MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Semi-Annual Report
June 30, 1997
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
Printed on post-consumer recycled paper
MERRILL LYNCH DRAGON FUND, INC.
Asset Allocation
As a Percentage* of
Net Assets as of
June 30, 1997
Map Depicting the Fund's Asset Allocation As a Percentage* of Net Assets
as of June 30, 1997
<PAGE>
INDIA 0.0%**
INDONESIA 8.0%
SINGAPORE 8.6%
MALAYSIA 12.9%
THAILAND 2.7%
CHINA 6.5%
HONG KONG 51.0%
SOUTH KOREA 2.0%
PHILIPPINES 6.4%
[FN]
*Total may not equal 100%.
**Holdings are less than 0.1%.
DEAR SHAREHOLDER
For the three-month period ended June 30, 1997, Merrill Lynch Dragon
Fund, Inc.'s Class A, Class B, Class C and Class D Shares had total
returns of +7.61%, +7.30%, +7.26% and +7.55%, respectively,
substantially outperforming the +3.56% return for the unmanaged
Morgan Stanley Capital International (MSCI) Combined Far East Free
(Ex-Japan and Ex-Taiwan) Index (the benchmark index). (Fund results
shown do not include sales charges, and would be lower if sales
charges were included. Complete performance information, including
average annual total returns, can be found on pages 5--7 of this
report to shareholders.)
Portfolio Matters
The major event during the June quarter was the handover of Hong
Kong to The People's Republic of China. The Hong Kong stock market
rose strongly in the two months leading up to the handover. The
market rally was supported by good economic fundamentals in both
China and Hong Kong (whose economies are inextricably linked), and
by strong liquidity flows. The increase in Hong Kong share prices
also indicated the confidence that foreign and local investors had
in the market following the change in sovereignty.
The US (but not necessarily British) media are suggesting that the
resumption of Chinese sovereignty over Hong Kong was more than just
the end of the British Empire in Asia. This point of view suggests
that the handover is the beginning of a period of great uncertainty
in the economic and political life of this remarkable territory.
However, in our view, the media are wrong. US news reports focused
too much on the entry of Chinese troops into Hong Kong which, in any
case, is a natural expression of sovereignty recognized under
international law. Consequently, the media neglected the painstaking
efforts of the Chinese government and Hong Kong's new chief
executive, Tung Chee Hwa, to reassure foreign investors of their
deep commitment to Hong Kong's economic and political vitality.
<PAGE>
In his moving address at the farewell ceremony, when the Union Jack
was lowered at sunset for the last time, former British Governor
Chris Patten rightly characterized Hong Kong as a "Chinese city with
British characteristics," a clever play on Deng Xiaoping's now-
famous phrase about China having a market economy with Chinese
characteristics. The words and actions of the Chinese government and
Mr. Tung during the handover ceremonies were clear evidence that,
notwithstanding occasional rhetoric about erasing the shame of the
Opium Wars, the new leaders of Hong Kong accept this characterization.
This pragmatic group of leaders understands the importance of the
rule of law, basic democratic reforms, and light-handed government--the
"scaffolding" the British provided--to Hong Kong's continued economic
success. In our view, such scaffolding is likely to be an increasingly
common feature in China, since Hong Kong is certain to exert profound
influence on the mainland in the coming years. In our opinion, neither
the Chinese government nor Mr.Tung are likely to tear down the
scaffolding in Hong Kong. In sum, the handover was memorable, at least
in part, for the simple reason that all foreign investors should view
as positive: it was smooth and marked by an absence of controversy.
One of the best-performing stock markets during the June quarter was
The People's Republic of China. The Chinese economy continues to
recover, and as credit conditions are loosened, investor liquidity
is flowing into the stock market. During the June quarter, we added
two new Chinese holdings to the Fund's portfolio: the conglomerates
China Merchants Holdings International Co., Ltd. and Beijing
Enterprises Holdings Limited. Beijing Enterprises is the flagship
company for the city of Beijing, and we purchased its shares on an
initial public offering.
There were major developments in Thailand during the June quarter.
Following a collapse in real estate and stock prices, the Bank of
Thailand announced at the beginning of July that it would no longer
peg its currency, the baht, to a basket of currencies (dominated by
the US dollar). Instead, the bank would allow the baht to float in a
managed way. This effectively signaled the much-anticipated end of
the baht peg, which caused the baht to decline by approximately 20%
relative to the US dollar in a period of two days.
However, the freeing of the baht was greeted positively by equity
investors and the stock market rose by 22% in the three days
following the announcement. By allowing the baht to float, the Bank
of Thailand was also allowing interest rates to decline eventually.
When the baht was pegged, interest rates had to be kept high in
order to prevent assets from flowing out of the country, thereby
putting pressure on the baht. Lower interest rates should stimulate
domestic demand and take pressure off property developers and their
bankers.
