MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Annual Report
December 31, 1994
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, Massachusetts 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
<PAGE>
Investing in emerging market securities involves a number of risk
factors and special considerations, including restrictions on
foreign investments and on repatriation of capital invested in
emerging markets, currency fluctuations, and potential price
volatility and less liquidity of securities traded in emerging
markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may
not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which US companies
are subject. Therefore, the Fund is designed as a long-term
investment for investors capable of assuming the risks of investing
in emerging markets. The Fund should be considered as a vehicle for
diversification and not as a complete investment program. Please
refer to the prospectus for details.
This report 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 December 31, 1994
A map illustrating the following percentages:
Pakistan 0.5%
India 2.0%
Indonesia 5.9%
Singapore 13.3%
Malaysia 21.8%
Thailand 10.6%
Hong Kong 26.8%
South Korea 3.5%
Taiwan 0.9%
Philippines 7.1%
<PAGE>
[FN]
*Total may not equal 100%.
DEAR SHAREHOLDER
Fiscal Year in Review
Following the exceptional investment returns achieved in 1993, most
of the "dragon" stock markets sustained sharp declines in 1994. For
the 12-month period ended December 31, 1994, Merrill Lynch Dragon
Fund Inc.'s Class B and Class D Shares had total returns of -17.86%
and -17.24%, respectively, in line with the unmanaged Morgan Stanley
Capital International Combined Far East Free (ex-Japan) Index, which
declined 17.48% for the year.
Investor sentiment regarding the dragon stock markets turned sharply
negative early in 1994 following the first round of Federal Reserve
Board monetary policy tightening, as investors anticipated higher
interest rates throughout the emerging Asian economies. Although the
dragon stock markets rallied briefly during the summer as investors
came to recognize the positive economic and corporate fundamentals,
investor sentiment again turned negative. The sell-off in the dragon
stock markets accelerated with another round of US central bank
monetary policy tightening in mid-November, eroding the price gains
achieved in the summer. The decline in emerging Asian stock markets
continued through December month-end, as investors became concerned
that substantial redemptions from US-based mutual funds would lead
to further selling in the markets.
Looking at individual markets within the Fund's investment universe,
Hong Kong was the worst performer, down 31.0% in US dollar terms,
where a sharp drop in property values and concerns regarding the
economic prospects of the People's Republic of China fueled the
decline in share prices. Merrill Lynch Dragon Fund was underweighted
in Hong Kong during the fiscal year, which benefited its
performance. On average, we had a 30% weighting in Hong Kong during
the fiscal year, and the portfolio's Hong Kong exposure at 1994 year-
end was 26.8% of net assets. The best-performing emerging Asian
stock markets were those that are largely closed to foreign
investors--that is, Korea, Taiwan and India--since they were viewed
as relatively immune from foreign capital outflows. The Fund's
positions in these stock markets helped performance for the year as
a whole, although our neutral market weightings did not
substantially enhance total return. The Fund's low weighting in
Thailand was beneficial, especially during the last quarter of the
year when the Thai stock market was one of the worst performers in
the region. We have continued to maintain a neutral weighting in
Malaysia, which negatively impacted performance as the Malaysian
stock market declined 20.7% in US dollar terms during 1994. Our
overweighting in Indonesia also had a detrimental effect on total
return, since the Indonesian stock market was affected by the
weakness in the US equity market and declined sharply. Although the
Philippine stock market declined by 8.3% in US dollar terms in 1994,
our overweight investments there made a positive contribution to
performance, especially in the last quarter of the year.
<PAGE>
Losses for the year were mitigated somewhat by our focus on more
defensive issues, as well as by the approximate 10% cash position
maintained throughout most of the year.
Investment Activities
The Hong Kong stock market continued to perform poorly through year-
end 1994. The extent of the increase in short-term interest rates in
the United States took Hong Kong investors by surprise, and the
subsequent fall in the US stock market resulted in more pronounced
declines not only in Hong Kong, but also in almost all of the
emerging Asian stock markets. Hong Kong's performance was further
hampered by concerns over its property market, which is closely
connected to the level of interest rates. A recent land auction was
canceled because of a lack of bids, indicating the apparent caution
on the part of developers. Housing prices have also shown some
weakness in the latest sales by developers.
In addition to these problems, analysts are beginning to downgrade
their earnings estimates for many Hong Kong companies, notably banks
and property companies. For some months we have expected slowing
earnings momentum in Hong Kong. Earnings growth is widely expected
to be about 15% in 1995, compared with approximately 19% in 1994. It
is very possible that further downward earnings revisions will be
made in the coming months, particularly after June 1995 interim
results are announced.
In the People's Republic of China, inflation continues to be a
problem, caused in part by higher food prices resulting from the
floods in southern China. Monetary policy is not as tight as we
believe necessary, and is still subject to the fear of large-scale
unemployment if state-owned enterprises go bankrupt. This inter-
mediate-term structural problem is not likely to be resolved in
1995. As a result, we believe that the Chinese economy will go
through a series of monetary "squeezes" and "releases" in the next
few months. The Chinese monetary authorities must walk the fine line
between preventing the economy from overheating and ensuring
unemployment does not get out of control. Inflation is likely to be
in the 11%--14% area in 1995 versus 16% in 1994, while growth should
continue to decelerate from an estimated 12% in 1994 to 10% in 1995.
The private and export sectors may be the buoyant parts of the
economy.
Based on this outlook, we are maintaining an underweighted position
in Hong Kong. Within the Hong Kong portion of the portfolio we have
switched to more defensive stocks. For example, we sold some of our
equity positions and purchased the convertible securities of the
same issuers instead. These convertibles offer some downside price
protection while still offering similar upside potential.
