WORLDWIDE
DOLLARVEST
FUND, INC.
FUND LOGO
Semi-Annual Report
May 31, 1997
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.
<PAGE>
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
Printed on post-consumer recycled paper
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).
<PAGE>
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 invest-
ments, 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.
DEAR SHAREHOLDER
Investment Results
For the six-month period ended May 31, 1997, total investment return
for Worldwide DollarVest Fund, Inc. was +6.77%, based on a change in
per share net asset value from $18.01 to $16.04, and assuming
reinvestment of $2.400 per share income dividends and $0.445 per
share capital gains distributions. During the same period, the Fund
earned $0.632 per share income dividends, representing a net
annualized yield of 7.90%, based on a month-end per share net asset
value of $16.04.
<PAGE>
Investment Environment
With the unmanaged J.P. Morgan Emerging Markets Sovereign Index at
an all-time high, we believe that the emerging bond markets are
fully valued. While there has been substantial progress on the
reform front, the major Latin countries had to increase their
borrowings during the past two years to help them deal with the
economic slowdown which resulted from the Mexican peso crisis. While
economic growth has been re-established in the region, debt service
and other credit ratios are less favorable today than during the
previous Index high established in January 1994. While we believe
that continued economic growth coupled with reforms will improve
debt service and other credit ratios in the medium term, we believe
that current price levels more than adequately reflect our optimism.
Emerging market assets of similar duration are trading at spread
parity with the US high yield market. We believe that this is an
indication of a bull market excess and as such we do not find value
in these assets at this time.
Our concern in the near term is the liquidity driven exuberance of
global markets and the complacency of investors toward a US economy
which is growing above historical trend in a tight labor market. We
are also in the midst of a currency crisis which has resulted in
devaluations in Thailand, the Philippines and the Czech Republic. We
believe that these external risks will dominate investor sentiment
in the emerging markets.
Very low interest rates in Japan led to a liquidity boom as money
flowed from Japan to global markets and resulted in the inflation of
financial assets. This inflation is evidenced by record highs in
most global equity markets and historically tight spreads in credit
markets. This scenario prompted Federal Reserve Board (FRB) Chairman
Alan Greenspan to make his "irrational exuberance" speech in
December 1996. Investors reacted negatively to his speech initially
but soon shrugged off his warning and markets proceeded to rally.
This complacency was a characteristic of our markets for the past
six months.
The euphoria and complacency of 1997 are very similar to our
experience in 1994, when there was abundant liquidity financed by
very low interest rates in the United States. At that time,
investors were sanguine about the US interest rate outlook until
after a second FRB tightening. The major sell off took place when it
became evident that the economy was not responding to the higher
interest rates and that the FRB would have to continue in a
tightening mode. In our view, this scenario could repeat itself in
1997.
<PAGE>
Based on our defensive view on the US bond market and the lack of
value in emerging market securities, we raised cash levels
substantially during the quarter with a view to shift out of long-
term exposure into a mixture of short-term exposure in emerging
markets where we see relative value and short-term US Treasury
issues for safety. Our effort in adding short-term emerging market
exposure was slow and deliberate for two reasons. First, short-term
credit product is in short supply as is usually the case at the top
of bull markets and second, we are redoubling our credit effort to
ensure the credit quality of these short-term assets.
Despite our near-term concerns, our longer-term view on emerging
markets remains very constructive. Fundamentals will continue to
improve as fiscal and structural reforms continue to be
implemented. Although periods of volatility are inevitable in
emerging markets, over the long term we believe they will provide
attractive return potential relative to more established markets. We
will therefore be waiting for the appropriate moment to extend
duration in the portfolio. While our cautious approach during this
period negatively impacted the short-term performance of the Fund,
we are confident that our investment strategy will enhance Fund
performance over the long term.
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
(Paolo Valle)
Paolo Valle
Vice President and
Portfolio Manager
July 18, 1997
<PAGE>
As of December 31, 1996, N. John Hewitt retired as Senior Vice
President of the Fund. His colleagues at Merrill Lynch Asset
Management, L.P. join the Fund's Board of Directors in wishing Mr.
Hewitt well in his retirement.
