MERRILL LYNCH
ASSET INCOME
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Semi-Annual Report
June 30, 1997
Officers and Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Thomas R. Robinson, Vice President
Gerald M. Richard, Treasurer
Barbara G. Fraser, Secretary
Custodian
The Chase Manhattan Bank
4 MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800)637-3863
Investing in emerging market securities involves a number of risk
factors and special considerations, including restrictions on foreign
investments and on repatriation of capital invested in emerging markets,
currency fluctuations, and potential price volatility and less liquidity
of securities traded in emerging markets. In addition, there may be less
publicly available information about the issurers of securities, and
such issuers may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which US
companies are subject. Therefore, the Fund is designed as a long-term
investment for investors capable of assuming the risks of investing in
emerging markets. The Fund should be considered as a vehicle for
diversification and not as a complete investment program. Please refer
to the prospectus for details.
This report is not authorized for use as an offer of sale or
a solicitation of an offer to buy shares of the Fund unless accompanied
or preceded by the Fund's current prospectus. Past performance results
shown in this report should not be considered a representation of future
performance. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less than
their original cost. Statements and other information herein are as
dated and are subject to change.
Merrill Lynch
Asset Income
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #18240 -- 6/97
[RECYCLE LOGO] Printed on post-consumer recycled paper
Worldwide Breakdown of
Investments as of Stocks & Fixed-Income Percent of
June 30, 1997 Securities by Country Net Assets+
United States* 65.3%
United Kingdom 2.7
Canada 2.5
Germany 2.4
Japan 1.8
Sweden 1.6
Australia 1.6
Finland 1.5
Italy 1.4
Denmark 1.0
Switzerland 0.7
Mexico 0.6
France 0.5
Brazil 0.4
South Africa 0.4
Spain 0.2
Philippines 0.2
Netherlands 0.2
Indonesia 0.2
Argentina 0.2
Hong Kong 0.2
Norway 0.1
South Korea 0.0++++
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Banking 1.8%
Insurance 1.7
Pharmaceuticals 1.3
Telecommunications 1.3
Computer Services & Software 1.2
Electronics 1.0
Leisure/Tourism 0.8
Machine Tools & Machinery 0.8
Oil Service 0.8
Retail Stores 0.8
Country Percent
Ten Largest Holdings of of Net
Equity Investments) Origin Assets
Ingersoll-Rand Co. United States 0.5%
UNUM Corporation United States 0.4
Sears, Roebuck & Co. United States 0.4
Dresser Industries,
Inc. United States 0.4
Brunswick
Corporation United States 0.4
Banc One Corp. United States 0.4
Rite Aid Corporation United States 0.4
Edison International. United States 0.4
Tenet Healthcare
Corporation United States 0.3
Merck & Co., Inc. United States 0.3
* Includes investments in short-term
securities.
+ Percent of net assets may not total 100%.
++++ Percent of net assets is less than 0.1%.
Merrill Lynch Asset Income Fund, Inc., June 30, 1997
DEAR SHAREHOLDER
As of June 30, 1997, the asset allocation for Merrill Lynch Asset Income
Fund, Inc. was: US bonds, 43% of net assets; foreign bonds, 12%; US
stocks, 15%; foreign equities, 9%; and cash reserves, 21%.
Having reduced the Fund's exposure to US bonds in March, we later
increased the allocation from 13% of net assets as of March 31, 1997 to
43% as of June 30, 1997. Indications of a slowing US economy during the
second quarter and subdued wage inflation led us to take a more positive
view of US bonds.
During the six months ended June 30, 1997, European bonds continued to
account for the major portion of assets in the foreign bonds sector.
We maintained obligations in the core markets of Germany and Denmark and
positions in the peripheral markets of Finland, Italy and Sweden.
Commitments were retained in Canada and Australia as a means of
obtaining indirect exposure to US interest rates. Our belief that the
total return potential for UK obligations was attractive, led us to
establish a position in sterling-denominated bonds. As of June 30, 1997,
we hedged our European bond and stock positions, the Japanese equity
holdings and the positions in Australian bonds and stocks back into the
US dollar, given our expectations of further US dollar strength.
We also reduced the Fund's exposure to US equities during the June
quarter from 24% of net assets at March 31, 1997 to 15% at June 30,
1997. Our increasingly cautious view of the US equity market reflected
our concern that a slower growing US economy in upcoming quarters could
lead to earnings disappointments. The Fund's largest concentrations
remain in the financial services, technology, energy and health sectors.
New positions in these sectors include: Intel Corp. and Microsoft Corp.
in technology; Banc One Corp. in financial services; and Smith
International, Inc. in energy.
In the foreign equity sector, we maintained the weighting in Japan
although the size of the commitment remained below the benchmark
unmanaged Morgan Stanley Europe, Australia and Far East (EAFE) Index as
we added Matsushita Electric Works, Ltd. We also initiated a position in
Australia through the shares of the Broken Hill Proprietary Co., Ltd.
Overall, significant positions were maintained in Canada and Latin
America, while the size of the equity commitment in Europe remained
below the unmanaged Morgan Stanley EAFE Index. Limited representation
was maintained in the emerging markets of Asia.
In Conclusion
We thank you for your investment in Merrill Lynch Asset Income Fund,
Inc., and we look forward to reviewing our outlook and strategy with you
in our upcoming quarterly report to shareholders.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/THOMAS R. ROBINSON
Thomas R. Robinson
Vice President and Senior
Portfolio Manager
August 8, 1997
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select Pricingsm System, which offers four pricing alternatives:
[bullet] Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors.
[bullet] Class B Shares are subject to a maximum contingent deferred
sales charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B Shares
are subject to a distribution fee of 0.50% and an account maintenance
fee of 0.25%. These shares automatically convert to Class D Shares after
approximately 10 years. (There is no initial sales charge for automatic
share conversions.)
[bullet] Class C Shares are subject to a distribution fee of 0.55% and
an account maintenance fee of 0.25%. In addition, Class C Shares
are subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
[bullet] Class D Shares incur a maximum initial sales charge of 4% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of
future performance. Figures shown in the "Average Annual Total Return"
tables as well as the total returns and cumulative total returns in the
"Performance Summary" tables assume reinvestment of all dividends and
capital gains distributions at net asset value on the payable date.
