MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Semi-Annual Report
June 30, 1998
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
MERRILL LYNCH DRAGON FUND, INC.
Map Depicting the Fund's Asset Allocation As a Percentage* of Net
Assets as of June 30, 1998
INDIA 0.9%
INDONESIA 1.3%
SINGAPORE 9.9%
MALAYSIA 6.3%
THAILAND 6.5%
CHINA 3.8%
HONG KONG 37.8%
SOUTH KOREA 4.7%
TAIWAN 4.1%
PHILIPPINES 6.1%
[FN]
*Total may not equal 100%.
Merrill Lynch Dragon Fund, Inc., June 30, 1998
DEAR SHAREHOLDER
The quarter ended June 30, 1998 proved to be difficult months for
the Asian stock markets. The markets gave back all the gains of the
previous quarter, falling 34.57% in US dollar terms, as measured by
the unmanaged Morgan Stanley Combined Far East Free (Ex-Japan and Ex-
Taiwan) Index. Japan became a new and larger threat to the smaller
Asian economies. The lack of economic reform in Tokyo has made
earlier predictions of a 150 yen/dollar exchange rate appear
conservative. The ramifications to the rest of Asia of a weak yen,
combined with the withdrawal of Japanese credit, have sent stock
markets from Thailand to Hong Kong reeling. For the three-month
period ended June 30, 1998, Merrill Lynch Dragon Fund, Inc.'s Class
A, Class B, Class C and Class D Shares had total returns of -25.38%,
- -25.51%, -25.52% and -25.32%, respectively. (Fund results do not
reflect sales charges, and would be lower if sales charges were
included. Complete performance information can be found on pages 4
and 5 of this report to shareholders.)
Investment Strategy
As the threat of a Chinese renminbi devaluation increases, so does
the risk premium on all the regional currencies, in particular, the
Hong Kong dollar. During the June quarter, we reduced Hong Kong from
an overweighted position to an underweighted one. We used the
proceeds to selectively increase our positions in countries where we
believe the most progress is being made economically: South Korea,
Taiwan, Thailand and the Philippines. The balance of the proceeds we
have kept in cash reserves until more attractive valuations appear
in the remaining markets.
Investment Outlook
The Hong Kong stock market declined 25.82% in US dollar terms during
the June quarter (as measured by the Hang Seng Index) as investors
eliminating Asian positions sold out of the region's largest, highly
liquid market. The decline was especially felt in the property and
banking sectors as the asset deflation required by the fixed
exchange rate worked its way through the economy. The government's
announcement of a decline in gross domestic product (GDP) of 2.0%
for the first calendar quarter of 1998 added to the malaise as
residents prepared for Hong Kong's first recession in 16 years. The
government's continued silence on a rescue program has set the stage
for another decline in property market values. With volume in the
futures market exceeding the stock market by 300% on many days,
stock prices have become increasingly volatile and subject to the
rapidly changing outlooks of global speculators. We reduced our
overall exposure to the Hong Kong stock market, but increased our
holdings in the cash-rich, high-yielding utility sector.
The stock markets in The People's Republic of China were hit equally
hard as concerns over China's ability to sustain high economic
growth have brought the issue of a renminbi devaluation back into
the limelight. The Chinese have made a commitment not to devalue
their currency, and economic fundamentals thus far can support the
renminbi. The one area where growth should continue unabated is
domestic infrastructure. The high profile and job-creating aspect of
infrastructure investment should make this the most resilient sector
for the near future. Accordingly, we currently expect the majority
of our Fund holdings in China to be positioned in this sector.
After strong GDP growth of 5.6% in the first quarter, growth in
Singapore has slowed sharply. Although the Ministry of Trade and
Industry has retained its 2.5%--4% GDP growth forecast for 1998, it
seems highly unlikely that this can be attained as the domestic
economy is slowing. Non-oil domestic exports showed a decline of
1.6% year-over-year in April. The stock market declined 37.65% in US
dollar terms during the June quarter, as measured by the Straits
Times Industrial Index. Competitiveness has been a key driver for
corporate profitability and stock market performance in the past.
