MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Annual Report
December 31, 1995
Investing in emerging market securities involves a number of risk
factors and special considerations, including restrictions on
foreign investments and on repatriation of capital invested in
emerging markets, currency fluctuations, and potential price
volatility and less liquidity of securities traded in emerging
markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may
not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which US companies
are subject. Therefore, the Fund is designed as a long-term
investment for investors capable of assuming the risks of investing
in emerging markets. The Fund should be considered as a vehicle for
diversification and not as a complete investment program. Please
refer to the prospectus for details.
<PAGE>
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
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.
<PAGE>
Asset Allocation
As a Percentage* of
Net Assets as of
December 31, 1995
A map illustrating the following percentages:
Pakistan 0.3%
India 0.9%
Indonesia 6.7%
Singapore 12.3%
Malaysia 13.6%
Thailand 12.0%
Hong Kong 36.7%
South Korea 4.6%
Taiwan 0.6%
Phillipines 5.8%
[FN]
*Total may not equal 100%.
DEAR SHAREHOLDER
Investor sentiment regarding most of the "dragon" stock markets did
not improve during the final months of 1995, with Hong Kong the
notable exception. Although interest rates in the United States,
Europe and Japan declined during the period, which typically results
in higher share prices for the dragon stock markets, global investor
interest remained focused on US equities. In addition, ongoing
political and economic troubles in Mexico led investors to view most
emerging markets with caution.
Investment Activities
The outlook for Hong Kong has become more positive as economic
conditions in The People's Republic of China have improved. It
appears that the Chinese government has achieved a "soft landing"
for the economy. On the political front, Chinese President Jiang has
solidified and consolidated his power base. Investor sentiment
regarding Hong Kong's prospects improved further when the central
bank eased monetary policy somewhat in December. In addition, there
are signs that the beleaguered Hong Kong real estate market may have
bottomed.
<PAGE>
We increased our investments in Hong Kong to 36.7% of net assets as
of December month-end, which is an overweighted position relative to
several market-weighted indexes of dragon stock markets. Our largest
industry exposures are in conglomerates and banking, where we
increased investments at very attractive valuations. For example,
during the December quarter we purchased shares of Citic Pacific
Ltd., a conglomerate with strong links to China through
infrastructure projects.
With 13.6% of net assets at December 31, 1995, Malaysia is the
Fund's second-largest country weighting, although this is an
underweighted position. We took advantage of share price weakness
and added to positions in Malaysian blue-chip and convertible
issues. It appears that the Malaysian economy has peaked during this
business cycle. In addition, a higher rate of inflation has led to
higher interest rates, which have depressed share prices. With the
prospect that the central bank may increase the statutory reserve
requirement for banks, which would discourage corporate loan growth,
it is likely that there will be even less liquidity available for
common stock investment. In addition, there is pressure on the
currency, given the country's large current account deficit.
We view Malaysia's current difficulties as a period of adjustment,
with the government and central bank working to engineer a soft
landing for the economy. Over the longer term, we believe the
country will again resume a stable rate of growth, which would
benefit stock prices. Furthermore, while prices of real estate-
related stocks have fallen out of investor favor in the high
interest rate environment, we continue to believe that our Malaysian
investment in this area, Land & General BHD, which is well-managed
and in a strong financial position, will emerge intact from the
current difficulties. The Fund is underweighted in the Malaysian
property sector.
The Fund's third-largest country weighting is Singapore at 12.3% of
net assets by December 31, 1995, which is a neutral exposure.
Our Singapore holdings are largely in banks and large blue-chip
companies, whose share prices usually perform in line with economic
activity. Although 1995's gross domestic product growth was above
8%, the economy has shown some signs of slowing in recent months.
However, on the positive side, monetary authorities appear to have
inflation under control. We also expect that corporate earnings
growth will be slower in 1996, but will likely approximate 16%,
compared to 18% estimated for 1995. At the same time, the stock
market appears attractively valued, with price/earnings ratios
slightly below historic averages.
<PAGE>
Thailand's stock market has declined as an overheated economy led to
a tight monetary policy and higher interest rates. At this point, it
appears that the negative economic developments may be fully
reflected in share prices, with valuations down to attractive
levels. The negative impact has been greatest for property-related
companies, whose shares corrected sharply. As of the end of
December, the Fund held only one real estate-related stock in
Thailand, Land & House Public Co., which we believe will prosper
once again under more favorable economic conditions. In our banking
holdings, we switched some of our positions from common to
convertible stock, since we believe the convertibles offered a more
attractive tradeoff between risk and potential return. As of
December month-end, the Fund had a 12.0% exposure to Thailand, which
is a slightly underweighted position.
We remain overweighted in the Philippines with 5.8% of net assets at
December 31, 1995, which has been one of the worst-performing stock
markets. The country is not making a smooth transition from a
heavily regulated, centrally controlled economy to a market-
oriented, decentralized one. However, we believe that the
Philippines is still in the very early stages of this process, and
that over the longer term our investments there will be rewarding.
