MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Semi-Annual Report
June 30, 1995
<PAGE>
Officers and Directors
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Kara W.Y. Tan Bhala, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
Brown Brothers Harriman &Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
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 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
Dragon Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH DRAGON FUND, INC.
Asset Allocation
As a Percentage* of
Net Assets as of
June 30, 1995
A map illustrating the following percentages:
Pakistan 0.3%
India 1.5%
Indonesia 6.6%
Singapore 12.2%
Malaysia 17.5%
Thailand 11.8%
Hong Kong 30.1%
South Korea 4.4%
Taiwan 0.9%
Philippines 7.2%
[FN]
*Total may not equal 100%.
<PAGE>
DEAR SHAREHOLDER
Macroeconomic crosscurrents led to a sharp improvement in the
investment outlook for the "dragon" stock markets during the three
months ended June 30, 1995. As noted in previous reports to
shareholders, the November 1994 round of US monetary policy
tightening led to investor concerns of higher interest rates and
slower economic growth in the emerging Asian economies. As 1994 drew
to a close, the negative investor sentiment was exacerbated by
concerns about currency devaluations following the Mexican financial
crisis. However, as 1995 began, evidence increased that US economic
growth was slowing and the emerging Asian stock markets began to
stage a modest recovery. This rally was interrupted by the
earthquake in Kobe, Japan, which affected markets throughout the
region. Nevertheless, as evidence mounted of slowing US economic
growth and as the situation in Mexico stabilized, global investors
began to return to the dragon stock markets.
Improved liquidity and the prospect of stable interest rates have
restored investor confidence. The outlook is further enhanced by the
attractive valuations offered by many of the emerging Asian stock
markets, since share prices are still below their historic highs
while average corporate earnings are projected to increase at around
a 20% level. As a result, price/earnings multiples for the emerging
Asian stock markets overall have contracted to levels that are below
the historic averages for the past ten years.
These developments are reflected in Merrill Lynch Dragon Fund,
Inc.'s total investment returns for the quarter ended June 30, 1995:
+9.90%, +9.81%, +9.80% and +9.95% for Class A, Class B, Class C and
Class D Shares, respectively, compared to a +9.45% total return for
the unmanaged Morgan Stanley Capital International Combined Far East
Free (Ex-Japan) Index. During the quarter, the Fund's performance
outpaced this benchmark index because of its overweighting in the
Philippines and neutral weightings in Hong Kong and Thailand. The
Fund's performance was also helped by an overweighting in the
banking sectors in these two countries. (Fund returns do not include
applicable sales charges, and would be lower if sales charges were
deducted. Complete performance information, including average annual
total returns, can be found on pages 5, 6 and 7 of this report to
shareholders.)
<PAGE>
Investment Activities
Hong Kong continues to be the Fund's largest country weighting at
30.1% of net assets, and its stock market has been among the best
performers in the world thus far in 1995. Stabilizing property
prices in Hong Kong (combined with an apparent economic "soft
landing" in the People's Republic of China) and stable interest
rates in the United States have sparked a resurgence of investor
interest in Hong Kong.
The Fund now has a neutral weighting in Hong Kong. We increased our
Hong Kong investments for two reasons. First, a decline in long-term
US bond yields has made the yield differential more attractive for
Hong Kong stocks. Second, the more benign interest rate environment
is likely to result in an increase in money flowing into the stock
market, particularly since it is the most liquid market in Asia
outside of Japan. However, we have decided not to overweight the
Hong Kong stock market at this time since corporate earnings growth
is lackluster relative to other emerging Asian economies.
Malaysia is the Fund's second-largest country weighting, and its
stock market's return has been among the best in the world this
year. With a decline in money supply growth, investors came to
recognize that the country's interest rate increases were not going
to be as large as originally expected. In addition, despite the
increase in the current account deficit through higher imports of
capital goods associated with greater foreign direct investments,
capital improvements ultimately will increase Malaysia's manufacture
of goods for export. However, in our view Malaysia's current
economic expansion may be peaking, and share prices there are fairly
valued to slightly expensive. Therefore, our 17.5% position is an
underweighted one.
We have made some strategic changes in our Malaysian investments,
increasing holdings of large-capitalization blue chip issues. At the
same time, we increased investments in convertible bonds for their
enhanced downside price protection relative to equities. For
example, we sold part of the Fund's common stock investment in
Telekom Malaysia BHD and purchased the company's convertible bonds.
We have also invested in the convertible bonds of Renong BHD, a
conglomerate with exposure to infrastructure and property
development.
Our slightly underweighted 12.2% exposure in Singapore is the Fund's
next-largest country investment. Interest rates continue to fall in
Singapore, and Singapore dollars are in demand since the currency is
perceived to be relatively immune from potential devaluations.
However, this liquidity has not spilled over to the Singapore stock
market.
<PAGE>
We believe that our investments in blue-chip companies are well
positioned to outperform the Singapore stock market in the months
ahead. Our investments are primarily focused on banks and high-
quality property companies with strong managements, good income
flows and diversification among commercial and residential
development.
The Fund has an overweighted 7.2% exposure to the Philippines.
President Ramos' policies to liberalize the economy are likely to
find even greater support since his party gained a majority in the
Philippine senate in the recent elections, which were peaceful by
historic standards. Early in 1995, investors feared that a Mexican-
style currency crisis would take place in the Philippines, although
these concerns have abated in recent weeks following the elections
and with improving economic fundamentals. Interest rates are
declining with inflation under control, and we believe that this
trend will continue as the central bank eases monetary policy.