<PAGE>
Over the short term, we expect Thailand to experience a serious
economic slowdown as the economy adjusts to a weaker baht. Many
companies with US dollar-based loans will be adversely affected. In
addition, imports will become more expensive and will lead to higher
inflation. The profits of some companies are likely to decline
steeply as import prices rise and demand falls. It may take some
time for the adjustments to occur. However, we believe that Thailand
has taken the right step toward economic recovery in changing its
currency policy. We remain underweighted in Thailand (relative to
the benchmark index), and have hedged part of our currency exposure
there. Our Thai investments are extremely defensive. For example,
our largest holding in Thailand is PTT Exploration and Production
Public Co., Ltd., an oil and gas company whose revenues are
denominated in US dollars and therefore insulated from the negative
effects of currency devaluation.
In Malaysia, the stock market corrected sharply because the
government announced measures aimed at cooling down overheating
property and stock markets. Bank lending has become slightly more
restrictive, and banks are expected to be more circumspect in making
loans for property or stock investment. Although we do expect that
the Malaysian economy will experience a significant cyclical
downturn over the next six months, we believe that any recession may
be a mild one. Therefore, in our view, investors have overreacted to
developments in Malaysia. Nevertheless, with restrictions on
liquidity, the Malaysian stock market is likely to remain weak in
the months ahead. Our strategy in this environment is to remain
underweighted in Malaysia (relative to the benchmark index), with
holdings focused on defensive issues such as newspaper publishing
companies, utilities and conglomerates.
The Singapore stock market was virtually flat as investors awaited a
convincing pick-up in business activity. Economic data have been
mixed, and provide no evidence of a clear growth trend for
industrial production and exports. However, the Singapore dollar has
been weakening relative to the US dollar, which should improve
export activity over the longer term. Although we continue to view
Singapore as having one of the best-managed economies in Southeast
Asia, once a recovery takes hold, we do not expect the country's
gross domestic product (GDP) to grow as strongly as other emerging
tiger economies. We are underweighted in Singapore (relative to the
benchmark index), and continue to favor investments in banks and
premier property developers.
<PAGE>
There was a sharp correction in the Philippine stock market as
investors became concerned about the prospects for the real estate
market, a rising current account deficit, high growth of bank
lending and a potential overheating of the economy. Furthermore,
investors also perceived that the Philippines would experience the
same economic woes as Thailand. In our view, the challenges facing
the Philippines economy are different and far less serious. The
Philippines is at an earlier stage of economic development than
Thailand. The percentage of GDP made up by bank loans is much lower
in the Philippines than in Thailand. While the Philippines is
experiencing double-digit export growth, Thailand's exports are
declining. The Philippines' GDP growth for the first quarter of 1997
was a stronger-than-expected 6.2%; at the same time, the rate of
inflation has declined. Currently, corporate earnings growth for
1997 is estimated at 25%.
Shortly after the close of the June quarter, the Philippine central
bank was faced with the challenge of defending the peso's value in
the foreign exchange markets. Rather than letting interest rates
rise to support the currency, the central bank chose to let the
peso's value float, which led to a 10% devaluation of the currency.
From a macroeconomic standpoint, the positive factors in the
Philippines far outweigh near-term difficulties, in our view.
Therefore, we believe that the peso's devaluation will be short-
lived. We remain positive regarding the country's long-term
prospects, and are maintaining our overweighted position (relative
to the benchmark index). Our holdings continue to focus on consumer-
and infrastructure-related holdings.
Political difficulties clouded the investment environment in
Indonesia for much of the June quarter. Although the riots preceding
the election at May month-end were disruptive, their occurrence was
not out of the ordinary. Furthermore, as expected, the ruling Golkar
party won an overwhelming victory in the elections. As a result, the
political environment settled down and the stock market rallied
convincingly following the elections. Economic fundamentals and
corporate flows of funds remain positive in Indonesia. Interest
rates may begin to trend lower as inflationary pressures seem to be
subdued. In addition, corporate earnings growth is forecast at 28%
in 1997, and stocks are relatively inexpensive based on historical
valuations. We are maintaining the Fund's overweighted position in
Indonesia (relative to the benchmark index), with investments
focused on banks, finance and consumer companies.
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,
<PAGE>
(Arthur Zeikel)
Arthur Zeikel
President
(Kara Tan Bhala)
Kara Tan Bhala
Vice President and
Portfolio Manager
August 1, 1997
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. However, in the
case of certain eligible investors, the shares 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 approximately 8 years. (There is no initial
sales charge for automatic share conversions.)
<PAGE>
* 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).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment
of all dividends and capital gains distributions at net asset
value on the ex-dividend date. Investment return and principal
value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Dividends paid to each
class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<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
1996 15.99 18.09 0.071 -- +13.59
1/1/97--6/30/97 18.09 18.38 -- -- + 1.60
------ ------
Total $0.312 Total $0.427
Cumulative total return as of 6/30/97: +10.59%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charges; results would be lower if
sales charge was included.
