MERRILL LYNCH
ASSET INCOME
FUND, INC.
FUND LOGO
Annual Report
December 31, 1998
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 issurers 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
Printed on post-consumer recycled paper
MERRILL LYNCH ASSET INCOME FUND, INC.
Worldwide
Investments as of
December 31, 1998
Breakdown of
Stocks & Fixed-Income Percent of
Securities by Country Net Assets++
United States* 76.9%
United Kingdom 8.4
Germany 8.4
France 1.1
Sweden 0.8
Japan 0.6
Spain 0.5
Switzerland 0.5
Finland 0.4
Italy 0.4
Netherlands 0.3
Canada 0.3
Ireland 0.1
Austria 0.1
Norway 0.1
Denmark 0.0++++
[FN]
*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
Telecommunications 1.7%
Banking 1.2
Insurance 0.9
Pharmaceuticals 0.8
Electronics 0.7
Computer Services & Software 0.6
Retail-Stores 0.5
Utilities-Electric 0.5
Financial Services 0.5
Automobile Parts 0.4
Ten Largest Holdings Country Percent of
(Equity Investments) of Origin Net Assets
UNUM Corporation US 0.3%
Beckman Coulter Inc. US 0.3
Teleglobe Inc. Canada 0.3
MCI WorldCom, Inc. US 0.3
Bristol-Myers Squibb
Company US 0.3
Premier Parks Inc. US 0.3
Cisco Systems, Inc. US 0.2
International Business
Machines Corporation US 0.2
Tele-Communications,
Inc. (Class A) US 0.2
Tele-Communications
TCI Ventures Group
(Class A) US 0.2
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
DEAR SHAREHOLDER
Fiscal Year in Review
For the year ended December 31, 1998, Merrill Lynch Asset Income
Fund, Inc.'s Class A, Class B, Class C and Class D Shares had total
returns of +10.01%, +9.19%, +9.14% and +9.74, respectively. During
much of the fiscal year ended December 31, 1998, we maintained the
Fund's position in US bonds at over 50% of net assets and the
average duration of the Fund's US fixed-income holdings at more than
five years. This strategy enabled the portfolio to benefit from the
overall decline in intermediate-term and long-term interest rates
that took place during the year. The Fund's foreign bond
commitments, which we concentrated in Europe during the year, also
had a positive impact on the Fund's total returns for the fiscal
year ended December 31, 1998.
US equities were the best-performing sector in 1998, although the
portfolio was underweighted for much of the year in the narrow group
of large-capitalization common stocks that dominated the performance
of the unmanaged Standard & Poor's 500 Index. Our foreign equity
representation also held down the Fund's return during 1998. A
relatively small group of larger-capitalization European equities
far outperformed the average stock in most foreign markets. We were
underweighted in these stocks for most of the year, increasing our
position during the Fund's fourth fiscal quarter.
Portfolio Matters
As of December 31, 1998, the asset allocation of Merrill Lynch Asset
Income Fund, Inc. was: US bonds, 59% of net assets, foreign bonds,
15%; US stocks, 10%; foreign stocks, 7%; and cash and cash
equivalents, 9%.
We continued to increase the Fund's fixed-income representation.
However, we shifted the mix of fixed-income assets in favor of US
bonds, increasing the position from 39% of net assets to 59% during
the three months ended December 31, 1998. Over the same period, we
reduced our cash and cash equivalents from 19% of net assets to 9%.
The average duration of our US bond holdings was 5.5 years as of
December 31, 1998, nearly unchanged from the September 30, 1998
average of 5.4 years. The easing of the crisis atmosphere in global
financial markets during the fourth quarter of 1998 reduced the
appeal of US fixed-income securities as a "safe-haven" investment.
However, we expect that intermediate-term and long-term US interest
rates are likely to remain in a downtrend in coming months in
response to the lack of inflationary pressures in the US economy.
Our commitment to foreign bonds at December 31, 1998 was unchanged
from September 30, 1998, at 15% of net assets. We held positions in
German and UK obligations. Because interest rates among the 11
countries included in the initial euro block have largely converged,
there appears to be limited opportunity for obtaining incremental
returns elsewhere in Europe. At the same time, risk/reward
relationships in other bond markets, including Japan, Canada and
Australia, do not appear attractive.
During the fourth quarter of 1998, we lifted the currency hedge on
our Japanese equity commitments because the Japanese government
seemed determined to reverse earlier weakness in the yen relative to
the US dollar. By December 31, 1998, our hedges were limited to UK
equities and fixed-income positions. The British pound still seemed
likely to weaken relative to the dollar.
During the three months ended December 31, 1998, we reduced the
Fund's US equity exposure from 18% of net assets to 10%. We
increased the emphasis on the shares of companies that offered a
high degree of earnings visibility through 1999 despite an expected
slowdown in economic activity. New positions included commitments in
the technology sector, such as Intel Corporation, Microsoft
Corporation and Motorola, Inc., and the healthcare sector, through
an investment in Johnson & Johnson. As of December 31, 1998,
consumer staples, technology, and financials represented the largest
sector weightings among the Fund's US equity commitments.
We decreased our position in foreign stocks slightly from 8% of net
assets at the end of the September quarter to 7% as of December 31,
1998. We continued to emphasize European common stocks. We focused
on companies with predictable earnings streams where the risk of
earnings disappointment seems low despite slower economic growth. In
recent months, we increased representation in industries such as
telecommunications, communications equipment, food and healthcare.
