MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Semi-Annual Report
June 30, 1996
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.
Statements and other information herein are as dated and are subject
to change.
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, 1996
Map Depicting the Fund's Asset Allocation As a Percentage* of
Net Assets as of June 30, 1996
<PAGE>
India 0.5%
Indonesia 6.8%
Singapore 11.0%
Malaysia 13.3%
Thailand 10.5%
Hong Kong 39.2%
South Korea 4.3%
Taiwan 1.2%
Philippines 6.5%
[FN]
*Total may not equal 100%.
DEAR SHAREHOLDER
The outlook for the "dragon" stock markets continued to be driven by
moves in US interest rates during the quarter ended June 30, 1996.
(As defined in the Merrill Lynch Dragon Fund, Inc.'s prospectus, the
dragon stock markets consist of all the stock markets in Asia and
the Pacific Basin other than Japan, Australia and New Zealand.)
During the period, most dragon markets traded within a relatively
narrow range, as reflected in the -0.25% return of the unmanaged
Morgan Stanley Capital International Combined Far East Free (Ex-
Japan) Index. For the three months ended June 30, 1996, Merrill
Lynch Dragon Fund, Inc. slightly underperformed relative to the
Index, with total returns for Class A, Class B, Class C and Class D
Shares of -0.75%, -0.93%, -1.00% and -0.81%, respectively. The
Fund's performance was helped by an overweight position in the
Philippines and an underweight position in Singapore. However, the
Fund's performance was hindered by an underweight position in
Malaysia. (Fund results do not reflect sales charges, and would be
lower if sales charges were included. Complete performance
information, including average annual total returns, can be found on
pages 4--6 of this report to shareholders.)
Thus far in 1996, the Hong Kong stock market has been held back by
uncertainty over US interest rates. After rising sharply in January
and February, Hong Kong share prices declined in March, but remained
steady during the June quarter. However, there are two important
positive developments in Hong Kong: economic recovery in The
People's Republic of China and improving real estate prices in Hong
Kong, which have risen approximately 12% thus far this year. We
believe that these developments will soon result in an upturn in the
Hong Kong economy, and that rising consumer demand will follow.
However, investor sentiment regarding Hong Kong's prospects will
probably continue to be strongly influenced by the outlook for US
interest rates.
The Fund currently has an overweight position in Hong Kong relative
to several market-weighted indexes of dragon stock markets. Our
investments in Hong Kong favor residential property companies and
conglomerates. The Fund also has an above-average exposure to stocks
which have operations in, and hence revenues from, China.
<PAGE>
Malaysia remains the Fund's second-largest weighting at 13.3% of net
assets at June 30, 1996, although this is an underweighted exposure.
Malaysia's central bank tightened monetary policy in late 1995, and
the economy is showing some signs of a slowdown. Although we believe
that further monetary policy tightening is needed to contain
inflationary pressures, it appears that the government is unwilling
at this time to cut off economic growth through higher interest
rates. However, if the economy continues to expand at an
inflationary pace, higher interest rates may become necessary by the
end of 1996. With the prospect of rising interest rates and slowing
economic growth, our investments in Malaysia focus on conglomerates
and infrastructure-related stocks.
In Thailand, the core rate of inflation is beginning to decline. The
Thai central bank has pursued a tight monetary policy since last
year, but we believe that this trend is unlikely to continue to the
end of 1996. On the political front, the recent cabinet reshuffling
had little effect on share prices. On the other hand, tight monetary
policy has had a detrimental effect on share prices as investors
await signs that the economy has bottomed. Our 10.5% exposure in
Thailand is a slightly underweighted one. We believe that current
share prices more than discount the current difficulties in the Thai
banking industry; therefore, we are overweighting Thai banks in the
Fund.
The Indonesian stock market had been a strong performer earlier this
year as corporate earnings reports--especially for textile and
cigarette companies--were generally at or above expectations.
However, the Indonesian stock market has been negatively impacted by
the uncertainty in the US interest rate environment. The stock
market is now relatively inexpensive by historical standards at 18
times estimated 1996 earnings, but consumer-related stocks are
somewhat overvalued at 22 times estimated 1996 earnings. Therefore,
we sold some of our consumer stocks and purchased shares of
infrastructure-related companies which are trading at 14 times
estimated 1996 earnings. Our 6.8% exposure at June 30, 1996 in
Indonesia is virtually a market weighting.
In the Philippines, fourth-quarter corporate results for the 1996
fiscal year were good, with companies reporting profits growth
averaging 28%. However, profits for food and beverage companies
(such as Fund holding San Miguel Corporation) have been squeezed
because of higher raw material prices. In contrast, banks and real
estate companies have done well, such as Fund investments Philippine
Commercial International Bank, Inc. and Ayala Land, Inc. The
Philippine economy grew at an approximately 4.7% rate in the first
calendar quarter of 1996. Inflation generally remains under control
except for a spike upward in January because of higher food prices.