Inflation has also become a near-term problem, since a series of
natural disasters have driven up food prices, although prices for
manufactured and consumer goods are stable.
The Fund is overweighted in the consumer sector and has a large
holding in San Miguel Corporation, a brewer and food producer. We
believe that the food and beverage industry in the Philippines will
fare well in the near term.
Indonesia accounted for 6.7% of net assets at December month-end. We
took advantage of price strength and trimmed our position in P.T.
Hanjaya Mandala Sampoerna. We utilized the proceeds of this sale to
establish a position in P.T. Telekomunikasi Indonesia (ADR), the
newly listed telephone company.
In India, political uncertainties, rising interest rates and a
devaluing currency have led to stock market weakness. Although we
expect that investors will continue to question the prospect for
further market-oriented reform in the run-up to the 1996 general
election, the worst of the economic developments may now be over.
Therefore, we would view further share price weakness as a buying
opportunity.
<PAGE>
Fiscal Year in Review
For the fiscal year ended December 31, 1995, Merrill Lynch Dragon
Fund's Class A, Class B, Class C and Class D Shares had total
returns of +7.44%, +6.49%, +6.46% and +7.35%, respectively, compared
to an +8.84% appreciation for the unmanaged Morgan Stanley Capital
International Combined Far East Free (Ex-Japan) Index. (Fund returns
do not reflect applicable sales charges and would be lower if sales
charges were included. Complete performance information, including
average annual total returns, can be found on pages 4-7 of this
report to shareholders.)
During the fiscal year, the Fund benefited from gradually shifting
its Hong Kong exposure from an underweighted 26.8% of net assets to
an overweighted 36.7% of net assets. The Hong Kong stock market was
the best-performing dragon stock market for the 12 months ended
December 31, 1995, with a total return of +23.0% for the year. Fund
performance was also enhanced by underweighting investments in the
underperforming Malaysian stock market and further reducing exposure
there over the course of the fiscal year. However, our overweighted
position in the Philippines was detrimental to performance.
At the sector level, overweighting financial stocks overall did not
hamper the Fund's performance for the fiscal year because our
investments in this sector focused on blue-chip stocks. Shifting
holdings from common to convertible stock helped to limit losses for
some individual financial stock investments. In addition, lowering
the Fund's exposure to Malaysian property companies over the course
of the fiscal year while increasing holdings in this sector in Hong
Kong was beneficial.
Finally, our strategy of focusing investments on blue-chip
companies, especially in Hong Kong, was positive for performance.
These companies have more dependable earnings in an uncertain
economic environment, and outperformed secondary stocks during the
fiscal year.
In Conclusion
We thank you for your investment in Merrill Lynch Dragon Fund, Inc.,
and we look forward to serving your financial needs throughout the
Fund's new fiscal year and beyond.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(Kara Tan Bhala)
Kara Tan Bhala
Vice President and Portfolio Manager
January 29, 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
12/31/95 9/30/95 12/31/94 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $15.99 $15.89 $15.05 +6.25% +0.63%
Class B Shares 15.98 15.76 15.03 +6.32 +1.40
Class C Shares 15.79 15.64 14.92 +5.83 +0.96
Class D Shares 16.05 15.91 15.08 +6.43 +0.88
Class A Shares--Total Return +7.44(1) +1.76(1)
Class B Shares--Total Return +6.49(2) +1.56(2)
Class C Shares--Total Return +6.46(3) +1.56(3)
Class D Shares--Total Return +7.35(4) +1.75(4)
<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>
Total Return
Based on a
$10,000
Investment
A line graph depicting the growth of an investment in the Fund's
Class A and Class C Shares compared to growth of an investment in
the Morgan Stanley Combined Far East (Ex-Japan) Free Index.
Beginning and ending values are:
<PAGE>
10/21/94** 12/95
ML Dragon Fund, Inc.++--
Class A Shares* $ 9,475 $9,079
ML Dragon Fund, Inc.++--
Class C Shares* $10,000 $9,477
Morgan Stanley Combined Far East
(Ex-Japan) Free Index++++ $10,000 $9,604
A line graph depicting the growth of an investment in the Fund's
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** 12/95
ML Dragon Fund, Inc.++--
Class B Shares* $10,000 $16,428
ML Dragon Fund, Inc.+++--
Class D Shares* $ 9,475 $16,099
Morgan Stanley Combined Far East
(Ex-Japan) Free Index++++ $10,000 $18,247
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
+++Class A Shares outstanding prior to October 21, 1994
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 market capitalization-weighted Index is
comprised of a representative sampling of stocks of large-,
medium-, and small-capitalization companies in Hong Kong,
Indonesia, Korea, Malaysia, the Philippines, Singapore and
Thailand and which are freely purchasable by foreign investors.