Malaysia remains the Fund's second-largest exposure at 21.8% of net
assets. However, this position is an underweighted one relative to
several market-weighted indexes of the dragon stock markets. Our
Malaysian investments are concentrated in financial and
infrastructure-related companies, two areas in which we are finding
the most attractive valuations. In the latter category, two of our
largest Malaysian investments are Leader Universal Cable BHD, a
manufacturer of electric cable, and Land & General BHD, the property
developer that should benefit from the strong demand for residential
property with Malaysia's increasing wealth.
<PAGE>
Despite investor concerns, it appears as if the rate of inflation in
Malaysia has been contained at about 4% annually. Inflationary
pressures remain relatively subdued because the government has
allowed the currency to appreciate and has cut tariffs on a number
of imported goods. The government's latest budget proposes cutting
still more tariffs, primarily on food, which is a very important
factor in the inflation outlook. The latest budget also proposes tax
cuts for both individuals and corporations and is mildly
expansionary, especially regarding public development expenditure.
The consensus forecast for Malaysian economic growth is 8% for 1995.
Although this does suggest that inflationary pressures will
increase, we believe that the government's strong anti-inflation
stance will continue to be successful. We believe that another area
of investor concern, the country's large current account deficit,
will also become more manageable over the next several years with
the significant increase in exports resulting from strong capacity
expansion.
The Fund's third-largest weighting is in Singapore, although our
13.3% exposure represents a neutral weighting. Gross domestic
product growth was an impressive 10% for the third calendar quarter,
spurred on by strong export growth, especially in electronics.
Singapore is perceived as a somewhat defensive stock market, since
shares of many large, blue-chip companies are traded there and the
country is relatively stable politically.
Our 7.1% investment in the Philippines represents a very
overweighted exposure. We believe that both Philippine economic
growth and corporate earnings will show strong upward momentum in
1995 as they continue to benefit from the market liberalization and
pro-business policies of the Ramos administration. Foreign direct
investment increased sharply in 1994, and the power supply situation
has improved considerably.
New issues continue to come to the Philippine market through
government privatizations. One such offering in which the Fund has
participated is that of the common stock of Petron Corp., an oil
refining and marketing company privatized in one of the largest such
transactions in the Philippines. We have also purchased shares of
Benpres Holdings Corp., a conglomerate with a large exposure to the
growing mass media market through its majority ownership of the most
popular television station and some radio stations in the
Philippines.
Our 10.6% underweighted exposure in Thailand is most heavily
concentrated in bank stocks, since they offer the lowest valuations
and the highest dividend yields. Although third calendar quarter
corporate earnings were strong, we are somewhat concerned about
rising interest rates and the political situation, since the
government may be forced to call elections once again.
<PAGE>
The portfolio is slightly overweighted in Indonesian stocks at 5.9%
of net assets. Our focus is primarily in consumer-related issues,
since the consumer sector is the driving force behind Indonesian
economic growth. Although we are somewhat concerned that the
manufacturing sector is not picking up, the prospects for this
portion of the Indonesian economy may improve with the strong trend
in foreign direct investment. Indonesian corporate earnings are
continuing to improve because interest rates remain low by
historical standards, which result in lower borrowing costs.
Interest rates are likely to rise in 1995, however.
A new position added to the Fund was P.T. Indonesia Satellite Corp.
(Indosat). Indosat shares, which are listed on the New York Stock
Exchange, became available through an initial public offering, the
result of a government privatization. The company has the franchise
for international telecommunications in Indonesia, and we expect it
to benefit from the country's continued positive economic growth.
The Indian stock market is now correcting after a flood of new
issues came to market in 1994. We expect most of these new issues to
be absorbed by investors by the first quarter of 1995, as the
companies are still showing strong earnings per share growth.
However, recent election results suggest that a more conservative
political influence may come to the fore, potentially slowing the
market-oriented reforms of the Rao government. Accordingly, we are
maintaining an underweighted 2.0% exposure to India at this time.
The South Korean stock market was the best-performing Asian stock
market in 1994, excluding Japan. Excellent corporate earnings and
controlled monetary growth provided good fundamental support to
equities. Although the stock market is largely closed to foreign
investors, this proved to be beneficial in a global environment
where there were grave concerns regarding the impact of higher US
interest rates. As a result, Korean equities were insulated from
international portfolio investment flows. Corporate earnings growth
in 1995 is expected to decelerate, and it is also likely that
interest rates will trend up in order to stem inflationary
pressures.
In Conclusion
In the near term, interest rate and significant stock market
movements in the United States are likely to determine the direction
of the emerging Asian stock markets. When investors generally
perceive that inflation and yields on long-term US Treasury bonds
have peaked, these stock markets are likely to rally. Although this
could take place as early as the first quarter of 1995, the dragon
stock markets probably must sustain another price correction before
a rally can occur.
We thank you for your investment in Merrill Lynch Dragon Fund, Inc.,
and we look forward to reviewing our outlook and strategy with you
again in our next report to shareholders.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Kara Tan Bhala)
Kara Tan Bhala
Vice President and Portfolio Manager
February 13, 1995
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.
<PAGE>
*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 "Total Return Based on a $10,000 Investment,"
"Performance Summary" and "Average Annual Total Return" tables on
pages 6 and 7. "Aggregate Total Return" tables for Class A and Class
C Shares are also presented on page 6. Data for all of the Fund's
shares, including Class A and Class C Shares, are presented in the
"Recent Performance Results" table.
The "Recent Performance Results" table on page 7 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 December
31, 1994 and for Class A and Class C Shares for the period since
inception through December 31, 1994. All data in this table assume
imposition of the actual total expenses incurred by each class of
shares during the relevant period.
