AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1996
INVESTMENT COMPANY ACT FILE NO. 811-07703
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
/x/ Registration Statement Under The Investment Company Act of 1940
/x/ Amendment No. 1
(check appropriate box or boxes)
SOMERSET EXCHANGE FUND
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (609) 282-2000
TERRY K. GLENN
SOMERSET EXCHANGE FUND
BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
PHILIP L. KIRSTEIN, ESQ. COUNSEL FOR THE FUND
MERRILL LYNCH ASSET MANAGEMENT BROWN & WOOD LLP
BOX 9011 ONE WORLD TRADE CENTER
PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10048-0557
ATTENTION: JOHN A. MACKINNON
</TABLE>
EXPLANATORY NOTE: This amendment no. 1 to Somerset Exchange Fund's Form
N-2 is being filed to include Exhibit r, "Financial data schedule", of
Item 24. In addition, the Fund is refiling its financial statements set
forth in Item 23 in order to reflect certain minor modifications to the
notes thereto.
ITEM 23. FINANCIAL STATEMENTS.
SOMERSET EXCHANGE FUND
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------
COMMON STOCK Market Value
Sectors Industries Investments Shares (Note 1a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Materials Aluminum MAXXAM Group, Inc.+ 64,000 $ 2,560,000
---------------------------------------------------------------------------------
Chemicals du Pont (E.I.) de Nemours & 20,000 1,615,000
Co.
---------------------------------------------------------------------------------
Chemicals - Diverse Airgas, Inc.+ 24,000 444,000
---------------------------------------------------------------------------------
Paper & Forest Products Longview Fibre Co. 29,140 451,670
- -------------------------------------------------------------------------------------------------------
Capital Goods Electrical Equipment AFC Cable Systems, Inc.+ 20,000 320,000
General Electric Co. 13,971 1,150,861
Honeywell, Inc. 5,715 302,895
---------------------------------------------------------------------------------
Engineering & Jacobs Engineering Group, 77,250 1,554,656
Construction Inc.+
---------------------------------------------------------------------------------
Manufacturing Dover Corp. 6,900 295,838
---------------------------------------------------------------------------------
Pollution Control World Fuel Services Corp.* 46,000 663,288
- -------------------------------------------------------------------------------------------------------
Consumer Cyclicals Auto Parts Bandag, Inc. (Class A) 6,200 280,549
---------------------------------------------------------------------------------
Entertainment Pinnacle Systems, Inc.+ 60,000 776,250
---------------------------------------------------------------------------------
Walt Disney Company (The) 29,000 1,613,125
---------------------------------------------------------------------------------
Hotel/Motel Harrah's Entertainment, 40,000 880,000
Inc.+
---------------------------------------------------------------------------------
Household Furniture & Basset Furniture Industries, 12,000 267,000
Appliances Inc. 43,000 1,118,000
Leggett & Platt, Inc.
