MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Annual Report
December 31, 1996
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
Investing in emerging market securities involves a number of risk
factors and special considerations, including restrictions on
foreign investments and on repatriation of capital invested in
emerging markets, currency fluctuations, and potential price
volatility and less liquidity of securities traded in emerging
markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may
not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which US companies
are subject. Therefore, the Fund is designed as a long-term
investment for investors capable of assuming the risks of investing
in emerging markets. The Fund should be considered as a vehicle for
diversification and not as a complete investment program. Please
refer to the prospectus for details.
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
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
<PAGE>
MERRILL LYNCH DRAGON FUND, INC.
Asset Allocation
As a Percentage* of
Net Assets as of
December 31, 1996
A map depicting the following asset allocation percentages:
India 0.0%**
Indonesia 6.1%
Singapore 10.0%
Malaysia 15.6%
Thailand 5.8%
China 4.2%
Hong Kong 43.9%
South Korea 2.5%
Philippines 6.7%
[FN]
*Total may not equal 100%.
**Holdings are less than 0.1%.
DEAR SHAREHOLDER
For the 12-month period ended December 31, 1996, Merrill Lynch
Dragon Fund, Inc.'s Class A, Class B, Class C and Class D Shares had
total returns of +13.59%, +12.41%, +12.43% and +13.29%,
respectively, compared to a +11.19% return for the unmanaged Morgan
Stanley Capital International Combined Far East Free (Ex-Japan and
Ex-Taiwan) Index. (Fund results shown do not reflect sales charges
and would be lower if sales charges were included. Complete
performance information, including average annual total returns, can
be found on pages 4--7 of this report to shareholders.)
<PAGE>
Fiscal Year in Review
The "dragon" stock markets experienced a strong uptrend during the
12-month period ended December 31, 1996, punctuated by occasional
setbacks. (As defined in the Fund's prospectus, the dragon countries
consist of all countries in Asia and the Pacific Basin other than
Japan, Australia and New Zealand.) The dragon stock markets had
bottomed out in November 1995 and rose in January 1996 as positive
investor sentiment regarding the US economy, stock market and
interest rates also improved the outlook for Asian economies.
However, concerns of an overheating US economy and higher interest
rates led to a sell-off in the dragon stock markets in February.
The dragon stock markets were rather lackluster until the final
quarter of the fiscal year. The one exception was Malaysia, where
strong liquidity inflows buoyed share prices. In the final months of
the fiscal year, there was mounting evidence of a steady, non-
inflationary rate of economic growth in the United States. As a
result, investors turned their focus to the positive fundamental
underpinnings of the dragon stock markets. For example,
price/earnings multiples of the dragon stock markets, on average,
are no longer at a premium to the US stock market. In addition,
based on historical price/earnings multiples, the "dragon" markets
are currently undervalued.
Economic statistics in Hong Kong continue to show a slow recovery.
Consumer spending has increased slightly, and business confidence
has shown improvement. The strongest sign of an economic recovery in
Hong Kong is the increase in residential property prices throughout
1996. Housing demand has been strong, as indicated by impressive pre-
sales figures. Real gross domestic product growth in the third
calendar quarter was stronger-than-expected, primarily because of a
rapid deceleration of retained import growth and effective de-stocking
of inventories.
We expect the Hong Kong economy to feel the positive effects of an
expected improving Chinese economy in 1997. Exports have been
rising, and industrial output has also increased. The People's
Republic of China formally announced that it made the yuan
convertible on a current-account basis beginning December 1, 1996.
This should boost China's foreign investment inflows and its chances
of joining the World Trade Organization next year. Given these
trends, we continue to overweight Hong Kong investments in the
Fund's portfolio. With the Hong Kong stock market's strong
performance, overweighting Hong Kong benefited the Fund's total
return for the fiscal year.
Throughout most of the fiscal year we maintained an underweighted
position in Malaysia. As we anticipated, an overheating Malaysian
economy led to higher interest rates during 1996. However, the
Malaysian stock market continued to rise, contrary to our ex-
pectations, because the government's loose fiscal policy fostered
continued growth in bank credit, and the liquidity created, flowed
into the stock market.
<PAGE>
At present, it appears as if the Malaysian government has success-
fully engineered an economic slowdown without shrinking business
activity too drastically. However, we do not anticipate that
interest rates will be cut in early 1997, since it appears that
tight monetary conditions will be maintained. As a result, liquidity
may evaporate and manufacturing growth decline. Therefore, we are
maintaining a slightly underweighted position in Malaysia, although
we increased holdings during the last two months of the Fund's
fiscal year. New positions in Malaysia included the electric utility
Tenaga Nasional Berhad, which could have higher earnings next year
because of possible rate increases. During the fiscal year, the
Fund's other new Malaysian position is the profitable newspaper
publisher, Star Publications Malaysia Berhad.
