................... 381,316 0.3
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 79,900 Endesa SA (ADR)*........................... 1,558,050 1.3
131,000 Iberdrola SA............................... 1,695,284 1.5
------------ -----
3,253,334 2.8
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN SPAIN 3,634,650 3.1
------------------------------------------------------------------------------------------------------------------------
UNITED TELECOMMUNICATIONS 58,216 British Telecommunications PLC............. 752,658 0.7
KINGDOM 10,000 British Telecommunications PLC (ADR)*...... 1,322,500 1.1
53,000 Vodafone AirTouch PLC (ADR)*............... 2,196,188 1.9
------------ -----
4,271,346 3.7
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 95,139 PowerGen PLC............................... 813,775 0.7
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE UNITED KINGDOM 5,085,121 4.4
------------------------------------------------------------------------------------------------------------------------
UNITED TELECOMMUNICATIONS 55,500 AT&T Corp.................................. 1,755,187 1.5
STATES 9,000 +Allegiance Telecom, Inc. ................. 576,000 0.5
47,616 +Bell Atlantic Corporation................. 2,419,488 2.1
58,000 BellSouth Corporation...................... 2,472,250 2.1
45,000 Broadwing Inc. ............................ 1,167,187 1.0
11,000 Lucent Technologies Inc. .................. 651,750 0.6
73,662 SBC Communications Inc. ................... 3,185,882 2.7
42,000 Sprint Corp. (FON Group)................... 2,142,000 1.8
21,000 Sprint Corp. (PCS Group)................... 1,249,500 1.1
14,000 +WinStar Communications, Inc. ............. 474,250 0.4
60,000 +WorldCom Inc. ............................ 2,752,500 2.4
------------ -----
18,845,994 16.2
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 65,600 Allegheny Energy, Inc. .................... 1,795,800 1.5
38,192 Cinergy Corp. ............................. 971,509 0.8
49,300 Consolidated Edison, Inc. ................. 1,460,512 1.3
37,000 Constellation Energy Group................. 1,204,812 1.0
31,500 DTE Energy Company......................... 962,719 0.8
32,000 DQE, Inc. ................................. 1,264,000 1.1
31,000 Duke Energy Corporation.................... 1,747,625 1.5
31,000 Edison International....................... 635,500 0.5
67,600 Energy East Corporation.................... 1,288,625 1.1
54,300 Entergy Corporation........................ 1,476,281 1.3
94,000 FPL Group, Inc. ........................... 4,653,000 4.0
89,000 GPU, Inc. ................................. 2,408,562 2.1
55,000 The Montana Power Company.................. 1,942,187 1.7
55,500 NSTAR...................................... 2,258,156 1.9
89,100 NiSource Inc. ............................. 1,659,488 1.4
38,000 Pinnacle West Capital Corporation.......... 1,287,250 1.1
49,200 Reliant Energy, Inc. ...................... 1,454,475 1.3
92,100 The Southern Company....................... 2,147,081 1.9
------------ -----
30,617,582 26.3
------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC 36,000 +Calpine Corporation....................... 2,367,000 2.1
&
GAS 2,300 +Capstone Turbine Corporation.............. 103,931 0.1
54,000 DPL Inc. .................................. 1,184,625 1.0
49,000 SCANA Corporation.......................... 1,182,125 1.0
------------ -----
4,837,681 4.2
------------------------------------------------------------------------------------------------------
UTILITIES--GAS 28,800 The Coastal Corporation.................... 1,753,200 1.5
19,000 Dynergy Inc. (Class A)..................... 1,297,937 1.1
53,400 El Paso Energy Corporation................. 2,720,062 2.3
30,000 Enron Corp. ............................... 1,935,000 1.7
33,000 KeySpan Corporation........................ 1,014,750 0.9
UTILITIES--GAS 37,100 National Fuel Gas Company.................. 1,808,625 1.6
</TABLE>
259
<PAGE> 261
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (CONCLUDED) (IN US DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
COUNTRY INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNITED 25,000 New Jersey Resources Corporation........... $ 951,562 0.8%
STATES
(CONCLUDED)
42,000 Washington Gas Light Company............... 1,010,625 0.9
64,000 The Williams Companies, Inc. .............. 2,668,000 2.3
------------ -----
15,159,761 13.1
------------------------------------------------------------------------------------------------------
UTILITIES--WATER 33,300 Philadelphia Suburban Corporation.......... 682,650 0.6
------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS IN THE UNITED STATES 70,143,668 60.4
------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST--$73,197,001) 103,520,073 89.1
------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL $4,000,000 CSW Credit Inc., 6.70% due 7/13/2000....... 3,990,322 3.4
PAPER** 2,187,000 General Motors Acceptance Corp., 7.13% due
7/03/2000................................ 2,185,701 1.9
1,500,000 Goldman Sachs Group, Inc., 6.58% due
7/28/2000................................ 1,492,323 1.3
------------ -----
7,668,346 6.6
------------------------------------------------------------------------------------------------------------------------
US GOVERNMENT Federal Home Loan Banks:
AGENCY 1,500,000 6.45% due 7/05/2000........................ 1,498,656 1.3
OBLIGATIONS** 3,500,000 6.42% due 8/02/2000........................ 3,479,403 3.0
------------ -----
4,978,059 4.3
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES (COST--$12,646,405) 12,646,405 10.9
------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$85,843,406)...... 116,166,478 100.0
OTHER ASSETS LESS LIABILITIES.............. 30,984 0.0
------------ -----
NET ASSETS................................. $116,197,462 100.0%
============ =====
------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* American Depositary Receipts (ADR).
** Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown reflect the discount rates paid at the
time of purchase by the Fund.
See Notes to Financial Statements.
260
<PAGE> 262
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$85,843,406)........ $116,166,478
Cash........................................................ 5,567
Receivables:
Securities sold........................................... $376,107
Dividends................................................. 191,587
Capital shares sold....................................... 10,080 577,774
--------
Prepaid expenses and other assets........................... 9,254
------------
Total assets................................................ 116,759,073
------------
-------------------------------------------------------------------------------------
LIABILITIES:
Payables:
Securities purchased...................................... 412,907
Capital shares redeemed................................... 63,322
Investment adviser........................................ 55,312 531,541
--------
Accrued expenses and other liabilities...................... 30,070
------------
Total liabilities........................................... 561,611
------------
-------------------------------------------------------------------------------------
NET ASSETS.................................................. $116,197,462
============
-------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 734,461
Paid-in capital in excess of par............................ 56,035,007
Undistributed investment income--net........................ 1,716,107
Undistributed realized capital gains on investments and
foreign currency transactions--net........................ 27,387,946
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 30,323,941
------------
NET ASSETS.................................................. $116,197,462
============
-------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $116,197,462 and 7,344,612
shares outstanding........................................ $ 15.82
============
-------------------------------------------------------------------------------------
</TABLE>
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
261
<PAGE> 263
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of $52,153 foreign withholding tax).......... $ 2,350,938
Interest and discount earned................................ 191,522
------------
Total income................................................ 2,542,460
------------
-----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 380,869
Custodian fees.............................................. 20,368
Accounting services......................................... 12,120
Professional fees........................................... 8,128
Printing and shareholder reports............................ 5,503
Transfer agent fees......................................... 2,522
Directors' fees and expenses................................ 1,267
Pricing services............................................ 908
Other....................................................... 1,666
------------
Total expenses.............................................. 433,351
------------
Investment income--net...................................... 2,109,109
------------
-----------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized gain from:
Investments--net.......................................... 27,364,505
Foreign currency transactions--net........................ 23,446 27,387,951
------------
Change in unrealized appreciation/depreciation on:
Investments--net.......................................... (35,199,292)
Foreign currency transactions--net........................ 2,694 (35,196,598)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (5,699,538)
============
-----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
262
<PAGE> 264
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Investment income--net...................................... $ 2,109,109 $ 2,416,512
Realized gain on investments and foreign currency
transactions--net......................................... 27,387,951 11,333,702
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net........ (35,196,598) 1,214,380
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ (5,699,538) 14,964,594
------------ ------------
------------------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (396,247) (2,956,986)
Realized gain on investments--net:
Class A................................................... (1,417,240) (14,676,812)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (1,813,487) (17,633,798)
------------ ------------
------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net decrease in net assets derived from capital share
transactions.............................................. (9,376,877) (9,221,584)
------------ ------------
------------------------------------------------------------------------------------------------
NET ASSETS:
Total decrease in net assets................................ (16,889,902) (11,890,788)
Beginning of period......................................... 133,087,364 144,978,152
------------ ------------
End of period*.............................................. $116,197,462 $133,087,364
============ ============
------------------------------------------------------------------------------------------------
* Undistributed investment income--net...................... $ 1,716,107 $ 3,245
============ ============
------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
263
<PAGE> 265
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ----------------------------------------------------------------
FINANCIAL STATEMENTS.