With increasing purchasing power in the Philippines, we are
especially positive regarding consumer stocks. In the consumer
sector, we purchased additional shares of companies such as the
brewer San Miguel Corp. and the snack-food manufacturer Universal
Robina Corp. In the export sector, we believe that the Fund's
investment in International Container Terminals will benefit from
increasing export activity. This company virtually controls
containerized shipping in Manila, and its earnings growth has been
directly correlated with Philippine export growth.
Our 11.8% position in Thailand is a slightly underweighted one. Our
investments primarily emphasize banks and finance companies, which
are selling at the most attractive valuations in this market.
Although corporate earnings growth is likely to reach a strong 22%
this year, concerns are arising that the rate of inflation will
increase rapidly. We plan to keep a close watch on developments in
Thailand and will alter our investment strategy, if necessary.
The Indonesian stock market is still attractive on a valuation
basis, in our view, since price/earnings ratios are low and
corporate earnings gains are high. However, a lack of liquidity in
the stock market remains a problem. The recent announcement of
tariff reductions and economic deregulation are positive, but such
developments are not occurring as rapidly as investors would like.
Our Indonesian holdings are largely in consumer stocks such as the
cigarette company P.T. Hanjaya Mandala Sampoerna, which is the
Fund's second-largest holding. The Fund's 6.6% Indonesian investment
is an overweighted position.
<PAGE>
In India, valuations have fallen to historically low levels, but a
lack of liquidity is creating uncertainty about investing there.
Since the Fund is only able to purchase convertible securities and
global depositary receipts, we have not expanded our 1.5% investment
even though valuations are now at very attractive levels.
The People's Republic of China's economy is still in a protracted
slowdown. The investment outlook has been clouded further by the
leadership power struggle taking place as Deng Xiao Ping's condition
worsens. Until corporate accounting standards improve for Chinese
companies issuing B shares traded on Chinese stock exchanges, we
plan to continue to invest in China solely through the purchase of H
shares, which are traded in Hong Kong, and through investment in
Hong Kong-based companies whose revenues are largely earned in
China.
In Conclusion
Outside of Japan, the Asian stock markets have had an impressive run
during the first half of 1995. The rally was precipitated by two
main factors: a severe over-correction which occurred in December
and January, and the improved interest rate outlook in the United
States. Much of the interest rate news has probably already been
discounted in current share prices. In our view, it is likely that
the Asian stock markets will undergo a period of consolidation in
the next several months until there are further positive
developments to spur share prices higher.
In our view, the dragon stock markets are still able to support
higher share prices. As we have stated, earnings growth in the
region remains respectable, valuations in many markets are still at
or below their historical averages, and dividend yields have become
attractive relative to fixed-income alternatives. The more positive
interest rate environment is unlikely to foster a contraction in
price/earnings multiples. Indeed, if interest rates do fall further,
multiples are more likely to expand as earnings growth is unchanged.
Investor sentiment toward the emerging Asian stock markets has
improved markedly from last year's low levels, although a bullish
consensus is still absent. Liquidity flowing into the region has
decreased since the speculative days of 1993. However, we believe
the sound underlying fundamentals will support a modest gain in the
region's stock markets this year.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(Kara Tan Bhala)
Kara Tan Bhala
Vice President and Portfolio Manager
July 31, 1995
Proxy Results
During the six-month period ended June 30, 1995, Merrill Lynch
Dragon Fund, Inc. shareholders voted on the following proposals.
Proposals 1, 2 and 4 were approved at a special shareholders'
meeting on September 28, 1994. Proposal 3 was passed at a special
shareholders' meeting on January 31, 1995. The description of each
proposal and number of shares voted are as follows:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: Donald Cecil 67,338,830 1,390,336
Edward H. Meyer 67,343,852 1,385,313
Charles C. Reilly 67,335,334 1,393,832
Richard R. West 67,340,516 1,388,650
Arthur Zeikel 67,339,288 1,389,877
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To select Deloitte & Touche LLP as the Fund's independent auditors. 66,143,052 483,514 2,102,600
3. To approve certain changes to the Fund's fundamental investment restrictions. 33,265,525 1,487,765 1,870,691
4. To amend the Fund's articles of incorporation to implement the Merrill Lynch
Select Pricing SM System. 62,037,058 3,045,688 3,646,420
</TABLE>
<PAGE>
PERFORMANCE DATA
About Fund Performance
Since October 21, 1994, investors have been 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, as detailed in the Fund's prospectus. If you were a Class
A shareholder prior to October 21, 1994, your Class A Shares were
redesignated to Class D Shares on October 21, 1994, which, in the
case of certain eligible investors, were simultaneously exchanged
for Class A Shares.
* 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 the Fund's Class B and Class D Shares are
presented in the "Average Annual Total Return" and "Performance
Summary" tables below and on page 6. "Aggregate Total Return" tables
for Class A and Class C Shares are also presented below. Data for
all of the Fund's shares are presented in the "Recent Performance
Results" table on pages 6 and 7.
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for Class B and Class D
Shares for the 12-month and 3-month periods ended June 30, 1995 and
for Class A and Class C Shares for the since inception and 3-month
periods ended June 30, 1995. All data in this table assume
imposition of the actual total expenses incurred by each class of
shares during the relevant period.
<PAGE>
None of the past results shown should be considered a represen-
tation 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.