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
PERFORMANCE DATA (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in Merrill Lynch
Dragon Fund, Inc., Class B and Class D Shares compared to growth of
an investment in the Morgan Stanley Combined Far East (Ex-Japan)
Free Index. Beginning and ending values are:
5/29/92** 12/94
ML Dragon Fund, Inc.++--Class B Shares* $10,000 $15,321
ML Dragon Fund, Inc.++--Class D Shares*+++ $ 9,600 $14,997
Morgan Stanley Combined Far East
(Ex-Japan) Free Index++++ $10,000 $16,765
<PAGE>
[FN]
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of Operations.
+++Class A Shares were redesignated to Class D Shares on October 21, 1994.
++ML Dragon Fund, Inc. invests primarily (at least 65% of the Fund's net
assets) in developing Asia-Pacific equity and debt securities.
++++This unmanaged marked capitalization-weighted Index is comprised of a
representative sampling of stocks of large-, medium-, and small-capital-
ization companies in Hong Kong, Indonesia, Korea, Malaysia, the
Philippines, Singapore and Thailand and which are freely purchasable
by foreign investors.
Average Annual
Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/94 -17.86% -21.06%
Inception (5/29/92) through 12/31/94 +18.49 +17.89
[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 12/31/94 -17.24% -21.59%
Inception (5/29/92) through 12/31/94 +19.38 +16.92
[FN]
*Maximum sales charge is 5.25%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
Aggregate
Total Return
<PAGE>
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94) through 12/31/94 -10.82% -15.50%
[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 12/31/94 -10.98% -11.85%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after one year.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month
12/31/94 9/30/94++ 12/31/93 % Change % Change++
<S> <C> <C> <C> <C> <C>
Class A Shares $15.05 $17.43 -- -- -12.27%(1)
Class B Shares 15.03 17.17 $18.74 -18.51%(1) -11.06(1)
Class C Shares 14.92 17.29 -- -- -12.31(1)
Class D Shares 15.08 17.30 18.77 -19.66(1) -12.83(1)
Class A Shares--Total Return -- -10.82(2)
Class B Shares--Total Return -17.86(3) -10.35(3)
Class C Shares--Total Return -- -10.98(4)
Class D Shares--Total Return -17.24(5) -10.21(5)
<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>
<PAGE>
<TABLE>
Performance
Summary--Class B Shares
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
------ ------
Total $0.247 Total $0.245
Cumulative total return as of 12/31/94: +55.21%**
<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>
<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
------ ------
Total $0.247 Total $0.473
Cumulative total return as of 12/31/94: +58.27%**
<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.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US Dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Hong Kong Banking 2,052,500 Dah Sing Financial Holdings Ltd. $ 6,435,482 $ 4,351,215 0.4%
2,197,606 HSBC Holdings, Ltd. 18,872,742 23,720,282 2.0
------------- -------------- ------
25,308,224 28,071,497 2.4
Conglomerates 22,408,000 Guangdong Investments, Ltd. 9,510,303 11,079,447 0.9
$ 3,436,000 Guangdong Investments, Ltd.,
4.50% due 10/07/1998 4,364,557 3,470,360 0.3
4,323,000 Hutchison Whampoa, Ltd. 12,516,919 17,490,938 1.5
897,800 Jardine Matheson Holdings Ltd. 7,511,867 6,412,028 0.5
3,227,000 Swire Pacific Ltd. 'A' 17,817,938 20,106,179 1.7
------------- -------------- ------
51,721,584 58,558,952 4.9
Electrical 18,211,000 Innovative International
Equipment Holdings Ltd. 7,882,226 5,178,930 0.4
4,225,000 Johnson Electric Holdings Ltd. 8,157,249 9,694,125 0.8
------------- -------------- ------
16,039,475 14,873,055 1.2
Electronics 16,600,000 ASM Pacific Technology 5,454,485 9,870,734 0.8
Finance 4,380,000 Guoco Group, Ltd. 16,323,506 18,740,693 1.6
5,500,000 Peregrine Investment Holdings 10,274,868 6,469,752 0.5
------------- -------------- ------
26,598,374 25,210,445 2.1
Insurance 19,767,000 National Mutual Asia, Ltd. 7,969,425 13,031,502 1.1
Leisure 6,370,000 Hong Kong & Shanghai Hotels 5,697,738 7,369,635 0.6
5,918,400 Shangri-La Asia, Ltd. 8,792,206 8,339,007 0.7
$ 3,005,000 Shangri-La Asia, Ltd., 2.875%
due 12/16/2000 2,330,884 2,343,900 0.2
3,816,000 Television Broadcasts Ltd. 15,283,220 15,242,296 1.3
------------- -------------- ------
32,104,048 33,294,838 2.8
Miscellaneous-- 17,912,000 C.P. Pokphand Co., Ltd. 7,227,529 4,190,889 0.4
Consumer
Newspaper/ 8,750,000 Oriental Press Group 5,834,025 4,100,149 0.3
Publishing 8,500,000 South China Morning Post Holdings 4,966,435 4,971,885 0.4
------------- -------------- ------
10,800,460 9,072,034 0.7
<PAGE>
Packaging 14,000,000 M.C. Packaging (HK), Ltd. 6,547,529 5,429,162 0.5
Real Estate 7,940,000 Amoy Properties Ltd. 6,819,474 7,184,592 0.6
2,183,000 Cheung Kong Holdings Ltd. 8,152,206 8,888,896 0.8
3,326,813 Hong Kong Land Holdings Ltd. 6,561,275 6,493,650 0.6
3,628,020 New World Development Co., Ltd. 9,331,350 9,684,412 0.8
2,790,100 Sun Hung Kai Properties, Ltd. 12,644,845 16,662,696 1.4