Interest rates are virtually unchanged, and we expect them to fall
by 1996 year-end if inflation remains under control. As a result, we
continue to overweight investment in the Philippines at 6.5% of net
assets as of June 30, 1996, with our holdings focused on the
infrastructure and consumer sectors.
<PAGE>
The Singapore stock market declined in May when the government
announced measures to reduce speculation in the property market, and
subsequently has been in a narrow trading range. Lackluster
corporate earnings results have also kept share prices from
appreciating. The Fund has investments in two Singapore real estate
companies, DBS Land Ltd. and City Development Ltd. We believe these
investments will be positive long-term performers as the new
government measures drive speculators from the real estate market.
Furthermore, underlying demand for housing remains strong.
Fears about an increase in the current account deficit and a
cyclical downturn in the electronic cycle had a negative effect on
the Korean stock market. The corporate bond yield has been edging
up. The trade balance is expected to deteriorate because of falling
prices of semiconductors and chips. The trade deficit, higher
interest rates and bearish local sentiment may depress the stock
market in the next few months, in our opinion.
Our 0.5% exposure in India at June 30, 1996 is a slightly
overweighted one, since India is not included in the Morgan Stanley
Capital International Combined Far East Free (Ex-Japan) Index.
Indian share prices rebounded at the beginning of 1996, then fell
when it became apparent that the general election would result in a
coalition government. Nevertheless, we expect that India will
continue to pursue more market-oriented policies.
In Conclusion
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.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(Kara Tan Bhala)
Kara Tan Bhala
Vice President and Portfolio Manager
July 31, 1996
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors, 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).
<PAGE>
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.
<TABLE>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month
6/30/96 3/31/96 6/30/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $17.11 $17.24 $15.88 +7.75% -0.75%
Class B Shares 17.01 17.17 15.79 +7.73 -0.93
Class C Shares 16.81 16.98 15.68 +7.21 -1.00
Class D Shares 17.15 17.29 15.91 +7.79 -0.81
Class A Shares--Total Return +8.96(1) -0.75
Class B Shares--Total Return +7.90(2) -0.93
Class C Shares--Total Return +7.84(3) -1.00
Class D Shares--Total Return +8.73(4) -0.81
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.176 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.025 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.091 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.136 per share ordinary
income dividends.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class A Shares***
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $17.43 $15.05 $0.241 $0.251 -10.82%
1995 15.05 15.99 -- 0.176 + 7.44
1/1/96--6/30/96 15.99 17.11 -- -- + 7.00
------ ------
Total $0.241 Total $0.427
Cumulative total return as of 6/30/96: +2.53%**
<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 any 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>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <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
1995 15.03 15.98 -- 0.025 + 6.49
1/1/96--6/30/96 15.98 17.01 -- -- + 6.45
------ ------
Total $0.247 Total $0.270
Cumulative total return as of 6/30/96: +75.94%**
<PAGE>
<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 C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $17.29 $14.92 $0.241 $0.229 -10.98%
1995 14.92 15.79 -- 0.091 + 6.46
1/1/96--6/30/96 15.79 16.81 -- -- + 6.46
------ ------
Total $0.241 Total $0.320
Cumulative total return as of 6/30/96: +0.89%**
<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**
<S> <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
1995 15.08 16.05 -- 0.136 + 7.35
1/1/96--6/30/96 16.05 17.15 -- -- + 6.85
------ ------
Total $0.247 Total $0.609
Cumulative total return as of 6/30/96: +81.56%**
<PAGE>
<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>
PERFORMANCE DATA (concluded)