---------------------------------------------------------------------------------
Leisure Time Grand Casinos, Inc.*+ 61,300 946,582
---------------------------------------------------------------------------------
Office Equipment & Alco Standard Corp. 10,000 437,500
Supplies
---------------------------------------------------------------------------------
Publishing - Newspaper Times Mirror Co. 11,330 468,779
---------------------------------------------------------------------------------
Restaurants Bob Evans Farms, Inc. 50,000 700,000
Boston Chicken, Inc.+ 30,000 795,000
Darden Restaurants, Inc. 18,605 146,514
McDonald's Corp. 4,255 197,326
Rainforest Cafe, Inc.*+ 15,000 294,638
---------------------------------------------------------------------------------
Retail - General Casey's General Stores, 15,000 236,283
Merchandise Inc.*
---------------------------------------------------------------------------------
Retail - Specialty Amplicon, Inc. 62,500 1,023,438
Office Depot, Inc.+ 48,000 684,000
Regis Corp. 20,000 440,000
Sunglass Hut International, 12,000 122,087
Inc.*+
---------------------------------------------------------------------------------
Specialized Services Career Horizons, Inc.+ 20,000 562,500
Catalina Marketing 23,000 1,012,000
Corporation+ 6,000 291,092
Service Corporation 36,675 829,772
International*
ServiceMaster L.P.+
---------------------------------------------------------------------------------
Textiles - Apparel Russell Corp. 19,900 $ 666,650
Manufacturing St. John Knits, Inc.* 59,954 2,042,477
- -------------------------------------------------------------------------------------------------------
Consumer Staples Beverages - Soft Drink Coca-Cola Co. 13,800 646,875
PanAmerican Beverages, Inc. 14,000 603,750
---------------------------------------------------------------------------------
Foods Archer-Daniels-Midland Co. 10,366 183,997
General Mills, Inc. 4,000 217,000
Heinz (H.J.) Co. 16,200 536,625
Ralston Purina Co. 6,000 376,500
---------------------------------------------------------------------------------
Household Products Procter & Gamble Co. 11,081 990,364
---------------------------------------------------------------------------------
Retail - Food Chains Albertson's, Inc. 7,500 307,500
Safeway, Inc.+ 12,000 432,000
Smart & Final, Inc.* 60,000 1,197,084
---------------------------------------------------------------------------------
Tobacco Philip Morris Companies, 13,671 1,430,328
Inc. 100,000 3,325,000
UST, Inc.
- -------------------------------------------------------------------------------------------------------
Energy Oil - International Exxon Corp. 16,500 1,357,125
- -------------------------------------------------------------------------------------------------------
Healthcare Healthcare - Diverse Abbott Laboratories 37,685 1,658,140
Johnson & Johnson Co. 19,600 935,900
Warner-Lambert Co. 5,500 299,750
---------------------------------------------------------------------------------
Healthcare - Drugs Pfizer, Inc. 10,200 712,725
Watson Pharmaceuticals, 100,000 3,900,000
Inc.+
---------------------------------------------------------------------------------
Healthcare - HMOs Medpartners/Mullikin Inc.+ 13,600 255,000
Medpartners/Mullikin Inc.*+ 161,400 2,642,409
Mid-Atlantic Medical 21,240 265,500
Services, Inc.
---------------------------------------------------------------------------------
Healthcare - Apria Healthcare Group, 39,060 758,467
Miscellaneous Inc.*+ 35,000 214,144
Community Care of America, 35,000 161,956
Inc.*+ 28,000 686,610
Exogen, Inc.*+ 60,000 181,314
Healthsouth Rehabilitation 68,451 567,822
Corp.*+ 36,145 877,434
HEARx, Ltd.*+
Horizon/CMS Healthcare
Corp.*+
OccuSystems, Inc.*+
---------------------------------------------------------------------------------
Hospital Management Tenet Healthcare Corp.+ 25,000 484,375
---------------------------------------------------------------------------------
Medical Products Saint Jude Medical, Inc.*+ 50,000 1,453,290
---------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Interest Sensitive Banks - Money Center Chase Manhattan Corp. 5,000 347,500
---------------------------------------------------------------------------------
Banks - Regional First Union Corporation 4,200 $ 266,700
Northern Trust Corp. 9,450 558,731
PNC Bank Corp. 18,860 549,297
Wells Fargo & Company 2,100 489,038
---------------------------------------------------------------------------------
Financial - Miscellaneous First USA, Inc. 14,991 732,685
Forest City Enterprises, 22,000 926,750
Inc. 37,000 402,375
Mercury Finance Company 4,110 300,030
Student Loan Marketing
Association
---------------------------------------------------------------------------------
Insurance - Brokers Marsh & McLennan Companies, 4,400 398,750
Inc.
---------------------------------------------------------------------------------
Insurance - Life John Alden Financial 11,536 232,162
Corporation
---------------------------------------------------------------------------------
Insurance - Multiline American International 5,015 472,037
Group, Inc.