1,795,000 Wharf Holdings Ltd. 6,952,014 6,056,037 0.5
$9,840,000 ++++Wharf Holdings Ltd.,
5.00% due 7/15/2000 9,335,976 10,332,000 0.9
------------- -------------- ------
59,797,140 65,302,283 5.6
Telecommunications 12,220,000 ABC Communications Holdings Ltd. 3,501,176 5,370,734 0.5
Transportation 1,154,000 Hong Kong Aircraft Engineering Co. 6,558,828 3,848,656 0.3
Utilities 2,225,200 China Light & Power Co., Ltd. 9,301,633 9,492,192 0.8
5,908,880 Hong Kong & China Gas Co. (The) 8,402,958 9,547,699 0.8
11,336,800 Hong Kong Telecommunications, Ltd. 19,430,788 21,615,538 1.8
16,500,000 ++Hong Kong Telecommunications,
Ltd. (Warrants) (a) 1,644,721 693,188 0.1
------------- -------------- ------
38,780,100 41,348,617 3.5
Total Investments in Hong Kong 298,408,377 317,473,398 26.8
India Chemicals 960,000 Mardia Chemicals Ltd. 4,415,127 5,509,326 0.5
960,000 ++Mardia Chemicals Ltd. (Rights) 0 0 0.0
------------- -------------- ------
4,415,127 5,509,326 0.5
Conglomerates 243,300 ++++Reliance Industries (ADR)*++ 6,667,743 4,683,525 0.4
Consumer--Durables 456,000 ++IFB Industries Ltd. 3,998,087 4,070,780 0.3
Foreign Bonds $ 2,600,000 ++++SCICI Ltd., 3.50% due 4/01/2004 2,699,375 2,262,000 0.2
Miscellaneous 66,210 Housing Development Finance 6,347,114 5,382,927 0.5
Steel Mills 540,000 Essar Gujarat Limited 1,967,410 1,635,581 0.1
Tobacco 32,000 Indian Tobacco Co. (GDR)** 408,000 320,000 0.0
Total Investments in India 26,502,856 23,864,139 2.0
<PAGE>
Indonesia Banking 1,744,000 P.T. Bank International Indonesia 7,223,733 5,556,668 0.5
Food 1,959,672 P.T. Mayorah Indah 5,799,651 9,633,344 0.8
Forest Products 5,359,200 P.T. Indah Kiat Pulp & Paper Corp. 6,453,834 6,342,249 0.5
Miscellaneous-- 1,941,250 P.T. Modern Photo Film 5,119,000 8,217,399 0.7
Consumer
Pharmaceuticals 1,774,500 P.T. Kalbe Farma 5,381,680 7,309,615 0.6
Real Estate 3,217,500 P.T. Duta Anggada Realty 5,056,298 2,196,746 0.2
Telecommunications 86,190 P.T. Indonesia Satellite Corp.
(Indosat) (ADR)* 3,054,420 3,081,292 0.3
Tobacco 5,425,000 P.T. Hanjaya Mandala Sampoerna 4,892,468 26,668,184 2.3
Total Investments in Indonesia 42,981,084 69,005,497 5.9
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US Dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Malaysia Banking 4,256,000 Affin Holdings BHD $ 6,646,052 $ 6,969,669 0.6%
2,054,000 Arab-Malaysian Merchant
Bank BHD 7,932,519 19,473,771 1.7
MYR 1,969,000 Arab-Malaysian Merchant Bank
BHD, 7.50% due 10/05/1999 768,090 971,965 0.1
2,850,000 Malayan Banking BHD 6,748,454 17,194,907 1.5
2,700,000 Public Bank BHD 'Foreign' 2,361,655 5,598,352 0.5
------------- -------------- ------
24,456,770 50,208,664 4.4
Building & 1,300,000 Bandar Raya Developments BHD 2,962,152 2,200,196 0.2
Construction 1,532,000 Ekran BHD 3,676,793 4,531,479 0.4
1,912,500 George Kent Holdings BHD 2,694,743 4,570,519 0.4
382,500 George Kent Holdings
BHD (Rights) (b) 100,463 274,231 0.0
2,355,000 I.J.M. Corp. BHD 5,257,205 7,888,443 0.7
4,671,000 Malayan Cement BHD 5,232,118 8,051,871 0.7
------------- -------------- ------
19,923,474 27,516,739 2.4
Conglomerates 9,000,000 Renong BHD 8,454,940 11,142,018 0.9
<PAGE>
Construction & 650,000 Golden Plus Holdings BHD 2,997,527 2,457,395 0.2
Housing
Finance 938,000 Hong Leong Credit BHD 6,877,505 4,556,787 0.4
3,440,000 MBF Capital BHD 5,461,287 3,611,832 0.3
2,850,000 United Merchant Group BHD 7,467,775 5,247,796 0.4
------------- -------------- ------
19,806,567 13,416,415 1.1
Financial Services 980,000 Pan Pacific Asia BHD 5,892,045 4,146,523 0.4
Food 1,721,700 Nestle Malaysia BHD 7,333,320 11,466,758 1.0
Forest Products $ 2,000,000 Aokam Perdana, 3.50%
due 6/13/2004 2,345,000 1,930,000 0.2
2,739,000 Aokam Perdana BHD (Ordinary) 8,368,426 16,954,437 1.4
3,944,000 ++Land & General BHD 8,186,738 16,378,609 1.4
986,000 Land & General BHD (Rights) (c) 0 1,931 0.0
736,000 Pacific Chemical BHD 4,004,307 3,114,123 0.3
------------- -------------- ------
22,904,471 38,379,100 3.3
Leisure 3,300,000 Berjaya Sports TOTO BHD 7,410,648 4,524,975 0.4
848,500 Genting BHD 7,511,393 7,279,980 0.6
4,000,000 Pernas International Hotels &
Properties BHD 3,815,457 6,080,313 0.5
3,216,000 Resorts World BHD 10,967,664 18,899,119 1.6
2,504,000 Tanjong PLC 7,760,037 7,455,593 0.6
------------- -------------- ------
37,465,199 44,239,980 3.7
Shipyards 830,000 Westmont BHD 6,278,222 5,170,225 0.4
Telecommunications 5,925,000 Leader Universal Cable BHD 8,791,618 19,034,280 1.6
1,532,000 Technology Resources
Industries BHD 2,767,725 4,891,596 0.4
1,611,000 Telekom Malaysia BHD 8,939,145 10,918,825 0.9
------------- -------------- ------
20,498,488 34,844,701 2.9
Transportation 1,199,000 Malaysian Airlines System BHD 3,345,381 3,593,477 0.3
612,800 Malaysian Helicopter Services BHD 300,328 1,152,376 0.1
2,957,333 Malaysian International Shipping
Co. BHD 6,043,232 8,457,799 0.7
------------- -------------- ------
9,688,941 13,203,652 1.1
Total Investments in Malaysia 185,699,964 256,192,170 21.8
<PAGE>
Pakistan Telecommunications 41,905 ++++Pakistan Telecommunications
