WORLDWIDE
DOLLARVEST
FUND, INC.
FUND LOGO
Semi-Annual Report
May 31, 1996
Officers and Directors
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
<PAGE>
Edward D. Zinbarg, Director
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Joseph T. Monagle, Jr., Senior Vice President
Donald C. Burke, Vice President
Vincent T. Lathbury III, Vice President
Paolo H. Valle, Vice President
Gerald M. Richard, Treasurer
Mark B. Goldfus, Secretary
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street
New York, NY 10286
NYSE Symbol
WDV
The Fund is leveraged to provide shareholders with a potentially
higher rate of return. However, leveraging may exaggerate changes in
the net asset value of the Fund's shares and in the yield on the
Fund's portfolio.
Investing in emerging market securities involves a number of risk
factors and special considerations, including restrictions on
foreign investments and on repatriation of capital invested in
emerging markets, currency fluctuations, and potential price
volatility and less liquidity of securities traded in emerging
markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may
not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which US companies
are subject. Therefore, the Fund is designed as a long-term
investment for investors capable of assuming the risks of investing
in emerging markets. The Fund should be considered as a vehicle for
diversification and not as a complete investment program. Please
refer to the prospectus for details.
This report, including the financial information herein, is
transmitted to the shareholders of Worldwide DollarVest Fund, Inc.
for their information. It is not a prospectus, circular or
representation intended for use in the purchase of shares of the
Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a
representation of future performance. Statements and other
information herein are as dated and are subject to change.
Worldwide DollarVest
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
WORLDWIDE DOLLARVEST FUND, INC.
The Benefits and
Risks of
Leveraging
The Fund is authorized to utilize leverage in an amount up to 33 1/3%
of the Fund's total assets (including the amount obtained from the
leverage).
The concept of leveraging is based on the premise that the cost of
assets to be obtained from leverage will be based on short-term
interest rates, which normally will be lower than the return earned
by the Fund on its longer-term portfolio investments. Since the
total assets of the Fund (including the assets obtained from
leverage) will be invested in the higher-yielding portfolio
investments, the Fund's Common Stock shareholders are the
beneficiaries of the incremental yield. Should the differential
between the underlying interest rates narrow, the incremental yield
"pick up" will be reduced. Furthermore, if long-term interest rates
rise, the Common Stock net asset value will reflect the full decline
in the entire portfolio holdings therefrom since the assets obtained
from leverage do not fluctuate.
Leverage creates risks for holders of Common Stock including the
likelihood of greater net asset value and market price volatility.
In addition, there is the risk that fluctuations in interest rates
on borrowings (or in the dividend rates on any Preferred Stock, if
the Fund were to issue Preferred Stock) may reduce the Common
Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage
exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from
the securities purchased is not sufficient to cover the cost of
leverage, the Fund's net income will be less than if leverage had
not been used, and therefore the amount available for distribution
to Common Stock shareholders will be reduced. In this case, the Fund
may nevertheless decide to maintain its leveraged position in order
to avoid capital losses on securities purchased with leverage.
However, the Fund will not generally utilize leverage if it
anticipates that its leveraged capital structure would result in a
lower rate of return for its Common Stock than would be obtained if
the Common Stock were unleveraged for any significant amount of
time.
<PAGE>
DEAR SHAREHOLDER
Investment Results
For the six-month period ended May 31, 1996, total investment return
of Worldwide DollarVest Fund, Inc. was +23.68%, based on a change in
per share net asset value from $12.22 to $14.22, and assuming
reinvestment of $0.786 per share income dividends. During the same
period, the Fund earned $0.790 per share income dividends,
representing a net annualized yield of 11.08%, based on a month-end
per share net asset value of $14.22.
Investment Environment
Fundamentals in the emerging markets continued to improve during the
six months ended May 31, 1996. The emerging markets remain focused
on the US bond market. Recent economic data indicate that the growth
in the US economy may be accelerating. Investors fear that continued
strength in the US economy will result in higher inflation and
trigger an interest rate hike by the Federal Reserve Board. While
improving fundamentals in our investment universe suggest that our
market can "de-couple" from the US bond market, inordinate weakness
in the US bond market most likely will cause substantial volatility
in our market.