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/96 +8.96% +3.24%
Inception (10/21/94) through 6/30/96 +1.49 -1.69
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/96 + 7.90% + 3.90%
Inception (5/29/92) through 6/30/96 +14.82 +14.82
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
<PAGE>
Year Ended 6/30/96 +7.84% +6.84%
Inception (10/21/94) through 6/30/96 +0.52 +0.52
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/96 + 8.73% + 3.02%
Inception (5/29/92) through 6/30/96 +15.71 +14.19
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<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> <S> <C> <S> <C> <C> <C>
Hong Kong Banking 1,200,000 Dao Heng Bank Group Ltd. $ 5,245,523 $ 4,635,359 0.3%
8,071,000 Guoco Group, Ltd. 35,028,436 38,475,538 2.3
4,314,681 HSBC Holdings, Ltd. 49,718,192 65,217,709 4.0
-------------- -------------- ------
89,992,151 108,328,606 6.6
Conglomerates 6,745,000 Citic Pacific Ltd. 22,796,209 27,274,530 1.7
19,676,542 First Pacific Company Ltd. 20,946,989 30,250,094 1.8
33,504,104 Guandong Investment, Ltd. 18,323,147 21,209,238 1.3
10,042,000 Hutchison Whampoa, Ltd. 43,438,391 63,180,079 3.9
3,537,000 Swire Pacific Ltd. 'A' 20,320,090 30,272,754 1.8
7,228,000 Swire Pacific Ltd. 'B' 9,490,519 9,944,861 0.6
-------------- -------------- ------
135,315,345 182,131,556 11.1
Electronic/ 12,200,000 ASM Pacific Technology Ltd. 4,026,946 9,614,366 0.6
Semiconductors
Insurance 23,683,000 National Mutual Asia, Ltd. 11,198,241 20,805,426 1.3
Leisure 6,370,000 Hong Kong & Shanghai Hotels Ltd. 5,697,738 10,862,864 0.7
Publishing & 7,600,000 South China Morning Post
Broadcasting Holdings Ltd. 4,440,430 5,203,798 0.3
4,401,000 Television Broadcasts Ltd. 17,630,137 16,516,898 1.0
-------------- -------------- ------
22,070,567 21,720,696 1.3
Real Estate 9,666,000 Cheung Kong Holdings Ltd. 53,327,250 69,618,177 4.2
US$ 15,900,000 Henderson Capital International,
5% due 3/28/1997 (b) 17,032,175 13,197,000 0.8
4,820,688 New World Development Co., Ltd. 15,049,394 22,358,078 1.4
US$ 2,910,000 New World Development Co., Ltd.,
4.375% due 12/11/2000 (b) 3,327,755 3,070,050 0.2
6,207,100 Sun Hung Kai Properties, Ltd. 40,790,596 62,748,605 3.8
3,973,000 ++Wharf Holdings Ltd. 14,713,572 14,217,699 0.9
US$ 9,840,000 Wharf Holdings Ltd., 5% due
7/15/2000 (b) 9,335,976 10,971,600 0.7
-------------- -------------- ------
153,576,718 196,181,209 12.0
Telecommunications 5,429,000 ABC Communications Holdings Ltd. 1,971,680 1,185,325 0.1
26,776,615 Hong Kong Telecommunications, Ltd. 49,908,972 48,084,096 2.9
-------------- -------------- ------
51,880,652 49,269,421 3.0
Utilities-- 4,851,200 China Light & Power Co., Ltd. 22,444,036 21,998,207 1.3
Electric &Gas 13,188,787 Hong Kong and China Gas Company Ltd. 15,087,452 21,042,765 1.3
1,099,065 Hong Kong and China Gas Company Ltd.
(Warrants) (a) 0 287,528 0.0
-------------- -------------- ------
37,531,488 43,328,500 2.6
Total Long-Term Investments in
Hong Kong 511,289,846 642,242,644 39.2
India Consumer--Durables 456,000 IFB Industries Ltd. 3,998,000 1,366,828 0.1
Finance 66,210 Housing Development Finance Corp., Ltd. 6,346,656 5,553,097 0.3
Pharmaceuticals 99,200 Ranbaxy Laboratories Ltd. 2,000,872 1,726,726 0.1
Steel 2,871 Essar Steel Ltd. 8,186 2,295 0.0
Total Long-Term Investments in India 12,353,714 8,648,946 0.5
Indonesia Banking 1,778,000 P.T. Bank International Indonesia
(Foreign) 7,402,080 8,786,850 0.5
<PAGE>
Food 11,614,032 P.T. Mayora Indah 6,796,338 6,488,286 0.4
Infrastructure 12,889,000 P.T. Citra Marga Nusaphala Persada 17,106,077 19,663,064 1.2
Insurance 3,577,000 P.T. Lippo Life Insurance (Foreign) 5,819,069 4,611,517 0.3
Miscellaneous-- 1,877,250 P.T. Modern Photo Film 5,624,954 8,067,254 0.5
Consumer
Telecommunications 374,500 P.T. Telekomunikasi Indonesia (ADR)* 9,205,351 11,141,375 0.7
Tobacco 4,574,500 P.T. Hanjaya Mandala Sampoerna 4,200,216 52,094,650 3.2
Total Long-Term Investments in
Indonesia 56,154,085 110,852,996 6.8
</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> <S> <C> <S> <C> <C> <C>
Malaysia Banking 4,256,000 Affin Holdings BHD $ 6,646,052 $ 9,982,999 0.6%
1,507,200 Arab-Malaysian Merchant Bank BHD 7,134,948 21,151,564 1.3
3,202,000 Malayan Banking BHD 11,414,612 30,813,152 1.9
6,148,000 Public Bank BHD (Foreign) 11,766,174 17,009,302 1.0