<PAGE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/95 +7.44% +1.80%
Inception (10/21/94) through 12/31/95 -3.51 -7.77
[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 B Shares*
Year Ended 12/31/95 + 6.49% + 2.49%
Inception (5/29/92) through 12/31/95 +15.02 +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*
Year Ended 12/31/95 +6.46% +5.46%
Inception (10/21/94) through 12/31/95 -4.40 -4.40
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 12/31/95 + 7.35% + 1.72%
Inception (5/29/92) through 12/31/95 +15.90 +14.18
[FN]
*Maximum sales charge is 5.25%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
PERFORMANCE DATA (concluded)
<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
------ ------
Total $0.241 Total $0.427
Cumulative total return as of 12/31/95: - 4.18%**
<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 charge; results would be lower if sales charge was
included.
</TABLE>
<PAGE>
<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
------ ------
Total $0.247 Total $0.270
Cumulative total return as of 12/31/95: +65.28%**
<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
------ ------
Total $0.241 Total $0.320
Cumulative total return as of 12/31/95: - 5.23%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class D Shares***
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<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
------ ------
Total $0.247 Total $0.609
Cumulative total return as of 12/31/95: +69.91%**
<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>
PORTFOLIO INFORMATION (unaudited)
Investments
As of 12/31/95
Ten Largest Holdings Percent of
Represented in the Portfolio Net Assets
Hutchison Whampoa, Ltd. 4.2%
HSBC Holdings, Ltd. 3.8
P.T. Hanjaya Mandala Sampoerna 3.8
Cheung Kong Holdings, Ltd. 3.3
Hong Kong Telecommunications, Ltd. 3.1
Sun Hung Kai Properties, Ltd. 2.6
Guoco Group, Ltd. 2.4
Swire Pacific Ltd.* 2.3
United Overseas Bank 1.9
Bangkok Bank 1.9
<PAGE>
[FN]
*Includes 'A' Shares.
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Banking 22.4%
Conglomerates 12.9
Real Estate 12.6
Telecommunications 9.1
Tobacco 3.8
Leisure 3.3
Publishing & Broadcasting 3.0
Utilities--Electric & Gas 2.6
Utilities--Electric 2.2
Financial Services 2.0
EQUITY PORTFOLIO CHANGES (unaudited)
For the Quarter Ended December 31, 1995
Additions
Citic Pacific Ltd.
P.T. Telekomunikasi Indonesia (ADR)
Samsung Electronics Co. (Preferred)(GDR)
Swire Pacific Ltd. 'B'
Deletions
Jardine Matheson Holdings Ltd. (ADR)
Johnson Electric Holdings Ltd.
MBF Capital BHD
Malaysian Airlines System BHD
President Enterprises (ADR)
Westmont BHD
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US Dollars)
<CAPTION>
Face Amount/ Value Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Hong Kong Banking 6,702,000 Guoco Group, Ltd. $ 27,334,197 $ 32,331,169 2.4%
3,340,806 HSBC Holdings, Ltd. 34,214,594 50,552,807 3.8
-------------- -------------- ------
61,548,791 82,883,976 6.2
Conglomerates 4,006,000 ++Citic Pacific Ltd. 12,684,076 13,703,919 1.0
19,488,250 First Pacific Company Limited 20,688,888 21,676,015 1.6
20,158,000 Guangdong Investment, Ltd. 9,301,920 12,122,957 0.9
US$ 3,436,000 Guangdong Investment, Ltd.,
4.50% due 10/07/1998(b) 4,364,558 4,191,920 0.3
9,277,000 Hutchison Whampoa, Ltd. 38,377,393 56,511,472 4.2
3,355,000 Swire Pacific Ltd. 'A' 18,818,725 26,034,661 2.0
2,528,000 Swire Pacific Ltd. 'B' 3,124,538 3,155,096 0.3
-------------- -------------- ------
107,360,098 137,396,040 10.3
Electrical 18,211,000 Innovative International Holdings Ltd. 7,882,226 5,358,255 0.4
Equipment
Electronic/ 12,200,000 ASM Pacific Technology 4,026,946 10,571,650 0.8
Semiconductors
Insurance 22,597,000 National Mutual Asia, Ltd. 10,212,562 20,457,708 1.5
Leisure 6,370,000 Hong Kong & Shanghai Hotels 5,697,738 9,227,108 0.7
Packaging 14,000,000 M.C. Packaging (HK), Ltd. 6,547,529 4,979,307 0.4
Publishing & 7,600,000 South China Morning Post Holdings 4,440,430 4,644,335 0.3
Broadcasting 4,401,000 Television Broadcast Ltd. 17,630,137 15,681,266 1.2
-------------- -------------- ------
22,070,567 20,325,601 1.5
Real Estate 7,323,000 Cheung Kong Holdings Ltd. 37,176,042 44,608,549 3.3
4,508,020 New World Development Co., Ltd. 12,941,206 19,648,251 1.5
4,332,100 Sun Hung Kai Properties, Ltd. 24,487,794 35,437,833 2.6
3,048,000 Wharf Holdings Ltd. 11,127,830 10,150,802 0.8
US$ 9,840,000 Wharf Holdings Ltd., 5% due
7/15/2000 (b) 9,335,976 10,553,400 0.8
-------------- -------------- ------
95,068,848 120,398,835 9.0
<PAGE>
Telecommuni- 12,220,000 ABC Communications Holdings Ltd. 3,501,176 2,212,623 0.2