</TABLE>
<PAGE>
PERFORMANCE DATA (concluded)
<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
1996 15.98 17.89 0.071 -- +12.41
1/1/97--6/30/97 17.89 18.08 -- -- + 1.06
------ ------
Total $0.318 Total $0.270
Cumulative total return as of 6/30/97: +87.77%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<TABLE>
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
1996 15.79 17.68 0.071 -- +12.43
1/1/97--6/30/97 17.68 17.87 -- -- + 1.07
------ ------
Total $0.312 Total $0.320
Cumulative total return as of 6/30/97: +7.70%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<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
1996 16.05 18.11 0.071 -- +13.29
1/1/97--6/30/97 18.11 18.38 -- -- + 1.49
------ ------
Total $0.318 Total $0.609
Cumulative total return as of 6/30/97: +95.37%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charges; results would be lower if
sales charge was included.
</TABLE>
<TABLE>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month
6/30/97 3/31/97 6/30/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $18.38 $17.08 $17.11 +7.86%(1) +7.61%
Class B Shares 18.08 16.85 17.01 +6.73(1) +7.30
Class C Shares 17.87 16.66 16.81 +6.75(1) +7.26
Class D Shares 18.38 17.09 17.15 +7.61(1) +7.55
Class A Shares--Total Return +7.86(1) +7.61
Class B Shares--Total Return +6.73(1) +7.30
Class C Shares--Total Return +6.75(1) +7.26
Class D Shares--Total Return +7.61(1) +7.55
<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 $0.071 per share capital
gains distributions.
</TABLE>
<PAGE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/97 +7.86% +2.20%
Inception (10/21/94) through 6/30/97 +3.81 +1.75
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/97 + 6.73% + 2.73%
Five Years Ended 6/30/97 +13.25 +13.25
Inception (5/29/92) through 6/30/97 +13.18 +13.18
[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 6/30/97 +6.75% +5.75%
Inception (10/21/94) through 6/30/97 +2.79 +2.79
[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 6/30/97 + 7.61% + 1.96%
Five Years Ended 6/30/97 +14.13 +12.90
Inception (5/29/92) through 6/30/97 +14.07 +12.87
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<TABLE>
SCHEDULE OF INVESTMENTS (in US Dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
China Conglomerates 818,000 ++Beijing Enterprises Holdings Limited $ 1,332,651 $ 5,152,889 0.4%
6,686,000 ++China Merchants Holdings
International Co., Ltd. 6,964,422 20,799,892 1.6
3,902,000 China Resources Enterprise Ltd. 5,959,981 19,140,290 1.4
10,429,104 Guangdong Investments, Ltd. 7,027,430 15,683,774 1.2
1,042,910 Guangdong Investments, Ltd.
(Warrants) (a) 0 706,779 0.1
1,545,000 Shanghai Industrial Holdings Ltd. 8,375,066 9,612,872 0.7
-------------- -------------- ------
29,659,550 71,096,496 5.4
Infrastructure 617,800 ++New World Infrastructure, Ltd. 1,753,032 1,746,504 0.1
US$ 3,997,000 New World Infrastructure, Ltd., 5%
due 7/15/2001 (b) 5,019,432 4,676,490 0.4
-------------- -------------- ------
6,772,464 6,422,994 0.5
Real Estate 9,895,600 China Overseas Land & Investment Co. 4,981,217 7,983,619 0.6
Total Long-Term Investments in China 41,413,231 85,503,109 6.5
Hong Kong Banking 7,254,000 Guoco Group, Ltd. 32,955,553 38,204,575 2.9
3,727,200 HSBC Holdings, Ltd. 49,116,644 112,102,752 8.4
-------------- -------------- ------
82,072,197 150,307,327 11.3
Conglomerates 7,318,000 Citic Pacific Ltd. 27,225,094 45,720,969 3.5
22,168,015 First Pacific Company Ltd. 25,118,961 28,329,549 2.1
10,634,000 Hutchison Whampoa, Ltd. 50,631,213 91,970,620 6.9
2,315,000 Swire Pacific Ltd. 'A' 15,674,439 20,843,606 1.6
8,058,000 Swire Pacific Ltd. 'B' 10,707,902 12,222,014 0.9
-------------- -------------- ------
129,357,609 199,086,758 15.0
<PAGE>
Electronic/ 2,002,000 ASM Pacific Technology Ltd. 718,300 1,395,518 0.1
Semiconductors
Insurance 24,395,000 National Mutual Asia, Ltd. 12,693,393 27,081,763 2.0
Leisure US$ 12,367,000 HSH Overseas Finance Ltd., 5% due
1/06/2001 (b) 13,702,646 12,614,340 1.0
Publishing & 8,270,000 South China Morning Post Holdings
Broadcasting Ltd. 5,040,886 8,113,286 0.6
5,213,000 Television Broadcasts Ltd. 20,622,840 23,417,721 1.8
-------------- -------------- ------