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -----------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2000+ 1999+ 1998+ 1997 1996
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 16.85 $ 17.08 $ 14.84 $ 12.19 $ 11.30
-------- -------- -------- -------- --------
Investment income--net............................. .28 .30 .36 .43 .46
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net........... (1.07) 1.75 2.99 2.66 .95
-------- -------- -------- -------- --------
Total from investment operations................... (.79) 2.05 3.35 3.09 1.41
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net........................... (.05) (.37) (.40) (.44) (.52)
Realized gain on investments--net................ (.19) (1.91) (.71) -- --
-------- -------- -------- -------- --------
Total dividends and distributions.................. (.24) (2.28) (1.11) (.44) (.52)
-------- -------- -------- -------- --------
Net asset value, end of period..................... $ 15.82 $ 16.85 $ 17.08 $ 14.84 $ 12.19
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................. (4.74%)++ 12.63% 24.06% 25.90% 12.96%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... .68%* .69% .68% .67% .66%
======== ======== ======== ======== ========
Investment income--net............................. 3.31%* 1.83% 2.39% 3.21% 3.90%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........... $116,197 $133,087 $144,978 $138,206 $142,438
======== ======== ======== ======== ========
Portfolio turnover................................. 23.41% 4.20% 5.20% 7.70% 11.39%
======== ======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
264
<PAGE> 266
--------------------------------------------------------------------------------
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--UTILITIES & TELECOMMUNICATIONS FOCUS
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 as of June 30, 2000 was comprised of 19
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. Utilities &
Telecommunications Focus Fund (the "Fund") (formerly Global Utility Focus Fund)
is classified as "diversified," as defined in the Investment Company Act of
1940. The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which may require
the use of management accruals and estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim period presented.
All such adjustments are of a normal recurring nature. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). Futures contracts are valued at the
settlement price at the close of the applicable exchange. Short-term securities
are valued at amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
265
<PAGE> 267
--------------------------------------------------------------------------------
value of the contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the time it
was closed.
- Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets and liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of premium and discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) Dividends and distributions--Dividends from net investment income are
declared and paid quarterly. Distributions of capital gains are recorded on the
ex-dividend date.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM 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.
MLIM 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 MLIM which, in turn, will be reimbursed by MLLA.
For the six months ended June 30, 2000, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a subsidiary of ML & Co., earned $5,632 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.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc., is the Fund's distributor.
Accounting services are provided to the Fund by MLIM at cost.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $28,044,838 and $46,643,856, respectively.
Net realized gains for the six months ended June 30, 2000 and net unrealized
gains as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Realized Unrealized
Gains Gains
---------------------------------------------------------------------
<S> <C> <C>
Long-term investments............... $27,364,505 $30,323,072
Foreign currency transactions....... 23,446 869
----------- -----------
Total............................... $27,387,951 $30,323,941
=========== ===========
---------------------------------------------------------------------
</TABLE>
266
<PAGE> 268
--------------------------------------------------------------------------------
At June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $30,323,072, of which $34,091,715 related to appreciated securities
and $3,768,643 related to depreciated securities. At June 30, 2000, the
aggregate cost of investments for Federal income tax purposes was $85,843,406.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Class A Shares for the Six Months Ended Dollar
June 30, 2000 Shares Amount
-------------------------------------------------------------------
<S> <C> <C>
Shares sold........................... 171,027 $ 2,928,726
Shares issued to shareholders in
reinvestment of dividends and
distributions........................ 109,576 1,813,487
---------- ------------
Total issued.......................... 280,603 4,742,213
Shares redeemed....................... (834,646) (14,119,090)
---------- ------------
Net decrease.......................... (554,043) $ (9,376,877)
========== ============
-------------------------------------------------------------------
</TABLE>
<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>
5. SUBSEQUENT EVENT:
On July 6, 2000, the Company's Board of Directors declared an ordinary income
dividend in the amount of $.233919 per Class A Share payable on July 11, 2000 to
shareholders of record as of July 5, 2000.
267
<PAGE> 269
---------------------------------------------------------
MERRILL LYNCH
VARIABLE SERIES FUNDS, INC.
---------------------------------------------------------
PRINCIPAL OFFICE OF THE FUNDS
Box 9011
Princeton, NJ 08543-9011
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
President
Kevin M. Rendino
Senior Vice President
Joe Grills
Director
Thomas R. Robinson
Senior Vice President
Walter Mintz
Director
Walter D. Rogers
Senior Vice President
Robert S. Salomon Jr.
Director
Kurt Schansinger
Senior Vice President
Melvin R. Seiden
Director
Robert M. Shearer
Senior Vice President
Stephen B. Swensrud
Director
Daniel V. Szemis
Senior Vice President
Arthur Zeikel
Director
Harry Escobar
Vice President
Christopher G. Ayoub
Senior Vice President
Clive D. Lang
Vice President
R. Elise Baum
Senior Vice President
Robert F. Murray
Vice President
Robert C. Doll, Jr.
Senior Vice President
Jacqueline L. Rogers
Vice President
Lawrence R. Fuller
Senior Vice President
Donald C. Burke
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> 270
--------------------------------------------------------------------------------
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 not insured or guaranteed by the Federal Deposit Insurance Corporation
or any other Government agency. Although the money market Funds seek to preserve
the value of your investment at $1.00 per share, it is possible to lose money by
investing in money market funds. Statements and other information herein are as
dated and are subject to change.
Merrill Lynch Variable Series Funds, Inc.
Box 9011
Princeton, NJ
08543-9011
#16897-6/00