(GDR)** 7,533,262 5,447,650 0.5
Total Investments in Pakistan 7,533,262 5,447,650 0.5
Philippines Beverages 4,804,800 San Miguel Corp. 'B' 10,222,586 25,205,508 2.1
Conglomerates 414,500 ++Benpres Holdings Corp.++++ 4,587,400 3,730,500 0.3
Food & Beverage 3,210,000 ++Universal Robina Corp. 2,874,306 2,302,254 0.2
International 13,253,416 International Container Terminal 8,867,496 10,591,869 0.9
Trade
Oil 6,570,000 Petron Corp. 5,609,882 5,789,139 0.5
Real Estate 3,480,000 Ayala Land, Inc. 5,004,038 5,419,672 0.5
Retail 30,960,750 ++SM Prime Holdings 7,735,729 10,151,066 0.9
Telecommunications 78,880 Philippine Long Distance
Telephone Co. (ADR)* 4,027,836 4,348,260 0.4
Utilities-- 1,145,300 Manila Electric Co.
Electric (MERALCO) 'B' 7,460,188 15,724,406 1.3
Total Investments in
the Philippines 56,389,461 83,262,674 7.1
Singapore Airlines 1,040,000 Singapore Airlines 'Foreign' Ltd. 6,170,157 9,568,143 0.8
Automotive 1,352,000 Cycle & Carriage, Ltd. 5,687,875 12,160,110 1.0
Banking 1,370,000 Development Bank of Singapore Ltd. 12,362,598 14,109,166 1.2
1,366,866 Overseas Chinese Banking Corp.
'Foreign' 8,900,801 14,076,890 1.2
220,000 Overseas Chinese Banking Corp.
'Foreign' (Warrants) (a) 1,156,680 853,416 0.1
1,533,587 United Overseas Bank 11,313,601 16,215,063 1.4
------------- -------------- ------
33,733,680 45,254,535 3.9
Beverages 190,000 ++Fraser & Neave Ltd.
(Warrants) (a) 1,139,529 821,833 0.1
Conglomerates 2,616,000 ACMA Ltd. 8,074,466 8,585,294 0.7
Electronics 14,340,000 I.P.C. Corp. 10,159,282 9,796,292 0.8
<PAGE>
Marine/Offshore 2,807,500 Sembawang Maritime Ltd. 8,560,245 13,589,341 1.2
Oil Services SG$ 2,090,000 Sembawang Maritime Ltd.,
1.50% due 10/25/1998 1,325,469 3,156,883 0.3
1,130,000 Van Der Horst Ltd. 6,229,305 3,475,729 0.3
------------- -------------- ------
16,115,019 20,221,953 1.8
Publishing & 762,000 Singapore Press Holdings Ltd. 8,194,511 13,864,058 1.2
Broadcasting
Real Estate 3,134,000 DBS Land Ltd. 9,439,475 9,338,524 0.8
1,000,000 ++DBS Land Ltd. (Warrants) (a) 1,013,666 865,088 0.1
------------- -------------- ------
10,453,141 10,203,612 0.9
Shipping 1,644,000 Sembawang Corp. (d) 13,268,668 12,303,193 1.0
Telecommunications 10,380,000 Goldtron, Ltd. 7,286,316 11,473,944 1.0
1,635,000 ++Goldtron, Ltd. (Warrants) (a) 1,194,319 667,920 0.1
------------- -------------- ------
8,480,635 12,141,864 1.1
Total Investments in Singapore 121,476,963 154,920,887 13.3
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
South Korea Automotive 22,045 Dong ah Tire Industries Co. $ 840,416 $ 1,790,947 0.2%
Building & 55,060 Samsung Heavy Industries 3,082,313 2,290,675 0.2
Construction 12,436 Samsung Heavy Industries (New) 404,639 504,759 0.0
------------- -------------- ------
3,486,952 2,795,434 0.2
Retail Stores 100,920 Shinsegae Department Stores Co. 3,492,485 11,267,096 1.0
Steel 89,000 Pohang Iron & Steel Co., Ltd. 8,236,443 9,635,797 0.8
Utilities 7,862 Korea Mobile Telecommuni-
cations Corp. 2,735,092 5,654,178 0.5
246,000 Korean Electric & Power Corp. 6,197,512 9,335,769 0.8
------------- -------------- ------
8,932,604 14,989,947 1.3
Total Investments in South Korea 24,988,900 40,479,221 3.5
<PAGE>
Taiwan Closed-End Funds 343,300 The R.O.C. Taiwan (ADR)* 2,904,850 4,076,687 0.3
Electrical $ 4,000,000 ++++TECO Electric and Machinery,
Equipment 2.75% due 4/15/2004 4,000,000 3,640,000 0.3
Food & Beverage 212,831 ++++President Enterprises (ADR)* 3,119,745 4,070,393 0.3
Total Investments in Taiwan 10,024,595 11,787,080 0.9
Thailand Banking 2,256,000 Bangkok Bank 8,127,594 24,092,767 2.0
5,853,333 Industrial Finance Corp. of
Thailand 10,224,432 12,478,713 1.1
1,434,000 Siam Commercial Bank, Ltd. (The) 7,125,609 13,142,857 1.1
110,000 Thai Farmers Bank, Ltd. 1,006,537 894,202 0.1
------------- -------------- ------
26,484,172 50,608,539 4.3
Building & 1,097,000 Christiani & Nielsen 'Local' 7,169,983 8,043,355 0.7
Construction 329,100 ++Christiani & Nielsen
'Local' (Warrants) (a) 647,325 885,206 0.1
936,000 Land & House Public Co. 7,122,664 16,709,623 1.4
------------- -------------- ------
14,939,972 25,638,184 2.2
Financial Services 452,600 Finance One Co., Ltd. 'Foreign' 8,693,175 7,033,831 0.6
1,082,000 Phatra Thanakit Co., Ltd. 9,718,270 8,364,535 0.7
------------- -------------- ------
18,411,445 15,398,366 1.3
Mutual Funds 12,600,000 Ruam Pattana Fund II 4,999,163 7,280,335 0.6
Oil & Gas 871,000 PTT Exploration 8,099,662 9,024,108 0.8
Publishing & 283,700 Post Publishing Public Co. Ltd. 2,672,649 1,865,332 0.2
Broadcasting
Telecommunications 510,000 Advanced Information Service 7,561,746 7,072,325 0.6
747,000 International Engineering Co. Ltd. 3,347,314 6,548,715 0.6
------------- -------------- ------
10,909,060 13,621,040 1.2
Total Investments in Thailand 86,516,123 123,435,904 10.6
Total Long-Term Investments 860,521,585 1,085,868,620 92.4
<PAGE>
Face Amount Short-Term Investments
United States Commercial $ 25,000,000 Ciesco L.P., 5.875% due 2/15/1995 24,812,326 24,812,326 2.1
Paper*** 30,000,000 Corporate Asset Funding Co.,