Mexico
In Mexico, signs of economic recovery and lower inflation are more
abundant. First quarter 1996 gross domestic product (GDP) grew 2.2%
over the previous quarter, and second quarter GDP is widely expected
to establish year-on-year growth. Strong growth in exports led to a
trade surplus of $2.5 billion for the first four months of 1996.
Trade data also indicated increased imports of capital goods which
points to optimism over the economy. Portfolio investment flows
continued to improve as inflationary expectations continue falling.
Local interest rates continued to decline with 28-day Cetes falling
to a post-crisis low of 25.6%.
Argentina
Argentina seems poised for growth with Finance Minister Cavallo
predicting 11% economic growth in the second half of 1996.
Industrial production, auto sales and electricity demand statistics
are all pointing to a revival of the economy. Deposits in the
banking system have grown to an all-time high of $45 billion.
Liquidity is abundant as evidenced by the success of the recent
Letes auction. The auction was massively oversubscribed at a yield
of 6.3%. This liquidity will eventually be the major catalyst in
establishing growth in Argentina.
<PAGE>
Brazil
Inflation in Brazil continued to be subdued and foreign exchange
reserves continued to increase. Foreign exchange reserves at May 31,
1996 stood at $60 billion. Foreign direct investment jumped to $3.3
billion in the first five months, its highest level in 15 years and
up sharply from $956 million in the same period last year. Another
major accomplishment during May was the successful privatization of
Light Servico de Electricidad S.A., which drew over 20 multinational
bidders. The reform process suffered another setback when congress
defeated a few amendments to the social security reform package.
These amendments were aimed at strengthening the diluted reform
package which is now being debated in the legislature. The recent
setbacks to the social security reform package combined with a
congress which is distracted by municipal elections will almost
certainly result in the deferral of tax and administrative reform
legislation into 1997. The Cardoso administration has lost momentum
for now and will have to wait until after the elections to promote
significant reforms.
Venezuela
Venezuela is performing well in the early stages of economic reform.
Contrary to investor expectations, the Bolivar was fairly stable at
the 470 level. There was no need for major intervention in the
currency markets. Inflation in May came in at 12%, which is better
than expected. While inflation for the year is expected at 100%,
most of it is probably behind us. Inflation in the second half of
the year is expected to be approximately 40%. As a result of good
pre-marketing of these socially painful policies, we have not seen
any significant political or social backlash. Negotiations with the
International Monetary Fund are on schedule, with expectations of a
final agreement in July. The administration is managing the program
better than expected.
In Conclusion
We thank you for your investment in Worldwide DollarVest Fund, Inc.,
and we look forward to updating our outlook and strategy with you in
our upcoming report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(Paolo Valle)
Paolo Valle
Vice President and Portfolio Manager
June 28, 1996
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Interest Maturity Value Percent of
COUNTRY Industry Face Amount Eurobonds Rate Date (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C> <C>
Argentina Banking $ 2,000,000 Banco de Galicia y Buenos Aires
S.A.--Yankee 9.00 % 11/01/2003 $ 1,810,000 2.0%
4,000,000 Banco del Rio de la Plata
S.A.--Yankee 8.75 12/15/2003 3,600,000 3.9
------------ ------
5,410,000 5.9
Utilities 1,000,000 Telecom Argentina STET--France
Telecom S.A. 12.00 11/15/2002 1,076,250 1.2
Total Eurobonds in Argentina
(Cost--$6,691,245) 6,486,250 7.1
Brazil Banking 1,000,000 ++Banco Bozano Simonsen S.A. 10.375 5/23/2004 988,000 1.1
Industrial 1,000,000 Celulose Nipo-Brasileira
S.A. (CENIBRA) 9.375 12/21/2003 982,500 1.1
1,000,000 ++Compania Brasileira de
Petroleo Ipiranga 8.625 2/25/2002 992,500 1.1
1,000,000 Klabine Fabricadora Papel 10.00 12/20/2001 990,000 1.1
------------ ------
2,965,000 3.3
<PAGE>
Steel 2,000,000 ++Metalurgica Gerdau S.A. 11.125 5/24/2004 1,997,500 2.2
Total Eurobonds in Brazil
(Cost--$5,996,669) 5,950,500 6.6
Hungary Banking 2,000,000 National Bank of Hungary 8.875 11/01/2013 1,995,000 2.2
Total Eurobonds in Hungary
(Cost--$1,845,000) 1,995,000 2.2
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Interest Maturity Value Percent of
COUNTRY Industry Face Amount Eurobonds Rate Date (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C> <C>
Mexico Banking $ 2,800,000 Banco Nacional de
Comercio Exterior 7.25 % 2/02/2004 $ 2,257,500 2.5%
Broadcast & 2,500,000 ++Grupo Televisa, S.A.