The Monetary Authority of Singapore seems to subscribe to this view
and, as a result, the Singapore dollar has depreciated with the
weakening yen and softening export growth. We also have seen the
beginning of consolidation in the financial system through large-
scale mergers and acquisitions. The Fund continues to be
underweighted in this market. We have unwound our currency hedge on
the Singapore dollar, which had benefitted from the weakness in the
currency.
The Malaysian stock market declined by 44.26% in USdollar terms, as
measured by the Kuala Lumpur Stock Exchange during the June quarter
as a result of poor policy responses and the problems in Japan.
Monetary policy remains disappointing, with the central bank
continuing to increase assistance to financial institutions. The
health of the banking system is deteriorating. Non-performing loans
in the system are approaching double-digit levels, and are expected
to rise further. The government announced the creation of Asset
Management Corporation (AMC) that will be privately funded and
acquire non-performing loans from the commercial banks. The
objective of the AMC would be to earn a profit from reselling loans
by either rehabilitating the borrowers' businesses or salvaging
value from the underlying assets. The Fund continues to be
underweighted in the Malaysian market, and is mainly exposed to
highly defensive companies with strong balance sheets.
The Thai economy continues to decline sharply because of tight
liquidity conditions. Unemployment is increasing rapidly and is
expected to breach 6% this year. Exports continue to be weak but the
country has a trade surplus because of collapsing imports. The big
wave of recapitalizations has started with the two premier Thai
banks (Bangkok Bank and Thai Farmers Bank) successfully raising
about US $2 billion. The second phase of the recapitalization
process has also begun with the second tier banks issuing large cash
calls. The announcement of new equity issues and concerns over the
Japanese economy led to the market declining by 46.47% in US dollar
terms in the June quarter, as measured by the unmanaged SET Index.
We have been selectively increasing our exposure to the Thai market
by adding the two large banks and the Electricity Generating Public
Company Limited, an independent power producer. We have been
switching out of the convertible bonds where yield spreads over
Treasury issues have narrowed considerably since we bought them,
leaving little upside in the bonds.
The South Korean economy is now in a deep recession with
consumption, government spending and investment falling sharply.
Export growth, which showed signs of recovery at the beginning of
the year, has slowed as a result of the stronger won and competition
from Japanese firms. The unemployment rate, currently at 7.7%, is
rising sharply and leading to labor strikes. Real interest rates
remain high at over 10%, in line with the International Monetary
Fund's (IMF) prescription to suppress demand and limit the outflow
of capital. However, interest rates have been declining in the past
few months. Large-scale recapitalization of the banking system has
started through rights issues. Three of the large chaebols announced
plans to sell and restructure their many business areas. We are
skeptical about these announcements until actual implementation
begins. There have been positive developments in foreign direct
investments, with large US and European companies buying out their
junior partners. The many deals in the pipeline are also very
encouraging. We have been increasing our weighting in South Korea in
companies with strong balance sheets that are trading at discounts
to replacement costs or franchise values. We are now only slightly
underweighted in the South Korean market.
The resignation of President Suharto and replacement by his long-
time friend, Habibie, has brought temporary calm to the Indonesian
markets. Habibie has done an admirable job in trying to distance
himself from Suharto. He has embraced the IMF conditions and removed
Suharto's children from positions in the government. Unfortunately,
any easing of crisis conditions may be short-lived as the economy is
likely to enter into hyperinflation. The banking and corporate
systems are essentially bankrupt. Until monopolies are dismantled
and banks recapitalized, there is little hope for economic
stability. The Fund is currently underweighted in this market
because we believe that it has probably the most distressed economy
in the region. Our exposure to the country is through one company,
Gulf Indonesia Resources, Ltd., which is an oil and gas company and
earns revenues in US dollars.