cations 23,665,015 Hong Kong Telecommunications, Ltd. 43,852,525 42,237,093 3.1
-------------- -------------- ------
47,353,701 44,449,716 3.3
Utilities-- 4,441,200 China Light & Power Co., Ltd. 20,428,753 20,448,360 1.5
Electric & Gas 8,990,656 Hong Kong & China Gas Co. (The) 11,559,886 14,476,677 1.1
-------------- -------------- ------
31,988,639 34,925,037 2.6
Total Long-Term Investments in
Hong Kong 399,757,645 490,973,233 36.7
India Chemicals 542,800 Mardia Chemicals Ltd. 2,496,386 779,841 0.1
Conglomerates 173,300 ++Reliance Industries (ADR)* 4,662,021 2,382,875 0.2
Consumer--Durables 456,000 ++IFB Industries Ltd. 3,998,087 1,832,432 0.1
Finance 66,210 Housing Development Finance 6,347,114 5,114,087 0.4
Pharmaceuticals 99,200 Ranbaxy Laboratories Limited 2,000,872 1,820,313 0.1
Steel Mills 131,320 Essar Gujarat Limited 376,037 148,506 0.0
Total Long-Term Investments
in India 19,880,517 12,078,054 0.9
Indonesia Banking 1,731,500 P.T. Bank International Indonesia 7,163,359 5,742,606 0.4
Food 10,364,032 P.T. Mayorah Indah 5,764,781 7,487,151 0.6
Miscellaneous-- 1,711,250 P.T. Modern Photo Film 4,620,559 9,927,348 0.7
Consumer
Pharmaceuticals 2,251,500 P.T. Kalbe Farma 7,362,735 7,639,722 0.6
Telecommuni- 118,490 P.T. Indonesia Satellite Corp.
cations (Indosat) (ADR)* 4,045,632 4,324,885 0.3
178,000 ++P.T. Telekomunikasi Indonesia (ADR)* 3,204,000 4,494,500 0.3
-------------- -------------- ------
7,249,632 8,819,385 0.6
Tobacco 4,839,000 P.T. Hanjaya Mandala Sampoerna 4,415,689 50,423,905 3.8
Total Long-Term Investments in
Indonesia 36,576,755 90,040,117 6.7
<PAGE>
Malaysia Banking 4,256,000 Affin Holdings BHD 6,646,052 8,215,245 0.6
1,507,200 ++Arab-Malaysian Merchant Bank BHD 7,134,948 17,218,357 1.3
MYR 1,969,000 Arab-Malaysian Merchant Bank BHD,
7.50% due 11/20/1999 (b) 768,090 1,047,134 0.1
2,667,000 Malayan Banking BHD 6,353,456 22,483,278 1.7
3,499,000 Public Bank BHD 'Foreign' 4,235,687 6,723,475 0.5
-------------- -------------- ------
25,138,233 55,687,489 4.2
Building & 5,200,000 I.J.M. Corp. BHD 6,266,933 8,275,753 0.6
Construction
Conglomerates 4,968,000 Renong BHD 4,822,048 7,358,550 0.5
US$ 9,025,000 Renong BHD, 2.50% due 1/15/2005 (b) 9,994,404 10,062,875 0.8
-------------- -------------- ------
14,816,452 17,421,425 1.3
Finance 938,000 Hong Leong Credit BHD 6,877,505 4,655,820 0.3
Food 1,721,700 Nestle Malaysia BHD 7,333,320 12,615,174 0.9
Leisure 3,300,000 Berjaya Sports TOTO BHD 7,410,648 7,669,884 0.5
1,281,500 Genting BHD 11,837,879 10,702,305 0.8
3,000,000 Pernas International Hotels &
Properties BHD (Warrants) (a) 165,079 892,259 0.1
2,980,000 Resorts World BHD 10,407,072 15,965,334 1.2
-------------- -------------- ------
29,820,678 35,229,782 2.6
Real Estate 4,156,000 Land & General BHD 5,065,849 9,004,530 0.7
Telecommuni- 5,711,000 Leader Universal Cable BHD 8,553,531 13,048,572 1.0
cations 1,631,000 Telekom Malaysia BHD 10,798,393 12,721,607 1.0
US$ 5,450,000 Telekom Malaysia BHD, 4% due
10/03/2004 (b) 4,732,023 5,272,875 0.4
-------------- -------------- ------
24,083,947 31,043,054 2.4
Transportation 2,957,333 Malaysian International Shipping
Co. BHD 6,043,232 7,747,199 0.6
Total Long-Term Investments
in Malaysia 125,446,149 181,680,226 13.6
Pakistan Telecommuni- 41,905 ++Pakistan Telecommunications
cations (GDR)**++++ 7,533,262 3,561,925 0.3
Total Long-Term Investments
in Pakistan 7,533,262 3,561,925 0.3
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
<CAPTION>
Face Amount/ Value Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Philippines Banking 339,900 ++Philippine Commercial International
Bank $ 2,822,740 $ 3,138,336 0.3%
Beverages 6,246,240 San Miguel Corporation 'B' 10,222,586 21,329,206 1.6
Conglomerates 909,183 ++Benpres Holdings Corp. (ADR)*++++ 8,047,236 4,318,619 0.3
International 16,566,770 ++International Container Terminals 8,867,496 8,691,075 0.7
Trade
Real Estate 4,822,500 ++Ayala Land, Inc. 5,508,954 5,887,829 0.4
5,232,600 ++C & P Homes 2,628,722 3,843,096 0.3
-------------- -------------- ------
8,137,676 9,730,925 0.7
Retail 50,408,475 ++SM Prime Holdings 10,093,708 14,424,401 1.1
Telecommunications 78,880 Philippine Long Distance Telephone
Co. (ADR)* 4,027,836 4,269,380 0.3
Utilities-- 1,357,950 ++Manila Electric Co. (MERALCO) 'B' 6,429,540 11,087,421 0.8
Electric
Total Long-Term Investments
in the Philippines 58,648,818 76,989,363 5.8
Singapore Airlines 1,862,000 Singapore Airlines 'Foreign' Ltd. 13,953,626 17,382,178 1.3
Automotive 1,610,000 Cycle & Carriage, Ltd. 7,464,505 16,054,455 1.2
Banking 2,026,000 Development Bank of Singapore Ltd. 18,809,266 25,217,539 1.9
1,366,866 Overseas Chinese Banking Corp.