---------------------------------------------------------------------------------
Insurance - Property Commerce Group, Inc. 50,000 1,031,250
---------------------------------------------------------------------------------
Savings & Loan Ahmanson (H.F.) & Co. 50,400 1,272,600
CCB Financial Corp. 6,643 343,775
- -------------------------------------------------------------------------------------------------------
Miscellaneous Miscellaneous Imation Corporation 286 6,506
Minnesota Mining & 2,860 185,900
Manufacturing Co.
- ------------------------------------------------------------------------------------------------------
Technology Communications - MFS Communications Co., 9,176 289,044
Equipment Inc.+
---------------------------------------------------------------------------------
Computer Software Informix, Corp.+ 13,273 289,517
Parametric Technology 7,000 291,375
Company+ 8,100 331,088
SunGard Data Systems, Inc.+
---------------------------------------------------------------------------------
Computer Systems 3Com Corp.*+ 6,000 217,638
Cerplex Group, Inc.*+ 50,000 298,895
COMPAQ Computer Corp.+ 6,300 344,925
Hewlett-Packard Co. 16,000 704,000
International Business 6,500 701,187
Machines 10,000 183,750
Corp.
Stratus Computer, Inc.
---------------------------------------------------------------------------------
Electronics - Instruments GenRad, Inc.+ 25,000 371,875
---------------------------------------------------------------------------------
Electronics - Intel Corporation 4,000 300,500
Semiconductors Motorola, Inc. 31,500 1,701,000
Solectron Corp.+ 9,750 307,125
---------------------------------------------------------------------------------
Telecommunications - Long AT&T Corp. 8,200 427,425
Distance
---------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Transportation Truckers Anuhco, Inc.+ 34,221 269,490
Caliber Systems, Inc. 8,600 156,950
- -------------------------------------------------------------------------------------------------------
Utilities Electric Utilities Citizens Utilities Company 25,000 $ 275,000
(Class A)
---------------------------------------------------------------------------------
Telephone ALLTEL Corp.* 35,000 849,646
C-TEC Corp. (Class B)+ 35,000 848,750
Telephone & Data Systems,
Inc. 11,300 436,462
- --------------------------------------------------------------------------------------------------------
Preferred Stock Banks - Foreign Banesto Holdings (10.50%,
Series A) 476,786 13,945,991
(ADR)**
Indosuez Holdings, S.C.A. 379,000 10,327,750
(10.375%,
Series A) (ADR)**
---------------------------------------------------------------------------------
Face
Short-Term Investments Amount
- -------------------------------------------------------------------------------------------------------
Commercial Paper*** Ford Motor Credit Co., $ 1,915,000 1,914,696
5.72% due 8/01/1996
- -------------------------------------------------------------------------------------------------------
Gross Contributions . . . . 98,148,919
Interest Rate Swaps . . . . (56,880)
Liabilities in Excess of (28,220,933)
Other $ 69,871,106
Assets . . . . . . . . . .
Net Assets . . . . . . . .
- -------------------------------------------------------------------------------------------------------
* Restricted security. The value of the Fund's investment in restricted securities
was approximately $13,919,000, representing 19.9% of net assets.