The Philippines has proven to be one of the most resilient markets
in the past few months, although its currency has not been immune
from the contagion. The country's relative lack of external debt is
in part the result of its adherence to an earlier IMF assistance
program. Its banking system remains sound and should be able to
survive the regional crisis without a large-scale recapitalization.
We increased our holdings slightly over the June quarter and
currently maintain an overweighted position.
The Taiwan market has come under pressure as the yen continues its
slide. We expect to see increasing weakness in the market with the
exception of the electronics sector. Despite a recent correction in
sympathy with US technology stocks, the Taiwan electronics sector
remains globally competitive and financially sound. It should remain
a net beneficiary of regional capital retrenchment and the global
trend of outsourcing within the industry.
Merrill Lynch Dragon Fund, Inc., June 30, 1998
Outlook and Strategy
As stated in our last report to shareholders, we expect the Asian
markets to continue to experience a very deep retrenchment in the
coming year. Those countries which will allow asset prices to clear
(such as Hong Kong and Singapore) and those implementing the
necessary reforms (as seen in Thailand and South Korea) should be in
our opinion, among the first to recover. The recent weakness in the
Japanese yen has added another unpredictable element of concern to
the region's markets that may prolong and deepen the current crisis.
Adding to the economic unrest is the rising political risk as both
India and Pakistan engage in competing claims about their nuclear
capabilities.
In general, we prefer to remain in the larger, more liquid markets
and companies that have net cash on their balance sheets and are in
a position to benefit over the long term from the present economic
clearing. We have lowered our exposure to Hong Kong because of the
impact of a deteriorating economic outlook in China. Over the past
quarter, we decreased our Hong Kong/China equity position from a
combined 56.7% of net assets to 40.8%. We allocated these proceeds
to selected stocks in South Korea and Thailand, while increasing our
cash position from 9.3% to 12.4%. Our purchases have been in
defensive export companies and banks whose shares are selling well
below their adjusted book values.
In Conclusion
The Asian stock markets corrected quite sharply over the June
quarter. We will continue to look for post-crisis survivors with
strong managements as stock prices reach attractive risk/ return
levels. At current share prices, the Asian markets appear oversold.
Furthermore, in our view, value can be found in various stocks
around the region.
We thank you for your investment in Merrill Lynch Dragon Fund, Inc.,
and we look forward to reviewing our outlook and strategy with you
again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Kara Tan Bhala)
Kara Tan Bhala
Senior Vice President and
Portfolio Manager
August 10, 1998
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.)
* 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 "Recent Performance
Results" and "Average Annual Total Return" 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>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Dragon Fund, Inc. Class A Shares -57.78% -25.38% -53.31%
ML Dragon Fund, Inc. Class B Shares -58.17 -25.51 -21.45
ML Dragon Fund, Inc. Class C Shares -58.18 -25.52 -54.96
MLDragon Fund, Inc. Class D Shares -57.84 -25.32 -17.63
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. The
Fund's inception dates are: Class A Shares and Class C Shares,
10/21/94; and Class B Shares and Class D Shares, 5/29/92.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/98 -57.78% -60.00%
Inception (10/21/94) through 6/30/98 -18.65 -19.83
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/98 -58.17% -59.42%
Five Years Ended 6/30/98 - 8.19 - 8.19
Inception (5/29/92) through 6/30/98 - 3.89 - 3.89
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/98 -58.18% -58.49%
Inception (10/21/94) through 6/30/98 -19.44 -19.44
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/98 -57.84% -60.05%
Five Years Ended 6/30/98 - 7.48 - 8.47
Inception (5/29/92) through 6/30/98 - 3.14 - 3.99
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Dragon Fund, Inc., June 30, 1998
<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> <S> <C> <S> <C> <C> <C>
China Appliances 1,631,000 Guangdong Kelon Electrical Holdings
Company Limited (Class H) $ 1,697,038 $ 1,284,070 0.4%
Conglomerates 542,000 Shanghai Industrial Holdings Ltd. 1,988,085 1,276,636 0.4
Infrastructure US$ 1,752,000 New World Infrastructure, Ltd.,
5% due 7/15/2001 (a) 2,266,790 1,366,560 0.4
4,867,000 ++Zhejiang Expressway Co. Ltd.
