MERRILL LYNCH
MIDDLE EAST/
AFRICA FUND, INC.
FUND LOGO
Semi-Annual Report
May 31, 1995
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 is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Merrill Lynch
Middle East/Africa
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
Asset Allocation
As a Percentage*
of
Net Assets as of
May 31, 1995
A map illustrating the following percentages:
Ghana 1.7%
Morocco 3.9%
South Africa 17.3%
Botswana 1.4%
Turkey 11.1%
Israel 6.2%
Zimbabwe 3.1%
[FN]
*Total may not equal 100%.
<PAGE>
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report for
Merrill Lynch Middle East/Africa Fund, Inc. In this and future
shareholder reports, we will highlight the Fund's performance,
describe recent investment activities and examine some of the
important market developments that helped shape our investment
strategy during the period under review.
Merrill Lynch Middle East/Africa Fund, Inc. seeks to provide
shareholders with long-term capital appreciation. The Fund invests
in equity and debt securities of corporate and governmental issuers
in countries located in the Middle East and Africa. The Fund expects
initially to emphasize investments in the securities of issuers in
Morocco, South Africa, Turkey, Israel and Zimbabwe.
During the three-month period ended May 31, 1995, total returns for
Merrill Lynch Middle East/Africa Fund, Inc.'s Class A, Class B,
Class C and Class D Shares were +5.41%, +5.12%, +5.12% and +5.31%,
respectively. The unmanaged Morgan Stanley Capital International
Indexes for the largest equity markets in the region (Israel, South
Africa and Turkey) appreciated 8.6%, 3.3% and 53.3%, respectively.
(Investment results shown do not include applicable sales charges,
and would be lower if sales charges were deducted. Complete
performance information, including aggregate total returns, can be
found on pages 4 and 5 of this report to shareholders.)
The Fund, which commenced operations on December 30, 1994, has 52.5%
of its net assets still in cash equivalent securities. The Fund's
relatively strong performance in spite of this large cash holding is
attributed to its large weighting in the Turkish equity market since
the beginning of the year and its underweighting in South African
stocks. The Fund's exposure to fixed-income securities in South
Africa and Turkey was beneficial to Fund performance as well.
Investment Activities
We have invested the Fund's assets gradually since its inception in
December. Our focus during this five-month period has been to build
positions in a broad range of countries; to concentrate assets in a
relatively few stocks selected for their attractive valuations; and
to use fixed-income securities to supplement equity returns. As a
result, at the end of May, the Fund had 19 equity and two
fixed-income holdings in seven countries--Botswana, Ghana, Israel,
Morocco, South Africa, Turkey and Zimbabwe. Seventeen percent of net
assets was concentrated in the five largest holdings. (See page 5 of
this report to shareholders for a listing of the Fund's top ten
holdings.)
<PAGE>
Examples of the Fund's equity holdings are: Turk Siemens Kablo Ve
Elektrik Sanayii A.S., the largest power and communications cable
producer in Turkey; Delta Corp., a brewer in Zimbabwe; Unilever
Ghana, the dominant supplier of consumer products such as soaps and
shampoos in Ghana; and PEC Israel Economic Corp., a company with
investments in publicly traded and private enterprises in the high
technology and communications industries, basic industry and real
estate. The Fund also holds the bonds of Transnet Ltd., which have a
15% coupon and are issued by the government agency responsible for
South Africa's airlines, railways, roads and ports.
Investment Outlook
We expect Middle East and African securities markets could perform
well in the coming months. The prolonged and staggered global
economic cycle has postponed the peak of commodity prices, which
should be favorable for the resource-based economies of Africa. The
improving liquidity of US investors could give a positive boost to
the stock markets in the region. In many of the Fund's targeted
countries, high real interest rates prevail, but, for long-term
investors, the continuing progress in structural reforms is
encouraging.
We believe that the Israeli equity market has the brightest
near-term prospects among the markets in which our Fund invests.
This market provides an opportunity to invest in a broad range of
industries, including highly developed and globally oriented
industries such as telecommunications, and some less-developed and
domestically oriented ones such as retailing. Israel's economic
management is sound, and real economic growth over the past five
years has averaged 6%. Although the diligent central bank will keep
monetary policy tight, we do not expect real interest rates to rise.
The political outlook is stable by local standards and should
improve as long as talks continue with Syria. We are increasing our
investments in Israel.