'Foreign' 8,900,801 17,109,992 1.3
2,690,704 United Overseas Bank 18,536,290 25,879,473 1.9
-------------- -------------- ------
46,246,357 68,207,004 5.1
Beverages 190,000 Fraser & Neave Ltd. (Warrants)(a) 1,139,529 1,202,617 0.1
Conglomerates 3,139,200 ACMA Ltd. 8,074,466 10,434,399 0.8
<PAGE>
Electronics 10,066,000 I.P.C. Corp. 7,496,013 6,691,683 0.5
Marine/ 2,807,500 Sembawang Maritime Ltd. 8,560,245 8,934,760 0.6
Offshore Oil SG$ 2,090,000 Sembawang Maritime Ltd., 1.50%
Services due 10/25/1998 (b) 1,325,469 2,276,238 0.2
9,885,714 11,210,998 0.8
-------------- -------------- ------
Publishing & 1,142,400 Singapore Press Holdings Ltd. 11,734,325 20,198,020 1.5
Broadcasting
Real Estate 4,104,000 DBS Land Ltd. 12,091,181 13,873,494 1.0
Total Long-Term Investments
in Singapore 118,085,716 165,254,848 12.3
South Korea Electronics 105,630 ++Samsung Electronics Co.
(Preferred) (GDR)** 6,987,373 6,337,800 0.5
Retail 78,020 ++Shinsegae Department Stores Co. 2,374,876 6,517,592 0.5
23,665 ++Shinsegae Department Stores Co. (New) 1,022,205 2,011,083 0.1
-------------- -------------- ------
3,397,081 8,528,675 0.6
Steel 143,600 Pohang Iron & Steel Co., Ltd. 13,187,601 10,136,601 0.8
Telecommuni- 16,104 Korea Mobile Telecommunications Corp. 8,995,064 17,671,010 1.3
cations
Utilities-- 428,900 Korean Electric & Power Corp. 12,196,137 18,562,628 1.4
Electric
Total Long-Term Investments
in South Korea 44,763,256 61,236,714 4.6
Taiwan Closed-End Funds 343,300 The R.O.C. Taiwan (ADR)* 2,904,850 3,604,650 0.2
Electronic/ 377,000 ++Advanced Semiconductor Engineering,
Semiconductors Inc. (GDR)** 5,892,909 4,985,825 0.4
Total Long-Term Investments
in Taiwan 8,797,759 8,590,475 0.6
<PAGE>
Thailand Banking 2,113,000 Bangkok Bank 11,408,866 25,678,237 1.9
US$ 6,453,000 Bangkok Bank, 3.25% due 3/03/2004 (b) 6,622,488 6,840,180 0.5
3,453,333 Industrial Finance Corp. of Thailand 5,771,637 11,725,972 0.9
1,262,747 Siam Commercial Bank Public Co. 8,699,381 16,649,404 1.2
US$ 5,241,000 Siam Commercial Bank Public Co.,
3.25% due 1/24/2004 (b) 5,259,179 5,647,178 0.4
1,652,300 Thai Farmers Bank, Ltd. 15,531,720 16,667,363 1.3
-------------- -------------- ------
53,293,271 83,208,334 6.2
Financial 1,834,800 Finance One Co., Ltd. 'Foreign' 12,567,383 11,585,909 0.9
Services 1,698,000 Phatra Thanakit Co., Ltd. 15,255,671 14,565,846 1.1
-------------- -------------- ------
27,823,054 26,151,755 2.0
Mutual Funds 15,977,000 Ruam Pattana Fund II 6,993,984 9,676,301 0.7
Oil & Gas 1,331,500 PITT Exploration `Foreign' 12,867,796 13,960,127 1.0
Real Estate 936,000 Land & House Public Co. 7,122,664 15,389,357 1.2
Telecommuni- 510,000 Advanced Information Service 7,561,746 9,033,360 0.7
cations 457,100 International Engineering Co. Ltd. 181,389 2,450,695 0.2
-------------- -------------- ------
7,743,135 11,484,055 0.9
Total Long-Term Investments
in Thailand 115,843,904 159,869,929 12.0
Total Long-Term Investments 935,333,781 1,250,274,884 93.5
Face
Amount Short-Term Securities
United Commercial US$ 2,606,000 General Electric Capital Corp.,
States Paper*** 5.90% due 1/02/1996 2,604,719 2,604,719 0.2
40,000,000 Goldman Sachs Group L.P., 5.90%
due 1/02/1996 39,980,333 39,980,333 3.0
15,000,000 Preferred Receivable Funding Corp.,
5.75% due 1/02/1996 14,992,812 14,992,812 1.1
-------------- -------------- ------
57,577,864 57,577,864 4.3
US Government & 20,000,000 Federal Home Loan Mortgage Corp.,
Agency 5.43%, due 1/22/1996 19,930,617 19,930,617 1.5
Obligations***
Total Investments in
Short-Term Securities 77,508,481 77,508,481 5.8
Total Investments $1,012,842,262 1,327,783,365 99.3
==============
Other Assets Less Liabilities 9,616,017 0.7
-------------- ------
Net Assets $1,337,399,382 100.0%
============== ======
<PAGE>
<FN>
*American Depositary Receipts (ADR).
**Global Depositary Receipts (GDR).
***Commercial Paper and certain US Government & Agency Obligations
are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
(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 $7,881,000,
representing 0.6% of net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Benpres Holdings Corp. (ADR) 10/25/1994-- $ 8,047,236 $ 4,318,619
3/10/1995
Pakistan Telecommunications (GDR) 9/16/1994 7,533,262 3,561,925
Total $15,580,498 $ 7,880,544
=========== ===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,012,842,262)(Note 1a) $1,327,783,365
Cash 10,892
Foreign cash (Note 1c) 3,247,889
Receivables:
Capital shares sold $ 14,333,196
Dividends 1,726,888
Securities sold 878,877
Interest 789,614 17,728,575