The negative effect of the Fund's underweighting in Malaysia was
offset by overweighted positions in the Philippines and The People's
Republic of China. Both stock markets were among the top-performing
Asian stock markets during the fiscal year. The Philippine stock
market rose approximately 17% from the beginning of 1996 through
year-end. In the Philippines, we have maintained a large exposure to
infrastructure-related companies.
The Chinese market was up about 35% for the year. We have been
heavily overweighted in China for some time, which benefited Fund
performance. Chinese share prices rose as the economic austerity
program ended and investors looked forward to a possible monetary
easing in the months ahead. A less-restrictive monetary policy could
flow through the Chinese economy in 1997, bolstering industrial
production and consumer spending. The Fund's investments in China
are mainly through so-called "red chips"; that is, Hong Kong-listed
companies whose profits are largely earned in China. Red chips have
a Chinese government entity as a major shareholder. The Fund's new
positions in China are the property developer, China Resources
Enterprise, Ltd., and New World Infrastructure, Ltd., a builder of
roads, power plants and bridges.
Three of the worst-performing stock markets in Asia were Singapore,
Thailand and South Korea. These markets make up a small percentage
of total market capitalization of the dragon countries. Furthermore,
we underweighted all these markets during the fiscal year, which
benefited the Fund's total return. Singapore experienced a slowdown
in economic growth because declining worldwide demand led to a
sluggish electronics industry. In addition, there were widespread
expectations of a decline in residential property prices.
<PAGE>
The Fund has a small position in Thailand, and our Thai investments
outperformed the stock market because of our focus on defensive
stocks and convertible securities. The Thai economy is going through
a contraction, and corporate earnings growth is down to the low
single-digit level. Domestic and external demand are depressed, and
the current account deficit remains stubbornly high. The key factor
for the Thai economy is export growth, which must improve in order
to stimulate business activity. Higher world prices for foodstuffs,
another significant Thai export, are also needed for a pick-up in
the Thai economy. At present, we believe that the recovery in the
Thai economy will occur more slowly than is generally expected.
The South Korean stock market suffered from deteriorating economic
fundamentals and poor liquidity. The trade deficit has continued to
worsen, as export growth has fallen off significantly with the
decline in electronic exports. There is also a large amount of
excess capacity in the manufacturing sector, and inventories are at
high levels. A large number of new issues have recently come to
market, and this has put further downward pressure on share prices.
We are maintaining an underweighted position in South Korea, as we
have throughout the fiscal year.
The Fund continues to have a slightly overweighted exposure in
Indonesia, which also benefited performance. It appears that
Indonesia will experience a pick-up in the business cycle in 1997.
The rate of inflation is more subdued, and interest rates may fall.
We have selected our Indonesian investments in financial,
infrastructure-related and consumer companies based on positive
stock-specific fundamental factors.
In Conclusion
At fiscal year-end, the Fund had a 6.1% cash reserve, reflecting the
positive environment for the dragon stock markets. If the US
interest rate environment remains stable, we expect the dragon stock
markets' performances to reflect the sound fundamentals of many of
their economies. We continue to see long-term investment
opportunities in Asia because its markets represent the fastest-
growing economies in the world.
We thank you for your investment in Merrill Lynch Dragon Fund, Inc.,
and we look forward to serving your investment 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
February 7, 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, 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 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. 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
12/31/96 9/30/96 12/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $18.09 $17.10 $15.99 +13.59%(1) +6.22%
Class B Shares 17.89 16.96 15.98 +12.41(1) +5.92
Class C Shares 17.68 16.76 15.79 +12.43(1) +5.93
Class D Shares 18.11 17.14 16.05 +13.29(1) +6.09
Class A Shares--Total Return +13.59(1) +6.22
Class B Shares--Total Return +12.41(1) +5.92
Class C Shares--Total Return +12.43(1) +5.93
Class D Shares--Total Return +13.29(1) +6.09
<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>
Total Return
Based on a
$10,000
Investment
<PAGE>
A line graph depicting the growth of an investment in Merrill Lynch
Dragon Fund, Inc., 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 balances are:
10/21/94** 12/96
ML Dragon Fund, Inc.++--Class A Shares*+++ $ 9,475 $10,312
ML Dragon Fund, Inc.++--Class C Shares* $10,000 $10,655
Morgan Stanley Combined Far East (Ex-Japan)
Free Index++++ $10,000 $10,679
A line graph depicting the growth of an investment in Merrill Lynch
Dragon Fund, Inc., Class B and Class D Shares compared to growth
of an investment in the Morgan Stanley Combined Far East (Ex-Japan)
Free Index. Beginning and ending balances are:
5/29/92** 12/96
ML Dragon Fund, Inc.++--Class B Shares* $10,000 $18,580
ML Dragon Fund, Inc.++--Class D Shares*+++ $ 9,475 $18,238
Morgan Stanley Combined Far East (Ex-Japan)
Free Index++++ $10,000 $20,289
[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.
