MERRILL LYNCH
ASSET INCOME
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Annual Report
December 31, 1997
Investing in emerging market securities involves a number of risk
factors and special considerations, including restrictions on foreign
investments and on repatriation of capital invested in emerging markets,
currency fluctuations, and potential price volatility and less liquidity
of securities traded in emerging markets. In addition, there may be less
publicly available information about the issuers of securities, and such
issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which US companies are
subject. Therefore, the Fund is designed as a long-term investment for
investors capable of assuming the risks of investing in emerging markets.
The Fund should be considered as a vehicle for diversification and not
as a complete investment program.Please refer to the prospectus for details.
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless accompanied
or preceded by the Fund's current prospectus. Past performance results
shown in this report should not be considered a representation of future
performance. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less than
their original cost. Statements and other information herein are as
dated and are subject to change.
Merrill Lynch
Asset Income
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #18240 -- 12/97
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MERRILL LYNCH ASSET INCOME FUND, INC.
Worldwide Percent Breakdown of
Investments as of Stocks & Fixed-Income Percent of
December 31, 1997 Securities by Country Net Assets+
United States* 85.5%
Canada 2.7
United Kingdom 2.7
Sweden 2.4
Denmark 1.2
France 1.0
Italy 1.0
Japan 0.8
Switzerland 0.3
Germany 0.3
Mexico 0.3
South Africa 0.2
Spain 0.2
Australia 0.2
Brazil 0.1
Norway 0.1
Argentina 0.1
Indonesia 0.1
Netherlands 0.1
Philippines 0.1
South Korea 0.0++
* Includes investments in short-term securities.
+ Percent of net assets may not total 100%.
++ Percent of net assets is less than 0.1%.
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Banking 1.5%
Pharmaceuticals 1.5
Insurance 1.5
Retail Stores 1.3
Computer Services & Software 1.0
Telecommunications 0.9
Real Estate Investment Trusts 0.7
Machine Tools & Machinery 0.6
Utilities 0.6
Financial Services 0.6
Country Percent
Ten Largest Holdings of of Net
(Equity Investments) Origin Assets
UNUM Corporation United States 0.5%
El Paso Natural Gas Co. United States 0.4
MGIC Investment Corporation United States 0.4
Edison International United States 0.4
Rite Aid Corporation United States 0.4
Carnival Corp. (Class A) United States 0.4
Owens-Illinois, Inc. United States 0.4
Bank of New York Co., Inc. United States 0.4
Travelers Group, Inc. United States 0.4
BankAmerica Corp. United States 0.4
Merrill Lynch Asset Income Fund, Inc., December 31, 1997
DEAR SHAREHOLDER
Fiscal Year In Review
During the fiscal year ended December 31, 1997, total returns of Merrill
Lynch Asset Income Fund, Inc.'s Class A, Class B, Class C and Class D
Shares were +11.67%, +10.84%, +10.79% and +11.29%, respectively.
(Results shown do not reflect sales charges and would be lower if sales
charges were included. Complete performance information, including
average annual total returns, can be found on pages 3 -- 7 of this
report to shareholders.)
During the fiscal year ended December 31, 1997, and, in particular,
during the second half of the year, we repositioned the Fund's asset
allocation. First, we reduced the Fund's cash reserve position from
21.3% of net assets as of June 30, 1997 to 13.1% as of December 31,
1997. In addition, during the second half of the Fund's fiscal year we
reduced our exposure to the foreign equity sector from 9% of net assets
as of June 30, 1997 to 5% at fiscal year-end. This lessened the negative
impact of foreign equities' laggard performance relative to the
performance of US equities. We then used these newly available assets to
increase the Fund's US bond representation. As for foreign bonds, we
remained hedged against European bond positions. As a result, our
enlarged US bond position enabled the portfolio to participate more
fully in the US bond market rally during the latter months of the year,
and our hedging strategy improved portfolio returns by limiting the
negative impact of a strong US dollar versus the European currencies.
Our US equity position was also a positive net contributor to portfolio
performance over the Fund's fiscal year.
Portfolio Matters
As of December 31, 1997, the asset allocation of Merrill Lynch Asset
Income Fund, Inc. was: US bonds, 57% of net assets; foreign bonds, 9%;
US stocks, 16%; foreign stocks, 5%; and cash reserves, 13%.
Having expanded the US bond and cash sectors during the three-month
period ended September 30, 1997, we slightly increased the Fund's
allocation to these two areas from 66% of net assets to 70%. We also
maintained the Fund's average duration at 6.2 years as of December 31,
1997. Our optimistic stance toward US bonds reflected indications that
inflationary pressures in the US economy were exceptionally subdued. The
problems in Asian economies and a resultant slowdown in the US economy
seemed likely to accentuate the trend toward lower inflation. At the
same time the rapid shrinkage, if not outright elimination, of the
Federal budget deficit was expected to continue to reduce the supply of
newly issued US Government securities relative to demand.
In the foreign sector, we initiated a position in French obligations.
The bulk of our foreign bond weighting remains concentrated in Europe,
including Denmark, France, Italy, Sweden and the United Kingdom. During
October, we became less confident that US dollar strength would continue
against European currencies. Given this changed assessment, we lifted
the hedges against commitments in European stocks and bonds, with the
exception of UK bonds where we maintained a partial hedge. In the
Pacific Basin, the Fund's residual commitment to Japanese equities
remains hedged back to the US dollar, since we expect yen weakness to
continue in coming months.
During the three months ended December 31, 1997, we became more cautious
toward foreign stocks. Our concerns over the widening economic problems
in Asia, including South Korea, Japan and Southeast Asia, led us to reduce
our allocation to foreign equities from 9% of net assets as of September 30,
1997 to 5% of net assets by December 31, 1997.
In reducing our foreign equity representation, we decreased our
relative position in Japan from an already underweighted posture. In
addition to reducing individual commitments, we liquidated positions in
Mitsubishi Heavy Industries, Inc., Mitsubishi Electric Co., Mitsui-Soko
Co., Ltd. and Toray Industries, Ltd. We are concerned that the
uncertainties surrounding the Japanese financial structure and economy
will limit the recovery potential in the Japanese stock market over
coming months.
The reduction of European equity representation was more limited in
scope, given a relatively favorable economic background for European
economies. Similarly, we maintained a significant representation in
Latin America, where prospects appear more favorable than was the case
for the emerging Asian markets. As for Asia, we lowered our already
limited representation through the sale of HSBC Holdings PLC.