</TABLE>
JULY 31, 1996
SCHEDULE OF INVESTMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Acquisition Market Value
Issue Date # Cost (Note 1a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3Com Corp. 7/11/1996 $ 273,000 $ 217,638
ALLTEL Corp. 7/11/1996 1,041,250 849,646
Apria Healthcare Group, Inc. 7/11/1996 1,122,975 758,467
Casey's General Stores, Inc. 7/11/1996 281,250 236,283
Cerplex Group, Inc. 7/11/1996 343,750 298,895
Community Care of America, Inc. 7/11/1996 273,438 214,144
Exogen, Inc. 7/11/1996 288,750 161,955
Grand Casinos, Inc. 7/11/1996 288,750 161,956
Healthsouth Rehabilitation Corp. 7/11/1996 973,000 686,610
HEARx, Ltd. 7/11/1996 367,500 181,314
Horizon/CMS Healthcare Corp. 7/11/1996 855,638 567,822
Medpartners/Mullikin Inc. 7/11/1996 3,086,775 2,642,409
OccuSystems, Inc. 7/11/1996 1,125,013 877,434
Rainforest Cafe, Inc. 7/11/1996 395,625 294,638
- -------------------------------------------------------------------------------------------------------
Saint Jude Medical, Inc. 7/11/1996 1,653,125 1,453,290
Service Corporation International 7/11/1996 336,000 291,092
Smart & Final, Inc. 7/11/1996 1,507,500 1,197,084
St. John Knits, Inc. 7/11/1996 2,682,942 2,042,477
Sunglass Hut International, Inc. 7/11/1996 237,000 122,087
World Fuel Services Corp. 7/11/1996 828,000 663,288
- -------------------------------------------------------------------------------------------------------
Total $17,961,281 $13,918,529
- -------------------------------------------------------------------------------------------------------
------------ ------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
** American Depository Receipts (ADR).
*** Commercial Paper is traded on a discount basis; the interest
rate shown is the discount rate paid at the time of purchase by the Fund.
# For Federal income taxes, the date the contributing
shareholder acquired the security represents the acquisition date.
+ Non-income producing securities.
See Notes to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
As of July 31, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost- $98,148,919
$104,964,149)
(Note 1a) . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . 266
Receivables:
Securities sold . . . . . . . . . . . $1,909,000
Dividends . . . . . . . . . . . . . . 33,270 1,942,270
Deferred organization expenses (Note 1e) . 300,701
----------
Prepaid registration fees and other assets 8,000
(Note 1e) . . . . . . . . . . . . . . . . .
------------
Total assets . . . . . . . . . . . . . . . 100,400,156
------------
- ------------------------------------------------------------------------------------------------------
Liabilities: Loans (Note 2) . . . . . . . . . . . . . . 28,000,000
Interest rate swaps (Notes 1b & 3) . . . . 56,880
Payables:
Securities purchased . . . . . . . . . 1,914,696
Loaned securities and extended 116,459
deliveries . . . . . . . . . . . . . . . .
Investment adviser (Note 2) . . . . . 24,416
Administrator (Note 2) . . . . . . . . 8,138 2,063,709
Accrued expenses and other liabilities . . ---------- 408,461
------------
Total liabilities . . . . . . . . . . . . . 30,529,050
------------
- ------------------------------------------------------------------------------------------------------
Net Assets: Net assets . . . . . . . . . . . . . . . . $69,871,106
===========
- ------------------------------------------------------------------------------------------------------
Capital stock . . . . . . . . . . . . . . . $76,850,424
Net Assets Accumulated investment loss-net . . . . . . (107,208)
Consist of: Unrealized depreciation on investments-net (6,872,110)
Net assets - Equivalent to $454.59 Per Share ------------
Based on 153,700 Shares of Beneficial Interest $69,871,106
Outstanding . . . . . . . . . . . . . . . . ============
- ----------------------------------------------------------------------------------------------------
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
STATEMENT OF
OPERATIONS
For the Period July 11, 1996+ to July 31,
1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Dividends . . . . . . . . . . . . . . . . . $27,941
Income
(Note 1d): Interest and amortization of discount
earned . . . . . . . . . . . . . . . . . . 5,167
-------------
Total income . . . . . . . . . . . . . . . 33,108
-------------
-----------------------------------------------------------------------------------------------------
Expenses: Interest expense . . . . . . . . . . . . . $98,847
Investment advisory fees (Note 2) . . . . . 24,416
Administrative fees (Note 2) . . . . . . . 8,138
Professional fees . . . . . . . . . . . . . 3,839
Amortization of organization expenses (Note 3,333
1e) . . . . . . . . . . . . . . . . . . . .