We are moderately optimistic about South Africa as economic growth
decelerates, and have invested there very selectively. In our
opinion, the recent inclusion of South Africa in two emerging market
indexes may begin to generate foreign investor demand for South
African equities. However, in light of relatively high equity
valuations, we prefer fixed-income investments. We believe that the
high real yields will compensate us for the near-term risk, as
short-term interest rates will be increased to fight inflation. With
the elimination of the Finrand in March 1995, South Africa did not
experience massive capital outflows, as the "unified" Rand currency
performance remained relatively stable. We will be monitoring Rand
currency risk carefully.
<PAGE>
We have been optimistic about Turkey given its recovering economy,
declining inflation, very low earnings valuations, satisfactory
reserve levels, and a current account which turned to surplus for
the first time in 12 years. However, we are more cautious now that
the stock market has had a powerful rally this year and the currency
has strengthened to levels which may not be sustainable.
In Conclusion
Our outlook for the region is positive, and we will continue to
carefully accumulate investments for the Fund.
We thank you for your investment in Merrill Lynch Middle East/Africa
Fund, Inc., and we look forward to reviewing our outlook and
strategy with you in our upcoming quarterly report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Grace Pineda)
Grace Pineda
Vice President and Portfolio Manager
July 3, 1995
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
<PAGE>
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after 8 years.
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
Performance data for all of the Fund's shares are presented in the
"Aggregate Total Return" and "Recent Performance Results" tables
below and on page 5. The "Recent Performance Results" table shows
investment results before the deduction of any sales charges for all
of the Fund's shares for the since inception (December 30, 1994) and
3-month periods ended May 31, 1995. All data in this table assume
imposition of the actual total expenses incurred by each class of
shares during the relevant period.
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
Aggregate
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (12/30/94)
through 3/31/95 +8.10% +0.38%
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (12/30/94)
through 3/31/95 +7.80% +1.64%
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (12/30/94)
through 3/31/95 +7.80% +4.64%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Inception (12/30/94)
through 3/31/95 +8.00% +0.28%
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<PAGE>
<TABLE>
Recent
Performance
Results*
<CAPTION>
12/30/94++ 3 Month
5/31/95 2/28/95 12/30/94++ % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $10.72 $10.17 $10.00 +7.20% +5.41%
Class B Shares 10.68 10.16 10.00 +6.80 +5.12
Class C Shares 10.68 10.16 10.00 +6.80 +5.12
Class D Shares 10.71 10.17 10.00 +7.10 +5.31
Class A Shares-Total Return +7.20 +5.41
Class B Shares-Total Return +6.80 +5.12
Class C Shares-Total Return +6.80 +5.12
Class D Shares-Total Return +7.10 +5.31
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
++Commencement of Operations.
</TABLE>
PORTFOLIO INFORMATION
As of May 31, 1995
Country Percent
Ten Largest Holdings of of Net
(Equity Investments) Origin Assets
PECIsrael Economic Corp. Israel 4.3%
South African Breweries Limited South Africa 4.1
Turk Siemens Kablo Ve Elektrik
Sanayii A.S. Turkey 3.3
Migros Turk A.S. Turkey 3.0
Delta Corp. Zimbabwe 2.3
Banque Marocaine du Commerce
Exterieure Morocco 2.3
Turkiye Garanti Bankasi A.S. Turkey 2.2
Ampal-American Israel Corp. Israel 1.9
Tofas Turk Otomobil Fibrikasi A.S. Turkey 1.9
Sechaba Investment Trust Botswana 1.4
<TABLE>
SCHEDULE OF INVESTMENTS (In US dollars)
<CAPTION>
Shares Held/ Value Percent of
AFRICA Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Botswana Multi-Industry 182,000 Sechaba Investment Trust $ 152,125 $ 144,144 1.4%
Total Investments in Botswana 152,125 144,144 1.4
<PAGE>
Ghana Health & Personal 55,000 Unilever Ghana 40,666 39,244 0.4