-------------- -------------- ------
36,961,786 78,957,017 4.8
Conglomerates 6,668,000 Renong BHD 7,833,973 10,640,994 0.7
993,600 Renong BHD (4% Convertible Preferred)
(ICULS) 391,104 374,492 0.0
US$ 9,025,000 Renong BHD, 2.50% due 1/15/2005 (b) 9,994,404 10,108,000 0.6
-------------- -------------- ------
18,219,481 21,123,486 1.3
Construction 5,200,000 I.J.M. Corp. BHD 6,266,933 9,007,217 0.6
Finance 938,000 Hong Leong Credit BHD 6,877,505 4,438,011 0.3
Food 1,721,700 Nestle Malaysia BHD 7,333,320 13,875,770 0.8
Leisure 5,116,000 Berjaya Sports ToTo BHD 12,957,878 16,923,416 1.0
1,281,500 Genting BHD 11,837,879 10,019,747 0.6
2,980,000 Resorts World BHD 10,407,072 17,086,608 1.1
-------------- -------------- ------
35,202,829 44,029,771 2.7
<PAGE>
Real Estate 6,038,000 Land & General BHD 10,103,122 14,889,214 0.9
Telecommunications 1,791,000 Telekom Malaysia BHD 12,287,753 15,942,342 1.0
US$ 14,870,000 Telekom Malaysia BHD, 4% due
10/03/2004 (b) 15,069,023 15,464,800 0.9
-------------- -------------- ------
27,356,776 31,407,142 1.9
Total Long-Term Investments in
Malaysia 148,321,752 217,727,628 13.3
Philippines Banking 841,900 Philippine Commercial International
Bank, Inc. 9,574,204 10,543,872 0.6
Beverages 6,870,864 San Miguel Corporation 'B' 10,222,586 23,778,707 1.4
Conglomerates 1,422,183 Benpres Holdings Corp. (GDR)**++++ 11,972,986 11,021,918 0.7
Construction 14,269,300 ++DMCI Holdings Inc. 8,803,557 10,231,334 0.6
International Trade 16,566,770 ++International Container Terminal
Services, Inc. (ICTSI) 8,867,496 11,245,131 0.7
Real Estate 5,092,500 Ayala Land, Inc. 'B' 5,975,232 9,152,868 0.6
Retail 60,490,170 SM Prime Holdings, Inc. 10,093,708 15,729,757 1.0
Utilities--Electric 1,419,950 Manila Electric Co. (MERALCO) 'B' 7,066,092 14,932,553 0.9
& Gas
Total Long-Term Investments in the
Philippines 72,575,861 106,636,140 6.5
Singapore Airlines 1,862,000 Singapore Airlines Ltd. (Foreign) 13,953,626 19,669,479 1.2
Automotive 1,492,000 Cycle & Carriage, Ltd. 7,008,828 15,972,492 1.0
Banking 2,471,000 Development Bank of Singapore Ltd.
(Foreign) 25,508,519 30,832,754 1.9
1,349,552 Overseas Chinese Banking Corp.
(Foreign) 8,315,720 15,787,032 0.9
2,549,704 United Overseas Bank (Foreign) 17,761,323 24,403,406 1.5
-------------- -------------- ------
51,585,562 71,023,192 4.3
Beverages 1,401,600 Fraser & Neave Ltd. 16,375,445 14,507,877 0.9
Conglomerates 2,925,200 ACMA Ltd. 7,623,675 8,544,363 0.5
<PAGE>
Publishing & 1,062,400 Singapore Press Holdings Ltd.
Broadcasting (Foreign) 11,124,064 20,863,864 1.3
Real Estate 1,984,000 City Development Ltd. 16,092,167 15,472,527 0.9
4,263,000 DBS Land Ltd. 13,275,507 14,628,089 0.9
-------------- -------------- ------
29,367,674 30,100,616 1.8
Total Long-Term Investments in
Singapore 137,038,874 180,681,883 11.0
South Korea Electronic/ 26,800 ++Samsung Electronics Co. 3,589,980 2,250,407 0.1
Semiconductors 522 Samsung Electronics Co. (GDR)**++++ 41,083 26,754 0.0
8,076 ++Samsung Electronics Co. (New
Common 1-96) 1,060,178 642,296 0.1
157 ++Samsung Electronics Co. (New Shares)
(GDR)**++++ 3,317 6,437 0.0
-------------- -------------- ------
4,694,558 2,925,894 0.2
Retail 103,805 Shinsegae Department Stores Co. 3,397,081 7,039,797 0.4
11,284 ++Shinsegae Department Stores Co.
(New Shares) 615,022 702,641 0.1
-------------- -------------- ------
4,012,103 7,742,438 0.5
Steel 143,600 Pohang Iron & Steel Co., Ltd. 13,187,601 11,896,667 0.7
Telecommunications 38,598 Korea Mobile Telecommunications Corp. 12,835,883 23,910,770 1.4
Utilities--Electric 587,680 Korean Electric & Power Corp. 19,069,823 23,739,084 1.5
& Gas
Total Long-Term Investments in
South Korea 53,799,968 70,214,853 4.3
Taiwan Closed-End Funds 732,600 R.O.C. Taiwan Fund (ADR)* 6,951,756 8,333,325 0.5
Electronic/ 301,600 Advanced Semiconductor Engineering,
Semiconductors Inc.(GDR)**++++ 2,495,679 2,601,300 0.2
Mutual Funds 347,000 Taiwan Fund Inc. 7,770,219 8,328,000 0.5
Total Long-Term Investments in Taiwan 17,217,654 19,262,625 1.2
<PAGE>
Thailand Banking 1,265,360 Bangkok Bank Public Company Ltd. 8,659,511 17,143,909 1.1
US$ 18,544,000 Bangkok Bank Public Company Ltd.,
3.25% due 3/03/2004 (b) 20,867,247 20,954,720 1.3
3,453,333 Industrial Finance Corp. of Thailand 5,771,637 15,505,316 0.9
884,347 Siam Commercial Bank Public Co.