--------------
Deferred organization expenses (Note 1f) 24,461
Prepaid registration fees and other assets (Note 1f) 138,772
--------------
Total assets 1,348,933,954
--------------
<PAGE>
Liabilities: Payables:
Securities purchased 5,513,534
Capital shares redeemed 3,562,742
Investment adviser (Note 2) 1,016,519
Distributor (Note 2) 837,890 10,930,685
--------------
Accrued expenses and other liabilities 603,887
--------------
Total liabilities 11,534,572
--------------
Net Assets: Net assets $1,337,399,382
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 197,542
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 6,205,187
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 183,950
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 1,778,993
Paid-in capital in excess of par 1,040,335,362
Accumulated distributions in excess of investment income (9,723,148)
Accumulated realized capital losses on investments and foreign
currency transactions--net (Note 6) (16,371,641)
Unrealized appreciation on investments and foreign currency transactions--net 314,793,137
--------------
Net assets . $1,337,399,382
==============
Net Asset Class A--Based on net assets of $31,591,148 and 1,975,424 shares
Value: outstanding $ 15.99
==============
Class B--Based on net assets of $991,280,764 and 62,051,871 shares
outstanding $ 15.98
==============
Class C--Based on net assets of $29,042,117 and 1,839,500 shares
outstanding $ 15.79
==============
Class D--Based on net assets of $285,485,353 and 17,789,930
shares outstanding $ 16.05
==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1995
<S> <S> <C> <C>
Investment Dividends (net of $1,882,078 foreign withholding tax) $ 20,302,648
Income Interest and discount earned (net of $22,263 foreign
(Notes 1d & 1e): withholding tax) 5,947,703
--------------
Total income 26,250,351
--------------
Expenses: Investment advisory fees (Note 2) $ 11,840,885
Account maintenance and distribution fees--Class B (Note 2) 8,958,872
Custodian fees 1,804,783
Transfer agent fees--Class B (Note 2) 1,765,532
Account maintenance fees--Class D (Note 2) 646,029
Transfer agent fees--Class D (Note 2) 425,160
Printing and shareholder reports 328,012
Accounting services (Note 2) 168,696
Account maintenance and distribution fees--Class C (Note 2) 133,278
Professional fees 99,487
Registration fees (Note 1f) 86,055
Directors' fees and expenses 38,934
Transfer agent fees--Class C (Note 2) 27,831
Transfer agent fees--Class A (Note 2) 25,942
Amortization of organization expenses (Note 1f) 17,267
Pricing fees 8,438
Other 27,672
--------------
Total expenses 26,402,873
--------------
Investment loss--net (152,522)
--------------
Realized & Realized loss from:
Unrealized Gain Investments--net (9,089,880)
(Loss) on Foreign currency transactions--net (411,507) (9,501,387)
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 89,594,068
(Notes 1b, 1c, Foreign currency transactions--net (134,348) 89,459,720
1e & 3): --------------
Net realized and unrealized gain on investments and foreign
currency transactions 79,958,333
--------------
Net Increase in Net Assets Resulting from Operations $ 79,805,811
==============
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
December 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment loss--net $ (152,522) $ (2,783,327)
Realized gain (loss) on investments and foreign currency
transactions--net (9,501,387) 6,883,021
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 89,459,720 (242,120,310)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 79,805,811 (238,020,616)
-------------- --------------
Dividends & In excess of investment income--net:
Distributions to Class A (312,371) (26,417)
Shareholders Class B (1,509,738) --
(Note 1g): Class C (151,749) (34,041)
Class D (2,159,398) (1,471,448)
Realized gain on investments--net:
Class A -- (56,223)
Class B -- (16,559,524)
Class C -- (87,816)
Class D -- (4,524,481)
In excess of realized gain on investments--net:
Class A -- (17,570)
Class B -- (5,175,064)
Class C -- (27,444)
Class D -- (1,413,958)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (4,133,256) (29,393,986)
-------------- --------------
Beneficial Net increase in net assets derived from capital share
Interest transactions 85,728,447 140,721,806
Transactions -------------- --------------
(Note 4):
<PAGE>
Net Assets: Total increase (decrease) in net assets 161,401,002 (126,692,796)
Beginning of year 1,175,998,380 1,302,691,176
-------------- --------------