The weighting of US equities was unchanged during the three months ended
December 31. Consistent with our expectation of further US interest rate
declines, financial services equities continued to account for the largest
concentration of assets in the US stock market. We maintained significant
representation in the areas of healthcare, technology and energy. Overall,
we are increasing emphasis on the shares of companies which, in our view,
have limited potential for earnings disappointments resulting from the
problems afflicting the Asian economies.
In Conclusion
We thank you for your investment in Merrill Lynch Asset Income Fund,
Inc., and we look forward to reviewing our outlook and strategy with you
in our upcoming quarterly report to shareholders.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/THOMAS R. ROBINSON
Thomas R. Robinson
Senior Vice President and
Portfolio Manager
February 16, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select Pricingsm System, which offers four pricing alternatives:
[bullet] Class A Shares incur a maximum initial sales charge (frontend
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors.
[bullet] Class B Shares are subject to a maximum contingent deferred
sales charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B Shares
are subject to a distribution fee of 0.50% and an account maintenance
fee of 0.25%. These shares automatically convert to Class D Shares after
approximately 10 years. (There is no initial sales charge for automatic
share conversions.)
[bullet] Class C Shares are subject to a distribution fee of 0.55%
and an account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within one
year of purchase.
[bullet] Class D Shares incur a maximum initial sales charge of 4%
and an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of
future performance. Figures shown in the "Average Annual Total Return"
tables as well as the total returns and cumulative total returns in the
"Performance Summary" tables assume reinvestment of all dividends and
capital gains distributions at net asset value on the payable date.
Investment return and principal value of shares will fluctuate so that
shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer
agency fees applicable to each class, which are deducted from the income
available to be paid to shareholders.
[GRAPHIC OMITTED: TOTAL RETURN BASED ON A $10,000 INVESTMENT]
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A
and Class B Shares compared to growth of an investment in the ML B0A0
Index and the Composite Index. Beginning and ending values are:
9/02/94** 12/97
ML Asset Income Fund, Inc.+ --
Class A Shares* $9,600 $13,294
ML Asset Income Fund, Inc.+ --
Class B Shares* $10,000 $13,407
ML B0A0 Index++++ $10,000 $13,323
Composite Index+++++ $10,000 $14,795
A line graph depicting the growth of an investment in the Fund's Class C
and Class D Shares compared to growth of an investment in the ML B0A0
Index and the Composite Index. Beginning and ending values are:
10/21/94** 12/97
ML Asset Income Fund, Inc.+ --
Class C Shares* $10,000 $13,566
ML Asset Income Fund, Inc.+ --
Class D Shares* $9,600 $13,241
ML B0A0 Index++++ $10,000 $13,554
Composite Index+++++ $10,000 $15,009
* Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
** Commencement of operations.
+ ML Asset Income Fund, Inc. invests in a portfolio of US and
foreign debt, equity and money market securities.
++++ This unmanaged Index is comprised of investment-grade bonds.
+++++ The Composite Index consists of: 5%--3-month US Treasury Bills;
75%--ML Bond Index: B0A0--Corporate & Government Master; and
20%--Standard & Poor's 500. The 3-month US Treasury bill is
using performance data as of August 31, 1994 for Class A and
Class B Shares and October 31, 1994 for Class C and Class D Shares.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return % Return
Without CDSC With CDSC**
Class A Shares*
Year Ended 12/31/97 +11.67% +7.21%
Inception (9/02/94) through 12/31/97 +10.27 +8.93
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/97 +10.84% +6.93%
Inception (9/02/94) through 12/31/97 + 9.45 +9.21
* Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 12/31/97 +10.79% + 9.81%
Inception (10/21/94) through 12/31/97 +10.02 +10.02
* Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 12/31/97 +11.29% +6.84%
Inception (10/21/94) through 12/31/97 +10.59 +9.19
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Recent Performance Results
12 Month 3 Month
12/31/97 9/30/97 12/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $10.32 $11.19 $10.53 + 1.94%(1) -4.89%(2)
Class B Shares* 10.32 11.19 10.53 + 1.94(1) -4.89(2)
Class C Shares* 10.32 11.20 10.53 + 1.94(1) -4.98(2)
Class D Shares* 10.31 11.19 10.53 + 1.84(1) -4.98(2)
Class A Shares -- Total Return* +11.67(3) +0.73(4)
Class B Shares -- Total Return* +10.84(5) +0.54(6)
Class C Shares -- Total Return* +10.79(7) +0.44(8)
Class D Shares -- Total Return* +11.29(9) +0.57(10)
Class A Shares -- Standardized 30-day Yield 4.64%
Class B Shares -- Standardized 30-day Yield 4.05%
Class C Shares -- Standardized 30-day Yield 4.00%
Class D Shares -- Standardized 30-day Yield 4.39%
* Investment results shown do not reflect sales charges; results would
be lower if a sales charge was included.
(1) Percent change includes reinvestment of $0.418 per share capital
gains distributions.
(2) Percent change includes reinvestment of $0.323 per share capital
gains distributions.
(3) Percent change includes reinvestment of $0.993 per share ordinary
income dividends and $0.418 per share capital gains distributions.
(4) Percent change includes reinvestment of $0.639 per share ordinary
income dividends and $0.323 per share capital gains distributions.
(5) Percent change includes reinvestment of $0.912 per share ordinary
income dividends and $0.418 per share capital gains distributions.
(6) Percent change includes reinvestment of $0.616 per share ordinary
income dividends and $0.323 per share capital gains distributions.
(7) Percent change includes reinvestment of $0.907 per share ordinary
income dividends and $0.418 per share capital gains distributions.
(8) Percent change includes reinvestment of $0.615 per share ordinary
income dividends and $0.323 per share capital gains distributions.
(9) Percent change includes reinvestment of $0.966 per share ordinary
income dividends and $0.418 per share capital gains distributions.
(10) Percent change includes reinvestment of $0.631 per share ordinary
income dividends and $0.323 per share capital gains distributions.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary --
Class A Shares
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* %Change**
<S> <C> <C> <C> <C> <C>
9/02/94 -- 12/31/94 $10.00 $9.68 -- $0.184 - 1.37%
1995 9.68 10.62 $0.036 0.662 +17.38
1996 10.62 10.53 0.270 0.549 + 7.11
1997 10.53 10.32 0.418 0.993 +11.67
Total $0.724 Total $2.388
Cumulative total return as of 12/31/97: +38.47%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales
charge was included.