Investment return and principal value of shares will fluctuate so that
shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer
agency fees applicable to each class, which are deducted from the income
available to be paid to shareholders.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/97 +13.36% +8.82%
Inception (9/02/94) through 6/30/97 +10.26 +8.68
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 +12.51% +8.51%
Inception (9/02/94) through 6/30/97 + 9.44 +8.84
* Maximum contingent deferred sales charge is 4% and is reduced to
0% after 4 years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/97 +12.46% +11.46%
Inception (10/21/94) through 6/30/97 +10.12 +10.12
* Maximum contingent deferred sales charge is 1% and is reduced to
0% after 1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/97 +13.07% +8.55%
Inception (10/21/94) through 6/30/97 +10.73 +9.06
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Recent
Performance
Results
12 Month 3 Month
6/30/97 3/31/97 6/30/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $10.94 $10.40 $10.40 + 7.89%(1) +5.19%
Class B Shares* 10.94 10.40 10.40 + 7.89(1) +5.19
Class C Shares* 10.94 10.40 10.40 + 7.89(1) +5.19
Class D Shares* 10.94 10.40 10.40 + 7.89(1) +5.19
Class A Shares - Total Return* +13.36(2) +6.42(3)
Class B Shares - Total Return* +12.51(4) +6.22(5)
Class C Shares - Total Return* +12.46(6) +6.21(7)
Class D Shares - Total Return* +13.07(8) +6.35(9)
Class A Shares - Standardized 30-day Yield 4.27%
Class B Shares - Standardized 30-day Yield 3.71%
Class C Shares - Standardized 30-day Yield 3.66%
Class D Shares - Standardized 30-day Yield 4.08%
* Investment results shown do not reflect sales charges; results would be lower if a sales
charge was included.
(1) Percent change includes reinvestment of $0.270 per share capital gains distributions.
(2) Percent change includes reinvestment of $0.527 per share ordinary income dividends and
$0.270 per share capital gains distributions.
(3) Percent change includes reinvestment of $0.122 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.448 per share ordinary income dividends
and $0.270 per share capital gains distributions.
(5) Percent change includes reinvestment of $0.102 per share ordinary income dividends.
(6) Percent change includes reinvestment of $0.442 per share ordinary income dividends
and $0.270 per share capital gains distributions.
(7) Percent change includes reinvestment of $0.101 per share ordinary income dividends.
(8) Percent change includes reinvestment of $0.500 per share ordinary income dividends
and $0.270 per share capital gains distributions.
(9) Percent change includes reinvestment of $0.115 per share ordinary income dividends.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <C> <C> <C> <C> <C>
9/02/94 -- 12/31/94 $10.00 $9.68 -- $0.184 - 1.37%
1995 9.68 10.62 $0.036 0.662 +17.38
1996 10.62 10.53 0.270 0.549 + 7.11
1/1/97 -- 6/30/97 10.53 10.94 -- 0.232 + 6.27
Total $0.306 Total $1.627
Cumulative total return as of 6/30/97: +31.77%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class B Shares
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <C> <C> <C> <C> <C>
9/02/94 -- 12/31/94 $10.00 $ 9.68 -- $0.159 - 1.62%
1995 9.68 10.62 $0.036 0.586 +16.51
1996 10.62 10.53 0.270 0.470 + 6.31
1/1/97 -- 6/30/97 10.53 10.94 -- 0.194 + 5.88
Total $0.306 Total $1.409
Cumulative total return as of 6/30/97: +29.02%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would be lower if sales
charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class C Shares
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $ 9.88 $ 9.69 -- $0.097 - 0.94%
1995 9.69 10.62 $0.036 0.580 +16.33
1996 10.62 10.53 0.270 0.464 + 6.25
1/1/97 -- 6/30/97 10.53 10.94 -- 0.192 + 5.85
Total $0.306 Total $1.333
Cumulative total return as of 6/30/97: +29.61%**
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would be lower if sales charge
was deducted.
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class D Shares
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94 -- 12/31/94 $ 9.88 $ 9.69 -- $0.108 - 0.83%
1995 9.69 10.62 $0.036 0.637 +16.97
1996 10.62 10.53 0.270 0.522 + 6.84
1/1/97 -- 6/30/97 10.53 10.94 -- 0.220 + 6.14
Total $0.306 Total $1.487
Cumulative total return as of 6/30/97: +31.54%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Asset Income Fund, Inc., June 30, 1997
SCHEDULE OF INVESTMENTS (in US dollars)
Percent
Shares Value of Net
COUNTRY Industries Held Common Stocks Cost (Note 1a) Assets
<S> <C> <C> <C> <C> <C> <C>
Argentina Oil & Gas Producers 700 Yacimientos Petroliferos Fiscales S.A.
(Class D) (ADR)* $14,314 $21,525 0.2%
----------- ----------- ------
Total Common Stocks in Argentina 14,314 21,525 0.2
=========== =========== ======
Australia Diversified 1,800 Broken Hill Proprietary Co., Ltd 23,683 26,285 0.2
----------- ----------- ------
Total Common Stocks in Australia 23,683 26,285 0.2
=========== =========== ======
Brazil Banking 400 +Uniao de Bancos Brasileiros S.A.
(Unibanco)(GDR)** 13,500 14,850 0.1
Beverages 25,000 Companhia Cervejaria Brahma S.A. PN
(Preferred) 14,337 19,043 0.1
Telecommunications 150 Telecomunicacoes Brasileiras S.A. -
Telebras (ADR)* 7,792 22,763 0.2
----------- ----------- ------
Total Common Stocks in Brazil 35,629 56,656 0.4
=========== =========== ======
Canada Automobile Parts 400 Magna International Inc. (Class A) 18,541 24,075 0.2
Leisure/Tourism 800 +Imax Corp. 12,650 19,500 0.1
Mining 280 Potash Corp. of Saskatchewan, Inc. 17,625 21,018 0.1
Multi-Industry 1,000 Canadian Pacific, Ltd. 17,418 28,438 0.2
----------- ----------- ------
Total Common Stocks in Canada 66,234 93,031 0.6
=========== =========== ======
France Iron & Steel 1,300 Usinor - Sacilor S.A. 19,469 23,456 0.1
Reinsurance 700 Scor S.A. 26,665 28,191 0.2
Semiconductor Capital 300 +SGS - Thomson Microelectronics N.V.