End of year $1,337,399,382 $1,175,998,380
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the financial Year Oct. 21, Ten Months May 29,
statements. Ended 1994++ to For the Year Ended 1992++ to
Dec. 31, Dec. 31, Ended Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1995++++ 1994++++ 1995++++ 1994++++ 1993++++ 1993++++
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.05 $ 17.43 $ 15.03 $ 18.74 $ 11.01 $ 10.00
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income (loss)--net .12 .02 (.03) (.07) (.02) (.02)
Realized and unrealized gain
(loss) on investments and
foreign currency transactions
--net 1.00 (1.91) 1.00 (3.28) 7.86 1.05
-------- -------- -------- -------- -------- --------
Total from investment operations 1.12 (1.89) .97 (3.35) 7.84 1.03
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- -- --+++++ --
In excess of investment income--net (.18) (.13) (.02) -- --+++++ (.02)
Realized gain on investments--net -- (.27) -- (.27) (.11) --+++++
In excess of realized gain on
investments--net -- (.09) -- (.09) -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.18) (.49) (.02) (.36) (.11) (.02)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 15.99 $ 15.05 $ 15.98 $ 15.03 $ 18.74 $ 11.01
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 7.44% (10.82%)+++ 6.49% (17.86%) 71.27%+++ 10.32%+++
Return:** ======== ======== ======== ======== ======== ========
<PAGE>
Ratios to Average Expenses, excluding account
Net Assets: maintenance and distribution fees 1.37% 1.54%* 1.41% 1.40% 1.35%* 1.49%*
======== ======== ======== ======== ======== ========
Expenses 1.37% 1.54%* 2.41% 2.40% 2.35%* 2.49%*
======== ======== ======== ======== ======== ========
Investment income (loss)--net .74% .84%* (.20%) (.42%) (.15%)* (.08%)*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period (in
Data: thousands) $ 31,591 $ 3,383 $991,281 $917,384 $990,843 $365,430
======== ======== ======== ======== ======== ========
Portfolio turnover 24.52% 16.45% 24.52% 16.45% 16.62% 4.65%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects 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>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
The following per share data and For the For the
ratios have been derived from For the Period For the Period
information provided in the financial Year Oct. 21, Ten Months May 29,
statements. Ended 1994++ to For the Year Ended 1992++ to
Dec. 31, Dec. 31, Ended Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1995++++ 1994++++ 1995++++ 1994++++ 1993++++ 1993++++
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 14.92 $ 17.29 $ 15.08 $ 18.77 $ 11.01 $ 10.00
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.04) (.01) .09 .06 .07 .05
Realized and unrealized gain
(loss) on investments and foreign
currency transactions--net 1.00 (1.89) 1.02 (3.30) 7.88 1.04
-------- -------- -------- -------- -------- --------
Total from investment operations .96 (1.90) 1.11 (3.24) 7.95 1.09
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- -- (.01) --+++++
In excess of investment income--net (.09) (.11) (.14) (.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 (.09) (.47) (.14) (.45) (.19) (.08)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 15.79 $ 14.92 $ 16.05 $ 15.08 $ 18.77 $ 11.01
======== ======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 6.46% (10.98%)+++ 7.35% (17.24%) 72.31%+++ 10.99%+++
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding account main-
Net Assets: tenance and distribution fees 1.42% 1.57%* 1.38% 1.38% 1.34%* 1.48%*
======== ======== ======== ======== ======== ========
Expenses 2.42% 2.57%* 1.63% 1.63% 1.59%* 1.73%*
======== ======== ======== ======== ======== ========
Investment income (loss)--net (.28%) (.17%)* .59% .34% .61%* .61%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 29,042 $ 5,329 $285,485 $249,903 $311,848 $111,180
======== ======== ======== ======== ======== ========
Portfolio turnover 24.52% 16.45% 24.52% 16.45% 16.62% 4.65%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects 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>
<PAGE>
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.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities
are valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market value
quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
<PAGE>
* 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 writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
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.