Our commitment to Japanese equities (0.6% of net assets) remained
underweighted relative to the unmanaged Morgan Stanley Capital
International Europe, Australia and Far East Index. We also remained
cautious toward emerging markets, with less than 1% of the Fund's
net assets invested there.
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,
(Arthur Zeikel)
Arthur Zeikel
President
(Thomas R. Robinson)
Thomas R. Robinson
Senior Vice President and
Portfolio Manager
February 8, 1999
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors.
* 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.)
* 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.
* 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 "Recent Performance
Results" and "Average Annual Total Return" 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.
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
PERFORMANCE DATA (concluded)
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 US Corporate and Government Master Index and the Corporate
Index. Beginning and ending values are:
9/02/94** 12/98
ML Asset Income Fund, Inc.++--
Class A Shares* $ 9,600 $14,624
ML Asset Income Fund, Inc.++--
Class B Shares* $10,000 $14,748
Merrill Lynch US Corporate
And Government Master
Index++++ $10,000 $14,592
Composite Index++++++ $10,000 $16,686
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 Merrill Lynch US Corporate and Government Master Index and the
Composite Index. Beginning and ending values are:
10/21/94** 12/98
ML Asset Income Fund, Inc.++--
Class C Shares* $10,000 $14,805
ML Asset Income Fund, Inc.++--
Class D Shares $ 9,600 $14,531
Merrill Lynch US Corporate and
Government Master Index++++ $10,000 $14,845
Composite Index++++++ $10,000 $16,930
[FN]
*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--Corporate & Government Master; and 20%--
Standard & Poor's 500 Index. The 3-month US Treasury Bills sector is
using performance data as of August 31, 1994 for the Class A & Class
B Shares graph and October 31, 1994 for the Class C & Class D Shares
graph.
Past performance is not predictive of future performance.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/98 +10.01% +5.61%
Inception (9/02/94)
through 12/31/98 +10.21 +9.18
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/98 +9.19% +5.19%
Inception (9/02/94)
through 12/31/98 +9.39 +9.39
[FN]
*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 12/31/98 +9.14% +8.14%
Inception (10/21/94)
through 12/31/98 +9.81 +9.81
[FN]
*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 12/31/98 + 9.74% +5.36%
Inception (10/21/94)
through 12/31/98 +10.39 +9.32
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<TABLE>
Recent Performance
Results*
<CAPTION>
Standardized
12 Month 3 Month Since Inception 30-Day Yield
Total Return Total Return Total Return As of 12/31/98
<S> <C> <C> <C> <C>
ML Asset Income Fund, Inc. Class A Shares +10.01% +5.25% +52.34% 3.72%
ML Asset Income Fund, Inc. Class B Shares + 9.19 +5.05 +47.48 3.11
ML Asset Income Fund, Inc. Class C Shares + 9.14 +4.93 +48.05 3.06
ML Asset Income Fund, Inc. Class D Shares + 9.74 +5.09 +51.37 3.48
<FN>
*Investment results shown do not reflect sales charges; results
would be lower if a sales charge was included. 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. The Fund's
since inception periods are Class A & Class B Shares, from 9/02/94
to 12/31/98 and Class C & Class D Shares, from 10/21/94 to 12/31/98.
</TABLE>
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Austria Paper Products 200 Mayr-Melnhof Karton AG $ 10,113 $ 9,344 0.1%
Total Common Stocks in Austria 10,113 9,344 0.1
Canada Telecommunications 1,200 Teleglobe Inc. 32,531 43,200 0.3
Total Common Stocks in Canada 32,531 43,200 0.3
Denmark Commercial Services 50 ISS International Service System
A/S (Class B) 3,263 3,254 0.0
Total Common Stocks in Denmark 3,263 3,254 0.0
Finland Communications Equipment 180 Nokia Oyj (Class A) 17,059 21,897 0.1
Insurance 400 Sampro Insurance Company PLC (Class A) 18,682 15,187 0.1
Paper & Forest Products 200 UPM-Kymmene OYJ 4,466 5,572 0.0
Pharmaceuticals 500 Orion-Yhtyma OYJ (Class B) 15,547 12,008 0.1
Real Estate 1,500 ++Sponda OYJ 10,774 8,741 0.1
Investment Trusts
Total Common Stocks in Finland 66,528 63,405 0.4
France Electronics 500 Thomson-CSF S.A. 19,299 21,472 0.1
Foods 63 Groupe Danone 16,540 18,036 0.1
Information Processing 15 Cap Gemini S.A. 2,288 2,408 0.0
Insurance 140 AXA 15,653 20,291 0.1
Oil--Related 200 Elf Aquitaine S.A. 27,818 23,118 0.2
Reinsurance 400 Scor S.A. 22,770 26,446 0.2
Semiconductor Capital 200 ++STMicroelectronics N.V. (NY
Equipment Registered Shares) 14,387 15,612 0.1
Telecommunications 200 France Telecom S.A. 14,057 15,889 0.1
Utilities--Water 85 Vivendi 18,712 22,053 0.2