Average Annual
Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/95 + 5.01% + 1.01%
Inception (5/29/92) through 6/30/95 +17.16 +16.69
[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 Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/95 + 5.80% + 0.25%
Inception (5/29/92) through 6/30/95 +18.06 +16.02
[FN]
*Maximum sales charge is 5.25%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
<PAGE>
Aggregate
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94) through 6/30/95 -5.90% -10.84%
[FN]
*Maximum sales charge is 5.25%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94) through 6/30/95 -6.45% -7.36%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
PERFORMANCE DATA (concluded)
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
5/29/92--12/31/92 $10.00 $10.13 -- $0.020 + 1.50%
1993 10.13 18.74 $0.006 0.103 +86.15
1994 18.74 15.03 0.241 0.122 -17.86
1/1/95--6/30/95 15.03 15.79 -- -- + 5.06
------ ------
Total $0.247 Total $0.245
Cumulative total return as of 6/30/95: +63.06%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class D Shares***
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
5/29/92--12/31/92 $10.00 $10.12 -- $0.080 + 2.02%
1993 10.12 18.77 $0.006 0.182 +87.46
1994 18.77 15.08 0.241 0.211 -17.24
1/1/95--6/30/95 15.08 15.91 -- -- + 5.50
------ ------
Total $0.247 Total $0.473
Cumulative total return as of 6/30/95: +66.99%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
include sales charges; results would be lower if sales charge was
included.
***As a result of the implementation of the Merrill Lynch Select
Pricing SM System, Class A Shares of the Fund outstanding prior to
October 21, 1994 were redesignated to Class D Shares.
</TABLE>
<TABLE>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month
6/30/95 3/31/95 6/30/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $15.88 $14.45 $17.43 -7.43%(1) +9.90%
Class B Shares 15.79 14.38 15.40 +4.18(1) +9.81
Class C Shares 15.68 14.28 17.29 -7.84(1) +9.80
Class D Shares 15.91 14.47 15.49 +4.36(1) +9.95
Class A Shares--Total Return -5.90(2) +9.90
Class B Shares--Total Return +5.01(3) +9.81
Class C Shares--Total Return -6.45(4) +9.80
Class D Shares--Total Return +5.80(5) +9.95
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
++Investment results shown for Class A and Class C Shares are since
inception (10/21/94).
(1)Percent change includes reinvestment of $0.241 per share capital
gains distributions.
(2)Percent change includes reinvestment of $0.251 per share ordinary
income dividends and $0.241 per share capital gains distributions.
(3)Percent change includes reinvestment of $0.122 per share ordinary
income dividends and $0.241 per share capital gains distributions.
(4)Percent change includes reinvestment of $0.229 per share ordinary
income dividends and $0.241 per share capital gains distributions.
(5)Percent change includes reinvestment of $0.211 per share ordinary
income dividends and $0.241 per share capital gains distributions.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US Dollars)
<CAPTION>
Face Amount/ Value Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Hong Kong Banking 6,580,000 Guoco Group, Ltd. $ 26,766,050 $ 30,700,374 2.5%
2,937,606 HSBC Holdings, Ltd. 28,120,364 37,682,059 3.0
-------------- -------------- ------
54,886,414 68,382,433 5.5
Conglomerates 16,808,000 Guangdong Investments, Ltd. 7,289,020 9,178,111 0.7
US$ 3,436,000 Guangdong Investments, Ltd., 4.50%
due 10/07/1998 4,364,558 3,813,960 0.3
7,423,000 Hutchison Whampoa, Ltd. 27,774,775 35,880,759 2.9
916,405 Jardine Matheson Holdings Ltd. 7,670,010 6,735,577 0.5
3,227,000 Swire Pacific Ltd. 'A' 17,817,938 24,607,163 2.0
-------------- -------------- ------
64,916,301 80,215,570 6.4
Electrical 18,211,000 Innovative International Holdings
Equipment Ltd. 7,882,226 4,883,852 0.4
3,125,000 Johnson Electric Holdings Ltd. 6,156,512 6,300,648 0.5
-------------- -------------- ------
14,038,738 11,184,500 0.9
<PAGE>
Electronics 12,200,000 ASM Pacific Technology 4,026,946 9,697,181 0.8
Insurance 20,867,000 National Mutual Asia, Ltd. 8,681,172 13,349,831 1.1
Leisure 6,370,000 Hong Kong & Shanghai Hotels 5,697,738 7,862,368 0.6
Packaging 14,000,000 M.C. Packaging (HK), Ltd. 6,547,529 4,840,190 0.4
Publishing & 8,750,000 Oriental Press Group 5,834,025 3,534,017 0.3
Broadcasting 7,600,000 South China Morning Post Holdings 4,440,430 4,567,485 0.4
3,616,000 Television Broadcasts Ltd. 14,546,891 12,711,825 1.0
-------------- -------------- ------
24,821,346 20,813,327 1.7
Real Estate 2,813,000 Cheung Kong Holdings Ltd. 11,290,164 13,924,483 1.1
3,670,870 New World Development Co., Ltd. 9,446,068 12,216,781 1.0
3,890,100 Sun Hung Kai Properties, Ltd. 20,918,378 28,783,713 2.3
1,795,000 Wharf Holdings Ltd. 6,952,014 5,857,825 0.5
US$ 9,840,000 Wharf Holdings Ltd., 5% due
7/15/2000 9,335,976 10,209,000 0.8
-------------- -------------- ------
57,942,600 70,991,802 5.7
Telecommunications 12,220,000 ABC Communications Holdings Ltd. 3,501,176 3,356,145 0.3
23,137,000 Hong Kong Telecommunications, Ltd. 42,978,645 45,751,890 3.7
-------------- -------------- ------
46,479,821 49,108,035 4.0
Utilities-- 4,441,200 China Light & Power Co., Ltd. 20,428,753 22,845,148 1.8
Electric & Gas 8,990,656 Hong Kong & China Gas Co. (The) 11,559,886 14,350,562 1.2
-------------- -------------- ------
31,988,639 37,195,710 3.0
Total Long-Term Investments in
Hong Kong 320,027,244 373,640,947 30.1
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US Dollars)
<CAPTION>
Face Amount/ Value Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
India Chemicals 957,200 Mardia Chemicals Ltd. $ 4,402,250 $ 3,079,382 0.2%
Conglomerates 243,300 ++Reliance Industries (ADR)*++++ 6,667,743 4,440,225 0.4
Consumer--Durables 456,000 ++IFB Industries Ltd. 3,998,087 2,614,429 0.2
<PAGE>
Finance 66,210 Housing Development Finance 6,347,114 5,029,809 0.4
Pharmaceuticals 96,000 Ranbaxy Laboratories Limited 1,935,716 1,987,578 0.2
Steel Mills 872,000 ++Essar Gujarat Limited 2,917,155 1,638,732 0.1
Total Long-Term Investments in
India 26,268,065 18,790,155 1.5
Indonesia Banking 1,744,000 P.T. Bank International Indonesia 7,223,733 5,386,343 0.4
Food 2,060,672 P.T. Mayorah Indah 6,294,418 9,442,432 0.8
Miscellaneous-- 1,941,250 ++P.T. Modern Photo Film 5,119,000 10,552,168 0.8
Consumer
Pharmaceuticals 2,251,500 P.T. Kalbe Farma 7,362,735 10,316,846 0.8
Telecommunications 118,490 P.T. Indonesian Satellite Corp.