Equipment (NY Registered Shares) 11,349 24,000 0.2
----------- ----------- ------
Total Common Stocks in France 57,483 75,647 0.5
=========== =========== ======
Germany Electronics 500 Siemens AG 22,176 29,711 0.2
Machinery & Equipment 70 Mannesmann AG 19,573 31,212 0.2
----------- ----------- ------
Total Common Stocks in Germany 41,749 60,923 0.4
=========== =========== ======
Hong Kong Banking 700 HSBC Holdings PLC 10,618 21,054 0.2
----------- ----------- ------
Total Common Stocks in Hong Kong 10,618 21,054 0.2
=========== =========== ======
Indonesia Telecommunications 720 P.T. Indonesian Satellite Corp. (ADR)* 26,205 21,555 0.2
----------- ----------- ------
Total Common Stocks in Indonesia 26,205 21,555 0.2
=========== =========== ======
Italy Apparel 300 Gucci Group N.V. (NY Registered Shares) 21,817 19,313 0.1
Publishing 2,000 Arnoldo Mondadori Editore S.p.A. 16,894 11,552 0.1
----------- ----------- ------
Total Common Stocks in Italy 38,711 30,865 0.2
=========== =========== ======
Japan Building & 3,000 Maeda Corp. 31,463 16,852 0.1
Construction 1,000 Matsushita Electric Works, Ltd. 11,398 11,357 0.1
4,000 Okumura Corp. 35,729 21,211 0.2
----------- ----------- ------
78,590 49,420 0.4
Capital Goods 3,000 Mitsubishi Heavy Industries, Inc. 24,018 23,037 0.2
Electrical Equipment 3,000 Mitsubishi Electric Co. 21,636 16,799 0.1
Electronics 1,000 Canon, Inc. 19,005 27,256 0.2
1,000 Matsushita Electric Industrial Co., Ltd. 16,152 20,180 0.1
300 Sony Corporation (ADR)* 21,921 26,400 0.2
----------- ----------- ------
57,078 73,836 0.5
Insurance 2,000 Tokio Marine & Fire Insurance Co., Ltd. 24,908 26,208 0.2
Textiles 3,000 Toray Industries Ltd. 19,082 21,412 0.1
Tires & Rubber 1,000 Bridgestone Corporation 17,241 23,238 0.2
Warehouse & Storage 3,000 Mitsui-Soko Co., Ltd. 25,215 20,940 0.1
----------- ----------- ------
Total Common Stocks in Japan 267,768 254,890 1.8
=========== =========== ======
Mexico Beverages 700 Panamerican Beverages, Inc. (Class A) 14,220 23,013 0.2
Multi-Industry 2,100 Grupo Carso, S.A. de C.V.(ADR)* 33,457 28,350 0.2
Telecommunications 600 Telefonos de Mexico, S.A. de C.V. (ADR)* 22,783 28,650 0.2
----------- ----------- ------
Total Common Stocks in Mexico 70,460 80,013 0.6
=========== =========== ======
Netherlands Banking 1,200 ABN AMRO Holding N.V. 16,900 22,394 0.2
----------- ----------- ------
Total Common Stocks in the Netherlands 16,900 22,394 0.2
=========== =========== ======
Norway Cruise Lines 3,000 Color Line ASA 11,280 13,519 0.1
----------- ----------- ------
Total Common Stocks in Norway 11,280 13,519 0.1
=========== =========== ======
Philippines Beverages 9,075 San Miguel Corp. (Class B) 26,591 23,936 0.2
----------- ----------- ------
Total Common Stocks in the Philippines 26,591 23,936 0.2
=========== =========== ======
South Africa Diversified 2,000 Sasol Limited 22,967 26,246 0.2
Mining 600 De Beers Consolidated Mines Limited (ADR)* 19,815 22,125 0.2
----------- ----------- ------
Total Common Stocks in South Africa 42,782 48,371 0.4
=========== =========== ======
South Korea Engineering & 710 +Hyundai Engineering & Construction Co.,
Construction Ltd. (GDR)** (a) 9,121 2,929 0.0
----------- ----------- ------
Total Common Stocks in South Korea 9,121 2,929 0.0
=========== =========== ======
Spain Energy & Petroleum 600 Repsol S.A. (ADR)* 22,129 25,463 0.2
----------- ----------- ------
Total Common Stocks in Spain 22,129 25,463 0.2
=========== =========== ======
Sweden Banking 1,200 Sparbanken Sverige AB (Class A) 15,094 26,696 0.2
Investment Management 1,300 Bure Investment AB 10,894 16,394 0.1
Real Estate
Investment Trusts 600 +Castellum AB 4,025 4,501 0.0
----------- ----------- ------
Total Common Stocks in Sweden 30,013 47,591 0.3
=========== =========== ======
Switzerland Electrical Equipment 15 BBC Brown Boveri & Cie (Bearer) 13,607 22,741 0.2
Pharmaceuticals 500 Novartis AG (ADR)* 21,705 40,000 0.3
3 Roche Holding AG 25,201 27,176 0.2
----------- ----------- ------
46,906 67,176 0.5
Total Common Stocks in Switzerland 60,513 89,917 0.7
=========== =========== ======
United Kingdom Automobile Parts 4,000 LucasVarity PLC 13,760 13,836 0.1
Beverages 2,900 Grand Metropolitan PLC 19,773 27,875 0.2
Chemicals 1,200 Imperial Chemical Industries PLC 15,490 16,643 0.1
400 Imperial Chemical Industries PLC (ADR)* 22,878 22,750 0.2
----------- ----------- ------
38,368 39,393 0.3
Merchandising 1,300 Boots Company PLC 12,216 15,231 0.1
Mining 1,600 Rio Tinto PLC 23,875 27,845 0.2
Steel 7,300 British Steel PLC 19,178 18,149 0.1
Telecommunications 6,000 Vodafone Group PLC 20,879 29,236 0.2
----------- ----------- ------
Total Common Stocks in the United Kingdom 148,049 171,565 1.2
=========== =========== ======
United States Aerospace 340 Allied Signal, Inc. 25,031 28,560 0.2
525 United Technologies Corp. 16,439 43,575 0.3
----------- ----------- ------