Printing and shareholder reports . . . . . 768
Trustees' fees and expenses . . . . . . . . 741
Pricing fees . . . . . . . . . . . . . . . 110
Registration fees (Note 1e) . . . . . . . . 14
Other . . . . . . . . . . . . . . . . . . . 110
-------
Total expenses . . . . . . . . . . . . . . 140,316
---------------
Investment income-net . . . . . . . . . . . (107,208)
---------------
----------------------------------------------------------------------------------
Unrealized Unrealized depreciation on investments . . (6,872,110)
Loss
on
Investments NET DECREASE IN NET ASSETS RESULTING FROM
(Notes 1b, OPERATIONS . . . . . . . . . . . . . . . . ($6,979,318)
1d): ============
- -----------------------------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
SOMERSET EXCHANGE FUND, JULY 31, 1996
STATEMENT OF CHANGES IN NET ASSETS For the Period
Increase (Decrease) in Net Assets: July 11, 1996+ to
July 31, 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations: Investment income-net . . . . . . . . . . . . $ (107,208)
Unrealized depreciation on investments . . . (6,872,110)
--------------------
Net decrease in net assets resulting from (6,979,318)
operations . . . . . . . . . . . . . . . . . --------------------
- -----------------------------------------------------------------------------------------------------
Beneficial Net increase in net assets derived
Interest from beneficial interest 76,850,424
Transactions: transactions . . . . . . . . . . . . . . . . --------------------
- ------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets . . . . . . . . 69,871,106
Beginning of period . . . . . . . . . . . . . -
-------------------
End of period* . . . . . . . . . . . . . . . $69,871,106
===================
- ------------------------------------------------------------------------------------------------------
*Accumulated net investment loss-net . . . . $ (107,208)
===================
- -----------------------------------------------------------------------------------------------------
+ Commencement of Operations.
See Notes to Financial Statements
</TABLE>
SOMERSET EXCHANGE FUND, JULY 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL
HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE
BEEN DERIVED FROM INFORMATION PROVIDED
IN THE FINANCIAL STATEMENTS. For the Period
July 11, 1996+ to
Increase (Decrease) in Net Asset Value: July 31, 1996
- ------------------------------------------------------------------------------------------------------
Per Share Net asset value, beginning of period . . . . $500.00
----------------
Operating Investment loss-net . . . . . . . . . . . . . (0.70)
----------------
Performance: Unrealized loss on investments-net . . . . . (44.71)
----------------
Total from investment operations . . . . . . (45.31)
----------------
Net asset value, end of period . . . . . . . $454.59
================
- ------------------------------------------------------------------------------------------------------
Ratios to Expenses excluding interest expense . . . . . .99% *
================
Average Net Expenses . . . . . . . . . . . . . . . . . . 3.36% *
================
Assets: Investment income-net . . . . . . . . . . . . (2.57%) *
================
- ------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) . . $69,871
================
Data: Portfolio turnover . . . . . . . . . . . . . 0.00%
================
- ------------------------------------------------------------------------------------------------------
* Annualized.
+ Commencement of Operations.