Publishing de C.V. 11.375 5/15/2003 2,525,000 2.8
Finance 1,500,000 Nacional Financiera S.A 9.375 7/15/2002 1,419,375 1.6
Industrial 1,500,000 Corporacion Industrial San Luis 9.125 11/16/1998 1,462,228 1.6
Tourism 1,000,000 +++Grupo Situr, S.A. de C.V.,
guaranteed by Grupo Sidek S.A. 8.75 9/14/1998 351,250 0.4
Total Eurobonds in Mexico
(Cost--$8,783,500) 8,015,353 8.9
Venezuela Oil 2,000,000 Bariven S.A. 10.625 3/17/2002 2,102,500 2.3
Total Eurobonds in Venezuela
(Cost--$1,620,000) 2,102,500 2.3
Total Investments in Eurobonds
(Cost--$24,936,414) 24,549,603 27.1
Brady Bonds**
Argentina Sovereign 7,920,000 Republic of Argentina,
Government Floating Rate Bond* 6.312 3/31/2005 6,098,400 6.7
Obligations 20,000,000 Republic of Argentina,
Par 'L'* 5.25 3/31/2023 10,775,000 11.8
Total Brady Bonds in Argentina
(Cost--$16,468,318) 16,873,400 18.5
<PAGE>
Brazil Sovereign 2,500,000 Republic of Brazil, DCB 6.562 4/15/2012 1,631,250 1.8
Government 5,000,000 Republic of Brazil, Discount 6.50 4/15/2024 3,406,250 3.7
Obligations 1,623,648 Republic of Brazil, C Bond 8.00 4/15/2014 980,277 1.1
Total Brady Bonds in Brazil
(Cost--$5,951,642) 6,017,777 6.6
Costa Rica Sovereign 1,000,000 Banco Central Costa Rica 6.25 5/21/2015 613,750 0.7
Government
Obligations
Total Brady Bonds in Costa Rica
(Cost--$661,250) 613,750 0.7
Ecuador Sovereign 10,412,700 Republic of Ecuador,
Government PDI (Registered) 6.0625 2/27/2015 4,516,509 5.0
Obligations 2,915,556 Republic of Ecuador,
PDI(Bearer) 6.0625 2/27/2015 1,268,267 1.4
Total Brady Bonds in Ecuador
(Cost--$5,784,776) 5,784,776 6.4
Mexico Sovereign 11,741,000 United Mexican States* 11.50 5/15/2026 10,801,720 11.9
Government 16,650,000 United Mexican States, Par 'B'* 6.25 12/31/2019 10,676,813 11.7
Obligations 16,650,000 United Mexican States
(Rights) (a) -- -- 17 0.0
Total Brady Bonds in Mexico
(Cost--$20,610,121) 21,478,550 23.6
Poland Sovereign 5,000,000 Republic of Poland, Discount 6.437 10/27/2024 4,600,000 5.0
Government
Obligations
Total Brady Bonds in Poland
(Cost--$3,462,500) 4,600,000 5.0
<PAGE>
Venezuela Sovereign 27,700,000 Republic of Venezuela, DCB* 6.562 12/18/2007 19,216,875 21.1
Government
Obligations
Total Brady Bonds in Venezuela
(Cost--$16,929,375) 19,216,875 21.1
Total Investments in Brady Bonds
(Cost--$69,867,982) 74,585,128 81.9
Loan Agreements
Morocco Sovereign 5,000,000 Morocco Consolidated
Government Agreement 6.4375 1/01/2009 3,637,500 4.0
Obligations
Total Loan Agreements in Morocco
(Cost--$3,708,750) 3,637,500 4.0
Panama Sovereign 1,000,000 Republic of Panama 3/09/2024 1,010,000 1.1
Government
Obligations
Total Loan Agreements in Panama
(Cost--$665,000) 1,010,000 1.1
Total Investments in Loan
Agreements(Cost--$4,373,750) 4,647,500 5.1
Total Investments
(Cost--$99,178,146) 103,782,231 114.1
OPTIONS Strike Expiration
WRITTEN Issue Price Date
Call Options 5,000,000 Republic of Brazil, Discount,
Written 4/15/2024 $67.50 June 1996 (55,000) 0.0
Total Options Written
(Premiums Received--$60,000) (55,000) 0.0
<PAGE>
Total Investments, Net of Options Written
(Cost--$99,118,146) 103,727,231 114.1
Liabilities in Excess of Other Assets (12,791,291) (14.1)
------------ ------
Net Assets $ 90,935,940 100.0%
============ ======
<FN>
*Security subject to reverse repurchase agreement (Note 5).
**Brady Bonds are debt obligations in which generally the principal
and at least one year of interest payments are collateralized by
cash or securities, usually US Obligations. The risk associated with
these instruments is the amount of any uncollateralized principal or
interest payments since there is a high default rate of commercial
bank loans by countries issuing these securities.
(a)The rights may be exercised until 12/31/2019.