Total Common Stocks in France 151,524 165,325 1.1
Germany Automobile 160 ++DaimlerChrysler AG 12,516 15,798 0.1
Chemicals 200 Henkel KGaA (Preferred) 18,441 17,887 0.1
Total Common Stocks in Germany 30,957 33,685 0.2
Ireland Banking 1,000 Bank of Ireland 21,156 21,903 0.1
Total Common Stocks in Ireland 21,156 21,903 0.1
Italy Banking 9,000 ++Banca di Roma 19,822 15,245 0.1
Publishing 1,000 ++Mondadori (Arnoldo) Editore S.p.A. 12,930 13,218 0.1
Telecommunications 3,200 Telecom Italia S.p.A. 24,270 27,296 0.2
Total Common Stocks in Italy 57,022 55,759 0.4
Japan Electrical Equipment 1,000 Fujikura Ltd. 5,774 5,375 0.0
Electronics 1,000 Fujitsu Limited 11,369 13,348 0.1
1,000 Matsushita Electric Industrial
Company, Ltd. 15,969 17,729 0.1
------------ ------------ ------
27,338 31,077 0.2
Insurance 2,000 Tokio Marine & Fire Insurance Co., Ltd. 20,158 23,947 0.2
Machine Tools & 2,000 Minebea Co., Ltd. 21,069 22,953 0.1
Machinery
Telecommunications 2 ++Nippon Telegraph & Telephone
Corporation 16,608 15,468 0.1
Total Common Stocks in Japan 90,947 98,820 0.6
Netherlands Broadcasting & 90 Wolters Kluwer N.V. 13,778 19,250 0.1
Publishing
Multi-Industry 300 Unilever N.V. 21,521 25,632 0.2
Total Common Stocks in the Netherlands 35,299 44,882 0.3
Norway Computer Software 800 Merkantildata ASA 6,117 7,878 0.1
Total Common Stocks in Norway 6,117 7,878 0.1
Singapore Electronic Components 70 ++Flextronics International Ltd. 4,895 5,985 0.0
Total Common Stocks in Singapore 4,895 5,985 0.0
Spain Building Materials 1,300 Uralita, S.A. 18,230 14,458 0.1
Real Estate 300 Metrovacesa, S.A. 9,351 9,059 0.0
Telecommunications 550 Telefonica S.A. 24,913 24,428 0.2
550 Telefonica S.A. (Rights)(a) 0 488 0.0
------------ ------------ ------
24,913 24,916 0.2
Utilities--Electric 1,000 Endesa S.A. 26,205 26,466 0.2
Venture Capital 600 ++Dinamia Capital Privado-Sociedad
de Capital Riesgo, S.A. 10,671 6,863 0.0
Total Common Stocks in Spain 89,370 81,762 0.5
Sweden Auto & Truck 400 Autoliv, Inc. 12,605 14,399 0.1
Automobile Parts 1,000 Haldex AB 17,681 10,144 0.1
Banking 500 ForeningsSparbanken AB 6,218 12,989 0.1
300 Nordbanken Holding AB 2,133 1,930 0.0
------------ ------------ ------
8,351 14,919 0.1
Communications Equipment 700 Telefonaktiebolaget LM Ericsson (ADR)* 17,226 16,713 0.1
Diversified 500 Custos AB (Class A) 13,636 9,896 0.1
Investment Management 900 Bure Investment AB 14,738 12,803 0.1
Laser Components 800 Spectra-Physics AB (Class A) 19,323 9,451 0.0
Real Estate 1,000 Fastighets AB Tornet 16,637 14,659 0.1
Real Estate 1,200 Castellum AB 12,476 13,063 0.1
Investment Trusts
Total Common Stocks in Sweden 132,673 116,047 0.8
Switzerland Drugs 10 Novartis AG (Registered Shares) 18,497 19,672 0.1
Foods/Food Processing 9 Nestle S.A. (Registered Shares) 18,519 19,607 0.1
Merchandising 35 Valora Holding AG 9,581 9,474 0.1
Telecommunications 56 ++Swisscom AG (Registered) 15,965 23,461 0.2
Total Common Stocks in Switzerland 62,562 72,214 0.5
</TABLE>
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Aerospace & Defense 2,600 British Aerospace PLC $ 20,089 $ 22,031 0.1%
Kingdom
Automobile Parts 4,000 LucasVarity PLC 18,438 13,338 0.1
Banking 1,200 Bank of Scotland 12,818 14,309 0.1
600 HSBC Holdings PLC 15,542 16,265 0.1
1,000 Lloyds TSB Group PLC 12,426 14,220 0.1
800 National Westminster Bank PLC
(Ordinary) 13,870 15,420 0.1
------------ ------------ ------
54,656 60,214 0.4
Beverages 1,382 Diageo PLC 16,998 15,721 0.1
Diversified 4,200 Billiton PLC 10,145 8,330 0.0
Drugs 600 Zeneca Group PLC 24,117 26,114 0.2
Foods 3,700 Devro PLC 29,536 10,646 0.1
Metal & Mining 800 Rio Tinto PLC (Registered) 9,870 9,300 0.0
Oil--Integrated 300 Shell Transport & Trading Company
(ADR)* 10,887 11,156 0.1
Oil--Related 800 British Petroleum Company PLC 11,445 11,941 0.1
Pharmaceuticals 800 Glaxo Wellcome PLC 25,563 27,514 0.2
Total Common Stocks in the
United Kingdom 231,744 216,305 1.4
United Aerospace 400 GenCorp Inc. 9,193 9,975 0.1
States 150 United Technologies Corporation 11,786 16,313 0.1
------------ ------------ ------
20,979 26,288 0.2
Automobile Parts 400 Federal-Mogul Corporation 20,866 23,800 0.2
Automobile Rental 310 ++Avis Rent A Car, Inc. 10,326 7,498 0.0
290 The Hertz Corporation (Class A) 11,088 13,231 0.1
------------ ------------ ------
21,414 20,729 0.1
Automotive 400 General Motors Corporation 28,059 28,625 0.2
Banking 265 BankAmerica Corporation 13,766 15,933 0.1
650 The Bank of New York Company, Inc. 14,297 26,163 0.2
400 First Union Corporation 20,507 24,325 0.2
------------ ------------ ------
48,570 66,421 0.5
Banking & Financial 200 Mellon Bank Corporation 12,171 13,750 0.1
Beverages 500 PepsiCo, Inc. 15,193 20,469 0.1
Broadcast--Media 400 ++Fox Entertainment Group, Inc.