(Foreign) 7,195,502 12,817,633 0.8
US$ 9,791,000 Siam Commercial Bank Public Co.,
3.25% due 1/24/2004 (b) 10,884,329 11,847,110 0.7
1,652,300 Thai Farmers Bank, Ltd. (Foreign) 15,531,720 18,091,351 1.1
-------------- -------------- ------
68,909,946 96,360,039 5.9
Financial 1,834,800 Finance One Co., Ltd. (Foreign) 12,567,383 11,851,406 0.7
Services 1,678,000 Phatra Thanakit Co., Ltd. 14,468,821 11,697,755 0.7
-------------- -------------- ------
27,036,204 23,549,161 1.4
</TABLE>
<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> <S> <C> <S> <C> <C> <C>
Thailand Mutual Funds 18,477,000 Ruam Pattana Fund II $ 8,601,546 $ 12,189,434 0.8%
(concluded)
Oil & Gas 1,331,500 PTT Exploration and Production
Public Co.,Ltd. (Foreign) 12,867,796 19,508,389 1.2
Real Estate 936,000 Land & House Public Co. (Foreign) 7,122,664 11,796,770 0.7
Telecommunications 510,000 Advanced Information Service Public
Company Ltd. 7,561,746 7,994,486 0.5
Total Long-Term Investments in
Thailand 132,099,902 171,398,279 10.5
Total Long-Term Investments 1,140,851,656 1,527,665,994 93.3
Face
Amount Short-Term Investments
<S> <S> <S> <C> <S> <C> <C> <C>
United Commercial US$ 50,000,000 ESC Securitization Inc., 5.42% due
States Paper*** 8/19/1996 49,616,083 49,616,083 3.0
43,658,000 General Electric Capital Corp.,
5.56% due 7/01/1996 43,644,515 43,644,515 2.7
Total Short-Term Investments 93,260,598 93,260,598 5.7
Total Investments $1,234,112,254 1,620,926,592 99.0
==============
Other Assets Less Liabilities 15,888,467 1.0
-------------- ------
Net Assets $1,636,815,059 100.0%
============== ======
<PAGE>
<FN>
*American Depositary Receipts (ADR).
**Global Depositary Receipts (GDR).
***Commercial Paper is traded on a discount basis; the interest
rates shown are the discount rates paid at the time of purchase by
the Fund.
(a)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)Convertible security.
++Non-income producing security.
++++Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $13,656,000,
representing 0.8% of net assets.
<CAPTION>
Acquisition Value
Issue Dates Cost (Note 1a)
<S> <C> <C> <C>
Advanced Semiconductor
Engineering, Inc. (GDR) 7/18/95-7/25/95 $ 2,495,679 $ 2,601,300
Benpres Holdings Corp. (GDR) 10/25/94-5/23/96 11,972,986 11,021,918
Samsung Electronics Co. (GDR) 12/15/95-1/22/96 41,083 26,754
Samsung Electronics Co.
(New Shares) (GDR) 12/15/95-1/22/96 3,317 6,437
Total $14,513,065 $13,656,409
=========== ===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,234,112,254)(Note 1a) $1,620,926,592
Cash 98,283
Foreign cash (Note 1c) 769,541
Receivables:
Securities sold $ 11,703,370
Capital shares sold 7,133,494
Dividends 4,128,667
Interest 907,087 23,872,618
--------------
Deferred organization expenses (Note 1f) 24,461
Prepaid registration fees and other assets (Note 1f) 95,864
--------------
Total assets 1,645,787,359
--------------
<PAGE>
Liabilities: Payables:
Capital shares redeemed 3,500,059
Securities purchased 2,165,731
Investment adviser (Note 2) 1,252,583
Distributor (Note 2) 1,036,288 7,954,661
--------------
Accrued expenses and other liabilities 1,017,639
--------------
Total liabilities 8,972,300
--------------
Net Assets: Net assets $1,636,815,059
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 289,901
Class B Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 7,072,635
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 381,568
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 1,866,068
Paid-in capital in excess of par 1,249,955,744
Accumulated dividends in excess of investment income (8,020,806)
Accumulated realized capital losses on investments and foreign
currency transactions--net (Note 6) (1,528,448)
Unrealized appreciation on investments and foreign currency
transactions--net 386,798,397
--------------
Net assets . $1,636,815,059
==============
Net Asset Class A--Based on net assets of $49,603,875 and 2,899,014 shares
Value: outstanding $ 17.11
==============
Class B--Based on net assets of $1,202,985,229 and 70,726,353 shares
outstanding $ 17.01
==============
Class C--Based on net assets of $64,155,416 and 3,815,676 shares
outstanding $ 16.81
==============
Class D--Based on net assets of $320,070,539 and 18,660,677 shares
outstanding $ 17.15
==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1996
<S> <S> <C> <C>
Investment Dividends (net of $452,130 foreign withholding tax) $ 14,600,668
Income Interest and discount earned (net of $645 foreign withholding tax) 4,302,989
(Notes 1d & 1e): --------------
Total income 18,903,657
--------------
Expenses: Investment advisory fees (Note 2) $ 8,058,256
Account maintenance and distribution fees--Class B (Note 2) 5,958,853
Transfer agent fees--Class B (Note 2) 936,535
Custodian fees 895,683
Account maintenance fees--Class D (Note 2) 398,608
Account maintenance and distribution fees--Class C (Note 2) 286,712
Transfer agent fees--Class D (Note 2) 202,463
Printing and shareholder reports 110,123
Registration fees (Note 1f) 109,118
Accounting services (Note 2) 85,457
Transfer agent fees--Class C (Note 2) 47,868
Professional fees 41,003
Transfer agent fees--Class A (Note 2) 27,764