Care
Multi-Industry 723,795 Guiness Ghana Ltd. 132,915 126,427 1.3
Tobacco 70,000 Pioneer Tobacco Co. 5,081 4,769 0.0
Total Investments in Ghana 178,662 170,440 1.7
Morocco Banking 5,000 Banque Marocaine du Commerce Exterieure 221,372 227,531 2.3
Building & 2,000 Groupe Omnium Nord Africain 89,278 81,911 0.8
Construction
Building Materials 2,000 Les Ciments de l'Oriental 87,576 81,432 0.8
Total Investments in Morocco 398,226 390,874 3.9
South Beverages 14,700 South African Breweries Limited 394,547 415,548 4.1
Africa
Beverages & 14,600 Rembrandt Group Ltd. 99,142 106,157 1.1
Tobacco
Retail ZAL 4,000,000 Transnet Ltd., 15% due 10/01/1995 986,520 1,087,252 10.8
Steel 111,860 South Africa Iron & Steel
Industrial Corp., Ltd. 120,987 133,782 1.3
Total Investments in South Africa 1,601,196 1,742,739 17.3
Zimbabwe Beverage and 160,000 Delta Corp. 200,000 236,267 2.3
Tobacco
Real Estate 215,000 Hippo Valley Estates 76,846 76,196 0.8
Total Investments in Zimbabwe 276,846 312,463 3.1
Total Investments in Africa 2,607,055 2,760,660 27.4
MIDDLE
EAST
<PAGE>
Israel Multi-Industry 32,300 Ampal-American Israel Corp. 196,639 189,763 1.9
17,800 PEC Israel Economic Corp. 440,496 431,650 4.3
Total Investments in Israel 637,135 621,413 6.2
Turkey Automobiles 245,000 Tofas Turk Otomobil Fabrikasi A.S. 208,636 188,023 1.9
Banking 862,000 Turkiye Garanti Bankasi A.S. 260,911 220,512 2.2
Industrial 1,093,334 Turk Siemens Kablo Ve Elektrik
Components Sanayii A.S. 206,649 330,543 3.3
Merchandising 89,000 Migros Turk A.S. 195,239 300,116 3.0
Multi-Industry 48,000 Dardanel Onentas Gida A.S. 78,183 66,977 0.7
Total Investments in Turkey 949,618 1,106,171 11.1
Total Investments in the Middle East 1,586,753 1,727,584 17.3
<CAPTION>
SHORT-TERM Face
SECURITIES Amount
<S> <S> <C> <S> <C> <C> <C>
Commercial US$ 237,000 General Electric Capital Corp., 6.13%
Paper* due 6/01/1995 237,000 237,000 2.4
Foreign TRL 93,348,000,000 Turkish Treasury Bills, 122.06% due
Government 3/22/1996 1,228,894 1,146,140 11.4
Obligations*
US Government US$ 3,900,000 US Treasury Bills, 5.74% due 6/22/1995 3,886,942 3,886,941 38.7
& Agency
Obligations*
Total Investments in Short-Term
Securities 5,352,836 5,270,081 52.5
Total Investments $9,546,644 9,758,325 97.2
==========
Other Assets Less Liabilities 281,017 2.8
----------- ------
Net Assets $10,039,342 100.0%
=========== ======
<FN>
*Commercial Paper and certain Foreign Government and 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.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$9,546,644) (Note 1a) $ 9,758,325
Cash 311
Receivables:
Capital shares sold $ 56,249
Interest 47,432
Investment adviser (Note 2) 41,084
Dividends 6,285 151,050
-----------
Deferred organization expenses (Note 1g). 219,210
Prepaid registration fees and other assets (Note 1g) 95,780
-----------
Total assets 10,224,676
-----------
Liabilities: Payables:
Securities purchased 41,471
Capital shares redeemed 13,258
Distributor (Note 2) 7,814 62,543
-----------
Accrued expenses and other liabilities 122,791
-----------
Total liabilities 185,334
-----------
Net Assets: Net assets $10,039,342
===========
<PAGE>
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 3,322
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 68,739
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 9,616
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 12,296
Paid-in capital in excess of par 9,325,292
Undistributed investment income--net 410,049
Accumulated realized capital loss on investments and foreign
currency transactions--net (3,545)
Unrealized appreciation on investments and foreign currency
transactions--net 213,573
-----------
Net assets $10,039,342
===========
Net Asset Value: Class A--Based on net assets of $356,159 and 33,215 shares
outstanding $ 10.72
===========
Class B--Based on net assets of $7,339,318 and 687,385 shares
outstanding $ 10.68
===========
Class C--Based on net assets of $1,026,764 and 96,164 shares
outstanding $ 10.68
===========
Class D--Based on net assets of $1,317,101 and 122,960 shares
outstanding. $ 10.71
===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period December 30, 1994++ to May 31, 1995
<S> <S> <C> <C>