(Class A) 9,000 10,075 0.1
Broadcasting/Cable 650 ++Tele-Communications, Inc. (Class A) 24,232 35,953 0.2
1,500 ++Tele-Communications TCI Ventures
Group (Class A) 27,453 35,344 0.2
------------ ------------ ------
51,685 71,297 0.4
Chemicals 200 du Pont (E.I.) de Nemours and Company 12,966 10,613 0.1
500 Morton International, Inc. 14,033 12,250 0.1
------------ ------------ ------
26,999 22,863 0.2
Computer Services & 350 ++BMC Software, Inc. 16,822 15,597 0.1
Software 400 ++Cisco Systems, Inc. 22,057 37,125 0.2
200 International Business Machines
Corporation 23,657 36,950 0.2
150 ++Microsoft Corporation 17,301 20,784 0.1
------------ ------------ ------
79,837 110,456 0.6
Computers 800 ++COMPAQ Computer Corporation 25,198 33,550 0.2
100 ++EMC Corporation 6,737 8,500 0.1
------------ ------------ ------
31,935 42,050 0.3
Consumer--Electronics 150 ++Dell Computer Corporation 9,458 10,978 0.1
Consumer Products 800 The Dial Corporation 17,873 23,100 0.1
Data Processing 100 ++Keane, Inc. 3,514 3,994 0.0
Electronics 150 General Electric Company 12,093 15,309 0.1
200 Intel Corporation 22,177 23,700 0.2
300 ++Micron Technology, Inc. 12,563 15,169 0.1
------------ ------------ ------
46,833 54,178 0.4
Entertainment 1,300 ++Premier Parks Inc. 27,419 39,325 0.3
Financial Services 400 Associates First Capital
Corporation (Class A) 13,726 16,950 0.1
800 Heller Financial, Inc. 20,386 23,500 0.2
360 Providian Financial Corporation 14,361 27,000 0.2
------------ ------------ ------
48,473 67,450 0.5
Food Distribution 250 Nabisco Holdings Corp. (Class A) 9,043 10,375 0.1
Foods 600 ++Keebler Foods Company 15,427 22,575 0.1
Hardware Products 300 The Black & Decker Corporation 13,967 16,819 0.1
Healthcare 800 ++HEALTHSOUTH Corporation 7,827 12,350 0.1
Hotels 50 ++3Com Corporation 1,969 2,241 0.0
Industrials 250 Millipore Corporation 5,137 7,109 0.0
Insurance 310 Allmerica Financial Corporation 19,355 17,941 0.1
350 The Equitable Companies Incorporated 17,108 20,256 0.1
900 UNUM Corporation 34,400 52,537 0.3
------------ ------------ ------
70,863 90,734 0.5
Machine Tools & 500 Ingersoll-Rand Company 21,372 23,469 0.2
Machinery
Machinery 150 Case Corporation 4,030 3,272 0.0
Manufacturing 450 Tyco International Ltd. 25,190 33,947 0.2
Medical 800 Beckman Coulter Inc. 47,152 43,400 0.3
Medical Technology 300 Johnson & Johnson 24,553 25,162 0.2
Metals 200 Aluminum Co. of America 15,499 14,913 0.1
Natural Gas 800 El Paso Energy Corporation 23,941 27,850 0.2
450 Enron Corporation 21,136 25,678 0.2
------------ ------------ ------
45,077 53,528 0.4
Oil--Integrated 150 Mobil Corporation 11,578 13,069 0.1
Oil Services 200 Schlumberger Limited 10,393 9,225 0.1
Paper & Forest Products 300 Kimberly-Clark Corporation 13,798 16,350 0.1
Petroleum 480 Unocal Corporation 16,131 14,010 0.1
</TABLE>
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Value Percent of
COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United Pharmaceuticals 300 Bristol-Myers Squibb Company $ 31,029 $ 40,144 0.3%
States 400 Warner-Lambert Company 23,319 30,075 0.2
(concluded) ------------ ------------ ------
54,348 70,219 0.5
Printing & Publishing 800 ++World Color Press, Inc. 23,404 24,350 0.2
Radio & Television 1,000 ++Capstar Broadcasting Corporation
(Class A) 18,062 22,875 0.1
Railroads 700 Burlington Northern Santa Fe Corp. 20,016 23,625 0.2
Retail--Specialty 500 Lowe's Companies, Inc. 17,520 25,594 0.2
Retail--Stores 700 Rite Aid Corporation 20,872 34,694 0.2
350 ++Safeway Inc. 15,312 21,328 0.1
300 Wal-Mart Stores, Inc. 16,977 24,431 0.2
------------ ------------ ------
53,161 80,453 0.5
Savings & Loan 800 GreenPoint Financial Corp. 27,397 28,100 0.2
Associations
Semiconductors 320 Motorola, Inc. 16,375 19,540 0.1
Services 400 ++Quintiles Transnational Corp. 18,555 21,325 0.1
Steel 700 ++Bethlehem Steel Corporation 7,409 5,863 0.0
300 USX-U.S. Steel Group 8,204 6,900 0.0
------------ ------------ ------
15,613 12,763 0.0
Telecommunications 400 GTE Corporation 21,461 26,975 0.2
600 ++MCI WorldCom, Inc. 25,074 43,050 0.3
------------ ------------ ------
46,535 70,025 0.5
Toys 200 Mattel, Inc. 4,631 4,562 0.0
Travel & Lodging 300 Royal Caribbean Cruises Ltd. 7,560 11,100 0.1
Utilities--Communication 500 Ameritech Corporation 25,194 31,688 0.2
Utilities--Electric 350 PECO Energy Company 11,938 14,569 0.1
300 Public Service Enterprise Group
Incorporated 11,647 12,000 0.1
250 Texas Utilities Company 11,209 11,672 0.1
------------ ------------ ------
34,794 38,241 0.3
Waste Management 350 Waste Management, Inc. 16,487 16,319 0.1