(Indosat) (ADR)* 4,045,632 4,532,242 0.4
Tobacco 5,425,000 P.T. Hanjaya Mandala Sampoerna 4,892,468 42,649,371 3.4
Total Long-Term Investments in
Indonesia 34,937,986 82,879,402 6.6
Malaysia Banking 4,256,000 Affin Holdings BHD 6,646,052 7,508,021 0.6
743,200 Affin Holdings BHD (Rights)(b) 137,667 469,550 0.0
2,054,000 Arab-Malaysian Merchant Bank BHD 7,932,519 24,437,333 2.0
US$ 1,969,000 Arab-Malaysian Merchant Bank
BHD, 7.50% due 11/20/1999 768,090 1,074,367 0.1
2,850,000 Malayan Banking BHD 6,748,454 22,566,154 1.8
2,700,000 Public Bank BHD 'Foreign' 2,361,655 5,662,849 0.5
-------------- -------------- ------
24,594,437 61,718,274 5.0
Building & 1,912,500 George Kent Holdings BHD 2,694,743 3,389,538 0.3
Construction 2,355,000 I.J.M. Corp. BHD 5,257,205 9,371,692 0.8
-------------- -------------- ------
7,951,948 12,761,230 1.1
Conglomerates 5,630,000 Renong BHD 5,468,820 10,486,236 0.8
US$ 5,325,000 Renong BHD, 2.50% due 1/15/2005 5,643,366 5,937,375 0.5
-------------- -------------- ------
11,112,186 16,423,611 1.3
<PAGE>
Finance 938,000 Hong Leong Credit BHD 6,877,505 4,733,292 0.4
3,440,000 MBF Capital BHD 5,461,287 4,008,041 0.3
-------------- -------------- ------
12,338,792 8,741,333 0.7
Financial Services 980,000 Pan Pacific Asia BHD 5,892,045 3,819,487 0.3
Food 1,721,700 Nestle Malaysia BHD 7,333,320 13,208,529 1.1
Hotels 3,000,000 Pernas International Hotels &
Properties BHD (Warrants)(a) 165,079 892,308 0.1
Leisure 3,300,000 Berjaya Sports TOTO BHD 7,410,648 5,848,615 0.5
1,048,500 Genting BHD 9,536,582 10,366,708 0.8
3,216,000 Resorts World BHD 10,967,664 18,867,200 1.5
-------------- -------------- ------
27,914,894 35,082,523 2.8
Real Estate 4,156,000 Land & General BHD 5,065,849 13,895,959 1.1
Shipyards 830,000 Westmont BHD 6,278,222 4,120,205 0.3
Telecommunications 5,925,000 Leader Universal Cable BHD 8,791,618 21,147,692 1.7
916,000 Telekom Malaysia BHD 5,236,252 6,952,205 0.6
US$ 5,450,000 Telekom Malaysia BHD, 4% due
10/03/2004 4,732,023 5,218,375 0.4
-------------- -------------- ------
18,759,893 33,318,272 2.7
Transportation 1,199,000 Malaysian Airlines System BHD 3,345,381 4,058,154 0.3
2,957,333 Malaysian International Shipping
Co. BHD 6,043,232 8,674,843 0.7
-------------- -------------- ------
9,388,613 12,732,997 1.0
Total Long-Term Investments in
Malaysia 136,795,278 216,714,728 17.5
Pakistan Telecommunications 41,905 ++Pakistan Telecommunications
(GDR)**++++ 7,533,262 4,169,547 0.3
Total Long-Term Investments in
Pakistan 7,533,262 4,169,547 0.3
Philippines Beverages 6,246,240 San Miguel Corp. 'B' 10,222,586 25,974,949 2.1
Conglomerates 909,183 Benpres Holdings Corp.++++ 8,047,236 7,500,760 0.6
Food & Beverage 3,779,000 Universal Robina Corp. 2,823,608 1,927,305 0.2
<PAGE>
International 16,566,770 International Container Terminals 8,867,496 11,536,295 0.9
Trade
Oil 8,212,500 Petron Corp. 5,609,882 5,396,602 0.4
Real Estate 4,822,500 Ayala Land, Inc. 5,508,954 5,581,159 0.5
Retail 50,408,475 SM Prime Holdings 10,093,708 13,843,049 1.1
Telecommunications 78,880 Philippine Long Distance
Telephone Co. (ADR)* 4,027,836 5,659,640 0.5
Utilities-- 1,357,950 Manila Electric Co. (MERALCO) 'B' 6,429,540 10,921,136 0.9
Electric
Total Long-Term Investments in the
Philippines 61,630,846 88,340,895 7.2
Singapore Airlines 1,529,000 Singapore Airlines 'Foreign' Ltd. 10,946,600 14,118,898 1.1
Automotive 1,610,000 Cycle & Carriage, Ltd. 7,464,505 14,405,870 1.2
Banking 2,016,000 Development Bank of Singapore Ltd. 18,696,296 22,945,168 1.8
1,366,866 Overseas Chinese Banking Corp.