41,470 72,135 0.5
Airlines 100 +US Airways Group Inc. 3,519 3,500 0.0
Appliances 1,100 Sunbeam Corp., Inc. 41,920 41,525 0.3
Automobile Rental 700 +Hertz Corp. (Class A) 20,734 25,200 0.2
Banking 991 Banc One Corp. 43,180 48,003 0.4
1,000 Bank of New York Co., Inc. 27,651 43,500 0.3
550 BankAmerica Corp. 29,431 35,509 0.3
200 Chase Manhattan Corporation 20,502 19,413 0.1
----------- ----------- ------
120,764 146,425 1.1
Chemicals 500 duPont (E.I.) de Nemours & Co. 27,292 31,437 0.2
Computer Services 700 +Cabletron Systems, Inc. 24,143 19,819 0.2
& Software 800 Computer Associates International, Inc. 32,418 44,550 0.3
1,050 First Data Corp. 41,032 46,134 0.3
170 International Business Machines Corp. 9,472 15,332 0.1
100 +Microsoft Corp. 10,250 12,644 0.1
552 +Oracle Corp. 20,414 27,772 0.2
----------- ----------- ------
137,729 166,251 1.2
Computers 400 +Compaq Computer Corp. 29,673 39,700 0.3
Containers 1,150 +Owens Illinois, Inc. 32,914 35,650 0.3
Electronics 285 Intel Corp. 39,162 40,345 0.3
Fertilizers 500 IMC Global, Inc. 18,969 17,500 0.1
Financial Services 600 American Express Company 27,063 44,700 0.3
900 MGIC Investment Corporation 34,378 43,144 0.3
----------- ----------- ------
61,441 87,844 0.6
Hardware Products 700 Black & Decker Corporation 23,461 26,031 0.2
Healthcare --
Managed Care 600 +Oxford Health Plans, Inc. 37,493 43,050 0.3
Insurance 425 Aetna Inc. 32,772 43,509 0.3
600 Allstate Corp. 24,915 43,800 0.3
315 +Hartford Life, Inc. (Class A) 10,222 11,812 0.1
300 Nationwide Financial Services, Inc. 7,050 7,969 0.1
700 Travelers Group, Inc. 37,325 44,144 0.3
100 Travelers Property Casualty Corp. (Class A) 3,870 3,987 0.0
1,400 UNUM Corporation 44,604 58,800 0.4
----------- ----------- ------
160,758 214,021 1.5
Leisure/Tourism 1,550 Brunswick Corporation 38,687 48,437 0.4
380 TCI Pacific Communications
(Convertible Preferred) 35,054 38,950 0.3
----------- ----------- ------
73,741 87,387 0.7
Machine Tools & 1,000 +American Standard Companies, Inc. 32,663 44,750 0.3
Machinery 1,000 Ingersoll-Rand Co. 45,157 61,750 0.5
----------- ----------- ------
77,820 106,500 0.8
Medical Services 1,600 +Tenet Healthcare Corporation 41,671 47,300 0.3
Natural Gas 700 El Paso Natural Gas Co. 35,652 38,500 0.3
1,020 Enron Corp. 40,476 41,629 0.3
----------- ----------- ------
76,128 80,129 0.6
Oil Service 1,350 Dresser Industries, Inc. 31,842 50,287 0.4
150 Schlumberger Ltd. 12,665 18,750 0.1
600 +Smith International, Inc. 27,162 36,450 0.3
----------- ----------- ------
71,669 105,487 0.8
Paper 850 Kimberly-Clark Corp. 33,004 42,287 0.3
Petroleum 350 Pennzoil Co. 15,138 26,862 0.2
850 Unocal Corp. 28,542 32,991 0.2
----------- ----------- ------
43,680 59,853 0.4
Pharmaceuticals 300 Abbott Laboratories 13,893 20,025 0.2
600 American Home Products Corporation 35,417 45,900 0.3
450 Merck & Co., Inc. 15,499 46,575 0.3
----------- ----------- ------
64,809 112,500 0.8
Railroads 350 Burlington Northern Santa Fe Inc. 28,317 31,456 0.2
Real Estate
Investment 800 Prentiss Properties Trust 16,001 20,500 0.2
Trust 680 Starwood Lodging Trust 30,600 29,027 0.2
----------- ----------- ------
46,601 49,527 0.4
Retail Stores 960 Rite Aid Corporation 30,504 47,880 0.4
1,060 Sears, Roebuck & Co. 47,686 56,975 0.4
----------- ----------- ------
78,190 104,855 0.8
Software -- Computer 800 +BMC Software, Inc. 29,984 44,300 0.3
Telecommunications 700 +Airtouch Communications, Inc. 19,613 19,162 0.2
150 +Tele-Communications, Inc. (Class A) 2,167 2,222 0.0
(Convertible Preferred)
1,350 +WorldCom, Inc. 33,886 43,116 0.3
----------- ----------- ------
55,666 64,500 0.5
Tobacco 525 Philip Morris Companies, Inc. 15,784 23,297 0.2
Travel & Lodging 1,090 Carnival Corp. (Class A) 31,403 44,962 0.3
Utilities 1,900 Edison International 35,605 47,262 0.4
----------- ----------- ------
Total Common Stocks in the United States 1,601,371 2,042,216 14.9
=========== =========== ======
Total Investments in Common Stocks 2,621,603 3,230,345 23.5
=========== =========== ======
<CAPTION>
Face
Amount Fixed-Income Securities
<S> <C> <C> <C> <C> <C> <C>
Australia A$ 250,000 Government of Australia, 7.50% due 7/15/2005 193,165 193,633 1.4
----------- ----------- ------
Total Fixed-Income Securities in Australia 193,165 193,633 1.4
=========== =========== ======
Canada C$ 350,000 Canadian Government Bonds, 7% due 12/01/2006 265,903 265,843 1.9
----------- ----------- ------
Total Fixed-Income Securities in Canada 265,903 265,843 1.9
=========== =========== ======
Denmark Dkr 850,000 Government of Denmark, 7% due 11/15/2007 135,796 134,570 1.0
----------- ----------- ------
Total Fixed-Income Securities in Denmark 135,796 134,570 1.0
=========== =========== ======
Finland Fim 1,000,000 Finnish Government Bonds, 7.25% due 4/18/2006 213,165 209,228 1.5
----------- ----------- ------
Total Fixed-Income Securities in Finland 213,165 209,228 1.5