Total Common Stocks in the
United States 1,278,936 1,569,175 10.4
Total Investments in Common Stocks 2,305,637 2,608,943 17.2
<CAPTION>
Face
Amount Fixed-Income Securities
<S> <S> <S> <C> <S> <C> <C> <C>
Germany Foreign Bundesrepublik Deutschland:
Government DM 1,200,000 6% due 7/04/2007 789,258 828,403 5.5
Obligations 470,000 4.75% due 7/04/2008 310,237 301,494 2.0
160,000 5.625% due 1/04/2028 92,224 108,120 0.7
Total Fixed-Income Securities
in Germany 1,191,719 1,238,017 8.2
United Foreign Pound 525,000 UK Treasury Bills, 7.25% due
Kingdom Government Sterling 12/07/2007 967,944 1,056,484 7.0
Obligations
Total Fixed-Income Securities in
the United Kingdom 967,944 1,056,484 7.0
United US Government Federal National Mortgage Association:
States Agency US$ 1,240,000 5.625% due 3/15/2001 1,243,245 1,258,216 8.3
Obligations 1,240,000 5.75% due 4/15/2003 1,246,248 1,272,934 8.4
1,510,000 5.75% due 2/15/2008 1,501,712 1,563,560 10.4
------------ ------------ ------
3,991,205 4,094,710 27.1
US Government 2,125,000 US Treasury Bonds, 6.625% due
Obligations 2/15/2027 2,453,677 2,513,471 16.6
US Treasury Notes:
1,600,000 6% due 8/15/1999 1,614,188 1,612,992 10.7
630,000 6.125% due 9/30/2000 644,142 645,454 4.3
------------ ------------ ------
2,258,330 2,258,446 15.0
Total Fixed-Income Securities
in the United States 8,703,212 8,866,627 58.7
Total Investments in Fixed-Income
Securities 10,862,875 11,161,128 73.9
<CAPTION>
Short-Term Securities
<S> <S> <S> <C> <S> <C> <C> <C>
United Commercial US$ 577,000 General Motors Acceptance Corp.,
States Paper** 5.13% due 1/04/1999 577,000 577,000 3.8
Total Investments in Commercial Paper 577,000 577,000 3.8
US Government 600,000 Federal Home Loan Mortgage
Agency Corporation, 5.08% due 1/07/1999 599,746 599,746 4.0
Obligations**
Total Investments in US Government
Agency Obligations 599,746 599,746 4.0
Total Investments in Short-Term
Securities 1,176,746 1,176,746 7.8
Total Investments $14,345,258 14,946,817 98.9
===========
Unrealized Appreciation on Forward Foreign Exchange Contracts++++ 1,467 0.0
Other Assets Less Liabilities 159,715 1.1
------------ ------
Net Assets $15,107,999 100.0%
============ ======
<FN>
*American Depositary Receipts (ADR).
**Commercial Paper and certain US Government Obligations are traded
on a discount basis; the interest rates shown reflect the discount
rates paid at the time of purchase by the Fund.
(a)The rights may be exercised until 1/30/1999.
++Non-income producing security.
++++Forward foreign exchange contracts sold as of December 31, 1998
were as follows:
Unrealized
Appreciation
Foreign Expiration (Depreciation)
Currency Sold Date (Note 1c)
C$ 55,000 February 1999 $ (297)
Pound 525,000 January 1999 (2,439)
Sterling
Pound 250,000 February 1999 4,203
Sterling --------
Total Unrealized Appreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$1,325,556) $ 1,467
========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$14,345,258)
(Note 1a) $14,946,817
Unrealized appreciation on forward foreign exchange
contracts (Note 1c) 1,467
Cash 885
Foreign cash (Note 1d) 2,050
Receivables:
Interest $ 211,013
Capital shares sold 127,101
Dividends 3,121 341,235
-----------
Deferred organization expenses (Note 1g). 14,796
Prepaid registration fees and other assets (Note 1g) 128,713
-----------
Total assets 15,435,963
-----------
Liabilities: Payables:
Distributions to shareholders (Note 1h) 180,828
Capital shares redeemed 35,173
Dividends to shareholders (Note 1h) 14,714
Distributor (Note 2) 7,023 237,738
-----------
Accrued expenses and other liabilities 90,226
-----------
Total liabilities 327,964
-----------
Net Assets: Net assets $15,107,999
===========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 42,883
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 86,839
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 6,166
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 6,252
Paid-in capital in excess of par 14,052,673
Undistributed realized capital gains on investments and foreign
currency transactions--net 309,622
Unrealized appreciation on investments and foreign currency
transactions--net 603,564
-----------
Net assets $15,107,999
===========
Net Asset Value: Class A--Based on net assets of $4,557,862 and 428,825 shares
outstanding $ 10.63
===========
Class B--Based on net assets of $9,230,236 and 868,386 shares
outstanding $ 10.63
===========
Class C--Based on net assets of $655,716 and 61,664 shares
outstanding $ 10.63
===========
Class D--Based on net assets of $664,185 and 62,520 shares