'Foreign' 8,900,801 15,165,657 1.2
2,690,705 United Overseas Bank 18,536,290 25,423,979 2.0
-------------- -------------- ------
46,133,387 63,534,804 5.0
Beverages 190,000 Fraser & Neave Ltd. (Warrants)(a) 1,139,529 938,440 0.1
Conglomerates 2,616,000 ACMA Ltd. 8,074,466 8,314,273 0.7
Electronics 272,000 Goldtron, Ltd. 134,903 233,644 0.0
14,340,000 I.P.C. Corp. 10,159,282 7,955,261 0.6
-------------- -------------- ------
10,294,185 8,188,905 0.6
Marine/Offshore 2,807,500 Sembawang Maritime Ltd. 8,560,245 11,656,049 0.9
Oil Services US$ 2,090,000 Sembawang Maritime Ltd., 1.50%
due 10/25/1998 1,325,469 2,842,520 0.2
-------------- -------------- ------
9,885,714 14,498,569 1.1
Publishing & 1,142,400 Singapore Press Holdings Ltd. 11,734,325 17,091,024 1.4
Broadcasting
Real Estate 4,104,000 DBS Land Ltd. 12,091,181 12,867,230 1.0
Total Long-Term Investments in
Singapore 117,763,892 153,958,013 12.2
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
<CAPTION>
Face Amount/ Value Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
South Korea Retail Stores 89,723 Shinsegae Department Stores Co. $ 2,691,974 $ 6,757,034 0.5%
11,962 Shinsegae Department Stores Co.
(New) 705,107 836,193 0.1
-------------- -------------- ------
3,397,081 7,593,227 0.6
Steel 146,200 Pohang Iron & Steel Co., Ltd. 13,398,607 14,502,377 1.2
Telecommunications 15,562 Korea Mobile Telecommunications
Corp. 8,576,917 15,730,304 1.3
Utilities-- 428,900 Korean Electric & Power Corp. 12,196,137 16,547,326 1.3
Electric
Total Long-Term Investments in
South Korea 37,568,742 54,373,234 4.4
Taiwan Closed-End Funds 343,300 ++The R.O.C. Taiwan (ADR)* 2,904,850 3,776,300 0.3
Electrical US$ 4,000,000 ++TECO Electric and Machinery, 2.75%
Equipment due 4/15/2004 4,000,000 3,710,000 0.3
Food & Beverage 215,649 President Enterprises (ADR)*++++ 3,119,745 3,504,296 0.3
Total Long-Term Investments in
Taiwan 10,024,595 10,990,596 0.9
Thailand Banking 2,474,800 Bangkok Bank 10,102,691 27,280,470 2.2
3,453,333 Industrial Finance Corp. of
Thailand 5,771,637 9,096,926 0.7
1,434,000 Siam Commercial Bank, Ltd. (The) 7,125,609 13,715,258 1.1
1,364,300 Thai Farmers Bank, Ltd. 12,381,617 13,048,624 1.0
-------------- -------------- ------
35,381,554 63,141,278 5.0
<PAGE>
Financial Services 1,834,800 Finance One Co., Ltd. 'Foreign' 12,567,383 13,533,277 1.1
1,698,000 Phatra Thanakit Co., Ltd. 15,255,671 14,175,805 1.1
-------------- -------------- ------
27,823,054 27,709,082 2.2
Mutual Funds 15,977,000 Ruam Pattana Fund II 6,993,984 10,198,085 0.8
Oil & Gas 1,331,500 PTT Exploration 12,867,796 14,353,759 1.2
Real Estate 936,000 Land & House Public Co. 7,122,664 19,725,228 1.6
Telecommunications 510,000 Advanced Information Service 7,561,746 7,564,742 0.6
747,000 International Engineering Co. Ltd. 3,347,314 5,418,967 0.4
-------------- -------------- ------
10,909,060 12,983,709 1.0
Total Long-Term Investments in
Thailand 101,098,112 148,111,141 11.8
Total Long-Term Investments 853,648,022 1,151,968,658 92.5
Face Amount Short-Term Investments
United Commercial US$ 40,000,000 ANZ (Delaware) Inc., 5.89% due
States Paper*** 7/12/1995 39,928,011 39,928,011 3.2
10,000,000 Daimler-Benz AG, 5.94% due
7/17/1995 9,973,600 9,973,600 0.8
14,981,000 General Electric Capital Corp.,
6.20% due 7/03/1995 14,975,840 14,975,840 1.2
30,000,000 Sheffield Receivables Corp.,
6.05% due 7/05/1995 29,979,833 29,979,833 2.4
Total Investments in Short-Term
Securities 94,857,284 94,857,284 7.6
Total Investments $ 948,505,306 1,246,825,942 100.1
==============
Liabilities in Excess of Other Assets (1,638,939) (0.1)
-------------- ------
Net Assets $1,245,187,003 100.0%
============== ======
<PAGE>
<FN>
*American Depositary Receipt (ADR).
**Global Depositary Receipt (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)Warrants entitle the Fund to purchase a predetermined number of
shares of Common Stock. The purchase price and number of shares are
subject to adjustment under certain conditions until the expiration
date.