+++Non-income producing security.
++Restricted securities as to resale. The value of the Fund's
investments in restricted securities was $6,503,000, representing
7.2% of net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Banco Bozano Simonsen S.A.,
10.375% due 5/23/2004 5/09/1996 $ 998,200 $ 988,000
Compania Brasileira de Petroleo
Ipiranga, 8.625% due 2/25/2002 2/15/1994 999,167 992,500
Grupo Televisa, S.A. de C.V.,
11.375% due 5/15/2003 5/08/1996 2,500,000 2,257,500
Metalurgica Gerdau S.A.,
11.125% due 5/24/2004 5/17/1996 1,998,000 1,997,500
Total $6,495,367 $6,503,000
========== ==========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$99,178,146) (Note 1a) $103,782,231
Cash 875,015
Receivables:
Securities sold $ 27,151,962
Interest 2,126,153 29,278,115
------------
Deferred organization expenses (Note 1e) 15,624
Prepaid expenses and other assets 2,057
------------
Total assets 133,953,042
------------
Liabilities: Options written, at value (premiums received--$60,000)
(Notes 1a & 1b) 55,000
Payables:
Reverse repurchase agreements (Note 5) 31,058,399
Securities purchased 11,519,537
Dividends to shareholders (Note 1f) 191,825
Investment adviser (Note 2) 61,475
Interest on loans (Note 5) 39,280 42,870,516
------------
Accrued expenses and other liabilities 91,586
------------
Total liabilities 43,017,102
------------
Net Assets: Net assets $ 90,935,940
============
Net Assets Common Stock, $.10 par value, 200,000,000 shares
Consist of: issued and outstanding $ 639,296
Paid-in capital in excess of par 89,557,739
Undistributed investment income--net 1,276,627
Accumulated realized capital losses on investments--
net (Note 6) (5,146,807)
Unrealized appreciation on investments--net 4,609,085
------------
Total--Equivalent to $14.22 per share based on 6,392,962 shares
of capital stock outstanding (market price--$13.125) $ 90,935,940
============
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended May 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 6,195,775
(Note 1d):
Expenses: Interest expense $ 741,351
Investment advisory fees (Note 2) 334,326
Professional fees 29,587
Printing and shareholder reports 24,011
Custodian fees 17,600
Directors' fees and expenses 14,942
Transfer agent fees 11,874
Accounting services (Note 2) 9,279
Listing fees 8,220
Amortization of organization expenses (Note 1e) 2,468
Pricing services 27
Other 2,009
------------
Total expenses 1,195,694
------------
Investment income--net 5,000,081
------------
Realized & Realized gain on investments--net 7,103,491
Unrealized Gain on Change in unrealized depreciation on investments--net 5,721,419
Investment--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 17,824,991
============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: May 31,1996 Nov. 30, 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 5,000,081 $ 8,519,050
Realized gain (loss) on investments--net 7,103,491 (6,272,891)
Change in unrealized appreciation/depreciation on investments--net 5,721,419 7,836,860
------------ ------------
Net increase in net assets resulting from operations 17,824,991 10,083,019
------------ ------------
<PAGE>
Dividends to Less dividends from investment income--net (5,028,039) (7,996,343)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (5,028,039) (7,996,343)
------------ ------------
Net Assets: Total increase in net assets 12,796,952 2,086,676
Beginning of period 78,138,988 76,052,312
------------ ------------
End of period* $ 90,935,940 $ 78,138,988
============ ============
<FN>
*Undistributed investment income-- net $ 1,276,627 $ 1,304,585
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended May 31, 1996
<S> <S> <S>
Cash Provided by Net increase in net assets resulting from operations $ 17,824,991