25,663,726 31,531,007 2.4
Real Estate 8,663,000 Cheung Kong Holdings Ltd. 50,732,309 85,547,516 6.5
4,193,014 New World Development Co., Ltd. 14,071,508 25,006,099 1.9
US$ 5,150,000 New World Development Co., Ltd.,
4.375% due 12/11/2000 (b) 5,822,455 6,720,750 0.5
6,402,100 Sun Hung Kai Properties, Ltd. 46,348,749 77,063,539 5.8
4,375,751 Wharf Holdings Ltd. 15,061,376 18,978,834 1.4
-------------- -------------- ------
132,036,397 213,316,738 16.1
Utilities-- 20,952,198 Hong Kong and China Gas Company Ltd. 23,438,617 41,921,706 3.1
Electric & Gas
Total Long-Term Investments in
Hong Kong 419,682,885 677,255,157 51.0
India Finance 522 Housing Development Finance Corp.,
Ltd. 51,177 59,572 0.0
Steel 250 Essar Steel Ltd. 713 129 0.0
Total Long-Term Investments in India 51,890 59,701 0.0
Indonesia Banking 29,809,772 P.T. Bank International Indonesia
(Foreign) 17,903,679 25,761,531 1.9
2,150,736 P.T. Bank International Indonesia
(Foreign) (Warrants) (a) 276,391 845,248 0.1
-------------- -------------- ------
18,180,070 26,606,779 2.0
Conglomerates 3,867,500 P.T. Astra International (Foreign) 12,188,274 15,915,638 1.2
Food 3,483,500 ++P.T. Fiskar Agung Perkasa 5,362,210 5,626,641 0.4
<PAGE>
Infrastructure 32,865,000 P.T. Citra Marga Nusaphala Persada
(Foreign) 14,433,923 19,272,685 1.5
Insurance 6,761,000 P.T. Lippo Life Insurance (Foreign) 6,338,628 7,999,126 0.6
Telecommunications 240,500 P.T. Telekomunikasi Indonesia
(Series B) (ADR)* 6,793,351 7,816,250 0.6
Tobacco 5,990,500 P.T. Hanjaya Mandala Sampoerna
(Foreign) 2,936,016 22,864,974 1.7
Total Long-Term Investments in
Indonesia 66,232,472 106,102,093 8.0
Malaysia Banking 2,101,400 AMMB Holdings BHD 5,787,560 13,072,861 1.0
MYR 3,014,400 AMMB Holdings BHD, 5% due 5/13/2002 797,214 1,021,243 0.1
3,014,400 AMMB Holdings BHD (ICULS), 7.50%
due 5/26/2002 (Convertible) 1,219,269 1,080,965 0.1
301,440 AMMB Holdings BHD(Warrants) (a) 422,055 406,109 0.0
1,869,000 Malayan Banking BHD 8,534,334 19,625,352 1.5
5,446,333 Public Bank BHD (Foreign) 9,954,231 8,502,814 0.6
-------------- -------------- ------
26,714,663 43,709,344 3.3
Conglomerates 1,490,000 Hicom Holdings BHD 4,247,278 2,822,126 0.2
589,000 Malaysian Plantation BHD 1,423,492 793,518 0.1
2,728,000 Malaysian Resources Corporation BHD 11,073,351 7,512,620 0.6
10,096,560 Renong BHD 15,184,467 13,202,301 1.0
-------------- -------------- ------
31,928,588 24,330,565 1.9
Construction 4,562,000 I.J.M. Corp. BHD 5,684,909 9,580,616 0.7
2,650,984 United Engineers BHD 22,299,579 19,117,926 1.4
-------------- -------------- ------
27,984,488 28,698,542 2.1
Food 1,526,700 Nestle Malaysia BHD 6,587,194 11,433,463 0.9
Leisure 4,579,000 Berjaya Sports ToTo BHD 11,651,826 21,591,354 1.6
Publishing & 1,944,000 Star Publications Malaysia BHD 6,682,690 8,319,214 0.6
Broadcasting
Telecommuni- 3,262,400 Telekom Malaysia BHD 15,239,443 15,253,921 1.2
cations US$ 7,150,000 Telekom Malaysia BHD, 4% due
10/03/2004 (b) 7,826,379 6,506,500 0.5
-------------- -------------- ------
23,065,822 21,760,421 1.7
<PAGE>
Utilities-- 2,195,000 Tenaga Nasional BHD 10,185,160 10,697,983 0.8
Electric & Gas
Total Long-Term Investments in
Malaysia 144,800,431 170,540,886 12.9
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Philippines Banking 999,900 Philippine Commercial International
Bank, Inc. $ 12,244,719 $ 9,676,452 0.7%
Beverages 2,489,150 San Miguel Corporation 'B' 3,818,827 6,565,311 0.5
Conglomerates 1,076,183 ++Benpres Holdings Corp. (GDR)** (c) 8,255,098 7,262,621 0.5
Construction 22,902,600 ++DMCI Holdings Inc. 7,179,793 7,561,769 0.6
Infrastructure 20,047,155 International Container Terminal
Services, Inc. (ICTSI) 7,713,352 10,270,838 0.8
Real Estate 15,889,988 Ayala Land, Inc. 'B' 12,689,126 14,623,613 1.1
Retail 53,264,170 SM Prime Holdings, Inc. 9,921,185 15,767,003 1.2
Utilities-- 2,597,394 Manila Electric Co. (MERALCO) 'B' 8,541,192 12,814,465 1.0
Electric & Gas
Total Long-Term Investments in the
Philippines 70,363,292 84,542,072 6.4
Singapore Airlines 1,373,000 Singapore Airlines Ltd. (Foreign) 11,529,043 12,295,809 0.9
Automotive 421,000 Cycle & Carriage, Ltd. 2,472,488 4,359,337 0.3
Banking 1,720,000 Development Bank of Singapore Ltd.