Directors' fees and expenses 17,490
Amortization of organization expenses (Note 1f) 7,747
Pricing fees 3,701
Other 13,934
--------------
Total expenses 17,201,315
--------------
Investment income--net 1,702,342
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 14,937,308
(Loss) on Foreign currency transactions--net (94,115) 14,843,193
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 71,873,235
(Notes 1b, 1c, Foreign currency transactions--net 132,025 72,005,260
1e & 3): -------------- --------------
Net realized and unrealized gain on investments and foreign
currency transactions 86,848,453
--------------
Net Increase in Net Assets Resulting from Operations $ 88,550,795
==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: June 30, 1996 Dec. 31, 1995
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ 1,702,342 $ (152,522)
Realized gain (loss) on investments and foreign currency
transactions--net 14,843,193 (9,501,387)
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 72,005,260 89,459,720
-------------- --------------
Net increase in net assets resulting from operations 88,550,795 79,805,811
-------------- --------------
Dividends to In excess of investment income--net:
Shareholders Class A -- (312,371)
(Note 1g): Class B -- (1,509,738)
Class C -- (151,749)
Class D -- (2,159,398)
-------------- --------------
Net decrease in net assets resulting from dividends to shareholders -- (4,133,256)
-------------- --------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 210,864,882 85,728,447
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 299,415,677 161,401,002
Beginning of period 1,337,399,382 1,175,998,380
-------------- --------------
End of period $1,636,815,059 $1,337,399,382
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A++++
<PAGE>
For the
The following per share data and ratios have For the For the Period
been derived from information provided in Six Months Year Oct. 21,
the financial statements. Ended Ended 1994++ to
June 30, Dec. 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.99 $ 15.05 $ 17.43
Operating -------- -------- --------
Performance: Investment income--net .09 .12 .02
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.03 1.00 (1.91)
-------- -------- --------
Total from investment operations 1.12 1.12 (1.89)
-------- -------- --------
Less dividends and distributions:
In excess of investment income--net -- (.18) (.13)
Realized gain on investments--net -- -- (.27)
In excess of realized gain on investments--net -- -- (.09)
-------- -------- --------
Total dividends and distributions -- (.18) (.49)
-------- -------- --------
Net asset value, end of period $ 17.11 $ 15.99 $ 15.05
======== ======== ========
Total Investment Based on net asset value per share 7.00%+++ 7.44% (10.82%)+++
Return:** ======== ======== ========
Ratios to Average Expenses 1.28%* 1.37% 1.54%*
Net Assets: ======== ======== ========
Investment income--net 1.08%* .74% .84%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 49,604 $ 31,591 $ 3,383
Data: ======== ======== ========
Portfolio turnover 9.10% 24.52% 16.45%
======== ======== ========
Average commission rate paid++++++ $ .0116 -- --
======== ======== ========
<PAGE>
<CAPTION>
Class B++++
For the
The following per share data and ratios For the For the Period
have been derived from information provided Six Months Ten Months May 29,
in the financial statements. Ended For the Year Ended 1992++ to
June 30, Ended Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.98 $ 15.03 $ 18.74 $ 11.01 $ 10.00
Operating ---------- -------- -------- -------- --------
Performance: Investment loss--net --+++++ (.03) (.07) (.02) (.02)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.03 1.00 (3.28) 7.86 1.05
---------- -------- -------- -------- --------
Total from investment operations 1.03 .97 (3.35) 7.84 1.03
---------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- --+++++ --
In excess of investment income--net -- (.02) -- --+++++ (.02)
Realized gain on investments--net -- -- (.27) (.11) --+++++
In excess of realized gain on investments--net -- -- (.09) -- --
---------- -------- -------- -------- --------
Total dividends and distributions -- (.02) (.36) (.11) (.02)
---------- -------- -------- -------- --------
Net asset value, end of period $ 17.01 $ 15.98 $ 15.03 $ 18.74 $ 11.01
========== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.45%+++ 6.49% (17.86%) 71.27%+++ 10.32%+++
Return:** ========== ======== ======== ======== ========
Ratios to Average Expenses 2.31%* 2.41% 2.40% 2.35%* 2.49%*
Net Assets: ========== ======== ======== ======== ========
Investment income (loss)--net .03%* (.20%) (.42%) (.15%)* (.08%)*
========== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $1,202,985 $991,281 $917,384 $990,843 $365,430
Data: ========== ======== ======== ======== ========
Portfolio turnover 9.10% 24.52% 16.45% 16.62% 4.65%
========== ======== ======== ======== ========
Average commission rate paid++++++ $ .0116 -- -- -- --
========== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
+++Aggregate total investment return.