=========== =========== ======
Germany Bundesrepublik Deutschland:
DM 250,000 7.125% due 12/20/2002 176,302 158,642 1.1
200,000 6% due 1/04/2007 118,959 117,709 0.9
----------- ----------- ------
Total Fixed-Income Securities in Germany 295,261 276,351 2.0
=========== =========== ======
Italy Lit 250,000,000 Buoni Poliennali del Tesoro (Italian
Government Bonds), 8.50% due 1/01/2004 177,115 160,961 1.2
----------- ----------- ------
Total Fixed-Income Securities in Italy 177,115 160,961 1.2
=========== =========== ======
Sweden Government of Sweden:
Skr 1,000,000 10.25% due 5/05/2000 171,007 146,316 1.1
200,000 8% due 8/15/2007 31,396 28,425 0.2
----------- ----------- ------
Total Fixed-Income Securities in Sweden 202,403 174,741 1.3
=========== =========== ======
United Kingdom [POUND] 125,000 UK Treasury Bills, 7.25% due 12/07/2007 206,901 210,279 1.5
----------- ----------- ------
Total Fixed-Income Securities in the
United Kingdom 206,901 210,279 1.5
=========== =========== ======
United States Federal National Mortgage Association:
US$ 349,843 6% due 11/01/2000 346,345 348,815 2.5
794,733 6% due 6/01/2001 786,661 781,694 5.7
474,528 6% due 2/01/2004 468,893 468,345 3.4
----------- ----------- ------
1,601,899 1,598,854 11.6
US Treasury Notes:
600,000 6% due 8/15/1999 599,578 598,500 4.4
950,000 6.50% due 5/31/2002 956,383 953,857 6.9
1,300,000 6.625% due 5/15/2007 1,314,016 1,310,764 9.5
1,525,000 6.625% due 2/15/2027 1,431,605 1,492,121 10.9
----------- ----------- ------
4,301,582 4,355,242 31.7
Total Fixed-Income Securities in the United
States 5,903,481 5,954,096 43.3
=========== =========== ======
Total Investments in Fixed-Income Securities 7,593,190 7,579,702 55.1
=========== =========== ======
Short-Term Securities
Commercial 500,000 General Electric Capital Corp., 5.70%
Paper*** due 7/03/1997 499,842 499,842 3.6
485,000 General Motors Acceptance Corp., 6.25%
due 7/01/1997 485,000 485,000 3.5
----------- ----------- ------
Total Investments in Short-Term Securities 984,842 984,842 7.1
=========== =========== ======
Total Investments $11,199,635 11,794,889 85.7
============
Unrealized Appreciation on Forward Foreign Exchange Contracts++ 11,587 0.1
Other Assets Less Liabilities 1,960,342 14.2
----------- ------
Net Assets $13,766,818 100.00%
=========== ======
* American Depositary Receipts (ADR).
** Global Depositary Receipts (GDR).
*** Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the Fund.
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
+ Non-income producing security.
++ Forward foreign exchange contracts sold as of June 30, 1997 were
as follows:
Unrealized
Appreciation
Expiration (Depreciation)
Foreign Currency Sold Date (Note 1c)
A$ 265,000 July 1997 $545
Chf 150,000 July 1997 1,860
Dkr 910,000 July 1997 918
DM 680,000 July 1997 5,091
Fim 1,100,000 July 1997 915
Frf 525,000 July 1997 865
[POUND] 250,000 August 1997 1,087
Lit 350,000,000 July 1997 1,513
Pta 3,800,000 July 1997 359
Skr 1,775,000 July 1997 831
(yen) 32,000,000 July 1997 (2,397)
Total Unrealized Appreciation on Forward Foreign
Exchange Contracts
(US$ Commitment -- $2,299,629) $11,587
=======
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost -- $11,199,635) (Note 1a) $11,794,889
Unrealized appreciation on forward foreign exchange contracts (Note 1c) 11,587
Cash 1,367,527
Receivables:
Securities sold $455,573
Interest 111,697
Dividends 8,383
Forward foreign exchange contracts (Note 1c) 3,264
Capital shares sold 1,169 580,086
------------
Deferred organization expenses (Note 1g). 59,185
Prepaid registration fees and other assets (Note 1g) 120,419
------------
Total assets 13,933,693
------------
Liabilities: Payables:
Capital shares redeemed 63,903
Dividends to shareholders (Note 1h) 10,458
Securities purchased 7,388
Distributor (Note 2) 5,271
Forward foreign exchange contracts (Note 1c) 2,217 89,237
------------
Accrued expenses and other liabilities 77,638
------------
Total liabilities 166,875
------------
Net Assets: Net assets $13,766,818
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $44,300
Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 70,416
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 7,636
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 3,488
Paid-in capital in excess of par 12,449,579
Undistributed realized capital gains on investments and foreign currency
transactions -- net 584,866
Unrealized appreciation on investments and foreign currency transactions -- net 606,533
------------
Net assets $13,766,818
============
Net Asset Value: Class A -- Based on net assets of $4,845,631 and 442,995 shares outstanding $10.94
============
Class B -- Based on net assets of $7,704,342 and 704,159 shares outstanding $10.94
============
Class C -- Based on net assets of $835,347 and 76,360 shares outstanding $10.94
============