Officers and
Directors
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Terry K. Glenn, Executive 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
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
<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> <S> <C> <C>
Argentina Industrial US$ 3,000,000 Acindar Industria Argentina
de Aceros S.A. 11.75 % 11/12/1998 $ 3,116,250 3.1%
Total Eurobonds in Argentina
(Cost--$3,116,250) 3,116,250 3.1
<PAGE>
Brazil Communications 500,000 Comtel Brasileira Ltd.++++++ 10.75 9/26/2004 531,250 0.5
Total Eurobonds in Brazil
(Cost--$535,000) 531,250 0.5
Mexico Broadcast & 5,000,000 Grupo Televisa, S.A. de C.V. 11.375 5/15/2003 5,462,500 5.3
Publishing
Industrial 5,000,000 Grupo Industrial Durango,
S.A. 12.625 8/01/2003 5,587,500 5.5
Tourism 1,000,000 Grupo Situr, S.A. de C.V.,
guaranteed by Grupo Sidek,
S.A.++ 8.75 9/14/1998 220,000 0.2
Total Eurobonds in Mexico
(Cost--$12,062,500) 11,270,000 11.0
Philippines Telecommunications 2,000,000 Philippine Long Distance
Telephone Co. 8.35 3/06/2017 1,867,340 1.8
Total Eurobonds in the
Philippines (Cost--$1,992,480) 1,867,340 1.8
Total Investments in Eurobonds
(Cost--$17,706,230) 16,784,840 16.4
Brady Bonds*
Argentina Sovereign Government 1,000,000 Republic of Argentina, Global 11.00 10/09/2006 1,090,000 1.1
Obligations
Total Brady Bonds in
Argentina (Cost--$1,016,250) 1,090,000 1.1
Brazil Sovereign Government 3,586,080 Republic of Brazil, C Bond
Obligations (Bearer) 8.00 4/15/2014 2,837,486 2.8
Total Brady Bonds in Brazil
(Cost--$2,821,530) 2,837,486 2.8
Costa Rica Sovereign Government 1,000,000 Banco Central Costa Rica,
Obligations Principal 'B' 6.25 5/21/2015 795,000 0.8
Total Brady Bonds in Costa Rica
(Cost--$661,250) 795,000 0.8
<PAGE>
Ecuador Sovereign Government 3,444,192 Republic of Ecuador, PDI
Obligations (Registered) 6.4375 2/27/2015 2,212,893 2.2
Total Brady Bonds in Ecuador
(Cost--$2,164,518) 2,212,893 2.2
Panama Sovereign Government 1,000,000 Republic of Panama, IRB 3.50 7/17/2014 751,250 0.7
Obligations 5,802,451 Republic of Panama, PDI 6.5625 7/17/2016 5,048,132 4.9
Total Brady Bonds in Panama
(Cost--$4,537,158) 5,799,382 5.6
Philippines Sovereign Government 4,000,000 Republic of the Philippines
Obligations (Registered)++++ 8.75 10/07/2016 4,020,000 3.9
Total Brady Bonds in the
Philippines (Cost--$4,053,500) 4,020,000 3.9
Poland Sovereign Government 7,500,000 Republic of Poland, Discount 6.937 10/27/2024 7,335,975 7.1
Obligations
Total Brady Bonds in Poland
(Cost--$7,298,437) 7,335,975 7.1
Venezuela Sovereign Government 16,190,460 Republic of Venezuela,
Obligations Floating Rate Bond 'B' 6.75 3/31/2007 14,794,033 14.4
Total Brady Bonds in Venezuela
(Cost--$14,389,271) 14,794,033 14.4
Total Investments in Brady
Bonds (Cost--$36,941,914) 38,884,769 37.9
Short-Term Investments
United States Commercial Paper** 5,762,000 General Electric Capital Corp. 5.60 6/02/1997 5,762,000 5.6
6,162,000 General Motors Acceptance
Corp. 5.62 6/02/1997 6,162,000 6.0
------------ ------
11,924,000 11.6
US Government 14,000,000 Federal Home Loan Banks 5.45 6/02/1997 14,000,000 13.7
& Agency 20,000,000 Federal Home Loan Mortgage
Obligations** Corp. 5.55 6/02/1997 20,000,000 19.5
------------ ------
34,000,000 33.2
Total Short-Term Investments
(Cost--$45,924,000) 45,924,000 44.8
<PAGE>
Total Investments (Cost--$100,572,144) 101,593,609 99.1
Other Assets Less Liabilities 924,783 0.9
------------ ------
Net Assets $102,518,392 100.0%
============ ======
<FN>
*Brady Bonds are securities which have been issued to refinance
commercial bank loans and other debt. 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.