(Class H) 861,134 816,600 0.2
-------------- -------------- ------
3,127,924 2,183,160 0.6
Mining 161,420 ++Yanzhou Coal Mining Co. Ltd. (ADR)* 2,542,365 1,573,845 0.4
Telecommuni- 2,429,000 ++China Telecom (Hong Kong) Limited 3,628,791 4,216,524 1.2
cations
Utilities-- 4,652,000 Beijing Datang Power Generation
Electric & Gas Co., Ltd. (Class H) 2,224,572 1,305,881 0.4
116,800 ++Huaneng Power International, Inc.
(ADR)* 1,776,793 1,569,500 0.4
-------------- -------------- ------
4,001,365 2,875,381 0.8
Total Long-Term Investments
in China 16,985,568 13,409,616 3.8
Hong Kong Banking 1,042,664 HSBC Holdings, Ltd. 18,575,068 25,501,068 7.3
Conglomerates 4,189,000 Hutchison Whampoa, Ltd. 29,300,771 22,112,531 6.4
7,015,000 Swire Pacific Ltd. 'B' 6,453,581 4,210,032 1.2
-------------- -------------- ------
35,754,352 26,322,563 7.6
Infrastructure 1,507,000 Cheung Kong Infrastructure
Holdings Ltd. 4,334,100 2,849,415 0.8
Insurance 5,156,000 National Mutual Asia, Ltd. 4,618,834 3,293,995 0.9
Publishing & 5,746,000 South China Morning Post
Broadcasting Holdings Ltd. 3,563,574 2,762,464 0.8
1,164,000 Television Broadcasts Ltd. 4,347,936 3,079,723 0.9
-------------- -------------- ------
7,911,510 5,842,187 1.7
Real Estate 2,465,000 Cheung Kong Holdings Ltd. 12,523,256 12,121,230 3.5
1,576,017 New World Development Co., Ltd. 10,738,993 3,051,103 0.9
2,526,599 Sun Hung Kai Properties, Ltd. 17,500,284 10,728,450 3.1
-------------- -------------- ------
40,762,533 25,900,783 7.5
Telecommuni- 12,945,800 Hong Kong Telecommunications Ltd. 24,510,099 24,310,655 7.0
cations
Utilities-- 2,757,000 CLP Holdings, Ltd. 12,582,160 12,560,770 3.6
Electric & Gas 4,205,817 Hong Kong and China Gas
Company Ltd. 6,535,992 4,776,808 1.4
-------------- -------------- ------
19,118,152 17,337,578 5.0
Total Long-Term Investments
in Hong Kong 155,584,648 131,358,244 37.8
India Finance 47 Housing Development Finance
Corp., Ltd. 4,608 3,326 0.0
Telecommuni- 287,000 ++Mahanagar Telephone Nigam
cations Ltd. (GDR)** 3,431,946 3,006,325 0.9
Total Long-Term Investments
in India 3,436,554 3,009,651 0.9
Indonesia Oil & Gas 404,300 ++Gulf Indonesia Resources,
Ltd. (ADR)* 8,334,119 4,649,450 1.3
Total Long-Term Investments
in Indonesia 8,334,119 4,649,450 1.3
Malaysia Banking 1,692,465 Public Bank BHD (Foreign) 1,533,235 510,702 0.2
Conglomerates 3,564,000 Sime Darby BHD 4,529,459 2,460,601 0.7
Consumer Products 1,230,000 Amway (Malaysia) Holdings BHD 1,994,644 1,989,378 0.6
Food 1,409,700 Nestle Malaysia BHD 6,139,518 6,397,673 1.8
Gaming/Leisure 1,747,000 Berjaya Sports ToTo BHD 5,342,419 2,593,615 0.7
868,000 Genting BHD 3,076,628 1,571,515 0.5