Performance Summary --
Class B Shares
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* %Change**
<S> <C> <C> <C> <C> <C>
9/02/94 -- 12/31/94 $10.00 $9.68 -- $0.159 - 1.62%
1995 9.68 10.62 $0.036 0.586 +16.51
1996 10.62 10.53 0.270 0.470 + 6.31
1997 10.53 10.32 0.418 0.912 +10.84
Total $0.724 Total $2.127
Cumulative total return as of 12/31/97: +35.07%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would
be lower if sales charge was deducted.
Performance Summary --
Class C Shares
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* %Change**
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $9.88 $9.69 -- $0.097 - 0.94%
1995 9.69 10.62 $0.036 0.580 +16.33
1996 10.62 10.53 0.270 0.464 + 6.25
1997 10.53 10.32 0.418 0.907 +10.79
Total $0.724 Total $2.048
Cumulative total return as of 12/31/97: +35.66%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would
be lower if sales charge was deducted.
Performance Summary --
Class D Shares
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* %Change**
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $9.88 $9.69 -- $0.108 - 0.83%
1995 9.69 10.62 $0.036 0.637 +16.97
1996 10.62 10.53 0.270 0.522 + 6.84
1997 10.53 10.31 0.418 0.966 +11.29
Total $0.724 Total $2.233
Cumulative total return as of 12/31/97: +37.92%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales
charge was included.
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Asset Income Fund, Inc., December 31, 1997
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Argentina Oil & Gas Producers 300 Yacimientos Petroliferos Fiscales S.A. (ADR)* $6,134 $10,256 0.1%
----------- ----------- -----
Total Common Stocks in Argentina 6,134 10,256 0.1
=========== =========== =====
Australia Diversified 1,800 Broken Hill Proprietary Co., Ltd. 23,683 16,698 0.2
----------- ----------- -----
Total Common Stocks in Australia 23,683 16,698 0.2
=========== =========== =====
Brazil Banking 200 +Uniao de Bancos Brasileiros S.A. (Unibanco) (GDR)** 6,750 6,438 0.0
Telecommunications 75 Telecomunicacoes Brasileiras S.A. - Telebras (ADR)* 3,896 8,733 0.1
----------- ----------- -----
Total Common Stocks in Brazil 10,646 15,171 0.1
=========== =========== =====
Canada Automobile Parts 200 Magna International Inc. (Class A) 9,381 12,563 0.1
Leisure/Tourism 500 +Imax Corp. 7,906 10,750 0.1
Oil & Gas Producers 1,000 +Gulf Canada Resources Ltd. 9,284 7,000 0.1
----------- ----------- -----
Total Common Stocks in Canada 26,571 30,313 0.3
=========== =========== =====
France Electronics 200 Thomson CSF S.A. 6,310 6,303 0.0
Reinsurance 400 Scor S.A. 15,237 19,126 0.2
Semiconductor Capital 200 +SGS -- Thomson Microelectronics N.V.
Equipment (NY Registered Shares) 7,659 12,213 0.1
----------- ----------- -----
Total Common Stocks in France 29,206 37,642 0.3
=========== =========== =====
Germany Banking 200 Bayerische Vereinsbank AG 12,089 13,087 0.1
Machinery & Equipment 45 Mannesmann AG 12,583 22,740 0.2
----------- ----------- -----
Total Common Stocks in Germany 24,672 35,827 0.3
=========== =========== =====
Indonesia Telecommunications 520 P.T. Indonesian Satellite Corp. (ADR)* 18,319 10,043 0.1
----------- ----------- -----
Total Common Stocks in Indonesia 18,319 10,043 0.1
=========== =========== =====
Italy Apparel 400 Gucci Group N.V. (NY Registered Shares) 27,509 16,750 0.2
Publishing 2,000 Arnoldo Mondadori Editore S.p.A. 16,894 15,713 0.1
----------- ----------- -----
Total Common Stocks in Italy 44,403 32,463 0.3
=========== =========== =====
Japan Building & 3,000 Maeda Corp. 31,463 6,679 0.0
Construction 1,000 Matsushita Electric Works, Ltd. 11,398 8,676 0.1
4,000 Okumura Corp. 35,729 9,520 0.1
----------- ----------- -----
78,590 24,875 0.2
Electronics 300 Sony Corporation (ADR)* 21,921 27,225 0.3
Insurance 1,000 Tokio Marine & Fire Insurance Co., Ltd. 13,148 11,363 0.1
Tires & Rubber 1,000 Bridgestone Corporation 17,241 21,727 0.2
----------- ----------- -----
Total Common Stocks in Japan 130,900 85,190 0.8
=========== =========== =====
Mexico Beverages 200 Panamerican Beverages, Inc. (Class A) 4,060 6,525 0.1
Financial Services 400 +Grupo Financiera Bancomer S.A. (Class B) (ADR)* 5,715 5,000 0.0
Multi-Industry 1,050 Grupo Carso, S.A. de C.V. (ADR)* 16,722 13,913 0.1
Telecommunications 150 Telefonos de Mexico, S.A. de C.V. (ADR)* 5,901 8,409 0.1
----------- ----------- -----
Total Common Stocks in Mexico 32,398 33,847 0.3
=========== =========== =====
Netherlands Oil -- Integrated 150 Royal Dutch Petroleum Co. (NY Registered Shares) 8,193 8,128 0.1
----------- ----------- -----
Total Common Stocks in the Netherlands 8,193 8,128 0.1
=========== =========== =====
Norway Cruise Lines 3,000 Color Line ASA 11,280 11,618 0.1
----------- ----------- -----
Total Common Stocks in Norway 11,280 11,618 0.1
=========== =========== =====
Philippines Beverages 5,075 San Miguel Corp. (Class B) 14,081 6,280 0.1
----------- ----------- -----
Total Common Stocks in the Philippines 14,081 6,280 0.1
=========== =========== =====
South Africa Diversified 1,300 Sasol Limited 14,929 13,631 0.1
Mining 600 De Beers Consolidated Mines Limited (ADR)* 19,815 12,263 0.1
----------- ----------- -----
Total Common Stocks in South Africa 34,744 25,894 0.2
=========== =========== =====
South Korea Engineering & 510 Hyundai Engineering & Construction Co., Ltd.