(Foreign) 20,608,863 21,660,953 1.6
1,383,800 Overseas Chinese Banking Corp.
(Foreign) 6,947,948 14,328,862 1.1
1,981,704 United Overseas Bank (Foreign) 14,572,348 20,381,340 1.6
-------------- -------------- ------
42,129,159 56,371,155 4.3
Beverages 526,600 Fraser & Neave Ltd. 6,137,089 3,758,007 0.3
Publishing & 685,400 Singapore Press Holdings Ltd.
Broadcasting (Foreign) 8,187,700 13,810,621 1.0
<PAGE>
Real Estate 1,374,000 City Development Ltd. 11,205,791 13,458,336 1.0
3,053,000 DBS Land Ltd. 9,818,745 9,654,768 0.8
-------------- -------------- ------
21,024,536 23,113,104 1.8
Total Long-Term Investments in
Singapore 91,480,015 113,708,033 8.6
South Korea Telecommunications 39,504 Korea Mobile Telecommunications Corp. 17,039,643 14,568,996 1.1
Utilities-- 404,180 Korean Electric & Power Corp. 14,237,672 12,088,905 0.9
Electric & Gas
Total Long-Term Investments in
South Korea 31,277,315 26,657,901 2.0
Thailand Banking US$ 18,544,000 Bangkok Bank Public Company Ltd.,
3.25% due 3/03/2004 (b) 20,867,247 14,186,160 1.1
US$ 6,891,000 Siam Commercial Bank Public Co.,
3.25% due 1/24/2004 (b) 7,988,329 4,375,785 0.3
-------------- -------------- ------
28,855,576 18,561,945 1.4
Mutual Funds 10,277,000 Ruam Pattana Fund II 5,389,931 3,098,593 0.2
Oil & Gas 1,014,500 PTT Exploration and Production
Public Co., Ltd. (Foreign) 9,964,256 14,744,956 1.1
Total Long-Term Investments in
Thailand 44,209,763 36,405,494 2.7
Total Long-Term Investments 909,511,294 1,300,774,446 98.1
Short-Term Investments
United Commercial US$ 31,059,000 General Motors Acceptance Corp.,
States Paper*** 6.25% due 7/01/1997 31,059,000 31,059,000 2.3
Total Investments in Short-Term
Investments 31,059,000 31,059,000 2.3
Total Investments $ 940,570,294 1,331,833,446 100.4
==============
Unrealized Depreciation on Forward Foreign Exchange Contracts++++ (146,099) 0.0
Liabilities in Excess of Other Assets (5,026,412) (0.4)
-------------- ------
Net Assets $1,326,660,935 100.0%
============== ======
<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.
(c)The security may be offered to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
++Non-income producing security.
++++Forward foreign exchange contracts sold as of June 30, 1997 were as follows:
Unrealized
Expiration Depreciation
Foreign Currency Sold Date (Note 1b)
THB 179,612,136 August 1997 $(146,099)
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--
Net (US$ Commitment--$6,803,490) $(146,099)
=========
See Notes to Financial Statements.
</TABLE>
EQUITY PORTFOLIO CHANGES
For the Quarter Ended June 30, 1997
Additions
Beijing Enterprises Holdings Limited
China Merchants Holdings
International Co., Ltd.
P.T. Fiskar Agung Perkasa
Shanghai Industrial Holdings Ltd.
Deletions
<PAGE>
ACMA Ltd.
Affin Holdings BHD
Bangkok Bank Public Company Ltd.
Dao Heng Bank Group Ltd.
Finance One Co., Ltd. (Foreign)
Guangdong Tannery Ltd.
Industrial Finance Corp. of Thailand
Pohang Iron & Steel Co., Ltd.