(b)The rights may be exercised until 7/07/1995.
See Notes to Financial Statements.
++Non-income producing security.
++++Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $19,615,000,
representing 1.6% of net assets.
<CAPTION>
Aquisition Value
Issue Date(s) Cost (Note 1a)
Benpres Holdings Corp. 10/25/1994 $ 8,047,236 $ 7,500,760
Pakistan Telecommunications (GDR) 9/16/1994 7,533,262 4,169,547
President Enterprises (ADR) 11/17/1992 3,119,745 3,504,296
Reliance Industries (ADR) 8/25/1994 6,667,743 4,440,225
Total $25,367,986 $19,614,828
=========== ===========
</TABLE>
PORTFOLIO CHANGES
For the Quarter Ended June 30, 1995
Addition
Renong BHD, 2.50% due 1/15/2005
<PAGE>
Deletions
Aokam Perdana BHD (Ordinary)
Aokam Perdana BHD, 3.50% due 6/13/2004
Christiani & Nielsen 'Local'
Christiani & Nielsen 'Local' (Warrants)
Dah Sing Financial Holdings Ltd.
Dong ah Tire Industries Co.
Finance One Co., Ltd. (New)
George Kent Holdings BHD (Rights)
Hong Kong Land Holdings Ltd.
Land & General BHD 'A'
Leader Universal Holdings BHD 'A'
Malayan Cement BHD
Mardia Chemicals Ltd. (Rights)
P.T. Indah Kiat Pulp & Paper Corp.
Pernas International Hotels &
Properties BHD
Samsung Heavy Industries (New)
Sembawang Corp.
PORTFOLIO INFORMATION
Investments
As of 6/30/95
Ten Largest Holdings Percent of
Represented in the Portfolio Net Assets
Hong Hong Telecommunications, Ltd. 3.7%
P.T. Hanjaya Mandala Sampoerna 3.4
HSBC Holdings, Ltd. 3.0
Hutchison Whampoa, Ltd. 2.9
Guoco Group, Ltd. 2.5
Sun Hung Kai Properties, Ltd. 2.3
Bangkok Bank 2.2
San Miguel Corp. 'B' 2.1
Arab-Malaysian Merchant Bank BHD* 2.1
United Overseas Bank 2.0
[FN]
*Includes common stock and convertible bonds.
<PAGE>
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Banking 20.8%
Telecommunications 9.8
Real Estate 9.1
Conglomerates 8.6
Tobacco 3.4
Leisure 3.4
Publishing & Broadcasting 3.1
Utilities Electric & Gas 3.0
Financial Services 2.5
Utilities--Electric 2.2
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$948,505,306)(Note 1a) $1,246,825,942
Foreign cash (Note 1c) 154,982
Receivables:
Capital shares sold $ 4,810,568
Dividends 2,573,590
Securities sold 1,601,036
Interest 540,747 9,525,941
--------------
Deferred organization expenses (Note 1f) 41,728
Prepaid registration fees and other assets (Note 1f) 86,313
--------------
Total assets 1,256,634,906
--------------
Liabilities: Payables:
Securities purchased 6,295,223
Capital shares redeemed 2,524,493
Investment adviser (Note 2) 1,040,966
Distributor (Note 2) 839,427 10,700,109
--------------
Accrued expenses and other liabilities 747,794
--------------
Total liabilities 11,447,903
--------------
Net Assets: Net assets $1,245,187,003
==============
<PAGE>
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 122,778
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 5,824,660
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 74,449
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 1,849,035
Paid-in capital in excess of par 966,016,892
Accumulated investment loss--net (1,156,199)
Accumulated dividends in excess of investment income--net (3,799,142)
Accumulated realized capital losses on investments and foreign
currency transactions--net (15,429,910)
Accumulated distributions in excess of realized capital gains--net (6,634,036)
Unrealized appreciation on investments and foreign currency
transactions--net 298,318,476
--------------
Net assets . $1,245,187,003
==============
Net Asset Class A--Based on net assets of $19,498,854 and 1,227,775
Value: shares outstanding $ 15.88
==============
Class B--Based on net assets of $919,778,346 and 58,246,595
shares outstanding $ 15.79
==============
Class C--Based on net assets of $11,670,374 and 744,485
shares outstanding $ 15.68
==============
Class D--Based on net assets of $294,239,429 and 18,490,348
shares outstanding $ 15.91
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1995
<S> <S> <C> <C>
Investment Dividends (net of $1,077,874 foreign withholding tax) $ 11,064,051
Income Interest and discount earned 3,376,010
(Notes 1d & 1e): --------------
Total income 14,440,061
--------------
<PAGE>
Expenses: Investment advisory fees (Note 2) $ 5,674,629
Account maintenance and distribution fees--Class B (Note 2) 4,294,574
Transfer agent fees--Class B (Note 2) 927,366
Custodian fees 870,550
Account maintenance fees--Class D (Note 2) 324,996
Transfer agent fees--Class D (Note 2) 236,696
Printing and shareholder reports 186,480
Registration fees (Note 1f) 80,753
Accounting services (Note 2) 74,218
Professional fees 45,278
Account maintenance and distribution fees--Class C (Note 2) 38,304
Directors' fees and expenses 19,138
Transfer agent fees--Class C (Note 2) 8,867
Amortization of organization expenses (Note 1f) 7,702
Transfer agent fees--Class A (Note 2) 7,510
Pricing fees 4,668
Other 11,203
--------------
Total expenses 12,812,932
--------------
Investment income--net 1,627,129
--------------
Realized & Realized loss from:
Unrealized Gain Investments--net (15,186,309)
(Loss) on Foreign currency transactions--net (243,601) (15,429,910)
Investments & --------------
Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net 72,973,601
Transactions Foreign currency transactions--net 11,458 72,985,059
--Net (Notes -------------- --------------
1b, 1c, 1e Net realized and unrealized gain on investments and foreign
& 3): currency transactions 57,555,149
--------------
Net Increase in Net Assets Resulting from Operations $ 59,182,278
==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the
For the Six Year Ended
Months Ended December 31,
Increase (Decrease) in Net Assets: June 30, 1995 1994
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ 1,627,129 $ (2,783,327)
Realized gain (loss) on investments and foreign currency
transactions--net (15,429,910) 6,883,021
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 72,985,059 (242,120,310)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 59,182,278 (238,020,616)
-------------- --------------