Construction (GDR)** (b) 6,551 447 0.0
----------- ----------- -----
Total Common Stocks in South Korea 6,551 447 0.0
=========== =========== =====
Spain Energy & Petroleum 450 Repsol S.A. (ADR)* 17,019 19,153 0.2
----------- ----------- -----
Total Common Stocks in Spain 17,019 19,153 0.2
=========== =========== =====
Sweden Banking 1,400 +Nordbanken Holding AB 7,599 7,917 0.1
1,200 Sparbanken Sverige AB (Class A) 15,094 27,281 0.2
----------- ----------- -----
22,693 35,198 0.3
Chemicals 700 Perstorp AB (Class B) 13,135 12,520 0.1
Investment Management 800 Bure Investment AB 6,704 10,530 0.1
Laser Components 300 Spectra-Physics AB (Class A) 9,195 5,687 0.0
Real Estate
Investment Trusts 600 +Castellum AB 4,025 5,970 0.1
----------- ----------- -----
Total Common Stocks in Sweden 55,752 69,905 0.6
=========== =========== =====
Switzerland Pharmaceuticals 200 Novartis AG (ADR)* 8,661 16,250 0.1
2 Roche Holding AG 16,801 19,877 0.2
----------- ----------- -----
Total Common Stocks in Switzerland 25,462 36,127 0.3
=========== =========== =====
United Automobile Parts 4,000 LucasVarity PLC 13,760 14,126 0.1
Kingdom Beverages 1,600 Diageo PLC (c) 10,909 14,704 0.1
Chemicals 250 Imperial Chemical Industries PLC (ADR)* 14,299 16,234 0.2
Mining 1,600 Rio Tinto PLC 23,875 19,684 0.2
Retail Stores 1,100 Dixons Group PLC 11,578 11,039 0.1
----------- ----------- -----
Total Common Stocks in the United Kingdom 74,421 75,787 0.7
=========== =========== =====
United States Aerospace 880 Allied Signal, Inc. 32,640 34,265 0.3
200 GenCorp, Inc. 5,970 5,000 0.1
150 +Orbital Sciences Corp. 3,935 4,463 0.0
----------- ----------- -----
42,545 43,728 0.4
Airlines 200 +US Airways Group, Inc. 7,285 12,500 0.1
Appliances 900 Sunbeam Corporation 35,192 37,913 0.3
Automobile Parts 750 Federal-Mogul Corp. 29,281 30,375 0.3
Automobile Rental 100 +Avis Rent-A-Car, Inc. 1,700 3,194 0.0
900 Hertz Corp. (Class A) 28,734 36,225 0.3
----------- ----------- -----
30,434 39,419 0.3
Banking 750 Bank of New York Co., Inc. 20,839 43,359 0.4
550 BankAmerica Corp. 29,431 40,150 0.4
670 First Union Corp. 33,018 34,338 0.3
----------- ----------- -----
83,288 117,847 1.1
Broadcasting 400 +Chancellor Media Corp. 25,414 29,850 0.3
Broadcasting/Cable 1,146 +Tele-Communications TCI Ventures Group (Class A) 20,349 32,446 0.3
Commercial Services 780 +Gartner Group, Inc. (Class A) 26,395 29,055 0.3
Computer Services
& Software 350 +BMC Software, Inc. 13,160 22,925 0.2
300 +Cisco Systems, Inc. 17,102 16,725 0.2
500 Computer Associates International, Inc. 13,456 26,437 0.2
170 International Business Machines Corp. 9,472 17,776 0.2
180 +Microsoft Corporation 21,278 23,254 0.2
----------- ----------- -----
74,468 107,117 1.0
Computers 45 Compaq Computer Corp. 1,348 2,540 0.0
605 +Quantum Corp. 17,078 12,138 0.1
----------- ----------- -----
18,426 14,678 0.1
Consumer Products 1,280 Dial Corp. 24,756 26,640 0.2
Containers 1,150 +Owens-Illinois, Inc. 32,914 43,628 0.4
Cruise Lines 350 Royal Caribbean Cruises Ltd. 15,296 18,659 0.2
Electronics 450 General Electric Company 31,813 33,019 0.3
Financial Services 210 American Express Company 9,466 18,742 0.2
700 MGIC Investment Corporation 27,000 46,550 0.4
----------- ----------- -----
36,466 65,292 0.6
Hardware Products 700 Black & Decker Corporation 23,461 27,344 0.2
Health Care 800 +HEALTHSOUTH Corp. 21,482 22,200 0.2
Insurance 315 Hartford Life, Inc. (Class A) 10,221 14,273 0.1
1,000 Provident Companies, Inc. 33,157 38,625 0.4
750 Travelers Group, Inc. 26,998 40,406 0.4
100 Travelers Property Casualty Corp. (Class A) 3,869 4,400 0.0
1,000 UNUM Corporation 31,713 54,375 0.5
----------- ----------- -----
105,958 152,079 1.4
Leisure/Tourism 850 Brunswick Corporation 21,306 25,766 0.2
Machine Tools
& Machinery 400 Harnischfeger Industries, Inc. 17,397 14,125 0.1
900 Ingersoll-Rand Co. 27,375 36,450 0.3
300 SPX Corp. 17,572 20,700 0.2
----------- ----------- -----
62,344 71,275 0.6
Medical Equipment 1,200 DENTSPLY International Inc. 31,756 36,600 0.3
Natural Gas 700 El Paso Natural Gas Co. 35,652 46,550 0.4
320 Enron Corp. 13,039 13,300 0.1
----------- ----------- -----
48,691 59,850 0.5
Office Equipment 300 Danka Business Systems PLC (ADR)* (a) 14,816 4,781 0.0
Oil Service 300 Schlumberger Ltd. 12,665 24,150 0.2
600 +Smith International, Inc. 27,162 36,825 0.3
----------- ----------- -----
39,827 60,975 0.5
Petroleum 850 Unocal Corp. 28,542 32,991 0.3
Pharmaceuticals 350 Bristol - Myers Squibb Co. 33,277 33,119 0.3
510 Lilly (Eli) & Co. 32,164 35,509 0.3
460 Pfizer Inc. 33,632 34,299 0.3
230 Warner - Lambert Co. 32,904 28,520 0.3
----------- ----------- -----
131,977 131,447 1.2
Railroads 350 Burlington Northern Santa Fe Inc. 28,317 32,528 0.3
Real Estate 740 Glenborough Realty Trust 18,500 21,922 0.2
Investment Trusts 800 Prentiss Properties Trust 16,001 22,350 0.2
380 Starwood Lodging Trust 17,100 21,992 0.2
----------- ----------- -----
51,601 66,264 0.6
Restaurants 500 +Tricon Global Restaurants, Inc. 17,219 14,531 0.1
Retail Stores 760 Rite Aid Corporation 24,882 44,602 0.4
350 +Safeway Inc. 19,656 22,137 0.2
760 Sears, Roebuck & Co. 35,726 34,390 0.3