Class D -- Based on net assets of $381,498 and 34,881 shares outstanding. $10.94
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
<S> <C> <C> <C>
Investment Interest and discount earned (net of $530 foreign witholding tax) $302,581
Income Dividends (net of $2,929 foreign witholding tax) 39,513
(Notes 1e & 1f): ------------
Total income 342,094
------------
Expenses: Investment advisory fees (Note 2) $50,220
Registration fees (Note 1g) 30,337
Account maintenance and distribution fees -- Class B (Note 2) 29,685
Professional fees 28,822
Accounting services (Note 2) 25,387
Printing and shareholder reports 22,314
Transfer agent fees -- Class B (Note 2) 19,614
Amortization of organization expenses (Note 1g) 10,830
Transfer agent fees -- Class A (Note 2) 10,217
Custodian fees 7,318
Directors' fees and expenses 6,187
Pricing fees 2,703
Account maintenance and distribution fees -- Class C (Note 2) 2,209
Transfer agent fees -- Class D (Note 2) 1,562
Transfer agent fees -- Class C (Note 2) 1,354
Account maintenance fees -- Class D (Note 2) 816
Other 7,113
------------
Total expenses before reimbursement 256,688
Reimbursement of expenses (Note 2) (190,548)
------------
Total expenses after reimbursement 66,140
------------
Investment income -- net 275,954
------------
Realized & Realized gain from:
Unrealized Gain on Investments -- net 279,083
Investments & Foreign currency transactions -- net 53,678 332,761
Foreign Currency ------------
Transactions -- Net Change in unrealized appreciation/depreciation on:
(Notes 1c, 1d, Investments -- net 170,592
1f & 3): Foreign currency transactions -- net 32,694 203,286
------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 536,047
------------
Net Increase in Net Assets Resulting from Operations $812,001
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Six
Months For the
Ended Year Ended
June 30, December 31,
1997 1996
Increase (Decrease) in Net Assets:
<S> <C> <C> <C>
Operations: Investment income -- net $275,954 $585,926
Realized gain on investments and foreign currency transactions -- net 332,761 782,602
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions -- net 203,286 (473,973)
------------ ------------
Net increase in net assets resulting from operations 812,001 894,555
------------ ------------
Dividends & Investment income -- net:
Distributions to Class A (98,456) (178,761)
Shareholders Class B (152,492) (356,040)
(Note 1h): Class C (10,745) (15,319)
Class D (14,261) (35,806)
In excess of investment income -- net:
Class A -- (19,148)
Class B -- (38,138)
Class C -- (1,641)
Class D -- (3,835)
Realized gain on investments -- net:
Class A -- (99,948)
Class B -- (217,791)
Class C -- (8,964)
Class D -- (19,583)
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (275,954) (994,974)
------------ ------------
Capital Share Net decrease in net assets derived from capital share transactions (367,677) (598,413)
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets 168,370 (698,832)
Beginning of period 13,598,448 14,297,280
------------ ------------
End of period $13,766,818 $13,598,448
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the For the
Six Period
Months For the Sept. 2,
The following per share data and ratios have been derived Ended Year Ended 1994+ to
from information provided in the financial statements. June 30, December 31, Dec. 31,
1997 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.53 $10.62 $9.68 $10.00
Operating ------- ------- ------- -------
Performance: Investment income -- net .24 .50 .60 .18
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net .41 .23 1.04 (.32)
------- ------- ------- -------
Total from investment operations .65 .73 1.64 (.14)
------- ------- ------- -------
Less dividends and distributions:
Investment income -- net (.24) (.50) (.60) (.18)
In excess of investment income -- net -- (.05) -- --
Realized gain on investments -- net -- (.27) (.01) --
In excess of realized gain on investments -- net -- -- (.09) --
------- ------- ------- -------
Total dividends and distributions (.24) (.82) (.70) (.18)
------- ------- ------- -------
Net asset value, end of period $10.94 $10.53 $10.62 $9.68
======= ======= ======= =======
Total Investment Based on net asset value per share 6.27%++++ 7.11% 17.38% (1.37%)++++
Return:** ======= ======= ======= =======
Ratios to Expenses, net of reimbursement .50%* .25% .00% .00%*
Average Net ======= ======= ======= =======
Assets: Expenses 3.33%* 3.48% 5.12% 5.20%*
======= ======= ======= =======
Investment income -- net 4.61%* 4.73% 5.78% 5.64%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $4,846 $3,918 $3,872 $1,147
Data: ======= ======= ======= =======
Portfolio turnover 110.36% 342.71% 46.75% .83%
======= ======= ======= =======
Average commission rate paid++ $.0145 $.0265 -- --
======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Commencement of Operations.