++ML Dragon Fund, Inc. invests primarily (at least 65% of the Fund's net
assets) in developing Asia-Pacific equity and debt securities.
++++This unmanaged marked capitalization-weighted Index is comprised
of a representative sampling of stocks of large-, medium-, and
small-capitalization companies in Hong Kong, Indonesia, Korea, Malayasia,
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 12/31/96 +13.59% +7.63%
Inception (10/21/94) through 12/31/96 + 3.94 +1.41
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/96 +12.41% + 8.41%
Inception (5/29/92) through 12/31/96 +14.44 +14.44
[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 12/31/96 +12.43% +11.43%
Inception (10/21/94) through 12/31/96 + 2.93 + 2.93
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
<PAGE>
Class D Shares*
Year Ended 12/31/96 +13.29% + 7.34%
Inception (5/29/92) through 12/31/96 +15.33 +13.98
[FN]
*Maximum sales charge is 5.25%.
**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**
<C> <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
------ ------
Total $0.312 Total $0.427
Cumulative total return as of 12/31/96: +8.84%**
<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>
<PAGE>
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
5/29/92--12/31/92 $10.00 $10.13 -- $0.020 + 1.50%
1993 10.13 18.74 $0.006 0.103 +86.15
1994 18.74 15.03 0.241 0.122 -17.86
1995 15.03 15.98 -- 0.025 + 6.49
1996 15.98 17.89 0.071 -- +12.41
------ ------
Total $0.318 Total $0.270
Cumulative total return as of 12/31/96: +85.80%**
<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**
<C> <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
------ ------
Total $0.312 Total $0.320
Cumulative total return as of 12/31/96: +6.55%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class D Shares***
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
5/29/92--12/31/92 $10.00 $10.12 -- $0.080 + 2.02%
1993 10.12 18.77 $0.006 0.182 +87.46
1994 18.77 15.08 0.241 0.211 -17.24
1995 15.08 16.05 -- 0.136 + 7.35
1996 16.05 18.11 0.071 -- +13.29
------ ------
Total $0.318 Total $0.609
Cumulative total return as of 12/31/96: +92.50%**
<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 12/31/96
Ten Largest Equity Holdings Percent of
Represented in the Portfolio Net Assets
HSBC Holdings, Ltd. 5.7%
Hutchison Whampoa, Ltd. 5.4
Cheung Kong Holdings Ltd. 5.4
Sun Hung Kai Properties, Ltd. 5.0
P.T. Hanjaya Mandala Sampoerna 3.0
Citic Pacific Ltd. 2.9
Guoco Group, Ltd. 2.7
Wharf Holdings Ltd. 2.3
Hong Kong and China Gas Company Ltd. 2.2
Swire Pacific Ltd. 'A' 2.2
<PAGE>
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Banking 23.1%
Real Estate 20.9
Conglomerates 18.2
Utilities--Electric & Gas 4.7
Telecommunications 3.9
Publishing & Broadcasting 3.5
Leisure 3.1
Tobacco 3.0
Insurance 2.3
Beverages 1.9
<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>
China Building & 2,606,800 ++New World Infrastructure, Ltd. $ 7,558,272 $ 7,617,492 0.5%
Construction
Conglomerates 32,504,104 Guangdong Investments, Ltd. 17,911,060 31,310,522 2.0
Manufacturing 1,675,205 ++Guangdong Tannery Ltd. 225,419 422,375 0.0
Real Estate 5,346,000 China Resources Enterprise Ltd. 7,838,543 12,027,463 0.8
US$ 15,900,000 Henderson Capital International,
5% due 3/28/1997 (b) 17,032,175 13,674,000 0.9
-------------- -------------- ------
24,870,718 25,701,463 1.7
Total Long-Term Investments
in China 50,565,469 65,051,852 4.2
Hong Kong Banking 905,500 Dao Heng Bank Group Ltd. 4,162,560 4,343,684 0.3
7,504,000 Guoco Group, Ltd. 33,753,379 42,012,309 2.7
4,241,106 HSBC Holdings, Ltd. 51,026,855 90,755,501 5.7
-------------- -------------- ------
88,942,794 137,111,494 8.7
Conglomerates 7,765,000 Citic Pacific Ltd. 28,620,635 45,079,972 2.9
23,328,159 First Pacific Company Ltd. 26,159,850 30,313,938 1.9
10,796,000 Hutchison Whampoa, Ltd. 51,036,357 84,801,784 5.4