outstanding. $ 10.62
===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1998
<S> <S> <C> <C>
Investment Interest and discount earned $ 583,799
Income Dividends (net of $2,504 foreign witholding tax) 41,101
(Notes 1e & 1f): -----------
Total income 624,900
-----------
Expenses: Investment advisory fees (Note 2) $ 102,885
Account maintenance and distribution fees--Class B (Note 2) 64,506
Printing and shareholder reports 64,195
Accounting services (Note 2) 55,769
Professional fees 51,956
Registration fees (Note 1g) 48,704
Custodian fees 34,199
Amortization of organization expenses (Note 1g) 22,194
Directors' fees and expenses 12,629
Transfer agent fees--Class B (Note 2) 12,483
Transfer agent fees--Class A (Note 2) 5,149
Account maintenance and distribution fees--Class C (Note 2) 4,582
Pricing fees 4,573
Account maintenance fees--Class D (Note 2) 1,378
Transfer agent fees--Class C (Note 2) 864
Transfer agent fees--Class D (Note 2) 708
Other 13,407
-----------
Total expenses before reimbursement 500,181
Reimbursement of expenses (Note 2) (361,128)
-----------
Total expenses after reimbursement 139,053
-----------
Investment income--net 485,847
-----------
Realized & Realized gain (loss) from:
Unrealized Investments--net 725,298
Gain (Loss) on Foreign currency transactions--net (55,309) 669,989
Investments & -----------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 52,285
(Notes 1c, Foreign currency transactions--net 2,239 54,524
1d, 1f & 3): ----------- -----------
Net realized and unrealized gain on investments and foreign
currency transactions 724,513
-----------
Net Increase in Net Assets Resulting from Operations $ 1,210,356
===========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
December 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 485,847 $ 495,042
Realized gain on investments and foreign currency
transactions--net 669,989 684,182
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 54,524 145,793
----------- -----------
Net increase in net assets resulting from operations 1,210,360 1,325,017
----------- -----------
Dividends & Investment income--net:
Distributions to Class A (160,965) (147,348)
Shareholders Class B (285,470) (303,839)
(Note 1h): Class C (18,652) (21,893)
Class D (20,760) (21,962)
Realized gain on investments--net:
Class A (111,852) (168,574)
Class B (230,474) (675,967)
Class C (15,569) (50,558)
Class D (16,614) (27,046)
----------- -----------
Net decrease in net assets resulting from dividends
and distributions to shareholders (860,356) (1,417,187)
----------- -----------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions share transactions 3,599,240 (2,347,523)
(Note 4): ----------- -----------
Net Assets: Total increase (decrease) in net assets 3,949,244 (2,439,693)
Beginning of year 11,158,755 13,598,448
----------- -----------
End of year $15,107,999 $11,158,755
=========== ===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived For the Sept. 2,
from information provided in the financial statements. Year Ended 1994++ to
December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.32 $ 10.53 $ 10.62 $ 9.68 $ 10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .43 .49 .50 .60 .18
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .58 .71 .23 1.04 (.32)
------- ------- ------- ------- -------
Total from investment operations 1.01 1.20 .73 1.64 (.14)
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.43) (.49) (.50) (.60) (.18)
In excess of investment income--net -- -- (.05) -- --
Realized gain on investments--net (.27) (.92) (.27) (.01) --
In excess of realized gain on
investments--net -- -- -- (.09) --
------- ------- ------- ------- -------
Total dividends and distributions (.70) (1.41) (.82) (.70) (.18)
------- ------- ------- ------- -------
Net asset value, end of period $ 10.63 $ 10.32 $ 10.53 $ 10.62 $ 9.68
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 10.01% 11.67% 7.11% 17.38% (1.37%)+++
Return:** ======= ======= ======= ======= =======
Ratios to Expenses, net of reimbursement .50% .50% .25% .00% .00%*
Average Net ======= ======= ======= ======= =======
Assets: Expenses 3.10% 3.28% 3.48% 5.12% 5.20%*
======= ======= ======= ======= =======
Investment income--net 4.03% 4.58% 4.73% 5.78% 5.64%*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 4,558 $ 2,188 $ 3,918 $ 3,872 $ 1,147
Data: ======= ======= ======= ======= =======
Portfolio turnover 155.44% 155.57% 342.71% 46.75% .83%
======= ======= ======= ======= =======
<FN>
++Commencement of operations.