5.90% due 1/05/1995 29,975,417 29,975,417 2.5
41,530,000 General Electric Capital Corp.,
5.80% due 1/03/1995 41,509,927 41,509,927 3.5
------------- -------------- ------
96,297,670 96,297,670 8.1
Total Short-Term Investments 96,297,670 96,297,670 8.1
Total Investments $ 956,819,255 1,182,166,290 100.5
=============
Liabilities in Excess of Other Assets (6,167,910) (0.5)
-------------- ------
Net Assets $1,175,998,380 100.0%
============== ======
*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 November 17, 1999.
(c)The rights may be exercised until January 6, 1995.
(d)Previously held as Sembawang Shipyard Ltd.
++Non-income producing security.
++++Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $34,166,000,
representing 2.91% of net assets.
<CAPTION>
Aquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Benpres Holdings Corp. 10/25/1994 $ 4,587,400 $ 3,730,500
Pakistan Telecommunications (GDR) 9/16/1994 7,533,262 5,447,650
President Enterprises (ADR) 11/17/1992 3,119,745 4,070,393
Reliance Industries (ADR) 8/25/1994 6,667,743 4,683,525
SCICI Ltd., 3.50% due 4/01/2004 10/18/1993 2,699,375 2,262,000
TECO Electric and Machinery,
2.75% due 4/15/2004 11/03/1994 4,000,000 3,640,000
Wharf Holdings Ltd., 5.00%
due 7/15/2000 12/12/1994 9,335,976 10,332,000
Total $37,943,501 $34,166,068
=========== ===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$956,819,255)(Note 1a) $1,182,166,290
Foreign cash (Note 1c) 141,887
Receivables:
Capital shares sold $ 2,121,139
Dividends 1,579,199
Interest 407,847 4,108,185
-------------
Deferred organization expenses (Note 1f) 41,728
Prepaid registration fees and other assets (Note 1f) 87,333
--------------
Total assets 1,186,545,423
--------------
Liabilities: Payables:
Capital shares redeemed 6,964,068
Investment adviser (Note 2) 964,477
Distributor (Note 2) 806,162 8,734,707
-------------
Accrued expenses and other liabilities 1,812,336
--------------
Total liabilities 10,547,043
--------------
Net Assets: Net assets $1,175,998,380
==============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorize $ 22,481
Class B Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 6,104,953
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 35,724
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 1,656,803
Paid-in capital in excess of par 956,061,507
Accumulated investment loss--net (2,783,327)
Accumulated dividends in excess of investment income--net (3,799,142)
Accumulated distributions in excess of realized capital gains--net (6,634,036)
Unrealized appreciation on investments and foreign currency
transactions--net 225,333,417
--------------
Net assets . $1,175,998,380
==============
<PAGE>
Net Asset Class A--Based on net assets of $3,382,590 and 224,805
Value: shares outstanding $ 15.05
==============
Class B--Based on net assets of $917,383,802 and 61,049,528
shares outstanding $ 15.03
==============
Class C--Based on net assets of $5,329,210 and 357,245
shares outstanding $ 14.92
==============
Class D--Based on net assets of $249,902,778 and 16,568,025
shares outstanding $ 15.08
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1994
<S> <S> <C> <C>
Investment Dividends (net of $2,559,899 foreign withholding tax) $ 18,007,792
Income Interest and discount earned 4,787,645
(Notes 1d & 1e): --------------
Total income 22,795,437
--------------
Expenses: Investment advisory fees (Note 2) $ 11,490,030
Distribution fees--Class B (Note 2) 8,860,392
Custodian fees 2,112,779
Transfer agent fees--Class B (Note 2) 1,155,482
Account maintenance fees--Class D (Note 2) 654,292
Registration fees (Note 1f) 334,406
Printing and shareholder reports 317,780
Transfer agent fees--Class D (Note 2) 297,766
Accounting services (Note 2) 162,198
Professional fees 107,682
Directors' fees and expenses 36,034
Amortization of organization expenses (Note 1f) 17,267
Pricing fees 8,638
Distribution fees--Class C (Note 2) 7,180
Transfer agent fees--Class C (Note 2) 1,368
Transfer agent fees--Class A (Note 2) 841
Other 14,629
-------------
Total expenses 25,578,764
--------------
Investment loss--net (2,783,327)
--------------
<PAGE>
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net $ 7,265,772
(Loss) on Foreign currency transactions--net (382,751) 6,883,021
Investments & ------------- --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (242,296,005)
(Notes 1b, 1c, Foreign currency transactions--net 175,695 (242,120,310)
1e & 3): ------------- --------------
Net realized and unrealized loss on investments and
foreign currency transactions (235,237,289)
--------------
Net Decrease in Net Assets Resulting from Operations $ (238,020,616)
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the Ten
Year Ended Months Ended
December 31, December 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <C> <C> <C>
Operations: Investment income (loss)--net $ (2,783,327) $ 167,916
Realized gain on investments and foreign currency
transactions--net 6,883,021 22,356,982
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net (242,120,310) 423,968,150