700 Wal-Mart Stores, Inc. 28,895 27,606 0.3
----------- ----------- -----
109,159 128,735 1.2
Semiconductors 1,100 +National Semiconductor Corporation 44,311 28,531 0.3
Telecommunications 1,104 +Tele-Communications, Inc. (Class A)
(Convertible Preferred) 20,028 30,774 0.3
1,150 +WorldCom, Inc. 28,792 34,787 0.3
----------- ----------- -----
48,820 65,561 0.6
Transport Services 660 +OMI Corporation 8,459 6,064 0.1
Travel & Lodging 790 Carnival Corp. (Class A) 22,760 43,746 0.4
Utilities 1,700 Edison International 31,893 46,219 0.4
600 Texas Utilities Company 23,930 24,937 0.2
----------- ----------- -----
55,823 71,156 0.6
Total Common Stocks in the United States 1,450,951 1,764,590 15.8
----------- ----------- -----
Total Investments in Common Stocks 2,045,386 2,325,379 20.9
=========== =========== =====
Face
Amount Fixed-Income Securities
<S> <C> <C> <C> <C> <C> <C> <C>
Canada Foreign Government C$ 350,000 Canadian Government Bonds, 7% due 12/01/2006 265,903 268,070 2.4
Obligations ----------- ----------- -----
Total Fixed-Income Securities in Canada 265,903 268,070 2.4
=========== =========== =====
Denmark Foreign Government Dkr 850,000 Government of Denmark, 7% due 11/15/2007 135,796 136,335 1.2
Obligations ----------- ----------- -----
Total Fixed-Income Securities in Denmark 135,796 136,335 1.2
=========== =========== =====
France Foreign Government Frf 480,000 French Government Bonds, 5.50% due 10/25/2007 79,032 80,704 0.7
Obligations ----------- ----------- -----
Total Fixed-Income Securities in France 79,032 80,704 0.7
=========== =========== =====
Italy Foreign Government Lit 125,000,000 Buoni Poliennali del Tesoro (Italian
Obligations Government Bonds), 8.50% due 1/01/2004 88,557 81,711 0.7
----------- ----------- -----
Total Fixed-Income Securities in Italy 88,557 81,711 0.7
=========== =========== =====
Sweden Foreign Government Skr 1,400,000 Government of Sweden, 8% due 8/15/2007 204,289 201,842 1.8
Obligations ----------- ----------- -----
Total Fixed-Income Securities in Sweden 204,289 201,842 1.8
=========== =========== =====
United Foreign Government [POUND] 125,000 UK Treasury Bills, 7.25% due 12/07/2007 206,901 219,620 2.0
Kingdom Obligations ----------- ----------- -----
Total Fixed-Income Securities in the
United Kingdom 206,901 219,620 2.0
=========== =========== =====
United US Government Federal National Mortgage Association:
States Agency US$ 320,290 6% due 11/01/2000 317,087 318,564 2.9
Obligations**** 720,216 6% due 6/01/2001 712,901 715,297 6.4
421,514 6% due 2/01/2004 416,509 418,509 3.7
----------- ----------- -----
1,446,497 1,452,370 13.0
US Government 2,155,000 US Treasury Bonds, 6.625% due 2/15/2027 2,120,126 2,339,511 21.0
Obligations US Treasury Notes:
1,425,000 6% due 8/15/1999 1,426,352 1,431,897 12.9
750,000 6.50% due 5/31/2002 755,039 771,915 6.9
300,000 6.625% due 5/15/2007 303,734 317,532 2.8
----------- ----------- -----
4,605,251 4,860,855 43.6
Total Fixed-Income Securities in the
United States 6,051,748 6,313,225 56.6
=========== =========== =====
Total Investments in Fixed-Income Securities 7,032,226 7,301,507 65.4
=========== =========== =====
Short-Term Securities
<S> <C> <C> <C> <C> <C> <C>
US Government 1,464,000 Federal Home Loan Bank, 5.40% due 1/02/1998 1,464,000 1,464,000 13.1
Agency Obligations*** ----------- ----------- -----
Total Investments in Short-Term Securities 1,464,000 1,464,000 13.1
=========== =========== =====
Total Investments $10,541,612 11,090,886 99.4
-----------
Unrealized Appreciation on Forward Foreign Exchange Contracts++ 118 0.0
Other Assets Less Liabilities 67,751 0.6
----------- -----
Net Assets $11,158,755 100.0%
=========== =====
</TABLE>
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Certain US Government Agency Obligations are traded on a discount
basis; the interest rate shown is the discount rate paid at the
time of purchase by the Fund.
**** Subject to principal paydowns.
(a) Consistent with the general policy of the Securities and Exchange
Commission, the nationality or domicile of an issuer for
determination of foreign issuer status may be (i) the country under
whose laws the issuer is organized, (ii) the country in which the
issuer's securities are principally traded, or (iii) the country in
which the issuer derives (at least 50%) of its revenue or profits
from goods produced and sold, investments made, or services
performed in the country, or in which at least 50% of the assets
of the issuer are situated.
(b) The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(c) Diageo PLC was the result of a merger between Grand Metropolitan PLC
and Guiness PLC.
+ Non-income producing security.
++ Forward foreign exchange contracts sold as of December 31, 1997 were
as follows:
Unrealized
Appreciation
Expiration (Depreciation)
Foreign Currency Sold Date (Note 1c)
A$ 25,000 January 1998 $217
C$ 450,000 March 1998 1,923
[POUND] 95,000 January 1998 (2,486)
(yen) 11,300,000 January 1998 464
------
Total Unrealized Appreciation on Forward Foreign
Exchange Contracts -- Net (US$Commitment -- $574,382) $118
======
See Notes to Financial Statements.