Siam Commercial Bank
Public Co. (Foreign)
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$940,570,294)(Note 1a) $1,331,833,446
Foreign cash (Note 1c) 6,840,560
Receivables:
Dividends $ 2,418,055
Capital shares sold 1,523,585
Securities sold 1,401,968
Interest 838,252 6,181,860
--------------
Deferred organization expenses (Note 1f) 7,194
Prepaid registration fees and other assets (Note 1f) 116,716
--------------
Total assets 1,344,979,776
--------------
Liabilities: Unrealized depreciation on forward foreign exchange
contracts (Note 1b) 146,099
Payables:
Securities purchased 8,978,056
Capital shares redeemed 5,726,477
Investment adviser (Note 2) 1,135,931
Distributor (Note 2) 937,487 16,777,951
--------------
Accrued expenses and other liabilities 1,394,791
--------------
Total liabilities 18,318,841
--------------
Net Assets: Net assets $1,326,660,935
==============
<PAGE>
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 182,491
Class B Shares of Common Stock, $0.10 par value,
200,000,000 shares authorized 5,447,010
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 275,416
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 1,410,046
Paid-in capital in excess of par 847,275,499
Accumulated investment loss--net (426,749)
Accumulated distributions in excess of investment income--net (9,384,694)
Undistributed realized capital gains on investments and
foreign currency transactions--net 90,770,674
Unrealized appreciation on investments and foreign currency
transactions--net 391,111,242
--------------
Net assets $1,326,660,935
==============
Net Asset Class A--Based on net assets of $33,533,185 and 1,824,909
Value: shares outstanding $ 18.38
==============
Class B--Based on net assets of $984,794,780 and 54,470,105
shares outstanding $ 18.08
==============
Class C--Based on net assets of $49,218,938 and 2,754,156
shares outstanding $ 17.87
==============
Class D--Based on net assets of $259,114,032 and 14,100,463
shares outstanding $ 18.38
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1997
<S> <S> <C> <C>
Investment Dividends (net of $230,430 foreign withholding tax) $ 12,678,301
Income Interest and discount earned (net of $1,566 foreign
(Notes 1d & 1e): withholding tax) 2,317,955
--------------
Total income 14,996,256
--------------
<PAGE>
Expenses: Investment advisory fees (Note 2) $ 7,025,646
Account maintenance and distribution fees--Class B (Note 2) 5,196,574
Transfer agent fees--Class B (Note 2) 978,280
Custodian fees 925,780
Account maintenance fees--Class D (Note 2) 339,544
Account maintenance and distribution fees--Class C (Note 2) 278,535
Transfer agent fees--Class D (Note 2) 212,941
Printing and shareholder reports 115,555
Accounting services (Note 2) 85,029
Registration fees (Note 1f) 77,991
Transfer agent fees--Class C (Note 2) 56,589
Professional fees 43,340
Transfer agent fees--Class A (Note 2) 30,155
Directors' fees and expenses 20,078
Pricing fees 5,871
Amortization of organization expenses (Note 1f) 3,819
Other 27,278
--------------
Total expenses 15,423,005
--------------
Investment loss--net (426,749)
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 64,779,237
(Loss) on Foreign currency transactions--net (384,427) 64,394,810
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (52,447,861)
(Notes 1b, 1c, Foreign currency transactions--net (137,693) (52,585,554)
1e & 3): -------------- --------------
Net realized and unrealized gain on investments and foreign
currency transactions 11,809,256
--------------
Net Increase in Net Assets Resulting from Operations $ 11,382,507
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: June 30, 1997 Dec. 31, 1996
<S> <S> <C> <C>
Operations: Investment loss--net $ (426,749) $ (982,484)
Realized gain on investments and foreign currency transactions
--net 64,394,810 49,205,560
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net (52,585,554) 128,903,659
-------------- --------------
Net increase in net assets resulting from operations 11,382,507 177,126,735
-------------- --------------
<PAGE>
Distributions to Realized gain on investments--net:
Shareholders Class A -- (191,338)
(Note 1g): Class B -- (4,598,194)
Class C -- (250,735)
Class D -- (1,140,627)
-------------- --------------
Net decrease in net assets resulting from distributions to
shareholders -- (6,180,894)
-------------- --------------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions share transactions (251,900,754) 58,833,959
(Note 4): -------------- --------------
Net Assets: Total increase (decrease) in net assets (240,518,247) 229,779,800
Beginning of period 1,567,179,182 1,337,399,382
-------------- --------------
End of period $1,326,660,935 $1,567,179,182
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A++++
For the For the
The following per share data and ratios have been Six Period
derived from information provided in the financial Months Oct. 21,
statements. Ended For the Year 1994++ to
June 30, Ended December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 18.09 $ 15.99 $ 15.05 $ 17.43
Operating -------- -------- -------- --------
Performance: Investment income--net .06 .14 .12 .02
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .23 2.03 1.00 (1.91)
-------- -------- -------- --------
Total from investment operations .29 2.17 1.12 (1.89)
-------- -------- -------- --------
Less dividends and distributions:
In excess of investment income--net -- -- (.18) (.13)
Realized gain on investments--net -- (.07) -- (.27)
In excess of realized gain on investments--net -- -- -- (.09)
-------- -------- -------- --------
Total dividends and distributions -- (.07) (.18) (.49)
-------- -------- -------- --------
Net asset value, end of period $ 18.38 $ 18.09 $ 15.99 $ 15.05
======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 1.60%+++ 13.59% 7.44% (10.82%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.34%* 1.33% 1.37% 1.54%*
Net Assets: ======== ======== ======== ========
Investment income--net .71%* .78% .74% .84%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 33,533 $ 49,943 $ 31,591 $ 3,383
Data: ======== ======== ======== ========
Portfolio turnover 9.68% 9.68% 24.52% 16.45%
======== ======== ======== ========
Average commission rate paid++++++ $ .0121 $ .0130 -- --
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects 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. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may significantly affect