Operating Adjustments to reconcile net increase (decrease) in net
Activities: assets resulting from operations to net cash
used for operating activities:
Increase in receivables (174,575)
Increase in other liabilities 48,508
Realized and unrealized loss on investments--net (12,824,910)
Amortization of premium and discount (753,791)
------------
Net cash provided by operating activities 4,120,223
------------
Cash Used for Proceeds from sales of long-term investments 95,031,468
Investing Purchases of long-term investments (102,997,191)
Activities: Purchases of short-term investments--net (121,557,086)
Proceeds from sales and maturities of short-term investments--net 125,469,925
------------
Net cash used for investing activities (4,052,884)
------------
<PAGE>
Cash Provided by Cash receipts from borrowings 98,218,914
(Used for) Cash payments on borrowings (92,616,894)
Financing Dividends paid to shareholders (5,052,672)
Activities: ------------
Net cash provided by financing activities 549,348
------------
Cash: Net increase in cash 616,687
Cash at beginning of period 258,328
------------
Cash at end of period $ 875,015
============
Cash Flow Cash paid for interest $ 720,943
Information: ============
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived For the
from information provided in the financial statements. For the Six For the Period
Months Ended Year Ended Feb. 4, 1994+ to
Increase (Decrease) in Net Asset Value: May 31, 1996 Nov. 30, 1995 Nov. 30, 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 12.22 $ 11.90 $ 14.18
Operating ------------ ------------ ------------
Performance: Investment income--net .79 1.33 .97
Realized and unrealized gain (loss) on
investments--net 2.00 .24 (2.39)
------------ ------------ ------------
Total from investment operations 2.79 1.57 (1.42)
------------ ------------ ------------
Less dividends from investment income--net (.79) (1.25) (.86)
------------ ------------ ------------
Net asset value, end of period $ 14.22 $ 12.22 $ 11.90
============ ============ ============
Market price per share, end of period $ 13.125 $ 11.25 $ 11.00
============ ============ ============
<PAGE>
Total Investment Based on market price per share 24.00%+++ 14.88% (21.13%)+++
Return:** ============ ============ ============
Based on net asset value per share 23.68%+++ 15.35% (9.71%)+++
============ ============ ============
Ratios to Expenses, net of reimbursement and excluding
Average interest expense 1.03%* .97% .18%*
Net Assets: ============ ============ ============
Expenses, net of reimbursement 2.72%* 1.83% .59%*
============ ============ ============
Expenses 2.72%* 1.83% 1.26%*
============ ============ ============
Investment income--net 11.38%* 10.48% 8.84%*
============ ============ ============
Supplemental Net assets, end of period (in thousands) $ 90,936 $ 78,139 $ 76,052
Data: ============ ============ ============
Portfolio turnover 111.07% 183.01% 68.31%
============ ============ ============
Leverage: Amount of borrowings (in thousands) $ 31,058 $ 25,456 $ 8,761
============ ============ ============
Average amount of borrowings outstanding
during the period (in thousands) $ 24,032 $ 10,829 $ 9,853
============ ============ ============
Average amount of borrowings per share
during the period $ 3.76 $ 1.69 $ 1.54
============ ============ ============
<FN>
++Commencement of Operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Worldwide DollarVest Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
The Fund determines and makes available for publication the net
asset value of its common stock on a weekly basis. The Fund's Common
Stock is listed on the New York Stock Exchange under the symbol WDV.