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $10,541,612) (Note 1a) $11,090,886
Unrealized appreciation on forward foreign exchange contracts (Note 1c) 118
Cash 586
Foreign cash (Note 1d) 222
Receivables:
Capital shares sold $127,082
Interest 114,396
Dividends 3,601 245,079
--------
Deferred organization expenses (Note 1g). 36,991
Prepaid registration fees and other assets (Note 1g) 80,456
-----------
Total assets 11,454,338
-----------
Liabilities: Payables:
Distributions to shareholders (Note 1h) 197,789
Dividends to shareholders (Note 1h) 27,883
Forward foreign exchange contracts (Note 1c) 7,273
Distributor (Note 2) 5,705
Capital shares redeemed 4,436
Securities purchased 1,452 244,538
-----------
Accrued expenses and other liabilities 51,045
-----------
Total liabilities 295,583
-----------
Net Assets: Net assets $11,158,755
===========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $21,210
Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 78,305
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 5,568
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 3,080
Paid-in capital in excess of par 10,487,410
Undistributed realized capital gains on investments and foreign currency
transactions -- net 14,142
Unrealized appreciation on investments and foreign currency
transactions -- net 549,040
-----------
Net assets $11,158,755
===========
Net Asset Value: Class A -- Based on net assets of $2,188,344 and 212,095 shares outstanding $10.32
===========
Class B -- Based on net assets of $8,078,186 and 783,050 shares outstanding $10.32
===========
Class C -- Based on net assets of $574,633 and 55,681 shares outstanding $10.32
===========
Class D -- Based on net assets of $317,592 and 30,800 shares outstanding $10.31
===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<S> <C> <C> <C>
Investment Interest and discount earned (net of $530 foreign witholding tax) $566,145
Income Dividends (net of $3,439 foreign witholding tax) 56,560
(Notes 1e & 1f): -----------
Total income 622,705
-----------
Expenses: Investment advisory fees (Note 2) $92,433
Account maintenance and distribution fees -- Class B (Note 2) 60,126
Registration fees (Note 1g) 59,474
Accounting services (Note 2) 59,442
Professional fees 55,426
Transfer agent fees -- Class B (Note 2) 29,561
Amortization of organization expenses (Note 1g) 22,194
Printing and shareholder reports 20,887
Custodian fees 13,540
Directors' fees and expenses 12,793
Transfer agent fees -- Class A (Note 2) 11,493
Pricing fees 5,224
Account maintenance and distribution fees -- Class C (Note 2) 4,635
Transfer agent fees -- Class C (Note 2) 2,174
Transfer agent fees -- Class D (Note 2) 1,824
Account maintenance fees -- Class D (Note 2) 1,272
Other 16,568
-----------
Total expenses before reimbursement 469,066
Reimbursement of expenses (Note 2) (341,403)
-----------
Total expenses after reimbursement 127,663
-----------
Investment income -- net 495,042
-----------
Realized & Realized gain from:
Unrealized Gain on Investments -- net 683,347
Investments & Foreign currency transactions -- net 835 684,182
Foreign Currency -----------
Transactions -- Net Change in unrealized appreciation/depreciation on:
(Notes 1c, 1d, 1f & 3): Investments -- net 124,612
Foreign currency transactions -- net 21,181 145,793
----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions 829,975
-----------
Net Increase in Net Assets Resulting from Operations $1,325,017
===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
December 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $495,042 $585,926
Realized gain on investments and foreign currency transactions -- net 684,182 782,602
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions -- net 145,793 (473,973)
----------- -----------
Net increase in net assets resulting from operations 1,325,017 894,555
----------- -----------
Dividends & Investment income -- net:
Distributions to Class A (147,348) (178,761)
Shareholders Class B (303,839) (356,040)
(Note 1h): Class C (21,893) (15,319)
Class D (21,962) (35,806)
In excess of investment income -- net:
Class A -- (19,148)
Class B -- (38,138)
Class C -- (1,641)
Class D -- (3,835)
Realized gain on investments -- net:
Class A (168,574) (99,948)
Class B (675,967) (217,791)
Class C (50,558) (8,964)
Class D (27,046) (19,583)
----------- -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders (1,417,187) (994,974)
----------- -----------
Capital Share Net decrease in net assets derived from capital share transactions (2,347,523) (598,413)
Transactions ----------- -----------
(Note 4):
Net Assets: Total decrease in net assets (2,439,693) (698,832)
Beginning of year 13,598,448 14,297,280
----------- -----------
End of year $11,158,755 $13,598,448
=========== ===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (concluded)
Class A Class B
----------------------------------- ---------------------------------
The following per share data For the For the
and ratios have been derived Period Period
from information provided For the Sept. 2, For the Sept. 2,
in the financial statements. Year Ended 1994+ to Year Ended 1994+ to
December 31, Dec. 31, December 31, Dec. 31,
------------------------ -------- ----------------------- --------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.53 $10.62 $9.68 $10.00 $10.53 $10.62 $9.68 $10.00
Operating ------ ------ ------ ------ ------ ------ ----- ------
Performance: Investment income -- net .49 .50 .60 .18 .41 .42 .51 .16
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net .71 .23 1.04 (.32) .71 .23 1.04 (.32)
------ ------ ------ ------ ------ ------ ----- ------
Total from investment operations 1.20 .73 1.64 (.14) 1.12 .65 1.55 (.16)
------ ------ ------ ------ ------ ------ ----- ------
Less dividends and distributions:
Investment income -- net (.49) (.50) (.60) (.18) (.41) (.42) (.51) (.16)
In excess of investment income -- net -- (.05) -- -- -- (.05) -- --
Realized gain on investments -- net (.92) (.27) (.01) -- (.92) (.27) (.01) --
In excess of realized gain
on investments -- net -- -- (.09) -- -- -- (.09) --
------ ------ ------ ------ ------ ------ ----- ------
Total dividends and distributions (1.41) (.82) (.70) (.18) (1.33) (.74) (.61) (.16)
------ ------ ------ ------ ------ ------ ----- ------
Net asset value, end of period $10.32 $10.53 $10.62 $9.68 $10.32 $10.53 $10.62 $9.68
====== ====== ====== ====== ====== ====== ====== ======
Total Based on net asset value per share 11.67% 7.11% 17.38% (1.37%)++++ 10.84% 6.31% 16.51% (1.62%)++++
Investment ====== ====== ====== ====== ====== ====== ====== ======
Return:**
Ratios to Expenses, net of reimbursement .50% .25% .00% .00%* 1.25% 1.00% .75% .75%*
Average ====== ====== ====== ====== ====== ====== ====== ======
Net Assets: Expenses 3.28% 3.48% 5.12% 5.20%* 4.01% 4.24% 5.94% 6.04%*
====== ====== ====== ====== ====== ====== ====== ======
Investment income -- net 4.58% 4.73% 5.78% 5.64%* 3.79% 3.99% 5.06% 4.86%*
====== ====== ====== ====== ====== ====== ====== ======
Supplemental Net assets, end of period (in thousands)$2,188 $3,918 $3,872 $1,147 $8,078 $8,690 $9,236 $6,797
Data: ====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover 155.57% 342.71% 46.75% .83% 155.57% 342.71% 46.75% .83%
====== ====== ====== ====== ====== ====== ====== ======
Average commission rate paid++ $.0182 $.0265 -- -- $.0182 $.0265 -- --
====== ====== ====== ====== ====== ====== ====== ======
Class C Class D
----------------------------------- ---------------------------------
The following per share data For the For the
and ratios have been derived Period Period
from information provided For the Sept. 2, For the Sept. 2,
in the financial statements. Year Ended 1994+ to Year Ended 1994+ to
December 31, Dec. 31, December 31, Dec. 31,