the rate shown.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Class B++++
<PAGE>
The following per share data
and ratios have been derived
from information provided For the For the
in the financial Six For the Period
statements. Months Ten Months May 29,
Ended Ended 1992++ to
Increase (Decrease) in Net June 30, For the Year Ended Dec. 31, Dec. 31, Feb. 28,
Asset Value: 1997 1996 1995 1994 1993 1993
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 17.89 $ 15.98 $ 15.03 $ 18.74 $ 11.01 $ 10.00
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment loss--net (.02) (.04) (.03) (.07) (.02) (.02)
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--net .21 2.02 1.00 (3.28) 7.86 1.05
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .19 1.98 .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 -- (.07) -- (.27) (.11) --+++++
In excess of realized
gain on investments--net -- -- -- (.09) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions -- (.07) (.02) (.36) (.11) (.02)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of
period $ 18.08 $ 17.89 $ 15.98 $ 15.03 $ 18.74 $ 11.01
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset value
Return:** per share 1.06%+++ 12.41% 6.49% (17.86%) 71.27%+++ 10.32%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses 2.37%* 2.36% 2.41% 2.40% 2.35%* 2.49%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment loss--net (.24%)* (.24%) (.20%) (.42%) (.15%)* (.08%)*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of
Data: period (in thousands) $ 984,795 $1,157,944 $ 991,281 $ 917,384 $ 990,843 $ 365,430
========== ========== ========== ========== ========== ==========
Portfolio turnover 9.68% 30.63% 24.52% 16.45% 16.62% 4.65%
========== ========== ========== ========== ========== ==========
Average commission rate
paid++++++ $ .0121 $ .0130 -- -- -- --
========== ========== ========== ========== ========== ==========
<PAGE>
Class C++++
For the For the
The following per share data and ratios have been Six Period
derived from information provided in the financial Months Oct. 21,
statements. Ended For the Year 1994++ to
June 30, Ended December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 17.68 $ 15.79 $ 14.92 $ 17.29
Operating -------- -------- -------- --------
Performance: Investment loss--net (.02) (.04) (.04) (.01)
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .21 2.00 1.00 (1.89)
-------- -------- -------- --------
Total from investment operations .19 1.96 .96 (1.90)
-------- -------- -------- --------
Less dividends and distributions:
In excess of investment income--net -- -- (.09) (.11)
Realized gain on investments--net -- (.07) -- (.27)
In excess of realized gain on investments--net -- -- -- (.09)
-------- -------- -------- --------
Total dividends and distributions -- (.07) (.09) (.47)
-------- -------- -------- --------
Net asset value, end of period $ 17.87 $ 17.68 $ 15.79 $ 14.92
======== ======== ======== ========
Total Investment Based on net asset value per share 1.07%+++ 12.43% 6.46% (10.98%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.39%* 2.37% 2.42% 2.57%*
Net Assets: ======== ======== ======== ========
Investment loss--net (.27%)* (.23%) (.28%) (.17%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 49,219 $ 62,113 $ 29,042 $ 5,329
Data: ======== ======== ======== ========
Portfolio turnover 9.68% 30.63% 24.52% 16.45%
======== ======== ======== ========
Average commission rate paid++++++ $ .0121 $ .0130 -- --
======== ======== ======== ========
<PAGE>
<FN>
*Annualized.
**Total investment returns exclude the effects 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. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may significantly affect
the rate shown.
+++Aggregate total investment return.
+++++Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class D++++
The following per share data
and ratios have been derived
from information provided For the For the
in the financial Six For the Period
statements. Months Ten Months May 29,
Ended Ended 1992++ to
Increase (Decrease) in Net June 30, For the Year Ended Dec. 31, Dec. 31, Feb. 28,
Asset Value: 1997 1996 1995 1994 1993 1993
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 18.11 $ 16.05 $ 15.08 $ 18.77 $ 11.01 $ 10.00
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .05 .09 .09 .06 .07 .05
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net .22 2.04 1.02 (3.30) 7.88 1.04
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .27 2.13 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 -- (.07) -- (.27) (.11) --
In excess of realized
gain on investments
--net -- -- -- (.09) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions -- (.07) (.14) (.45) (.19) (.08)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of
period $ 18.38 $ 18.11 $ 16.05 $ 15.08 $ 18.77 $ 11.01
========== ========== ========== ========== ========== ==========
<PAGE>
Total Investment Based on net asset value
Return:** per share 1.49%+++ 13.29% 7.35% (17.24%) 72.31%+++ 10.99%+++
========== ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.59%* 1.58% 1.63% 1.63% 1.59%* 1.73%*
Net Assets: ========== ========== ========== ========== ========== ==========
Investment income--net .55%* .53% .59% .34% .61%* .61%*
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 259,114 $ 297,179 $ 285,485 $ 249,903 $ 311,848 $ 111,180
========== ========== ========== ========== ========== ==========
Portfolio turnover 9.68% 30.63% 24.52% 16.45% 16.62% 4.65%
========== ========== ========== ========== ========== ==========
Average commission rate
paid++++++ $ .0121 $ .0130 -- -- -- --
========== ========== ========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects 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. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may significantly affect
the rate shown.
+++Aggregate total investment return.
+++++Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
<PAGE>
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 options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and 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.
(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.
<PAGE>
* 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.
NOTES TO FINANCIAL STATEMENTS (continued)
(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 dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(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.