See Notes to Financial Statements
</TABLE>
SOMERSET EXCHANGE FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Somerset Exchange Fund (the "Fund"), a Delaware business trust, is
registered under the Investment Company Act of 1940 as a diversified,
closed-end management investment company. Investments in the Fund were
made by investors contributing publicly-traded equity securities in
exchange for shares of beneficial interest in the Fund. Shares of
beneficial interest will be illiquid unless and until shareholders vote to
convert the Fund into an open-end investment company (or, if appropriate,
an interval fund, which is a closed-end investment company which makes
scheduled periodic repurchase offers, if at that time redemptions in kind
are permissible). No present market exists for the shares of beneficial
interest and none is expected to develop. The Fund will not be listed on
an exchange or otherwise be regularly traded. No provision will be made
initially for the Fund to provide liquidity through cash tender offers or
other means that may be available to closed-end investment companies. The
following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of securities - Securities for which market quotations are
readily available and which are not restricted securities, including
listed options and futures contracts, will be valued at their current
market values in the principal market in which such securities are
normally traded. The value of equity securities that are not restricted
securities listed on the New York or American Stock Exchanges or listed on
the NASDAQ National Market System shall be the closing sale prices or,
lacking any closing prices, the last available bid price. Equity
securities that are not restricted securities and not listed on the New
York or American Stock Exchanges but that are listed on any other
securities exchange shall be valued as if listed on the New York Stock
Exchange, providing the closing of trading coincides. If the close of
trading on such securities exchange does not coincide with the closing of
trading on the New York Stock Exchange, the value shall be based on the
latest available price data at the time of determination of net asset
value. Unlisted readily marketable equity securities that are not
restricted securities shall be valued at the latest bid price in the over-
the-counter market.
Merrill Lynch Asset Management, L.P. ("MLAM"), subject to the supervision
of the Trustees of the Fund, will generally value restricted securities at
discounts to the fair market value of freely tradable securities of the
same class. United States Trust Company of New York may assist MLAM in
the valuation of restricted securities. It is expected that such
discounts, which may vary with respect to particular securities, will
range initially between 5% and 25% of the fair market value of freely
tradable securities with such discounts diminishing until the time the
restricted securities become freely tradable .
Pursuant to procedures authorized by the Trustees of the Fund, the
preferred stock holdings will be valued at fair value as determined by
MLAM or its designee, after consideration of all relevant factors, data
and information, which may include information from various firms with
knowledge of such issues, and the prices of comparable preferred stock
issues. Unlisted options and interest rate and equity swaps will be
valued at their fair values determined in good faith by or on behalf of
the Trustees of the Fund.
(b) Derivative financial instruments - The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt and equity markets.
Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
- - Options - The Fund is authorized to write 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).The Fund does not expect to sell securities contributed by
shareholders upon exercise of written call options and purchased put options.
Written and purchased options are non-income producing investments.
- - Financial futures contracts - The Fund may purchase or sell financial
futures contracts as a hedge against adverse changes in interest rates and
the stock market. A futures contract is an agreement between two parties to
buy and sell a security, respectively, for a set price on a future date.
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.
- - Interest rate swaps - The Fund is authorized to enter into interest
rate swaps and purchase or sell interest rate caps and floors. In an
interest rate swap, the Fund exchanges with another party their respective
commitments to pay or receive interest on a specified notional principal
amount. The purchase of an interest rate cap (or floor) entitles the
purchaser, to the extent that a specified index exceeds (or falls below) a
predetermined interest rate, to receive payments of interest equal to the
difference between the index and the predetermined rate on a notional
principal amount from the party selling such interest rate cap (or floor).
(c) Income taxes - The Fund will be treated as a partnership for federal
income tax purposes. As a partnership for federal income tax purposes,
the Fund will not incur federal income tax liability. Items of
partnership income, gain, loss and deduction will pass through to the
shareholders as partners in the Fund.
(d) Security transactions and investment income - Interest income
(including amortization of discount) is recognized on the accrual basis.
Dividend income is recorded on the ex-dividend date. Realized gains and
losses on security transactions are determined on the identified cost
basis.
(e) Deferred organization expenses - Deferred organization expenses are
charged to expense over a five-year period.
(f) Distributions - Distributions of cash from investment income will be
made quarterly in such amounts as the Trustees of the Fund may determine.
Distributions of cash from realized capital gains will be made at least
once annually in years in which such gains are realized.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with 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.
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 operation of the Fund. For such services, the
Fund pays a quarterly fee of 0.60%, on an annual basis, of the Fund s
average weekly net assets.