------------------------ -------- ----------------------- --------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.53 $10.62 $9.69 $9.88 $10.53 $10.62 $9.69 $9.88
Operating ------ ------ ------ ------ ------ ------ ----- ------
Performance: Investment income -- net .41 .41 .52 .10 .47 .46 .57 .11
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net .71 .23 1.03 (.19) .70 .24 1.03 (.19)
------ ------ ------ ------ ------ ------ ----- ------
Total from investment operations 1.12 .64 1.55 (.09) 1.17 .70 1.60 (.08)
------ ------ ------ ------ ------ ------ ----- ------
Less dividends and distributions:
Investment income -- net (.41) (.42) (.52) (.10) (.47) (.47) (.57) (.11)
In excess of investment income -- net -- (.04) -- -- -- (.05) -- --
Realized gain on investments -- net (.92) (.27) (.01) -- (.92) (.27) (.01) --
In excess of realized gain on
investments -- net -- -- (.09) -- -- -- (.09) --
------ ------ ------ ------ ------ ------ ----- ------
Total dividends and distributions (1.33) (.73) (.62) (.10) (1.39) (.79) (.67) (.11)
------ ------ ------ ------ ------ ------ ----- ------
Net asset value, end of period $10.32 $10.53 $10.62 $9.69 $10.31 $10.53 $10.62 $9.69
====== ====== ====== ====== ====== ====== ====== ======
Total Based on net asset value per share 10.79% 6.25% 16.33% (.94%)++++ 11.29% 6.84% 16.97% (.83%)++++
Investment ====== ====== ====== ====== ====== ====== ====== ======
Return:**
Ratios to Expenses, net of reimbursement 1.30% 1.04% .80% .80%* .75% .50% .25% .25%*
Average ====== ====== ====== ====== ====== ====== ====== ======
Net Assets: Expenses 4.12% 4.28% 6.02% 5.75%* 3.54% 3.70% 5.44% 5.14%*
====== ====== ====== ====== ====== ====== ====== ======
Investment income -- net 3.78% 3.95% 4.99% 5.19%* 4.32% 4.48% 5.53% 5.70%*
Supplemental Net assets, end of period (in thousands) $575 $357 $418 $154 $318 $633 $771 $63
Data: ====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover 155.57% 342.71% 46.75% .83% 155.57% 342.71% 46.75% .83%
====== ====== ====== ====== ====== ====== ====== ======
Average commission rate paid++ $.0182 $.0265 -- -- $.0182 $.0265 -- --
====== ====== ====== ====== ====== ====== ====== ======
* Annualized.
** Total investment returns exclude the effects of sales loads.
++++ Aggregate total investment return.
+ Commencement of operations.
++ For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission rate
per share for purchases and sales of equity securities. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US dollars
using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate
shown.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Asset Income Fund, Inc., December 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Asset Income Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing SM System. Shares of Class A and
Class D are sold with a front-end sales charge. Shares of Class B and
Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and other
rights and the same terms and conditions, except that Class B, Class C
and Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class
has exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market
are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market.
Securities which are traded both in the over-the-counter market and on a
stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale price
in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter market, the
last bid price. Short-term securities are valued at amortized cost,
which approximates market value. Other investments, including futures
contracts and related options, are stated at 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 Fund's Board of Directors.
(b) Repurchase agreements -- The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of the
Federal Reserve System or a primary dealer in US Government securities.
Under such agreements, the bank or primary dealer agrees to repurchase
the security at a mutually agreed upon time and price. The Fund takes
possession of the underlying securities, marks to market such securities
and, if necessary, receives additions to such securities daily to ensure
that the contract is fully collateralized.
(c) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and
currency markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the
contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate 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.
[bullet] Forward foreign exchange contracts -- The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium or
discount is amortized over the life of the contracts.
[bullet] 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.
[bullet] Options -- The Fund is authorized to write covered call 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.
(d) 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.
(e) 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.
(f) 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 discount) is recognized on
the accrual basis. Realized gains and losses on security transactions
are determined on the identified cost basis.
(g) Deferred organization expenses and prepaid registration
fees -- Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Prepaid registration fees
are charged to expense as the related shares are issued.
(h) Dividends and distributions -- Dividends from net investment income
are declared daily and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates. Distributions in excess of realized
capital gains are due primarily to differing tax treatments for post-
October losses.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement
with Merrill Lynch Asset Management, L.P. ("MLAM"). The general
partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution Agreement
and Distribution Plans with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch
Group, Inc.
MLAM is responsible for the management of the Fund's portfolio 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 of 0.75%, on an annual basis, of
the average daily value of the Fund's net assets.
For the year ended December 31, 1997, MLAM earned fees of $92,433, all
of which were waived. MLAM also reimbursed the Fund for additional
expenses of $248,970.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays
the Distributor ongoing account maintenance and distribution fees. The
fees are accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor
and MLPF&S for providing shareholder and distribution-related services
to Class B and Class C shareholders.
For the year ended December 31, 1997, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class A and
Class D Shares as follows:
MLFD MLPF&S
Class A $7 $60
Class D $100 $141
For the year ended December 31, 1997, MLPF&S received contingent
deferred sales charges of $29,931 relating to transactions in Class B
Shares.
In addition, MLPF&S received $496 in commissions on the execution of
portfolio security transactions for the Fund for the year ended December
31, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
During the year ended December 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $283
for security price quotations to compute the net asset value of
the Fund.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended December 31, 1997 were $16,183,642 and $19,970,814,
respectively.
Net realized and unrealized gains (losses) as of December 31, 1997 were
as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $683,315 $549,274
Short-term investments 32 --
Forward foreign exchange contracts 227,532 118
Foreign currency transactions (226,697) (352)
-------- --------
Total $684,182 $549,040
======== ========
As of December 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $546,486, of which $726,696 related to
appreciated securities and $180,210 related to depreciated securities.