<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, 1997, 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 $ 137 $ 1,867
Class D $5,720 $78,434
For the six months ended June 30, 1997, MLPF&S received contingent
deferred sales charges of $1,944,865 and $14,107 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $135,122 in commissions on the
execution of portfolio security transactions for the Fund for the
six months ended June 30, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1997 were $134,267,026 and
$331,362,162, respectively.
Net realized and unrealized gains (losses) as of June 30, 1997 were
as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $64,779,237 $ 391,263,152
Foreign currency transactions (384,427) (5,811)
Forward foreign exchange
contracts -- (146,099)
----------- -------------
Total $64,394,810 $ 391,111,242
=========== =============
As of June 30, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $391,263,152, of which $434,325,391 related
to appreciated securities and $43,062,239 related to depreciated
securities. At June 30, 1997, the aggregate cost of investments for
Federal income tax purposes was $940,570,294.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions for the six months ended June 30, 1997 and the year
ended December 31, 1996 was $(251,900,754) and $58,833,959,
respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended June 30, 1997 Shares Amount
Shares sold 3,014,595 $ 53,516,942
Shares redeemed (3,950,190) (70,221,797)
------------- -------------
Net decrease (935,595) $ (16,704,855)
============= =============
Class A Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
<PAGE>
Shares sold 12,899,901 $ 220,044,411
Shares issued to shareholders
in reinvestment of distributions 9,549 166,434
------------- -------------
Total issued 12,909,450 220,210,845
Shares redeemed (12,124,370) (208,148,463)
------------- -------------
Net increase 785,080 $ 12,062,382
============= =============
Class B Shares for the Six Months Dollar
Ended June 30, 1997 Shares Amount
Shares sold 7,261,882 $ 126,093,572
Shares redeemed (17,396,275) (303,245,012)
Automatic conversion of shares (114,836) (1,994,223)
------------- -------------
Net decrease (10,249,229) $(179,145,663)
============= =============
Class B Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 25,325,787 $ 434,357,379
Shares issued to shareholders
in reinvestment of
distributions 228,431 3,938,163
------------- -------------
Total issued 25,554,218 438,295,542
Shares redeemed (22,696,021) (388,041,441)
Automatic conversion of shares (190,734) (3,243,492)
------------- -------------
Net increase 2,667,463 $ 47,010,609
============= =============
Class C Shares for the Six Months Dollar
Ended June 30, 1997 Shares Amount
Shares sold 7,192,191 $ 123,439,637
Shares redeemed (7,950,230) (137,194,683)
------------- -------------
Net decrease (758,039) $ (13,755,046)
============= =============
Class C Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
<PAGE>
Shares sold 10,211,909 $ 171,725,625
Shares issued to shareholders
in reinvestment of
distributions 13,170 224,411
------------- -------------
Total issued 10,225,079 171,950,036
Shares redeemed (8,552,384) (144,423,321)
------------- -------------
Net increase 1,672,695 $ 27,526,715
============= =============
NOTES TO FINANCIAL STATEMENTS (concluded)
Class D Shares for the Six Months Dollar
Ended June 30, 1997 Shares Amount
Shares sold 7,826,083 $ 136,404,483
Automatic conversion of shares 113,185 1,994,223
------------- -------------
Total issued 7,939,268 138,398,706
Shares redeemed (10,243,993) (180,693,896)
------------- -------------
Net decrease (2,304,725) $ (42,295,190)
============= =============
Class D Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
Shares sold 25,641,811 $ 438,051,376
Automatic conversion of shares 189,401 3,243,492
Shares issued to shareholders
in reinvestment of
distributions 55,362 966,068
------------- -------------
Total issued 25,886,574 442,260,936
Shares redeemed (27,271,316) (470,026,683)
------------- -------------
Net decrease (1,384,742) $ (27,765,747)
============= =============
5. Commitments:
On June 30, 1997, the Fund had entered into foreign exchange
contracts, in addition to the contracts listed on the Schedule of
Investments, under which it had agreed to purchase and sell foreign
currency with the approximate value of $1,989,000 and $2,624,000,
respectively.
<PAGE>
PORTFOLIO INFORMATION
Investments
As of 6/30/97
Ten Largest Equity Holdings Percent of
Represented in the Portfolio Net Assets
HSBC Holdings, Ltd. 8.4%
Hutchison Whampoa, Ltd. 6.9
Cheung Kong Holdings Ltd. 6.5
Sun Hung Kai Properties, Ltd. 5.8
Citic Pacific Ltd. 3.5
Hong Kong and China Gas Company Ltd. 3.1
Guoco Group, Ltd. 2.9
First Pacific Company Ltd. 2.1
National Mutual Asia, Ltd. 2.0
P.T. Bank International Indonesia (Foreign) 1.9
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Conglomerates 24.0%
Banking 23.0
Real Estate 19.6
Utilities--Electric & Gas 5.8
Publishing & Broadcasting 4.0
Telecommunications 3.4
Infrastructure 2.8
Construction 2.7
Insurance 2.6
Leisure 2.6
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
<PAGE>
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