3,615,000 Swire Pacific Ltd. 'A' 21,539,530 34,471,974 2.2
8,058,000 Swire Pacific Ltd. 'B' 10,707,902 12,190,147 0.8
-------------- -------------- ------
138,064,274 206,857,815 13.2
<PAGE>
Electronic/ 12,200,000 ASM Pacific Technology Ltd. 4,026,946 9,464,701 0.6
Semiconductors
Insurance 25,633,000 National Mutual Asia, Ltd. 13,051,294 24,360,299 1.6
Leisure US$ 12,367,000 HSH Overseas Finance Ltd.,
5% due 1/06/2001 (b) 13,702,646 14,129,298 0.9
Publishing & 8,270,000 South China Morning Post
Broadcasting Holdings Ltd. 5,040,886 6,843,548 0.5
5,213,000 Television Broadcasts Ltd. 20,622,840 20,827,735 1.3
-------------- -------------- ------
25,663,726 27,671,283 1.8
Real Estate 9,517,000 Cheung Kong Holdings Ltd. 53,448,004 84,599,657 5.4
4,093,688 New World Development Co., Ltd. 13,461,944 27,656,478 1.8
US$ 5,150,000 New World Development Co.,
Ltd., 4.375% due 12/11/2000 (b) 5,822,455 6,926,750 0.4
6,402,100 Sun Hung Kai Properties, Ltd. 46,348,749 78,432,761 5.0
7,280,751 Wharf Holdings Ltd. 25,378,541 36,337,857 2.3
-------------- -------------- ------
144,459,693 233,953,503 14.9
Utilities-- 18,132,665 Hong Kong and China Gas
Electric & Gas Company Ltd. 24,017,834 35,050,847 2.2
Total Long-Term Investments
in Hong Kong 451,929,207 688,599,240 43.9
India Finance 1,029 Housing Development Finance
Corp., Ltd. 100,884 64,813 0.0
Steel 1,331 Essar Steel Ltd. 3,795 733 0.0
Total Long-Term Investments
in India 104,679 65,546 0.0
Indonesia Banking 14,517,459 P.T. Bank International
Indonesia (Foreign) 10,072,259 14,296,099 0.9
Infrastructure 19,400,500 P.T. Citra Marga Nusaphala
Persada (Foreign) 12,949,979 15,201,578 1.0
Insurance 11,721,000 P.T. Lippo Life Insurance
(Foreign) 12,047,256 10,797,618 0.7
<PAGE>
Telecommunications 240,500 P.T. Telekomunikasi Indonesia
(Series B) (ADR)* 6,793,351 8,297,250 0.5
Tobacco 8,748,500 P.T. Hanjaya Mandala Sampoerna
(Foreign) 4,037,272 46,688,310 3.0
Total Long-Term Investments
in Indonesia 45,900,117 95,280,855 6.1
Malaysia Banking 3,692,000 Affin Holdings BHD 5,854,154 10,162,139 0.7
3,014,400 Arab-Malaysian Merchant Bank BHD 7,134,948 25,309,022 1.6
2,465,000 Malayan Banking BHD 9,836,948 27,334,653 1.7
7,382,333 Public Bank BHD (Foreign) 11,225,061 15,641,775 1.0
-------------- -------------- ------
34,051,111 78,447,589 5.0
Conglomerates 3,305,000 Malaysian Resources
Corporation BHD 13,688,114 13,023,663 0.8
11,040,560 Renong BHD 14,220,969 19,588,796 1.3
US$ 3,185,000 Renong BHD, 2.50% due
1/15/2005 (b) 3,742,823 3,710,525 0.2
-------------- -------------- ------
31,651,906 36,322,984 2.3
Construction 5,200,000 I.J.M. Corp. BHD 6,266,933 12,253,465 0.8
Diversified 1,358,000 United Engineers Berhad 11,925,657 12,262,337 0.8
Engineering US$ 2,000,000 United Engineering, Ltd.,
2% due 3/01/2004 (b) 2,937,500 3,040,000 0.2
Finance 91,000 Hong Leong Credit BHD 596,823 573,030 0.0
Food 1,721,700 Nestle Malaysia BHD 7,333,320 13,841,786 0.9
Leisure 5,116,000 Berjaya Sports ToTo BHD 12,957,878 25,529,347 1.6
1,882,000 Resorts World BHD 7,644,074 8,571,485 0.6
-------------- -------------- ------
20,601,952 34,100,832 2.2
Publishing & 2,173,000 Star Publications Malaysia
Broadcasting Berhad 7,475,073 8,562,911 0.5
Real Estate 2,723,000 Land & General BHD 6,708,694 6,524,416 0.4
Telecommuni- 1,791,000 Telekom Malaysia BHD 12,287,753 15,959,406 1.0
cations US$12,895,000 Telekom Malaysia BHD, 4%
due 10/03/2004 (b) 13,379,386 13,281,850 0.9
-------------- -------------- ------
25,667,139 29,241,256 1.9
<PAGE>
Utilities-- 2,106,000 Tenaga Nasional Berhad 9,538,501 10,092,119 0.6
Electric & Gas
Total Long-Term Investments
in Malaysia 164,754,609 245,262,725 15.6
Philippines Banking 1,144,900 Philippine Commercial
International Bank, Inc. 13,448,889 15,041,527 0.9
Beverages 3,773,864 San Miguel Corporation 'B' 5,817,118 16,670,534 1.1
Conglomerates 1,076,183 ++Benpres Holdings Corp.