++ For fiscal years beginning on or after September 1, 1995, the Fund is required to
disclose its average commission rate per share for purchases and sales
of equity securities. The "Average Commission Rate Paid" includes commissions
paid in foreign currencies, which have been converted into US dollars
using the prevailing exchange rate on the date of the transaction. Such conversions
may significantly affect the rate shown.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class B
For the For the
Six Period
Months For the Sept. 2,
The following per share data and ratios have been derived Ended Year Ended 1994+ to
from information provided in the financial statements. June 30, December 31, Dec. 31,
1997 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.53 $10.62 $9.68 $10.00
Operating ------- ------- ------- -------
Performance: Investment income -- net .20 .42 .51 .16
Realized and unrealized gain (loss) on investments
and foreign currency transactions -- net .41 .23 1.04 (.32)
------- ------- ------- -------
Total from investment operations .61 .65 1.55 (.16)
------- ------- ------- -------
Less dividends and distributions:
Investment income -- net (.20) (.42) (.51) (.16)
In excess of investment income -- net -- (.05) -- --
Realized gain on investments -- net -- (.27) (.01) --
In excess of realized gain on investments -- net -- -- (.09) --
------- ------- ------- -------
Total dividends and distributions (.20) (.74) (.61) (.16)
------- ------- ------- -------
Net asset value, end of period $10.94 $10.53 $10.62 $9.68
======= ======= ======= =======
Total Investment Based on net asset value per share 5.88%++++ 6.31% 16.51% (1.62%)++++
Return:** ======= ======= ======= =======
Ratios to Expenses, net of reimbursement 1.25%* 1.00% .75% .75%*
Average Net ======= ======= ======= =======
Assets: Expenses 4.10%* 4.24% 5.94% 6.04%*
======= ======= ======= =======
Investment income -- net 3.85%* 3.99% 5.06% 4.86%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $7,704 $8,690 $9,236 $6,797
Data: ======= ======= ======= =======
Portfolio turnover 110.36% 342.71% 46.75% .83%
======= ======= ======= =======
Average commission rate paid++ $.0145 $.0265 -- --
======= ======= ======= =======
Class C
For the For the
Six Period
Months For the Oct. 21,
The following per share data and ratios have been derived Ended Year Ended 1994+ to
from information provided in the financial statements. June 30, December 31, Dec. 31,
1997 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.53 $10.62 $9.69 $9.88
Operating ------- ------- ------- -------
Performance: Investment income -- net .20 .41 .52 .10
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net .41 .23 1.03 (.19)
------- ------- ------- -------
Total from investment operations .61 .64 1.55 (.09)
------- ------- ------- -------
Less dividends and distributions:
Investment income -- net (.20) (.42) (.52) (.10)
In excess of investment income -- net -- (.04) -- --
Realized gain on investments -- net -- (.27) (.01) --
In excess of realized gain on investments -- net -- -- (.09) --
------- ------- ------- -------
Total dividends and distributions (.20) (.73) (.62) (.10)
------- ------- ------- -------
Net asset value, end of period $10.94 $10.53 $10.62 $9.69
======= ======= ======= =======
Total Investment Based on net asset value per share 5.85%++++ 6.25% 16.33% (.94%)++++
Return:** ======= ======= ======= =======
Ratios to Expenses, net of reimbursement 1.30%* 1.04% .80% .80%*
Average Net ======= ======= ======= =======
Assets: Expenses 4.13%* 4.28% 6.02% 5.75%*
======= ======= ======= =======
Investment income -- net 3.89%* 3.95% 4.99% 5.19%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $835 $357 $418 $154
Data: ======= ======= ======= =======
Portfolio turnover 110.36% 342.71% 46.75% .83%
======= ======= ======= =======
Average commission rate paid++ $.0145 $.0265 -- --
======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Commencement of Operations.
++ For fiscal years beginning on or after September 1, 1995, the Fund is required to
disclose its average commission rate per share for purchases and sales
of equity securities. The "Average Commission Rate Paid" includes commissions paid
in foreign currencies, which have been converted into US dollars
using the prevailing exchange rate on the date of the transaction. Such conversions
may significantly affect the rate shown.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Class D
For the For the
Six Period
Months For the Oct. 21,
The following per share data and ratios have been derived Ended Year Ended 1994+ to
from information provided in the financial statements. June 30, December 31, Dec. 31,
1997 1996 1995 1994
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $10.53 $10.62 $9.69 $9.88
Operating ------- ------- ------- -------
Performance: Investment income -- net .23 .46 .57 .11
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net .41 .24 1.03 (.19)
------- ------- ------- -------
Total from investment operations .64 .70 1.60 (.08)
------- ------- ------- -------
Less dividends and distributions:
Investment income -- net (.23) (.47) (.57) (.11)
In excess of investment income -- net -- (.05) -- --
Realized gain on investments -- net -- (.27) (.01) --
In excess of realized gain on investments -- net -- -- (.09) --
------- ------- ------- -------
Total dividends and distributions (.23) (.79) (.67) (.11)
------- ------- ------- -------
Net asset value, end of period $10.94 $10.53 $10.62 $9.69
======= ======= ======= =======
Total Investment Based on net asset value per share 6.14%++++ 6.84% 16.97% (.83%)++++
Return:** ======= ======= ======= =======
Ratios to Expenses, net of reimbursement .75%* .50% .25% .25%*
Average Net ======= ======= ======= =======
Assets: Expenses 3.58%* 3.70% 5.44% 5.14%*
======= ======= ======= =======
Investment income -- net 4.37%* 4.48% 5.53% 5.70%*
======= ======= ======= =======
Supplemental Net assets, end of period (in thousands) $382 $633 $771 $63
Data: ======= ======= ======= =======
Portfolio turnover 110.36% 342.71% 46.75% .83%
======= ======= ======= =======
Average commission rate paid++ $.0145 $.0265 -- --
======= ======= ======= =======
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Commencement of Operations.
++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and sales
of equity securities. The "Average Commission Rate Paid" includes commissions paid
in foreign currencies, which have been converted into US dollars using the prevailing
exchange rate on the date of the transaction. Such conversions may significantly affect
the rate shown.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Asset Income Fund, Inc., June 30, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Asset Income Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. 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
Pricingsm System. Shares of Class A and Class D are sold with a front
end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B
and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market
are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market.
Securities which are traded both in the over-the-counter market and on a
stock exchange are valued according to the broadest and most
representative market. Options written 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 quotations are not available are valued at
fair value as determined in good faith by or under the direction of the
Fund's Board of Directors.
(b) Repurchase agreements -- The Fund invests in US Government
securities pursuant to repurchase agreements 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.
(c) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and
currency markets. Losses may arise due to changes in the value
of the contract or if the counterparty does not perform under
the contract.
[bullet] 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.
[bullet] 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.
[bullet] 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.
[bullet] Options -- The Fund is authorized to write covered call options
and purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset and
an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing
investments.
(d) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at
the exchange rate at the end of the period. Foreign currency
transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
(e) Income taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required. Under the applicable foreign tax law, a withholding tax may
be imposed on interest, dividends, and capital gains at various rates.
(f) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Dividend income is recorded on the ex-dividend dates. Dividends
from foreign securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend date.
Interest income (including amortization of discount) is recognized on
the accrual basis. Realized gains and losses on security transactions
are determined on the identified cost basis.
(g) Deferred organization expenses and prepaid registration
fees -- Deferred organization expenses are charged to expense
on a straight-line basis over a five-year period. Prepaid regis-
tration fees are charged to expense as the related shares are issued.