+++Aggregate total investment returns.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Class B
For the
Period
The following per share data and ratios have been derived For the Sept. 2,
from information provided in the financial statements. Year Ended 1994++ to
December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.32 $ 10.53 $ 10.62 $ 9.68 $ 10.00
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .35 .41 .42 .51 .16
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net .58 .71 .23 1.04 (.32)
------- ------- ------- ------- -------
Total from investment operations .93 1.12 .65 1.55 (.16)
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.35) (.41) (.42) (.51) (.16)
In excess of investment income--net -- -- (.05) -- --
Realized gain on investments--net (.27) (.92) (.27) (.01) --
In excess of realized gain on invest-
ments--net -- -- -- (.09) --
------- ------- ------- ------- -------
Total dividends and distributions (.62) (1.33) (.74) (.61) (.16)
------- ------- ------- ------- -------
Net asset value, end of period $ 10.63 $ 10.32 $ 10.53 $ 10.62 $ 9.68
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 9.19% 10.84% 6.31% 16.51% (1.62%)+++
Return:** ======= ======= ======= ======= =======
Ratios to Expenses, net of reimbursement 1.25% 1.25% 1.00% .75% .75%*
Average Net ======= ======= ======= ======= =======
Assets: Expenses 3.90% 4.01% 4.24% 5.94% 6.04%*
======= ======= ======= ======= =======
Investment income--net 3.32% 3.79% 3.99% 5.06% 4.86%*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 9,230 $ 8,078 $ 8,690 $ 9,236 $ 6,797
Data: ======= ======= ======= ======= =======
Portfolio turnover 155.44% 155.57% 342.71% 46.75% .83%
======= ======= ======= ======= =======
<CAPTION>
Class C
For the
Period
The following per share data and ratios have been derived For the Oct. 21,
from information provided in the financial statements. Year Ended 1994++ to
December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.32 $ 10.53 $ 10.62 $ 9.69 $ 9.88
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .35 .41 .41 .52 .10
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net .58 .71 .23 1.03 (.19)
------- ------- ------- ------- -------
Total from investment operations .93 1.12 .64 1.55 (.09)
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.35) (.41) (.42) (.52) (.10)
In excess of investment income--net -- -- (.04) -- --
Realized gain on investments--net (.27) (.92) (.27) (.01) --
In excess of realized gain on invest-
ments--net -- -- -- (.09) --
------- ------- ------- ------- -------
Total dividends and distributions (.62) (1.33) (.73) (.62) (.10)
------- ------- ------- ------- -------
Net asset value, end of period $ 10.63 $ 10.32 $ 10.53 $ 10.62 $ 9.69
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 9.14% 10.79% 6.25% 16.33% (.94%)+++
Return:** ======= ======= ======= ======= =======
Ratios to Expenses, net of reimbursement 1.30% 1.30% 1.04% .80% .80%*
Average Net ======= ======= ======= ======= =======
Assets: Expenses 3.94% 4.12% 4.28% 6.02% 5.75%*
======= ======= ======= ======= =======
Investment income--net 3.25% 3.78% 3.95% 4.99% 5.19%*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 656 $ 575 $ 357 $ 418 $ 154
Data: ======= ======= ======= ======= =======
Portfolio turnover 155.44% 155.57% 342.71% 46.75% .83%
======= ======= ======= ======= =======
<FN>
++Commencement of operations.
+++Aggregate total investment returns.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class D
For the
Period
The following per share data and ratios have been derived For the Oct. 21,
from information provided in the financial statements. Year Ended 1994++ to
December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.31 $ 10.53 $ 10.62 $ 9.69 $ 9.88
Operating ------- ------- ------- ------- -------
Performance: Investment income--net .41 .47 .46 .57 .11
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .58 .70 .24 1.03 (.19)
------- ------- ------- ------- -------
Total from investment operations .99 1.17 .70 1.60 (.08)
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.41) (.47) (.47) (.57) (.11)
In excess of investment income--net -- -- (.05) -- --
Realized gain on investments--net (.27) (.92) (.27) (.01) --
In excess of realized gain on
investments--net -- -- -- (.09) --
------- ------- ------- ------- -------
Total dividends and distributions (.68) (1.39) (.79) (.67) (.11)
------- ------- ------- ------- -------
Net asset value, end of period $ 10.62 $ 10.31 $ 10.53 $ 10.62 $ 9.69
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 9.74% 11.29% 6.84% 16.97% (.83%)+++
Return:** ======= ======= ======= ======= =======
Ratios to Expenses, net of reimbursement .75% .75% .50% .25% .25%*
Average Net ======= ======= ======= ======= =======
Assets: Expenses 3.35% 3.54% 3.70% 5.44% 5.14%*
======= ======= ======= ======= =======
Investment income--net 3.78% 4.32% 4.48% 5.53% 5.70%*
======= ======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $ 664 $ 318 $ 633 $ 771 $ 63
Data: ======= ======= ======= ======= =======
Portfolio turnover 155.44% 155.57% 342.71% 46.75% .83%
======= ======= ======= ======= =======
<FN>
++Commencement of operations.
+++Aggregate total investment returns.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
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's financial statements
are prepared in accordance with generally accepted accounting
principles which may require the use of management accruals and
estimates. 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 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. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market
quotations are not 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. Under such agreements,
the counterparty agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the
underlying securities, marks to market such securities and, if
necessary, receives additions to such securities daily to ensure
that the contract is fully collateralized.
(c) 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.
* 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.
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
NOTES TO FINANCIAL STATEMENTS (continued)
* 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.
* 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.
* Options--The Fund is authorized to 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.
(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 amortized on a straight-line
basis over a period not exceeding five years. Prepaid registration
fees are charged to expense as the related shares are issued.
(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.
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 ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of
Merrill Lynch Group, Inc.
MLAM is responsible for the management of the 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, 1998, MLAM earned fees of $102,885,
all of which were waived. MLAM also reimbursed the Fund for
additional expenses of $258,243.
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
Maintenance Distribution
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, 1998, 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 $ 3 $ 37
Class D $256 $2,146
For the year ended December 31, 1998, MLPF&S received contingent
deferred sales charges of $17,769 and $898 relating to transactions
in Class B and Class C Shares, respectively.
In addition, MLPF&S received $1,437 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
December 31, 1998.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1998 were $21,620,867 and
$18,251,085, respectively.
Net realized gains (losses) for the year ended December 31, 1998 and
unrealized gains as of December 31, 1998 were as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $ 725,315 $ 601,559
Short-term investments (17) --
Forward foreign exchange contracts (55,133) 1,467
Foreign currency transactions (176) 538
--------- ----------
Total $ 669,989 $ 603,564
========= ==========
As of December 31, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $591,656, of which $710,209 related
to appreciated securities and $118,553 related to depreciated
securities. At December 31, 1998, the aggregate cost of investments
for Federal income tax purposes was $14,355,161.