**Commercial Paper and certain US Government & Agency Obligations
are traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
++Non-income producing security.
++++The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
++++++Restricted security as to resale. The value of the Fund's
investment in restricted securities was approximately $531,000,
representing 0.5% of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
Comtel Brasileira Ltd.,
10.75% due 9/26/2004 2/28/1997 $535,000 $531,250
Total $535,000 $531,250
======== ========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of May 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$100,572,144) (Note 1a) $101,593,609
Cash 927
Receivables:
Securities sold $ 21,125,000
Interest 1,015,633 22,140,633
------------
Deferred organization expenses (Note 1e) 10,693
Prepaid expenses and other assets 2,398
------------
Total assets 123,748,260
------------
<PAGE>
Liabilities: Payables:
Securities purchased 21,000,000
Dividends to shareholders (Note 1f) 139,464
Investment adviser (Note 2) 53,373 21,192,837
------------
Accrued expenses and other liabilities 37,031
------------
Total liabilities 21,229,868
------------
Net Assets: Net assets $102,518,392
============
Capital: Common Stock, $.10 par value, 200,000,000 shares authorized $ 639,296
Paid-in capital in excess of par 89,557,341
Undistributed investment income--net 2,852,269
Undistributed realized capital gains on investments--net 8,448,021
Unrealized appreciation on investments--net 1,021,465
------------
Total--Equivalent to $16.04 per share based on 6,392,962 shares
of capital stock issued and outstanding (market price--$13.875) $102,518,392
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended May 31, 1997
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 6,107,330
(Note 1d):
Expenses: Interest on reverse repurchase agreements $ 590,695
Investment advisory fees (Note 2) 388,736
Interest on short sales 44,564
Professional fees 28,732
Printing and shareholder reports 22,051
Accounting services (Note 2) 21,365
Custodian fees 17,843
Transfer agent fees 15,369
Directors' fees and expenses 14,263
Listing fees 7,844
Amortization of organization expenses (Note 1e) 2,392
Pricing services 491
Other 3,491
------------
Total expenses 1,157,836
------------
Investment income--net 4,949,494
------------
<PAGE>
Realized & Realized gain on investments--net 8,706,780
Unrealized Gain Change in unrealized appreciation on investments--net (8,084,026)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 5,572,248
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
May 31, November 30,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 4,949,494 $ 10,267,525
Realized gain on investments--net 8,706,780 25,906,932
Change in unrealized appreciation on investments--net (8,084,026) 10,217,825
------------ ------------
Net increase in net assets resulting from operations 5,572,248 46,392,282
------------ ------------
Dividends & Investment income--net (4,344,489) (9,397,828)
Distributions to Realized gain on investments--net (13,842,809) --
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends and
distributions to shareholders (18,187,298) (9,397,828)
------------ ------------
Net Assets: Total increase (decrease) in net assets (12,615,050) 36,994,454
Beginning of period 115,133,442 78,138,988
------------ ------------
End of period* $102,518,392 $115,133,442
============ ============
<FN>
*Undistributed investment income--net $ 2,852,269 $ 2,247,264
============ ============
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended May 31, 1997
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 5,572,248
by Operating Adjustments to reconcile net increase (decrease) in net assets resulting
Activities: from operations to net cash provided by operating activities:
Decrease in receivables 1,166,190
Decrease in other assets 200
Decrease in other liabilities (599,244)
Realized and unrealized gain on investments--net (622,754)
Amortization of premium and discount (1,374,953)
Net cash provided by operating activities 4,141,687
-------------
Cash Provided Proceeds from sales of long-term investments 274,856,902
by Investing Purchases of long-term investments (181,019,827)
Activities: Purchases of short-term investments (1,342,752,740)
Proceeds from sales and maturities of short-term investments 1,316,720,410
-------------
Net cash provided by investing activities 67,804,745
-------------
Cash Used for Cash receipts from borrowings 145,262,035