-------------- -------------
Net increase (decrease) in net assets resulting from operations (238,020,616) 446,493,048
-------------- -------------
Dividends & Investment income--net:
Distributions to Class B -- (22,033)
Shareholders Class D -- (145,883)
(Note 1g): In excess of investment income--net:
Class A (26,417) --
Class B -- (144,731)
Class C (34,041) --
Class D (1,471,448) (958,265)
Realized gain on investments--net:
Class A (56,223) --
Class B (16,559,524) (4,539,541)
Class C (87,816) --
Class D (4,524,481) (1,408,405)
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) (7,218,858)
-------------- -------------
<PAGE>
Beneficial Interest Net increase in net assets derived from capital
Transactions share transactions 140,721,806 386,806,540
(Note 4): -------------- -------------
Net Assets: Total increase (decrease) in net assets (126,692,796) 826,080,730
Beginning of period 1,302,691,176 476,610,446
-------------- --------------
End of period $1,175,998,380 $1,302,691,176
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
For the For the
The following per share data and ratios Period For the For the Period
have been derived from information provided in Oct. 21, Year Ten Months May 29,
the financial statements. 1994++ to Ended Ended 1992++ to
Dec. 31, Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1994++++ 1994++++ 1993++++ 1993++++
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 17.43 $ 18.74 $ 11.01 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net .02 (.07) (.02) (.02)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (1.91) (3.28) 7.86 1.05
-------- -------- -------- --------
Total from investment operations (1.89) (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 $ 15.05 $ 15.03 $ 18.74 $ 11.01
======== ======== ======== ========
Total Investment Based on net asset value per share (10.82%)+++ (17.86%) 71.27%+++ 10.32%+++
Return:** ======== ======== ======== ========
<PAGE>
Ratios to Average Expenses, excluding distribution fees 1.54%* 1.40% 1.35%* 1.49%*
Net Assets: ======== ======== ======== ========
Expenses 1.54%* 2.40% 2.35%* 2.49%*
======== ======== ======== ========
Investment income (loss)--net .84%* (.42%) (.15%)* (.08%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 3,383 $917,384 $990,843 $365,430
Data: ======== ======== ======== ========
Portfolio turnover 16.45% 16.45% 16.62% 4.65%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
+++++Amount was less than $.01 per share.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios Period For the For the Period
have been derived from information provided in Oct. 21, Year Ten Months May 29,
the financial statements. 1994++ to Ended Ended 1992++ to
Dec. 31, Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1994++++ 1994++++ 1993++++ 1993++++
<S> <S> <C> <C> <C> <C>
Per Per Share Net asset value, beginning of period $ 17.29 $ 18.77 $ 11.01 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net (.01) .06 .07 .05
Realized and unrealized gain on investments and
foreign currency transactions--net (1.89) (3.30) 7.88 1.04
-------- -------- -------- --------
Total from investment operations (1.90) (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 distributions (.47) (.45) (.19) (.08)
-------- -------- -------- --------
Net asset value, end of period $ 14.92 $ 15.08 $ 18.77 $ 11.01
======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share (10.98%)+++ (17.24%) 72.31%+++ 10.99%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, excluding account maintenance and
Net Assets: distribution fees 1.57%* 1.38% 1.34%* 1.48%*
======== ======== ======== ========
Expenses 2.57%* 1.63% 1.59%* 1.73%*
======== ======== ======== ========
Investment income (loss)--net (.17%)* .34% .61%* .61%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 5,329 $249,903 $311,848 $111,180
Data: ======== ======== ======== ========
Portfolio turnover 16.45% 16.45% 16.62% 4.65%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
+++++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. 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
principal market 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 prices obtained from one or more dealers in the over-
the-counter market 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. Short-term securities with
a remaining maturity of sixty days or less are valued at amortized
cost, which approximates market value. Options written by the Fund
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 average of the last asked price as obtained from one or
more dealers. Options purchased by the Fund 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 average of the
last bid price as obtained from two or more dealers unless there is
only one dealer, in which case that dealer's price is used. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of
Directors of the Fund.
(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--When the Fund sells 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.