Investment Interest and discount earned $ 438,005
Income Dividends (net of $1,107 foreign withholding tax) 7,319
(Notes 1e & 1f): -----------
Total income 445,324
-----------
<PAGE>
Expenses: Investment advisory fees (Note 2) $ 40,437
Registration fees (Note 1g) 38,978
Distribution fees--Class B (Note 2) 29,871
Printing and shareholder reports 25,675
Amortization of organization expenses (Note 1g) 24,717
Directors' fees and expenses 16,657
Accounting services (Note 2) 16,223
Professional fees 9,063
Custodian fees 7,370
Transfer agent fees--Class B (Note 2) 7,013
Distribution fees--Class C (Note 2) 4,110
Account maintenance fees--Class D (Note 2) 1,294
Transfer agent fees--Class D (Note 2) 1,035
Transfer agent fees--Class C (Note 2) 934
Transfer agent fees--Class A (Note 2) 255
Pricing fees 240
Other 2,771
-----------
Total expenses before reimbursement 226,643
Reimbursement of expenses (Note 2) (191,368)
-----------
Total expenses after reimbursement 35,275
-----------
Investment income--net 410,049
-----------
Realized & Realized loss from:
Unrealized Gain Investments--net (334)
(Loss) on Foreign currency transactions--net (3,211) (3,545)
Investments & -----------
Foreign Unrealized appreciation on:
Currency Investments--net 211,681
Transactions Foreign currency transactions--net 1,892 213,573
- --Net (Notes ----------- -----------
1b, 1c, 1d, Net realized and unrealized gain on investments and foreign
1f & 3): currency transactions 210,028
-----------
Net Increase in Net Assets Resulting from Operations $ 620,077
===========
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
December 30, 1994++
Increase (Decrease) in Net Assets: to May 31, 1995
<S> <S> <C>
Operations: Investment income--net $ 410,049
Realized loss on investments and foreign currency transactions--net (3,545)
Unrealized appreciation on investments and foreign currency transactions--net 213,573
-----------
Net increase in net assets resulting from operations 620,077
-----------
Capital Share Net increase in net assets derived from capital share transactions 9,319,265
Transactions -----------
(Note 4):
Net Assets: Total increase in net assets 9,939,342
Beginning of period 100,000
-----------
End of period* $10,039,342
===========
*Undistributed investment income--net $ 410,049
===========
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been
derived from information provided in the
financial statements. For the Period
December 30, 1994++ to May 31, 1995
Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00
Operating ------ ------ ------ ------
Performance: Investment income--net .44 .43 .43 .46
Realized and unrealized gain on investments and
foreign currency transactions--net .28 .25 .25 .25
------ ------ ------ ------
Total from investment operations .72 .68 .68 .71
------ ------ ------ ------
Net asset value, end of period $10.72 $10.68 $10.68 $10.71
====== ====== ====== ======
<PAGE>
Total Investment Based on net asset value per share 7.20%+++ 6.80%+++ 6.80%+++ 7.10%+++
Return:** ====== ====== ====== ======
Ratios to Expenses, excluding account maintenance and
Average Net distribution fees and net of reimbursement .00%* .00%* .00%* .00%*
Assets: ====== ====== ====== ======
Expenses, net of reimbursement .00%* 1.00%* 1.00%* .25%*
====== ====== ====== ======
Expenses 4.69%* 5.74%* 5.73%* 4.94%*
====== ====== ====== ======
Investment income--net 11.34%* 9.97%* 10.03%* 10.91%*
====== ====== ====== ======
Supplemental Net assets, end of period (in thousands) $ 356 $7,339 $1,027 $1,317
Data: ====== ====== ====== ======
Portfolio turnover .00% .00% .00% .00%
====== ====== ====== ======
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. Prior to
commencement of operations on December 30, 1994, the Fund had no
operations other than those relating to organizational matters and
the issuance of 10,000 shares of capital stock of the Fund to
Merrill Lynch Asset Management, L.P. ("MLAM") for $100,000. 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 offers four classes of shares
under the Merrill Lynch Select Pricing SM System. Shares of Class A
and Class D are sold with a front-end sales charge. Shares of Class
B and Class C may be subject to a contingent deferred sales charge.
All classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to
the account maintenance of such shares, and Class B and Class C
Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
<PAGE>
(a) Valuation of securities--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 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.
(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 equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
<PAGE>
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to enter
into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium
or discount is amortized over the life of the contracts.
* Foreign currency options and futures--The Fund may also purchase or
sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Financial futures contracts--The Fund may purchase or sell stock
index futures contracts and options on such futures contracts. 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.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) receivables or payables expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(d) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of
the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additions to such
securities daily to ensure that the contract is fully
collateralized.
<PAGE>
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(f) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the
ex-dividend date, except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Fund is informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period beginning with
commencement of operations. Prepaid registration fees are charged to
expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid by
the Fund 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
MLAM. The general partner of MLAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. As
compensation for its services to the Fund, the Investment Adviser
receives monthly compensation at the annual rate of 1.0% of the
average daily net assets of the Fund.
<PAGE>
Certain states in which shares of the Fund are qualified for sale
impose limitations on the expenses of the Fund. The most restrictive
annual expense limitation requires that the Investment Adviser
reimburse the Fund to the extent that expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions, and
extraordinary items) exceed 2.5% of the Fund's first $30 million of
average daily net assets, 2.0% of the Fund's next $70 million of
average daily net assets, and 1.5% of the average daily net assets
in excess thereof. The Investment Adviser's obligation to reimburse
the Fund is limited to the amount of the investment advisory fee. No
fee payment will be made to MLAM during any fiscal year which will
cause such expenses to exceed the most restrictive expense
limitation at the time of such payment. For the period December 30,
1994 to May 31, 1995, the Investment Adviser earned fees of $40,437,
all of which was voluntarily waived. The Adviser also voluntarily
reimbursed the Fund $150,931 in additional expenses.
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
NOTES TO FINANCIAL STATEMENTS (concluded)
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the period December 30, 1994 to May 31, 1995, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of the Fund's Class D Shares as follows:
MLFD MLPF&S
Class D $39,046 $5,030
<PAGE>
For the period ended May 31, 1995, MLPF&S received contingent
deferred sales charges of $9,609 and $261 relating to transactions
in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLPF&S, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments
Purchases of investments, excluding short-term securities, for the
period ended May 31, 1995 were $4,193,808.
Net realized and unrealized gains (losses) as of May 31,1995 were as
follows:
Unrealized
Realized Gains
Losses (Losses)
Long-term investments -- $ 294,435
Short-term investments $ (334) (82,754)
Foreign currency transactions (3,211) 1,892
------------ -----------
Total $ (3,545) $ 213,573
============ ===========
As of May 31,1995, net unrealized appreciation for Federal income
tax purposes aggregated $211,681, of which $412,741 related to
appreciated securities and $201,060 related to depreciated
securities. The aggregate cost of investments at May 31, 1995 for
Federal income tax purposes was $9,546,644.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $9,319,265 for the period ended May 31, 1995.
Transactions in capital shares for each class were as follows:
<PAGE>
Class A Shares for the Period Dollar
December 30, 1994++ to May 31, 1995 Shares Amount
Shares sold 35,650 $ 362,014
Shares redeemed (4,935) (50,530)
------------ -----------
Net increase 30,715 $ 311,484
============ ===========
[FN]
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class B Shares for the Period Dollar
December 30, 1994++ to May 31, 1995 Shares Amount
Shares sold 763,294 $ 7,648,639
Shares redeemed (78,409) (789,828)
------------ -----------
Net increase 684,885 $ 6,858,811
============ ===========
[FN]
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class C Shares for the Period Dollar
December 30, 1994++ to May 31, 1995 Shares Amount
Shares sold 96,644 $ 969,704
Shares redeemed (2,980) (30,115)
------------ -----------
Net increase 93,664 $ 939,589
============ ===========
[FN]
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class D Shares for the Period Dollar
December 30, 1994++ to May 31, 1995 Shares Amount
Shares sold 122,258 $ 1,226,589
Shares redeemed (1,798) (17,208)
------------ -----------
Net increase 120,460 $ 1,209,381
============ ===========
[FN]
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
<PAGE>
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Grace Pineda, Vice President and Portfolio Manager
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
The Chase Manhattan Bank, N.A.
Global Securities Services
4 MetroTech Center, 18th Floor
Brooklyn, New York 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800)637-3863