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions were $3,599,240 and $(2,347,523) for the years ended
December 31, 1998 and December 31, 1997, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended December 31, 1998 Shares Amount
Shares sold 376,505 $ 3,979,028
Shares issued to shareholders
in reinvestment of dividends
and distributions 6,240 66,148
---------- -----------
Total issued 382,745 4,045,176
Shares redeemed (166,015) (1,751,205)
---------- -----------
Net increase 216,730 $ 2,293,971
========== ===========
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 B Shares for the Year Dollar
Ended December 31, 1998 Shares Amount
Shares sold 312,797 $ 3,307,756
Shares issued to shareholders
in reinvestment of dividends
and distributions 32,166 340,647
---------- -----------
Total issued 344,963 3,648,403
Shares redeemed (258,565) (2,730,775)
Automatic conversion of shares (1,062) (11,241)
---------- -----------
Net increase 85,336 $ 906,387
========== ===========
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 C Shares for the Year Dollar
Ended December 31, 1998 Shares Amount
Shares sold 37,121 $ 393,015
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,363 25,042
---------- -----------
Total issued 39,484 418,057
Shares redeemed (33,501) (353,172)
---------- -----------
Net increase 5,983 $ 64,885
========== ===========
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 D Shares for the Year Dollar
Ended December 31, 1998 Shares Amount
Shares sold 33,192 $ 349,068
Automatic conversion of shares 1,062 11,241
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,555 27,048
---------- -----------
Total issued 36,809 387,357
Shares redeemed (5,089) (53,360)
---------- -----------
Net increase 31,720 $ 333,997
========== ===========
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)
========== ===========
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
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, 1998, 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 four-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 the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at December
31, 1998 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, 1998, 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 15, 1999
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
Of the net investment income distributions paid monthly by Merrill
Lynch Asset Income Fund, Inc. during the fiscal year ended December
31, 1998, 3.74% qualifies for the dividends received deduction for
corporations. Additionally, the Fund paid a long-term capital gains
distribution of $0.219277 per share (all of which is subject to the
20% tax rate) and a special ordinary income distribution of
$0.050562 per share to shareholders of record on December 22, 1998.
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 at right are the percentages of total assets of the Fund
invested in Federal obligations as of the end of each quarter of the
fiscal year.
For the Percentage of
Quarter Ended Federal Obligations*
March 31, 1998 36.30%
June 30, 1998 49.78%
September 30, 1998 9.24%
December 31, 1998 30.90%
[FN]
*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, 1998, 55.8% 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.
Merrill Lynch Asset Income Fund, Inc., December 31, 1998
COMMON STOCK PORTFOLIO CHANGES (unaudited)
For the Quarter Ended December 31, 1998
Additions
3Com Corporation
Aluminum Co. of America
Associates First Capital Corporation
(Class A)
Bank of Scotland
Bethlehem Steel Corporation
Billiton PLC
British Petroleum Company PLC
Cap Gemini S.A.
Case Corporation
*ConAgra, Inc.
DaimlerChrysler AG
Dell Computer Corporation
du Pont (E.I.) de Nemours and Company
EMC Corporation
Endesa S.A.
Flextronics International Ltd.
Fox Entertainment Group, Inc. (Class A)
France Telecom S.A.
Fujikura Ltd.
Fujitsu Limited
General Motors Corporation
Glaxo Wellcome PLC
Groupe Danone
HSBC Holdings PLC
ISS International Service System A/S
(Class B)
Intel Corporation
Johnson & Johnson
Keane, Inc.
Kimberly-Clark Corporation
Lloyds TSB Group PLC
Mattel, Inc.
Mayr-Melnhof Karton AG
Mellon Bank Corporation
Merkantildata ASA
Micron Technology, Inc.
Microsoft Corporation
Mobil Corporation
Morton International, Inc.
Motorola, Inc.
*NTT Mobile Communication Network, Inc.
Nabisco Holdings Corp. (Class A)
National Westminster Bank PLC (Ordinary)
Nestle S.A. (Registered Shares)
Nippon Telegraph & Telephone
Corporation
Nokia Oyj (Class A)
Novartis AG (Registered Shares)
Rio Tinto PLC (Registered)
Shell Transport & Trading Company (ADR)
Swisscom AG (Registered)
Telecom Italia S.p.A.
Telefonica S.A.
UPM-Kymmene OYJ
USX-U.S. Steel Group
Unilever N.V.
Valora Holding AG
Zeneca Group PLC
Deletions
Alstom S.A.
Amer Group Ltd.
Bayerische Vereinsbank AG
Carnival Corporation (Class A)
Columbia/HCA Healthcare Corporation
Computer Associates International, Inc.
*ConAgra, Inc.
Consolidated Stores Corporation
Custos AB (Class B)
Great Lakes Chemical Corp.
Magna International, Inc. (Class A)
Merkur (Registered Shares)
*NTT Mobile Communication Network, Inc.
Owens-Illinois, Inc.
Schindler Holding AG
Sony Corporation (ADR)
Starwood Hotels & Resorts
Texas Instruments Inc.
Thomson Travel Group PLC
Tokyo Electron Limited
US Airways Group, Inc.
[FN]
*Added and deleted in the same quarter.
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 G. Fraser, Secretary
Custodian
The Chase Manhattan Bank
4 MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800)637-3863