Financing Cash payments on borrowings (198,968,248)
Activities: Dividends paid to shareholders (18,239,292)
Net cash used for financing activities (71,945,505)
-------------
Cash: Net increase in cash 927
Cash at beginning of period --
-------------
Cash at end of period $ 927
=============
Cash Flow Cash paid for interest $ 806,412
Information: =============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the For the
The following per share data and ratios have Six Period
been derived from information provided in the Months For the February 4,
financial statements. Ended Year Ended 1994++ to
May 31, November 30, November 30,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 18.01 $ 12.22 $ 11.90 $ 14.18
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .78 1.61 1.33 .97
Realized and unrealized gain (loss) on
investments--net .10 5.65 .24 (2.39)
---------- ---------- ---------- ----------
Total from investment operations .88 7.26 1.57 (1.42)
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.68) (1.47) (1.25) (.86)
Realized gain on investments--net (2.17) -- -- --
---------- ---------- ---------- ----------
Total dividends and distributions (2.85) (1.47) (1.25) (.86)
---------- ---------- ---------- ----------
Net asset value, end of period $ 16.04 $ 18.01 $ 12.22 $ 11.90
========== ========== ========== ==========
Market price per share, end of period $ 13.875 $ 14.75 $ 11.25 $ 11.00
========== ========== ========== ==========
Total Investment Based on market price per share 12.77%+++ 45.94% 14.88% (21.13%)+++
Return:** ========== ========== ========== ==========
Based on net asset value per share 6.77%+++ 64.05% 15.35% (9.71%)+++
========== ========== ========== ==========
Ratios to Expenses, net of reimbursement and excluding
Average interest expense .88%* .80% .97% .18%*
Net Assets: ========== ========== ========== ==========
Expenses, net of reimbursement 1.79%* 2.10% 1.83% .59%*
========== ========== ========== ==========
Expenses 1.79%* 2.10% 1.83% 1.26%*
========== ========== ========== ==========
Investment income--net 7.64%* 8.54% 10.48% 8.84%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 102,518 $ 115,133 $ 78,139 $ 76,052
Data: ========== ========== ========== ==========
Portfolio turnover 147.95% 342.06% 183.01% 68.31%
========== ========== ========== ==========
<PAGE>
Leverage: Amount of borrowings (in thousands) $ -- $ 53,706 $ 25,456 $ 8,761
========== ========== ========== ==========
Average amount of borrowings outstanding
during the period (in thousands) $ 22,507 $ 26,812 $ 10,829 $ 9,853
========== ========== ========== ==========
Average amount of borrowings per share during
the period $ 3.52 $ 4.19 $ 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>
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 which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
<PAGE>
(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.
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.
<PAGE>
* 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.
(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.
<PAGE>
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended May 31, 1997 were $172,890,978 and
$251,291,091, respectively.
Net realized and unrealized gains (losses) as of May 31, 1997 were
as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $ 9,106,896 $ 1,021,465
Short-term investments 6,141 --
Short sales (484,945) --
Financial futures contracts 78,688 --
------------ ------------
Total $ 8,706,780 $ 1,021,465
============ ============
As of May 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $1,021,465, of which $1,976,355 related to
appreciated securities and $954,890 related to depreciated
securities. At May 31, 1997, the aggregate cost of investments for
Federal income tax purposes was $100,572,144.
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, 1997,
shares issued and outstanding remained constant at 6,392,962. At May
31, 1997, total paid-in capital amounted to $90,196,637.
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, 1997, the Fund had no open reverse repurchase
agreements. For the six months ended May 31, 1997, the maximum
amount entered into was $53,706,214, the average outstanding was
approximately $22,507,000 and the daily weighted average interest
rate was 5.26%.
6. Subsequent Event:
On June 9, 1997, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.076222 payable on June 30, 1997 to shareholders of record as of
June 19, 1997.
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