(GDR)**++++ 8,255,098 7,802,327 0.5
Construction 11,451,300 ++DMCI Holdings Inc. 7,179,793 7,522,274 0.5
International 20,347,155 International Container Terminal
Trade Services, Inc. (ICTSI) 7,785,441 10,653,975 0.7
Real Estate 12,711,990 Ayala Land, Inc. 'B' 12,689,126 14,522,456 0.9
Retail 59,964,170 SM Prime Holdings, Inc. 10,790,371 15,527,660 1.0
Utilities-- 2,055,935 Manila Electric Co. (MERALCO) 'B' 8,662,519 16,832,674 1.1
Electric & Gas
Total Long-Term Investments
in the Philippines 74,628,355 104,573,427 6.7
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
<CAPTION>
Face Amount/ Value Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Singapore Airlines 1,605,000 Singapore Airlines Ltd.
(Foreign) $ 12,704,463 $ 14,572,133 0.9%
Automotive 1,203,000 Cycle & Carriage, Ltd. 5,832,188 14,706,391 0.9
Banking 1,720,000 Development Bank of Singapore
Ltd. (Foreign) 19,114,401 23,239,920 1.5
1,147,976 Overseas Chinese Banking Corp.
(Foreign) 6,877,709 14,279,942 0.9
2,247,704 United Overseas Bank (Foreign) 16,101,465 25,067,331 1.6
-------------- -------------- ------
42,093,575 62,587,193 4.0
<PAGE>
Beverages 1,247,600 Fraser & Neave Ltd. 14,614,946 12,843,466 0.8
Conglomerates 1,397,400 ACMA Ltd. 4,165,286 3,016,977 0.2
Publishing & 913,400 Singapore Press Holdings
Broadcasting Ltd. (Foreign) 9,980,798 18,022,476 1.2
Real Estate 1,862,000 City Development Ltd. 15,104,510 16,772,376 1.1
3,870,000 DBS Land Ltd. 12,140,189 14,248,284 0.9
-------------- -------------- ------
27,244,699 31,020,660 2.0
Total Long-Term Investments
in Singapore 116,635,955 156,769,296 10.0
South Korea Steel 93,600 Pohang Iron & Steel Co., Ltd. 8,685,845 5,433,799 0.3
Telecommuni- 20,289 Korea Mobile Telecommunications
cations Corp. 17,206,771 21,084,184 1.4
Utilities-- 437,580 Korean Electric & Power Corp. 15,055,387 12,776,817 0.8
Electric & Gas
Total Long-Term Investments
in South Korea 40,948,003 39,294,800 2.5
Thailand Banking 1,155,360 Bangkok Bank Public Company Ltd. 8,269,986 11,172,039 0.7
US$ 18,544,000 Bangkok Bank Public Company Ltd.,
3.25% due 3/03/2004 (b) 20,867,247 18,080,400 1.2
3,063,333 Industrial Finance Corp. of
Thailand 4,959,597 8,181,788 0.5
654,347 Siam Commercial Bank Public Co.
(Foreign) 6,217,446 4,745,527 0.3
US$ 9,791,000 Siam Commercial Bank Public Co.,
3.25% due 1/24/2004 (b) 10,884,329 8,640,558 0.6
754,300 Thai Farmers Bank, Ltd. (Foreign) 7,796,032 4,705,736 0.3
206,537 Thai Farmers Bank, Ltd. (Foreign)
(Warrants) (a) 204,387 195,287 0.0
-------------- -------------- ------
59,199,024 55,721,335 3.6
Financial 1,534,800 Finance One Co., Ltd. (Foreign) 6,904,837 3,111,849 0.2
Services 420,000 Phatra Thanakit Co., Ltd. 3,760,656 1,195,461 0.1
-------------- -------------- ------
10,665,493 4,307,310 0.3
Mutual Funds 18,477,000 Ruam Pattana Fund II 8,601,546 7,564,569 0.5
Oil & Gas 1,234,500 PTT Exploration and Production
Public Co., Ltd. (Foreign) 11,993,094 17,809,685 1.1
<PAGE>
Real Estate 528,900 Land & House Public Co. (Foreign) 4,770,219 3,856,369 0.2
Telecommuni- 154,600 Advanced Information Service
cations Public Company Ltd. 1,064,329 1,314,103 0.1
Total Long-Term Investments
in Thailand 96,293,705 90,573,371 5.8
Total Long-Term Investments 1,041,760,099 1,485,471,112 94.8
Face
Amount Short-Term Securities
United Commercial US$ 50,992,000 General Motors Acceptance Corp.,
States Paper*** 7.50% due 1/02/1997 50,981,377 50,981,377 3.3
34,350,000 Three Rivers Funding, 5.72%
due 1/21/1997 34,240,843 34,240,843 2.2
-------------- -------------- ------
85,222,220 85,222,220 5.5
US Government 10,000,000 Federal Home Loan Mortgage Corp.,
& Agency 5.45% due 1/06/1997 9,992,431 9,992,431 0.6
Obligations***
Total Investments in
Short-Term Securities 95,214,651 95,214,651 6.1
Total Investments $1,136,974,750 1,580,685,763 100.9
==============
Liabilities in Excess of Other Assets (13,506,581) (0.9)
-------------- ------
Net Assets $1,567,179,182 100.0%
============== ======
<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 $7,802,000,
representing 0.5% of net assets.