Dividends & In excess of investment income--net:
Distributions Class A -- (26,417)
to Shareholders Class B -- --
(Note 1g): Class C -- (34,041)
Class D -- (1,471,448)
Realized gain on investments--net:
Class A -- (56,223)
Class B -- (16,559,524)
Class C -- (87,816)
Class D -- (4,524,481)
In excess of realized gain on investments--net:
Class A -- (17,570)
Class B -- (5,175,064)
Class C -- (27,444)
Class D -- (1,413,958)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders -- (29,393,986)
-------------- --------------
Beneficial Net increase in net assets derived from capital share transactions 10,006,345 140,721,806
Interest -------------- --------------
Transactions
(Note 4):
Net Assets: Total increase (decrease) in net assets 69,188,623 (126,692,796)
Beginning of period 1,175,998,380 1,302,691,176
-------------- --------------
End of period $1,245,187,003 $1,175,998,380
============== ==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
The following per share data and For the For the
ratios have been derived from For the Period For the For the For the Period
information provided in the Six Months Oct. 21, Six Months Year Ten Months May 29,
financial statements. Ended 1994++ to Ended Ended Ended 1992++ to
June 30, Dec. 31, June 30, Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1995++++ 1994++++ 1995++++ 1994++++ 1993++++ 1993++++
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $ 15.05 $ 17.43 $ 15.03 $ 18.74 $ 11.01 $ 10.00
Performance: -------- -------- -------- -------- -------- --------
Investment income (loss)--net .10 .02 .01 (.07) (.02) (.02)
Realized and unrealized gain
(loss) on investments and foreign
currency transactions--net .73 (1.91) .75 (3.28) 7.86 1.05
-------- -------- -------- -------- -------- --------
Total from investment operations .83 (1.89) .76 (3.35) 7.84 1.03
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- -- --+++++ --
In excess of investment
income--net -- (.13) -- -- --+++++ (.02)
Realized gain on investments--net -- (.27) -- (.27) (.11) --+++++
In excess of realized gain on
investments--net -- (.09) -- (.09) -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions -- (.49) -- (.36) (.11) (.02)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 15.88 $ 15.05 $ 15.79 $ 15.03 $ 18.74 $ 11.01
======== ======== ======== ======== ======== ========
Total Based on net asset value per
Investment share 5.51%+++ (10.82%)+++ 5.06%+++ (17.86%) 71.27%+++ 10.32%+++
Return:** ======== ======== ======== ======== ======== ========
<PAGE>
Ratios to Expenses, excluding account
Average maintenance and distribution
Net Assets: fees 1.41%* 1.54%* 1.45%* 1.40% 1.35%* 1.49%*
======== ======== ======== ======== ======== ========
Expenses 1.41%* 1.54%* 2.45%* 2.40% 2.35%* 2.49%*
======== ======== ======== ======== ======== ========
Investment income (loss)--net 1.27%* .84%* .09%* (.42%) (.15%)* (.08%)*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period (in
Data: thousands) $ 19,499 $ 3,383 $919,778 $917,384 $990,843 $365,430
======== ======== ======== ======== ======== ========
Portfolio turnover 17.59% 16.45% 17.59% 16.45% 16.62% 4.65%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
++++Based on average shares outstanding during the period.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
+++++Amount was less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the For the For the Period
information provided in the Six Months Oct. 21, Six Months Year Ten Months May 29,
financial statements. Ended 1994++ to Ended Ended Ended 1992++ to
June 30, Dec. 31, June 30, Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1995++++ 1994++++ 1995++++ 1994++++ 1993++++ 1993++++
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $ 14.92 $ 17.29 $ 15.08 $ 18.77 $ 11.01 $ 10.00
Performance: -------- -------- -------- -------- -------- --------
Investment income (loss)--net .02 (.01) .07 .06 .07 .05
Realized and unrealized gain
(loss) on investments and
foreign currency trans-
actions--net .74 (1.89) .76 (3.30) 7.88 1.04
-------- -------- -------- -------- -------- --------
Total from investment operations .76 (1.90) .83 (3.24) 7.95 1.09
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- -- (.01) --+++++
In excess of investment
income--net -- (.11) -- (.09) (.07) (.08)
Realized gain on investments
--net -- (.27) -- (.27) (.11) --
In excess of realized gain
on investments--net -- (.09) -- (.09) -- --
-------- -------- -------- -------- -------- --------
Total dividends and distri-
butions -- (.47) -- (.45) (.19) (.08)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 15.68 $ 14.92 $ 15.91 $ 15.08 $ 18.77 $ 11.01
======== ======== ======== ======== ======== ========
Total Based on net asset value
Investment per share 5.09%+++ (10.98%)+++ 5.50%+++ (17.24%) 72.31%+++ 10.99%+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Expenses, excluding account
Average maintenance and distribution
Net Assets: fees 1.46%* (1.57%)* 1.41%* 1.38% 1.34%* 1.48%*
======== ======== ======== ======== ======== ========
Expenses 2.46%* (2.57%)* 1.66%* 1.63% 1.59%* 1.73%*
======== ======== ======== ======== ======== ========
Investment income (loss)--
net .20%* (.17%)* .90%* .34% .61%* .61%*
======== ======== ======== ======== ======== ========
<PAGE>
Supplemental Net assets, end of period (in
Data: thousands) $ 11,670 $ 5,329 $294,239 $249,903 $311,848 $111,180
======== ======== ======== ======== ======== ========
Portfolio turnover 17.59% 16.45% 17.59% 16.45% 16.62% 4.65%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
++++Based on average shares outstanding during the period.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
+++++Amount was less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Dragon 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 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 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 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 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.