(a) Valuation of investments--Portfolio securities (other than short-
term obligations but including listed issues) may be valued on the
basis of prices furnished by one or more pricing services which
determine prices for normal, institutional-size trading units of
such securities using market information, transactions for
comparable securities and various relationships between securities
which are generally recognized by institutional traders. In certain
circumstances, portfolio securities are valued at the last sale
price on the exchange that is the primary market for such
securities, or the last quoted bid price for those securities for
which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The
value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by
obtaining a bank or dealer quotation. Positions in options or
futures contracts are valued at the last sale price on the market
where any such option or future contract is principally traded, or
in the case of options traded in the over-the-counter market, the
last bid price (or average of the last bid prices) from one or more
dealers. Obligations with remaining maturities of sixty days or less
are valued at amortized cost, which approximates market value,
unless the method no longer produces fair valuations. Securities for
which there exist no price quotations or valuations and all other
assets are valued at fair value as determined in good faith by or on
behalf of the Board of Directors of the Fund.
NOTES TO FINANCIAL STATEMENTS (concluded)
(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 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 purchase and write 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.
<PAGE>
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell interest
rate futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Interest rate transactions--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--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 and capital gains at
various rates.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). 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.
<PAGE>
(e) Deferred organization expenses--Deferred organization expenses
are charged to expense on a straight-line basis over a five-year period.
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distribution 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 Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM 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 at an annual rate of 0.60% of
the Fund's average weekly net assets plus the proceeds of any
outstanding borrowings used for leverage.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended May 31, 1996 were $114,516,728 and
$112,526,267, respectively.
Net realized and unrealized gains as of May 31, 1996 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $ 6,913,566 $ 4,604,085
Financial futures 62,425 --
Options written 127,500 5,000
------------ ------------
Total $ 7,103,491 $ 4,609,085
============ ============
<PAGE>
Transactions in call options written for the six months ended
May 31, 1996 were as follows:
Premiums
Call Options Written Par Value Received
Outstanding call options written
at beginning of period -- --
Options written $ 11,000,000 $ 187,500
Options expired (6,000,000) (127,500)
------------ ------------
Outstanding call options written
at end of period $ 5,000,000 $ 60,000
============ ============
As of May 31, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $4,609,085, of which $6,339,149 related to
appreciated securities and $1,730,064 related to depreciated
securities. At May 31, 1996, the aggregate cost of investments, less
premiums received for options written, for Federal income tax
purposes was $99,118,146.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
par value $.10 per share. For the six months ended May 31, 1996,
shares issued and outstanding remained constant at 6,392,962. At May
31, 1996, total paid-in capital amounted to $90,197,035.
5. Reverse Repurchase Agreements:
Under a reverse repurchase agreement, the Fund sells securities and
agrees to repurchase them at a mutually agreed upon date and price.
As of May 31, 1996, the Fund had entered into reverse repurchase
agreements in the amount of $31,058,399. For the six months ended
May 31, 1996, the maximum amount entered into was $38,833,625, the
average outstanding was approximately $24,032,000 and the daily
weighted average interest rate was 6.15%.
6. Capital Loss Carryforward:
At November 30, 1995, the Fund had a capital loss carryforward of
approximately $10,590,000, of which $4,614,000 expires in 2002, and
$5,976,000 expires in 2003. This amount will be available to offset
like amounts of any future taxable gains.
<PAGE>
7. Subsequent Event:
On June 7, 1996, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$0.121859 payable on June 28, 1996 to shareholders of record as of
June 18, 1996.