+++++Amount was less than $.01 per share.
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C++++
For the
The following per share data and ratios have For the For the Period
been derived from information provided in the Six Months Year Oct. 21,
financial statements. Ended Ended 1994++ to
June 30, Dec. 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.79 $ 14.92 $ 17.29
Operating -------- -------- --------
Performance: Investment income (loss)--net .01 (.04) (.01)
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 1.01 1.00 (1.89)
-------- -------- --------
Total from investment operations 1.02 .96 (1.90)
-------- -------- --------
Less dividends and distributions:
In excess of investment income--net -- (.09) (.11)
Realized gain on investments--net -- -- (.27)
In excess of realized gain on investments--net -- -- (.09)
-------- -------- --------
Total dividends and distributions -- (.09) (.47)
-------- -------- --------
Net asset value, end of period $ 16.81 $ 15.79 $ 14.92
======== ======== ========
Total Investment Based on net asset value per share 6.46%+++ 6.46% (10.98%)+++
Return:** ======== ======== ========
Ratios to Average Expenses 2.32%* 2.42% 2.57%*
Net Assets: ======== ======== ========
Investment income (loss)--net .11%* (.28%) (.17%)*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 64,155 $ 29,042 $ 5,329
Data: ======== ======== ========
Portfolio turnover 9.10% 24.52% 16.45%
======== ======== ========
Average commission rate paid++++++ $ .0116 -- --
======== ======== ========
<PAGE>
<CAPTION>
Class D++++
For the
The following per share data and ratios For the For the Period
have been derived from information provided Six Months Ten Months May 29,
in the financial statements. Ended For the Year Ended 1992++ to
June 30, Ended Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 16.05 $ 15.08 $ 18.77 $ 11.01 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .07 .09 .06 .07 .05
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.03 1.02 (3.30) 7.88 1.04
-------- -------- -------- -------- --------
Total from investment operations 1.10 1.11 (3.24) 7.95 1.09
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- (.01) --+++++
In excess of investment income--net -- (.14) (.09) (.07) (.08)
Realized gain on investments--net -- -- (.27) (.11) --
In excess of realized gain on investments
--net -- -- (.09) -- --
-------- -------- -------- -------- --------
Total dividends and distributions -- (.14) (.45) (.19) (.08)
-------- -------- -------- -------- --------
Net asset value, end of period $ 17.15 $ 16.05 $ 15.08 $ 18.77 $ 11.01
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.85%+++ 7.35% (17.24%) 72.31%+++ 10.99%+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.53%* 1.63% 1.63% 1.59%* 1.73%*
Net Assets: ======== ======== ======== ======== ========
Investment income--net .79%* .59% .34% .61%* .61%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $320,071 $285,485 $249,903 $311,848 $111,180
Data: ======== ======== ======== ======== ========
Portfolio turnover 9.10% 24.52% 16.45% 16.62% 4.65%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0116 -- -- -- --
======== ======== ======== ======== ========
<PAGE>
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
+++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. 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.
(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 other assets for which market
value quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's
Board of Directors.
<PAGE>
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the 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.
* Options--The Fund is authorized to write covered call options and
purchase put 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.
<PAGE>
(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.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates. Distributions in
excess of realized capital gains are due primarily to differing tax
treatments for futures transactions, and post-October losses.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 1.00%, 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 MLAM 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 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.
<PAGE>
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% --
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, 1996, MLFD earned underwriting
discounts and direct commissions 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 $ 210 $ 2,616
Class D $55,021 $747,562
For the six months ended June 30, 1996, MLPF&S received contingent
deferred sales charges of $880,993 and $34,617 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $44,319 in commissions on the execution
of portfolio security transactions for the Fund for the six months
ended June 30, 1996.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
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, 1996 were $328,675,880 and
$135,594,900, respectively.