At December 31, 1997, the aggregate cost of investments for Federal
income tax purposes was $10,544,400.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions were
$2,347,523 and $598,413 for the years ended December 31, 1997 and
December 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
Shares sold 219,328 $2,372,110
Shares issued to shareholders in
reinvestment of dividends and
distributions 17,302 179,770
-------- -----------
Total issued 236,630 2,551,880
Shares redeemed (396,614) (4,337,800)
-------- -----------
Net decrease (159,984) $(1,785,920)
======== ===========
Class A Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 148,235 $1,558,183
Shares issued to shareholders in
reinvestment of dividends and
distributions 6,575 68,638
-------- -----------
Total issued 154,810 1,626,821
Shares redeemed (147,468) (1,548,311)
-------- -----------
Net increase 7,342 $78,510
======== ===========
Class B Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
Shares sold 155,829 $1,701,811
Shares issued to shareholders in
reinvestment of dividends and
distributions 62,225 652,787
-------- -----------
Total issued 218,054 2,354,598
Shares redeemed (255,141) (2,742,988)
Automatic conversion of shares (4,962) (53,559)
-------- -----------
Net decrease (42,049) $(441,949)
======== ===========
Class B Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 188,856 $1,980,405
Shares issued to shareholders in
reinvestment of dividends and
distributions 32,429 340,779
-------- -----------
Total issued 221,285 2,321,184
Shares redeemed (262,466) (2,771,235)
Automatic conversion of shares (3,441) (35,577)
-------- -----------
Net decrease (44,622) $(485,628)
======== ===========
Class C Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
Shares sold 98,085 $1,038,826
Shares issued to shareholders in
reinvestment of dividends and
distributions 4,838 51,010
-------- -----------
Total issued 102,923 1,089,836
Shares redeemed (81,177) (885,235)
-------- -----------
Net increase 21,746 $204,601
======== ===========
Class C Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 7,915 $84,054
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,406 14,763
-------- -----------
Total issued 9,321 98,817
Shares redeemed (14,748) (155,613)
-------- -----------
Net decrease (5,427) $(56,796)
======== ===========
Class D Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
Shares sold 9,787 $104,433
Automatic conversion of shares 4,962 53,559
Shares issued to shareholders in
reinvestment of dividends and
distributions 3,652 38,561
-------- -----------
Total issued 18,401 196,553
Shares redeemed (47,668) (520,808)
-------- -----------
Net decrease (29,267) $(324,255)
======== ===========
Class D Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 19,806 $207,380
Automatic conversion of shares 3,441 35,577
Shares issued to shareholders in
reinvestment of dividends and
distributions 5,725 60,261
-------- -----------
Total issued 28,972 303,218
Shares redeemed (41,498) (437,717)
-------- -----------
Net decrease (12,526) $(134,499)
======== ===========
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders,
Merrill Lynch Asset Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Asset Income
Fund, Inc. as of December 31, 1997, the related statements of operations
for the year then ended and changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for each
of the years in the three-year period then ended and the period
September 2, 1994 (commencement of operations) to December 31, 1994.
These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
the financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1997, by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Asset Income Fund, Inc. as of December 31, 1997,
the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 18, 1998
IMPORTANT TAX INFORMATION (unaudited)
Of the net investment income distributions paid monthly by the Merrill
Lynch Asset Income Fund, Inc. during the fiscal year ended December 31,
1997, 4.69% qualifies for the dividends received deduction for
corporations. The Fund paid a long-term capital gain distribution of
$0.094872 per share to shareholders of record on July 14, 1997. All of
this long-term capital gain distribution is subject to the 28% tax rate.
Additionally, the Fund paid a special ordinary income distibution of
$0.500894 per share and a long-term capital gain distribution of
$0.322689 per share to shareholders of record on December 22, 1997.
Of this long-term capital gain distribution, 28.32% is subject to the
28% tax rate and 71.68% is subject to the 20% tax rate.
The law varies in each state as to whether and what percentage of
dividend income attributable to Federal obligations is exempt from
state income tax. We recommend that you consult your tax adviser to
determine if any portion of the dividends you received is exempt
from state income tax.
Listed below are the percentages of total assets of the Fund invested in
Federal obligations as of the end of each quarter of the fiscal year:
Percentage of
Quarter Ended Federal Obligations*
March 31, 1997 12.99%
June 30, 1997 31.27%
September 30, 1997 48.89%
December 31, 1997 40.18%
* For purposes of this calculation, Federal obligations include
US Treasury notes, US Treasury bills, and US Treasury bonds. Also
included are obligations issued by the following agencies: Banks for
Cooperatives, Federal Intermediate Credit Banks, Federal Land Banks,
Federal Home Loan Banks, and the Student Loan Marketing Association.
Repurchase agreements are not included in this calculation.
Of the Fund's net investment income distributions paid monthly during
the fiscal year ended December 31, 1997, 48.50% was attributable to
Federal obligations. In calculating the foregoing percentage, Fund
expenses have been allocated on a pro rata basis.
Please retain this information for your records.
EQUITY PORTFOLIO CHANGES (unaudited)
For the Quarter Ended December 31, 1997
Additions
Bayerische Vereinsbank AG
Bristol-Myers Squibb Co.
Chancellor Media Corp.
Cisco Systems, Inc.
Dial Corp.
Gartner Group, Inc. (Class A)
General Electric Company
Glenborough Realty Trust, Inc.
Gulf Canada Resources Ltd.
Lilly (Eli) & Co.
Nordbanken Holding AB
Orbital Sciences Corp.
Pfizer Inc.
Royal Dutch Petroleum Co. (NY Registered Shares)
Spectra-Physics AB (Class A)
Texas Utilities Company
Thomson CSF S.A.
Tricon Global Restaurants, Inc.
Wal-Mart Stores, Inc.
Warner-Lambert Co.
Deletions
ABB AG
ABN AMRO Holding N.V.
AirTouch Communications, Inc.
American Home Products Corporation
American Standard Companies, Inc.
Avon Products, Inc.
Banc One Corp.
Boots Company PLC
Companhia Cervejaria Brahma S.A. PN (Preferred)
Dresser Industries, Inc.
duPont (E.I.) de Nemours & Co.
HSBC Holdings PLC
Intel Corp.
Merck & Co., Inc.
Mitsubishi Electric Co.
Mitsubishi Heavy Industries, Inc.
Mitsui-Soko Co., Ltd.
Oracle Corp.
Oxford Health Plans, Inc.
Pennzoil Co.
Siemens AG
Toray Industries Ltd.
United Technologies Corp.
Usinor-Sacilor S.A.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Thomas R. Robinson, Senior Vice President and Portfolio Manager
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Barbara Fraser, Secretary
Custodian
The Chase Manhattan Bank
4 MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800)637-3863