NOTES TO FINANCIAL STATEMENTS (continued)
(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.
<PAGE>
(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.
(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
a 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
of the 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 year ended December 31, 1994, 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 $ 7 $ 92
Class D $63,868 $1,035,446
MLPF&S received contingent deferred sales charges of $2,008,623
relating to transactions in Class B Shares of beneficial interest,
$141 relating to transactions in Class C Shares of beneficial
interest, and $74,612 in commissions on the execution of portfolio
security transactions for the Fund for the year ended December 31,
1994.
Financial Data Services, Inc. ("FDS"), 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, FDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1994 were $423,655,198 and
$172,834,766, respectively.
Net realized and unrealized gains (losses) as of December 31, 1994
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 7,261,566 $225,347,035
Short-term investments 4,206 --
Foreign currency transactions (382,751) (13,618)
----------- ------------
Total $ 6,883,021 $225,333,417
=========== ============
<PAGE>
As of December 31, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $219,356,813, of which $279,235,407
related to appreciated securities and $59,878,594 related to
depreciated securities. At December 31, 1994, the aggregate cost of
investments for Federal income tax purposes was $962,809,477.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
for the year ended December 31, 1994 and the ten months ended
December 31, 1993 were $140,721,806 and $386,806,540, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Period Dollar
October 21, 1994++ to December 31, 1994 Shares Amount
Shares sold 703,677 $ 11,334,140
Shares issued to shareholders in rein-
vestment of dividends and 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.
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 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 B Shares for the Ten Months Dollar
Ended December 31, 1993 Shares Amount
Shares sold 23,415,440 $ 343,265,805
Shares issued to shareholders in rein-
vestment of dividends and distributions 227,775 3,976,951
----------- -------------
Total issued 23,643,215 347,242,756
Shares redeemed (3,945,149) (56,510,569)
----------- -------------
Net increase 19,698,066 $ 290,732,187
=========== =============
<PAGE>
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 rein-
vestment of dividends and 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
=========== =============
[FN]
++Commencement of Operations.
NOTES TO FINANCIAL STATEMENTS (concluded)
Class D Shares for the Year Ended Dollar
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 and
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)
=========== =============
Class D Shares for the Ten Months Dollar
Ended December 31, 1993 Shares Amount
Shares sold 7,846,115 $ 114,904,877
Shares issued to shareholders in
reinvestment of dividends and
distributions 120,851 2,113,683
----------- -------------
Total issued 7,966,966 117,018,560
Shares redeemed (1,451,683) (20,944,207)
----------- -------------
Net increase 6,515,283 $ 96,074,353
=========== =============
<PAGE>
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 have been redesignated to Class D Shares. There
were 2,997,993 shares redesignated amounting to $29,941,279.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Dragon Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Dragon Fund, Inc. as of December 31, 1994, the related statements of
operations for the year then ended, and changes in net assets for the
year then ended and the period ended December 31, 1993 and the financial
highlights for the year then ended, the period ended December 31, 1993
and the period May 29, 1992 (commencement of operations) to
February 28, 1993. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at December
31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Dragon Fund, Inc. as of December 31, 1994, the results
of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 15, 1995
</AUDIT-REPORT>
<PAGE>
<TABLE>
IMPORTANT TAX INFORMATION (unaudited)
<CAPTION>
The following information summarizes all per share distributions
paid by Merrill Lynch Dragon Fund, Inc. during the year
ended December 31, 1994:
Domestic Domestic
Qualifying Non-Qualifying Foreign Total Foreign Taxes Long-Term
Record Payable Ordinary Ordinary Source Ordinary Paid or Capital
Date Date Income Income Income Income Withheld Gains
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Shares
12/19/94 12/28/94 $0.010593 $0.128915 $0.111774 $0.251282 $0.144574 $0.240714
Class B Shares
12/19/94 12/28/94 $ -- $0.121582 $ -- $0.121582 $ -- $0.240714
Class C Shares
12/19/94 12/28/94 $0.009637 $0.117268 $0.101677 $0.228582 $0.144574 $0.240714
Class D Shares
12/19/94 12/28/94 $0.008910 $0.108430 $0.094013 $0.211353 $0.144574 $0.240714
</TABLE>
The qualifying domestic ordinary income qualifies for the dividends
received deduction for corporations. All of the foreign taxes paid
or withheld represent taxes incurred by the Fund on dividends
received by the Fund from foreign sources. Foreign taxes paid or
withheld should be included in taxable income with an offsetting
deduction from gross income or as a credit for taxes paid to foreign
governments. You should consult your tax adviser regarding the
appropriate treatment of foreign taxes paid.
Please retain this information for your records.
PORTFOLIO INFORMATION (unaudited)
For the Quarter Ended December 31, 1994
Additions
Arab-Malaysian Merchant Bank BHD, 7.50% due 10/05/1999
Benpres Holdings Corp.
Land & General BHD (Rights)
Mardia Chemicals Ltd. (Rights)
P.T. Indonesia Satellite Corp. (Indosat) (ADR)
Pan Pacific Asia BHD
Samsung Heavy Industries (New)
Shangri-La Asia, Ltd., 2.875% due 12/16/2000
TECO Electric and Machinery, 2.75% due 4/15/2004
Thai Farmers Bank, Ltd.
Wharf Holdings Ltd., 5.00% due 7/15/2000
<PAGE>
Deletions
Amoy Properties Ltd. (Warrants)
Aokam Perdana 'A'
Aokam Perdana TSR (Warrants)
Arab-Malaysian Merchant Bank BHD (Rights)
Gold Lion Holdings Ltd.
JG Summit Holdings
National Mutual Asia, Ltd. (Warrants)
Natsteel Ltd.
Pengkalen Holdings BHD
Samsung Heavy Industries (New) (Rights)