The Fund has also entered into an Administration Agreement with MLAM
whereby MLAM will provide or arrange for the provision of administrative
services (other than investment advice and related portfolio activities)
necessary for the operation of the Fund. For such services, the Fund pays
a quarterly fee of 0.20%, on an annual basis, of the Fund s average weekly
net assets. MLAM has entered into a Sub-Administration Agreement with
United States Trust Company of New York ("U.S. Trust") pursuant to which
U.S. Trust performs certain administrative services in connection with the
Fund. MLAM compensates U.S. Trust for such services directly out of its
fee with no additional cost to the Fund. MLAM has also entered into an
agreement with U.S. Trust pursuant to which U.S. Trust performs certain
ongoing shareholder services. MLAM compensates U.S. Trust directly for
such services with no additional cost to the Fund.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, Merrill Lynch and/or ML & Co.
The Fund has entered into a loan agreement with Merrill Lynch
International Bank Limited, a wholly-owned indirect subsidiary of ML &
Co., with respect to a loan commitment of up to $35,000,000. The interest
rate on borrowed funds is reset at regular intervals based upon a fixed
and pre-determined spread referenced to LIBOR. Interest on the amount of
outstanding borrowings and a commitment fee of .10% on the unused amount
of the loan commitment is payable periodically.
3. INVESTMENTS:
Net unrealized losses as of July 31, 1996 were as follows:
<TABLE>
CAPTION>
- -----------------------------------------------------------------------------------------------------
Unrealized
Losses
<S> <C>
Long-term investments...................................... $(6,815,230)
Interest rate swaps........................................ (56,880)
------------
Total...................................................... $(6,872,110)
------------
</TABLE>
- ------------------------------------------------------------------------------
The Fund has entered into the following interest rate swaps as of July 31,
1996:
- ------------------------------------------------------------------------------
Notional Interest Received Interest Paid
------------------------------ -------------------------
Expiration Amount Current Rate Type Current Rate Type
Date
- ------------------------------------------------------------------------------
$24,000,000 5.688% Variable* 6.89%
Fixed 7/15/2001
- ------------------------------------------------------------------------------
*3 month LIBOR at reset date.
PART C
ITEM 24. FINANCIAL STATEMENT AND EXHIBITS.
(1) Financial Statements.
Schedule of Investments as of July 31, 1996
(unaudited).
Statement of Assets and Liabilities as of July 31,
1996 (unaudited).
Statement of Operations for the period July 11, 1996
(commencement of operations) to July 31, 1996 (unaudited).
Statement of Changes in Net Assets for the period July
11, 1996 (commencement of operations) to July 31, 1996
(unaudited).
Financial Highlights for the period July 11, 1996
(commencement of operations) to July 31, 1996 (unaudited).
(2) Exhibits:
Exhibit Letter Description
-------------- -----------
A. -Seconded Amended and Restated Declaration of Trust
("Declaration of Trust") of Registrant. (a)
B. -Form of By-Laws of Registrant. (a)
C. -Not applicable.
D. -Portions of the Declaration of Trust and By-Laws
of the Registrant defining the rights of holders of
shares of the Registrant. (a)
E. -Not applicable.
F. -Loan Agreement between the Registrant and Merrill
Lynch International Bank Limited. (a)
G. (1) Investment Advisory Agreement between Registrant
and Merrill Lynch Asset Management, L.P. (a)
(2) Administration Agreement between Registrant and
Merrill Lynch Asset Management, L.P. (a)
(3) Sub-Administration Agreement between Merrill Lynch
Asset Management, L.P. and United States Trust
Company of New York. (a)
H. Not applicable.
I. Not applicable.
J. Custodian Contract between Registrant and The Chase
Manhattan Bank, N.A. (a)
K. Shareholder Transfer Agency Agreement between
Registrant and The Chase Manhattan Bank, N.A. (a)
L. Not applicable.
M. Not applicable.
N. Not applicable.
O. Not applicable.
P. Not applicable.
Q. Not applicable.
R. Financial data schedule.
- ----------------
(a) Previously filed.
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