<PAGE>
Acquisition Value
Issue Date Cost (Note 1a)
Benpres Holdings Corp. (GDR) 2/08/1995 $8,255,098 $7,802,327
Total $8,255,098 $7,802,327
========== ==========
See Notes to Financial Statements.
</TABLE>
PORTFOLIO CHANGES (unaudited)
For the Quarter Ended December 31, 1996
Additions
China Resources Enterprise Ltd.
Guangdong Tannery Ltd.
Malaysian Resources Corporation BHD
New World Infrastructure, Ltd.
Tenaga Nasional Berhad
United Engineers Berhad
Deletions
ACMA Ltd. (Warrants)
Advanced Semiconductor Engineering,
Inc. (GDR)
China Light & Power Co., Ltd.
Genting BHD
Hong Kong and China Gas Company Ltd.
(Warrants)
Hong Kong & Shanghai Hotels Ltd.
Hong Kong Telecommunications, Ltd.
IFB Industries Ltd.
Kian Joo Can Factory BHD
P.T. Mayora Indah
P.T. Modern Photo Film
R.O.C. Taiwan Fund (ADR)
Ranbaxy Laboratories Ltd.
Samsung Electronics Co. (GDR)
Samsung Electronics Co. (New Shares)
(GDR)
Shinsegae Department Stores Co.
Taiwan Fund Inc. (ADR)
Timah Langat BHD
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,136,974,750)(Note 1a) $1,580,685,763
Foreign cash (Note 1c) 4,604,383
Receivables:
Securities sold $ 1,863,679
Interest 1,735,569
Capital shares sold 1,551,253
Dividends 1,377,354 6,527,855
--------------
Deferred organization expenses (Note 1f) 7,194
Prepaid registration fees and other assets (Note 1f) 117,665
--------------
Total assets 1,591,942,860
--------------
Liabilities: Payables:
Capital shares redeemed 20,495,516
Investment adviser (Note 2) 1,367,230
Distributor (Note 2) 1,127,536 22,990,282
--------------
Accrued expenses and other liabilities 1,773,396
--------------
Total liabilities 24,763,678
--------------
Net Assets: Net assets $1,567,179,182
==============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 276,050
Class B Shares of Common Stock, $0.10 par value,
200,000,000 shares authorized 6,471,933
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 351,220
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 1,640,519
Paid-in capital in excess of par 1,097,751,494
Accumulated distributions in excess of investment income--net (9,384,694)
Undistributed realized capital gains on investments and
foreign currency transactions--net 26,375,864
Unrealized appreciation on investments and foreign currency
transactions--net 443,696,796
--------------
Net assets $1,567,179,182
==============
<PAGE>
Net Asset Class A--Based on net assets of $49,942,833 and 2,760,504
Value: shares outstanding $ 18.09
==============
Class B--Based on net assets of $1,157,944,111 and 64,719,334
shares outstanding $ 17.89
==============
Class C--Based on net assets of $62,112,801 and 3,512,195
shares outstanding $ 17.68
==============
Class D--Based on net assets of $297,179,437 and 16,405,188
shares outstanding $ 18.11
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1996
<S> <S> <C> <C>
Investment Dividends (net of $1,027,833 foreign withholding tax) $ 26,215,944
Income Interest and discount earned (net of $645 foreign withholding tax) 7,660,994
(Notes 1d & 1e): --------------
Total income 33,876,938
--------------
Expenses: Investment advisory fees (Note 2) $ 15,984,061
Account maintenance and distribution fees--Class B (Note 2) 11,795,965
Transfer agent fees--Class B (Note 2) 2,186,878
Custodian fees 2,064,536
Account maintenance fees--Class D (Note 2) 780,000
Account maintenance and distribution fees--Class C (Note 2) 606,862
Transfer agent fees--Class D (Note 2) 480,074
Printing and shareholder reports 221,345
Registration fees (Note 1f) 208,432
Accounting services (Note 2) 124,707
Transfer agent fees--Class C (Note 2) 120,958
Professional fees 99,005
Transfer agent fees--Class A (Note 2) 71,788
Directors' fees and expenses 37,698
Amortization of organization expenses (Note 1f) 17,267
Pricing fees 8,880
Other 50,966
--------------
<PAGE>
Total expenses 34,859,422
--------------
Investment loss--net (982,484)
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 49,562,464
(Loss) on Foreign currency transactions--net (356,904) 49,205,560
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 128,769,910
(Notes 1b, 1c, Foreign currency transactions--net 133,749 128,903,659
1e & 3): -------------- --------------
Net realized and unrealized gain on investments and
foreign currency transactions 178,109,219
--------------
Net Increase in Net Assets Resulting from Operations $ 177,126,735
==============
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: 1996 1995
<S> <S> <C> <C>
Operations: Investment loss--net $ (982,484) $ (152,522)
Realized gain (loss) on investments and foreign
currency transactions--net 49,205,560 (9,501,387)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net 128,903,659 89,459,720