(h) Dividends and distributions -- Dividends from net investment income
are declared daily and paid monthly. Distributions of capital gains are
recorded on the ex-dividend dates. Distributions in excess of realized
capital gains are due primarily to differing tax treatments for post-
October losses.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). The general partner of MLAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
The Fund has also entered into a Distribution Agreement and Distribution
Plans with Merrill Lynch Funds Distributor, 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. For such
services, the Fund pays a monthly fee of 0.75%, on an annual basis, of
the average daily value of the Fund's net assets.
For the six months ended June 30, 1997, MLAM earned fees of $50,220, all
of which were waived. MLAM also reimbursed the Fund for additional
expenses of $140,328.
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
Maintenance Distribution
Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and MLPF&S for
providing account maintenance services to Class B, Class C and Class D
shareholders. The ongoing distribution fee compensates the Distributor
and MLPF&S for providing shareholder and distribution-related services
to Class B and Class C shareholders.
For the six months ended June 30, 1997, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the Fund's
Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 5 $39
Class D $96 $1,085
For the six months ended June 30, 1997, MLPF&S received contingent
deferred sales charges of $24,583 relating to transactions in Class B
Shares.
In addition, MLPF&S received $283 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended
June 30, 1997.
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.
During the six months ended June 30, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $106 for security
price quotations to compute the net asset value of the Fund.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the six months ended June 30, 1997 were $11,825,267 and $14,148,036,
respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were as
follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $279,049 $595,254
Short-term investments 34 --
Forward foreign exchange contracts 200,595 11,587
Foreign currency transactions (146,917) (308)
---------- ---------
Total $332,761 $606,533
========== =========
As of June 30, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $595,254, of which $751,767 related to appreciated
securities and $156,513 related to depreciated securities. At June 30,
1997, the aggregate cost of investments for Federal income tax purposes
was $11,199,635.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share trans-
actions were $367,677 and $598,413 for the six months ended
June 30, 1997 and for the year ended December 31, 1996,
respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended June 30, 1997 Shares Amount
Shares sold 127,922 $1,362,623
Shares issued to shareholders
in reinvestment of dividends 1,027 10,931
------------ ------------
Total issued 128,949 1,373,554
Shares redeemed (58,033) (615,251)
------------ ------------
Net increase 70,916 $758,303
============ ============
Class A Shares for the Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 148,235 $1,558,183
Shares issued to shareholders
in reinvestment of dividends
and distributions 6,575 68,638
------------ ------------
Total issued 154,810 1,626,821
Shares redeemed (147,468) (1,548,311)
------------ ------------
Net increase 7,342 $78,510
============ ============
Class B Shares for the Six Months Dollar
Ended June 30, 1997 Shares Amount
Shares sold 76,542 $821,959
Shares issued to shareholders
in reinvestment of dividends 8,378 89,096
------------ ------------
Total issued 84,920 911,055
Shares redeemed (201,347) (2,145,075)
Automatic conversion of shares (4,513) (48,605)
------------ ------------
Net decrease (120,940) $(1,282,625)
============ ============
Class B Shares for the Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 188,856 $1,980,405
Shares issued to shareholders
in reinvestment of dividends
and distributions 32,429 340,779
------------ ------------
Total issued 221,285 2,321,184
Shares redeemed (262,466) (2,771,235)
Automatic conversion of shares (3,441) (35,577)
------------ ------------
Net decrease (44,622) $(485,628)
============ ============
Class C Shares for the Six Months Dollar
Ended June 30, 1997 Shares Amount
Shares sold 70,099 $729,422
Shares issued to shareholders
in reinvestment of dividends 651 6,985
------------ ------------
Total issued 70,750 736,407
Shares redeemed (28,325) (302,739)
------------ ------------
Net increase 42,425 $433,668
============ ============
Class C Shares for the Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 7,915 $84,054
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,406 14,763
------------ ------------
Total issued 9,321 98,817
Shares redeemed (14,748) (155,613)
------------ ------------
Net decrease (5,427) $(56,796)
============ ============
Class D Shares for the Six Months Dollar
Ended June 30, 1997 Shares Amount
Shares sold 8,050 $85,139
Automatic conversion of shares 4,513 48,605
Shares issued to shareholders
in reinvestment of dividends 1,134 12,078
------------ ------------
Total issued 13,697 145,822
Shares redeemed (38,883) (422,845)
------------ ------------
Net decrease (25,186) $(277,023)
============ ============
Class D Shares for the Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 19,806 $207,380
Automatic conversion of shares 3,441 35,577
Shares issued to shareholders
in reinvestment of dividends
and distributions 5,725 60,261
------------ ------------
Total issued 28,972 303,218
Shares redeemed (41,498) (437,717)
------------ ------------
Net decrease (12,526) $(134,499)
============ ============
5. Commitments:
At June 30, 1997, the Fund entered into foreign exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under
which it had agreed to sell various foreign currencies with a value of
approximately $371,000.
COMMON STOCK PORTFOLIO CHANGES
For the Quarter Ended June 30, 1997
Additions Banc One Corp.
Broken Hill Proprietary Co., Ltd.
Castellum AB
Gucci Group N.V. (NY Registered Shares)
Hartford Life, Inc. (Class A)
Hertz Corp. (Class A)
Ingersoll-Rand Co.
Intel Corp.
LucasVarity PLC
Matsushita Electric Works, Ltd.
*McDonald's Corp.
Microsoft Corp.
Owens-Illinois, Inc.
Smith International, Inc.
Sunbeam Corp., Inc.
Travelers Property Casualty Corp. (Class A)
US Airways Group Inc.
Uniao de Bancos Brasileiros S.A.
(Unibanco) (GDR)
Deletions Banco Frances del Rio de la Plata S.A. (ADR)
Centocor, Inc.
Ciba Specialty Chemicals AG (ADR)
Cisco Systems, Inc.
Countrywide Credit Industries, Inc.
Eisai Co., Ltd.
FMC Corporation
First USA, Inc.
Fischer Scientific International, Inc.
H.J. Heinz Company
Health Management Associates, Inc.
(Class A)
Henkel KGaA
Henkel KGaA (Preferred)
Hong Kong Telecommunications, Ltd. (ADR)
Lear Corporation
*McDonald's Corp.
Puma AG
* Added and deleted in the same quarter.