Net realized and unrealized gains (losses) as of June 30, 1996 were
as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $14,939,030 $386,814,338
Short-term investments (1,722) --
Foreign currency transactions (94,115) (15,941)
----------- ------------
Total $14,843,193 $386,798,397
=========== ============
As of June 30, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $386,814,338, of which $416,546,697 related
to appreciated securities and $29,732,359 related to depreciated
securities. At June 30, 1996, the aggregate cost of investments for
Federal income tax purposes was $1,234,112,254.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $210,864,882 and $85,728,447 for the six months ended June 30,
1996 and the year ended December 31, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Dollar
Months Ended June 30, 1996 Shares Amount
Shares sold 5,983,230 $ 103,055,391
Shares redeemed (5,059,640) (87,646,841)
------------ -------------
Net increase 923,590 $ 15,408,550
============= =============
<PAGE>
Class A Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 15,316,591 $ 235,070,334
Shares issued to shareholders
in reinvestment of dividends 18,086 282,321
------------- -------------
Total issued 15,334,677 235,352,655
Shares redeemed (13,584,058) (209,762,961)
------------- -------------
Net increase 1,750,619 $ 25,589,694
============= =============
Class B Shares for the Six Dollar
Months Ended June 30, 1996 Shares Amount
Shares sold 19,371,661 $ 334,354,525
Shares redeemed (10,564,614) (182,724,820)
Automatic conversion of shares (132,565) (2,260,417)
------------- -------------
Net increase 8,674,482 $ 149,369,288
============= =============
Class B Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 25,831,182 $ 397,664,798
Shares issued to shareholders
in reinvestment of dividends 81,436 1,269,593
------------- -------------
Total issued 25,912,618 398,934,391
Shares redeemed (24,541,247) (372,106,945)
Automatic conversion of shares (369,028) (5,593,649)
------------- -------------
Net increase 1,002,343 $ 21,233,797
============= =============
<PAGE>
Class C Shares for the Six Dollar
Months Ended June 30, 1996 Shares Amount
Shares sold 5,238,643 $ 88,947,202
Shares redeemed (3,262,467) (55,530,902)
------------- -------------
Net increase 1,976,176 $ 33,416,300
============= =============
Class C Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 4,484,570 $ 68,645,095
Shares issued to shareholders
in reinvestment of dividends 8,702 134,106
------------- -------------
Total issued 4,493,272 68,779,201
Shares redeemed (3,011,017) (46,232,303)
------------- -------------
Net increase 1,482,255 $ 22,546,898
============= =============
Class D Shares for the Six Dollar
Months Ended June 30, 1996 Shares Amount
Shares sold 18,062,452 $ 310,293,869
Automatic conversion of shares 131,721 2,260,417
------------- -------------
Total issued 18,194,173 312,554,286
Shares redeemed (17,323,426) (299,883,542)
------------- -------------
Net increase 870,747 $ 12,670,744
============= =============
Class D Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 25,578,665 $ 391,676,072
Automatic conversion of shares 364,477 5,593,649
Shares issued to shareholders
in reinvestment of dividends 113,447 1,776,581
------------- -------------
Total issued 26,056,589 399,046,302
Shares redeemed (24,834,684) (382,688,244)
------------- -------------
Net increase 1,221,905 $ 16,358,058
============= =============
5. Commitments:
At June 30, 1996, the Fund had entered into foreign exchange
contracts under which it had agreed to sell various foreign
currencies with values of approximately $11,707,000.
<PAGE>
6. Capital Loss Carryforward:
At December 31, 1995, the Fund had a capital loss carryforward of
approximately $16,372,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
PORTFOLIO INFORMATION
Investments
As of 6/30/96
Ten Largest Holdings Percent of
Represented in the Portfolio Net Assets
Cheung Kong Holdings Ltd. 4.2%
HSBC Holdings, Ltd. 4.0
Hutchison Whampoa, Ltd. 3.9
Sun Hung Kai Properties, Ltd. 3.8
P.T. Hanjaya Mandala Sampoerna 3.2
Hong Kong Telecommunications, Ltd. 2.9
Guoco Group, Ltd. 2.3
Development Bank of Singapore Ltd. (Foreign) 1.9
Malayan Banking BHD 1.9
Swire Pacific Ltd. 'A' 1.8
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Banking 22.7%
Real Estate 16.0
Conglomerates 13.6
Telecommunications 7.5
Utilities--Electric & Gas 5.0
Leisure 3.4
Tobacco 3.2
Publishing & Broadcasting 2.6
Beverages 2.3
Insurance 1.6
EQUITY PORTFOLIO CHANGES
<PAGE>
For the Quarter Ended June 30, 1996
Additions
Hong Kong and China Gas Company Ltd. (Warrants)
P.T. Lippo Life Insurance (Foreign)
Samsung Electronics Co. (GDR)
Samsung Electronics Co. (New Shares) (GDR)
Taiwan Fund Inc.
Deletions
C&P Homes
Innovative International Holdings Ltd.
Leader Universal Cable BHD
M.C. Packaging (HK), Ltd.
Malaysian International Shipping Co. BHD (Foreign)
Mardia Chemicals Ltd.
P.T. Indonesian Satelitte Corp. (Indosat) (ADR)
P.T. Kalbe Farma
Philippine Long Distance Telephone Co. (ADR)
Renong BHD (Warrants)
Samsung Electronics Co. (New Shares) (Preferred) (GDR)
Samsung Electronics Co. (Preferred) (GDR)
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 and Portfolio Manager
Gerald M. Richard, Treasurer
James W. Harshaw, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
<PAGE>
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