* 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.
<PAGE>
* Options--The Fund is authorized to purchase and write call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(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) 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.
(d) 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.
(e) 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.
(f) 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 registration fees are
charged to expense as the related shares are issued.
NOTES TO FINANCIAL STATEMENTS (concluded)
<PAGE>
(g) 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
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 1.0%, on an annual basis,
of the average daily value of the Fund's net assets. Certain states
in which the 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 the Fund's 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 next $70 million of average
daily net assets, and 1.5% of the average daily net assets in excess
thereof. No fee payment will be made to MLAM during any fiscal year
which will cause such expenses to exceed the expense limitations at
the time of such payment.
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% --
<PAGE>
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, 1995, 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 $ 10 $ 137
Class D $ 13,036 $205,043
For the six months ended June 30 1995, MLPF&S received contingent
deferred sales charges of $1,218,072 and $3,531 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $118,428 in commissions on the
execution of portfolio security transactions for the Fund for the
six months ended June 30, 1995.
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, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1995 were $193,734,010 and
$185,426,557, respectively.
Net realized and unrealized gains (losses) as of June 30, 1995 were
as follows:
Realized Unrealized
Losses Gains (Losses)
Long-term investments $(15,186,309) $ 298,320,636
Foreign currency transactions (243,601) (2,160)
------------ -------------
Total $(15,429,910) $ 298,318,476
============ =============
<PAGE>
As of June 30, 1995, net unrealized appreciation for Federal income
tax purposes aggregated $298,320,636, of which $337,437,651 related
to appreciated securities and $39,117,015 related to depreciated
securities. At June 30, 1995, the aggregate cost of investments for
Federal income tax purposes was $948,505,306.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
for the six months ended June 30, 1995 and the year ended December
31, 1994 were $10,006,345 and $140,721,806, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended June 30, 1995 Shares Amount
Shares sold 11,328,084 $ 171,451,337
Shares redeemed (10,325,114) (157,568,419)
------------ -------------
Net increase 1,002,970 $ 13,882,918
============ =============
Class A Shares for the Period
October 21, 1994++ to Dollar
December 31, 1994 Shares Amount
Shares sold 703,677 $ 11,334,140
Shares issued to shareholders
in reinvestment of dividends &
distributions 5,563 83,383
------------ -------------
Total issued 709,240 11,417,523
Shares redeemed (484,435) (7,719,173)
------------ -------------
Net increase 224,805 $ 3,698,350
============ =============
[FN]
++Commencement of Operations.
<PAGE>
Class B Shares for the Six Months Dollar
Ended June 30, 1995 Shares Amount
Shares sold 9,259,695 $ 137,596,536
Shares redeemed (11,839,727) (172,997,958)
Conversion of shares (222,901) (3,299,895)
------------ -------------
Net decrease (2,802,933) $ (38,701,317)
============ =============
Class B Shares for the Year Dollar
Ended December 31, 1994 Shares Amount
Shares sold 21,626,213 $ 354,250,510
Shares issued to shareholders
in reinvestment of dividends
& distributions 1,207,843 18,081,410
------------ -------------
Total issued 22,834,056 372,331,920
Shares redeemed (14,613,098) (239,406,135)
Conversion of shares (47,440) (716,815)
------------ -------------
Net increase 8,173,518 $ 132,208,970
============ =============
Class C Shares for the Six Months Dollar
Ended June 30, 1995 Shares Amount
Shares sold 1,538,437 $ 22,880,575
Shares redeemed (1,151,197) (17,284,193)
------------ -------------
Net increase 387,240 $ 5,596,382
============ =============
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Dec. 31, 1994 Shares Amount
Shares sold 381,246 $ 6,281,385
Shares issued to shareholders
in reinvestment of dividends &
distributions 8,965 133,227
------------ -------------
Total issued 390,211 6,414,612
Shares redeemed (32,966) (508,889)
------------ -------------
Net increase 357,245 $ 5,905,723
============ =============
<PAGE>
[FN]
++Commencement of Operations.
Class D Shares for the Six Months Dollar
Ended June 30, 1995 Shares Amount
Shares sold 13,118,445 $ 194,542,133
Conversion of shares 219,698 3,299,895
------------ -------------
Total issued 13,338,143 197,842,028
Shares redeemed (11,415,820) (168,613,666)
------------ -------------
Net increase 1,922,323 $ 29,228,362
============ =============
Class D Shares for the Year Dollar
Ended December 31, 1994 Shares Amount
Shares sold 5,213,331 $ 85,671,153
Conversion of shares 47,252 716,815
Shares issued to shareholders in
reinvestment of dividends &
distributions 405,832 6,095,592
------------ -------------
Total issued 5,666,415 92,483,560
Shares redeemed (5,709,447) (93,574,797)
------------ -------------
Net decrease (43,032) $ (1,091,237)
============ =============
5. Commitments:
At June 30, 1995, the Fund had entered into foreign exchange
contracts under which it had agreed to buy and sell various foreign
currencies with values of approximately $6,091,000 and $1,576,000,
respectively.