<PAGE>
(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.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $236,218 and $908,881 have been reclassified from accumulated net
realized capital losses and paid-in capital in excess of par,
respectively, to accumulated net investment loss. These
reclassifications have no effect on net assets or net asset values
per share.
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 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.
<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 year ended December 31, 1995, 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 $ 150 $ 2,353
Class D $43,548 $576,736
For the year ended December 31, 1995, MLPF&S received contingent
deferred sales charges of $2,203,281 and $9,778 relating to
transactions in Class B and Class C Shares, respectively.
<PAGE>
In addition, MLPF&S received $150,732 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended December 31, 1995.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1995 were $356,778,723 and
$272,882,645, respectively.
Net realized and unrealized gains (losses) as of December 31, 1995
were as follows:
Realized Unrealized
Losses Gains (Losses)
Long-term investments $(9,089,174) $314,941,103
Short-term investments (706) --
Foreign currency transactions (411,507) (147,966)
----------- ------------
Total $(9,501,387) $314,793,137
=========== ============
As of December 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $305,270,816, of which $344,283,633
related to appreciated securities and $39,012,817 related to
depreciated securities. At December 31, 1995, the aggregate cost of
investments for Federal income tax purposes was $1,022,512,549.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
for the year ended December 31, 1995 and the period ended December
31, 1994 were $85,728,447 and $140,721,806, respectively.
Transactions in capital shares for each class were as follows:
<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 A Shares for the Period
October 21, 1994++ to Dollar
December 31, 1994 Shares Amount
Shares sold 703,677 $ 11,334,140
Shares issued to shareholders
in reinvestment of dividends &
distributions 5,563 83,383
----------- -------------
Total issued 709,240 11,417,523
Shares redeemed (484,435) (7,719,173)
----------- -------------
Net increase 224,805 $ 3,698,350
=========== =============
[FN]
++Commencement of Operations.
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
=========== =============
NOTES TO FINANCIAL STATEMENTS (concluded)
Class B Shares for the Year Dollar
Ended December 31, 1994 Shares Amount
Shares sold 21,626,213 $ 354,250,510
Shares issued to shareholders
in reinvestment of dividends &
distributions 1,207,843 18,081,410
----------- -------------
Total issued 22,834,056 372,331,920
Shares redeemed (14,613,098) (239,406,135)
Automatic conversion of shares (47,440) (716,815)
----------- -------------
Net increase 8,173,518 $ 132,208,970
=========== =============
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 C Shares for the Period
October 21, 1994++ to Dollar
December 31, 1994 Shares Amount
Shares sold 381,246 $ 6,281,385
Shares issued to shareholders
in reinvestment of dividends &
distributions 8,965 133,227
----------- -------------
Total issued 390,211 6,414,612
Shares redeemed (32,966) (508,889)
----------- -------------
Net increase 357,245 $ 5,905,723
=========== =============
[FN]
++Commencement of Operations.
<PAGE>
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
=========== =============
Class D Shares for the Year Dollar
Ended December 31, 1994 Shares Amount
Shares sold 5,213,331 $ 85,671,153
Automatic conversion of shares 47,252 716,815
Shares issued to shareholders
in reinvestment of dividends &
distributions 405,832 6,095,592
----------- -------------
Total issued 5,666,415 92,483,560
Shares redeemed (5,709,447) (93,574,797)
----------- -------------
Net decrease (43,032) $ (1,091,237)
=========== =============
5. Commitments:
At December 31, 1995, the Fund had entered into foreign exchange
contracts under which it had agreed to purchase and sell various
foreign currencies with values of approximately $3,427,000 and
$856,000, respectively.
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.
<PAGE>
<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, 1995, the related statements of
operations for the year then ended, and changes in net assets for
each of the years in the two-year period then ended and the
financial highlights for each of the years in the two-year period
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, 1995, 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, 1995, 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 9, 1996
</AUDIT-REPORT>
<PAGE>
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions
paid by Merrill Lynch Dragon Fund, Inc. during its fiscal year ended
December 31, 1995:
<TABLE>
<CAPTION>
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
12/15/95 12/26/95 $ -- $0.044028 $0.132138 $0.176166 $0.024585 $ --
Class B Shares
12/15/95 12/26/95 $ -- $0.006149 $0.018454 $0.024603 $0.024585 $ --
Class C Shares
12/15/95 12/26/95 $ -- $0.022834 $0.068530 $0.091364 $0.024585 $ --
Class D Shares
12/15/95 12/26/95 $ -- $0.033871 $0.101653 $0.135524 $0.024585 $ --
</TABLE>
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 as foreign source 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.
<PAGE>
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Kara W.Y. Tan Bhala, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