-------------- --------------
Net increase in net assets resulting from operations 177,126,735 79,805,811
-------------- --------------
<PAGE>
Dividends & In excess of investment income--net:
Distributions to Class A -- (312,371)
Shareholders Class B -- (1,509,738)
(Note 1g): Class C -- (151,749)
Class D -- (2,159,398)
Realized gain on investments--net:
Class A (191,338) --
Class B (4,598,194) --
Class C (250,735) --
Class D (1,140,627) --
-------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (6,180,894) (4,133,256)
-------------- --------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 58,833,959 85,728,447
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 229,779,800 161,401,002
Beginning of year 1,337,399,382 1,175,998,380
-------------- --------------
End of year $1,567,179,182 $1,337,399,382
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A++++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year 1994++ to
Ended December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.99 $ 15.05 $ 17.43
Operating -------- -------- --------
Performance: Investment income--net .14 .12 .02
Realized and unrealized gain (loss) on
investments and foreign currency transactions--net 2.03 1.00 (1.91)
-------- -------- --------
Total from investment operations 2.17 1.12 (1.89)
<PAGE> -------- -------- --------
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 $ 18.09 $ 15.99 $ 15.05
======== ======== ========
Total Investment Based on net asset value per share 13.59% 7.44% (10.82%)+++
Return:** ======== ======== ========
Ratios to Average Expenses 1.33% 1.37% 1.54%*
Net Assets: ======== ======== ========
Investment income--net .78% .74% .84%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 49,943 $ 31,591 $ 3,383
Data: ======== ======== ========
Portfolio turnover 30.63% 24.52% 16.45%
======== ======== ========
Average commission rate paid++++++ $ .0130 -- --
======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. 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>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Class B++++
For the
The following per share data and ratios For the Period
have been derived from information Ten Months May 29,
provided in the financial statements. Ended 1992++ to
For the Year Ended Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.98 $ 15.03 $ 18.74 $ 11.01 $ 10.00
Operating ---------- -------- -------- -------- --------
Performance: Investment loss--net (.04) (.03) (.07) (.02) (.02)
Realized and unrealized gain (loss) on
investments and foreign
currency transactions--net 2.02 1.00 (3.28) 7.86 1.05
---------- -------- -------- -------- --------
Total from investment operations 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 $ 17.89 $ 15.98 $ 15.03 $ 18.74 $ 11.01
========== ======== ======== ======== ========
Total Investment Based on net asset value per share 12.41% 6.49% (17.86%) 71.27%+++ 10.32%+++
Return:** ========== ======== ======== ======== ========
Ratios to Average Expenses 2.36% 2.41% 2.40% 2.35%* 2.49%*
========== ======== ======== ======== ========
Net Assets: Investment loss--net (.24%) (.20%) (.42%) (.15%)* (.08%)*
========== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $1,157,944 $991,281 $917,384 $990,843 $365,430
Data: ========== ======== ======== ======== ========
Portfolio turnover 30.63% 24.52% 16.45% 16.62% 4.65%
========== ======== ======== ======== ========
Average commission rate paid++++++ $ .0130 -- -- -- --
========== ======== ======== ======== ========
<PAGE>
<CAPTION>
Class C++++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year 1994++ to
Ended December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.79 $ 14.92 $ 17.29
Operating -------- -------- --------
Performance: Investment loss--net (.04) (.04) (.01)
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 2.00 1.00 (1.89)
-------- -------- --------
Total from investment operations 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 $ 17.68 $ 15.79 $ 14.92
======== ======== ========
Total Investment Based on net asset value per share 12.43% 6.46% (10.98%)+++
Return:** ======== ======== ========
Ratios to Average Expenses 2.37% 2.42% 2.57%*
Net Assets: ======== ======== ========
Investment loss--net (.23%) (.28%) (.17%)*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 62,113 $ 29,042 $ 5,329
Data: ======== ======== ========
Portfolio turnover 30.63% 24.52% 16.45%
======== ======== ========
Average commission rate paid++++++ $ .0130 -- --
======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. 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 was less than $.01 per share.
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class D++++
For the
The following per share data and ratios For the Period
have been derived from information Ten Months May 29,
provided in the financial statements. Ended 1992++ to
For the Year Ended Dec. 31, Dec. 31, Feb. 28,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 16.05 $ 15.08 $ 18.77 $ 11.01 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .09 .09 .06 .07 .05
Realized and unrealized gain (loss)
on investments and foreign
currency transactions--net 2.04 1.02 (3.30) 7.88 1.04
-------- -------- -------- -------- --------
Total from investment operations 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 $ 18.11 $ 16.05 $ 15.08 $ 18.77 $ 11.01
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 13.29% 7.35% (17.24%) 72.31%+++ 10.99%+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.58% 1.63% 1.63% 1.59%* 1.73%*
Net Assets: ======== ======== ======== ======== ========
Investment income--net .53% .59% .34% .61%* .61%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $297,179 $285,485 $249,903 $311,848 $111,180
Data: ======== ======== ======== ======== ========
Portfolio turnover 30.63% 24.52% 16.45% 16.62% 4.65%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0130 -- -- -- --
======== ======== ======== ======== ========
<PAGE>
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. 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 was less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Dragon Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
<PAGE>
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities
are valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and other assets for which market
value quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's
Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund sells an option, an amount equal
to the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
<PAGE>
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
NOTES TO FINANCIAL STATEMENTS (continued)
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend 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.
<PAGE>
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$1,043,777 have been reclassified between paid-in capital in excess
of par and accumulated distributions in excess of net investment
income and differences of $277,161 have been reclassified between
undistributed realized capital gains and accumulated distributions
in excess of net investment income. 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.
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.
<PAGE>
For the year ended December 31, 1996, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $ 322 $ 4,074
Class D $64,519 $876,291
For the year ended December 31, 1996, MLPF&S received contingent
deferred sales charges of $2,098,967 and $71,125 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $307,021 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended December 31, 1996.
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, 1996 were $519,885,051 and
$457,322,279, respectively.
Net realized and unrealized gains (losses) as of December 31, 1996
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $49,565,900 $443,711,013
Short-term investments (3,436) --
Foreign currency transactions (356,904) (14,217)
----------- ------------
Total $49,205,560 $443,696,796
=========== ============
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $434,164,398, of which $476,975,886
related to appreciated securities and $42,811,488 related to
depreciated securities. At December 31, 1996, the aggregate cost of
investments for Federal income tax purposes was $1,146,521,365.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
for the years ended December 31, 1996 and December 31, 1995 was
$58,833,959 and $85,728,447, respectively.
<PAGE>
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
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 A Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 15,316,591 $ 235,070,334
Shares issued to shareholders
in reinvestment of dividends 18,086 282,321
------------ -------------
Total issued 15,334,677 235,352,655
Shares redeemed (13,584,058) (209,762,961)
------------ -------------
Net increase 1,750,619 $ 25,589,694
============ =============
Class B Shares for the 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
============ =============
<PAGE>
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
============ =============
Class C Shares for the Year Dollar
Ended December 31, 1996 Shares Amount
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 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
============ =============
<PAGE>
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)
============ =============
Class D Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 25,578,665 $ 391,676,072
Automatic conversion of shares 364,477 5,593,649
Shares issued to shareholders
in reinvestment of dividends 113,447 1,776,581
------------ -------------
Total issued 26,056,589 399,046,302
Shares redeemed (24,834,684) (382,688,244)
------------ -------------
Net increase 1,221,905 $ 16,358,058
============ =============
5. Commitments:
At December 31, 1996, the Fund had entered into foreign exchange
contracts under which it had agreed to sell various foreign
currencies with values of approximately $1,491,000.
<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, 1996, 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 periods presented. 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.
<PAGE>
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, 1996, by correspondence with the custodian. 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, 1996, 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 10, 1997
</AUDIT-REPORT>
<PAGE>
IMPORTANT TAX INFORMATION (unaudited)
During the taxable year ended December 31, 1996, Merrill Lynch
Dragon Fund, Inc. paid a long-term capital gain distribution of
$.070670 per share to shareholders of record on December 16, 1996.
Additionally, the Fund has qualified to "pass through" the foreign
withholding taxes paid by the Fund to its shareholders. The amount
of taxes allocable to each shareholder of record on December 16,
1996 is $.010840 per share. Such amount is considered foreign source
income. Accordingly, you may elect to deduct your portion of the
taxes in computing your taxable income. Alternatively, it may be
beneficial for you to elect to forego the deduction and to take a
credit against your tax liability. These deductions or credits may
be subject to limitations under the tax law. Please consult your tax
adviser regarding the appropriate treatment of foreign taxes paid.
Please retain this information for your records.