620,000 Resorts World BHD 1,496,549 682,486 0.2
-------------- -------------- ------
9,915,596 4,847,616 1.4
Publishing 2,643,000 Star Publications Malaysia BHD 7,556,692 2,220,311 0.6
& Broadcasting
Telecommunications 618,000 Telekom Malaysia BHD 1,549,320 1,044,297 0.3
Utilities-- 2,444,000 ++YTL Power International BHD 2,233,582 1,333,359 0.4
Electric & Gas
Wire & Cable US$ 1,390,000 Leader Universal Holdings BHD,
2.75% due 5/05/2004 (a) 1,013,662 928,694 0.3
Total Long-Term Investments
in Malaysia 36,465,708 21,732,631 6.3
Philippines Conglomerates 28,436,320 ++Benpres Holdings Corp. (GDR)** 9,228,480 4,316,839 1.3
Infrastructure 3,707,300 ++International Container Terminal
Services, Inc. (ICTSI) 513,912 424,330 0.1
Real Estate 15,373,184 Ayala Land, Inc. 'B' 10,878,228 4,445,258 1.3
Retail 53,264,170 SM Prime Holdings, Inc. 9,921,185 8,470,928 2.4
Utilities-- 1,351,993 Manila Electric Co. (MERALCO) 'B' 6,517,356 3,583,596 1.0
Electric & Gas
Total Long-Term Investments in
the Philippines 37,059,161 21,240,951 6.1
Singapore Airlines 1,383,000 Singapore Airlines Ltd. (Foreign) 11,871,889 6,470,654 1.9
Banking 1,118,000 Development Bank of Singapore
Ltd. (Foreign) 13,008,252 6,190,879 1.8
627,704 United Overseas Bank (Foreign) 5,384,413 1,951,700 0.5
-------------- -------------- ------
18,392,665 8,142,579 2.3
Electronics 213,000 ++Creative Technology Ltd. 5,145,058 2,635,875 0.7
1,311,000 Elec & Eltek International Co., Ltd. 7,506,983 4,431,180 1.3
2,408,000 Natsteel Electronics Ltd. 4,626,349 4,035,914 1.2
-------------- -------------- ------
17,278,390 11,102,969 3.2
Publishing & 1,054,486 Singapore Press Holdings
Broadcasting Ltd. (Foreign) 10,189,672 7,056,969 2.0
Real Estate 572,000 City Development Ltd. 3,011,699 1,598,958 0.5
Total Long-Term Investments
in Singapore 60,744,315 34,372,129 9.9
</TABLE>
Merrill Lynch Dragon Fund, Inc., June 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
South Korea Banking 971,295 ++Kookmin Bank $ 4,721,624 $ 3,615,769 1.0%
Electronics 182,038 Samsung Display Devices Co., Ltd. 8,297,064 4,982,792 1.4
106,410 Samsung Electronics Co., Ltd. 4,918,473 3,301,040 1.0
-------------- -------------- ------
13,215,537 8,283,832 2.4
Utilities-- 408,890 Korea Electric Power Corporation 4,827,926 4,372,437 1.3
Electric & Gas
Total Long-Term Investments in
South Korea 22,765,087 16,272,038 4.7
Taiwan Electronics 225,664 ++Advanced Semiconductor Engineering,
Inc. (GDR)** 4,058,625 2,002,768 0.6
707,000 ++Compeq Manufacturing Co., Ltd. 4,809,674 3,766,441 1.1
645,000 ++Hon Hai Precision Industry 4,644,877 3,267,154 0.9
184,900 ++Taiwan Semiconductor Manufacturing
Company Ltd. (ADR)* 4,809,614 3,120,187 0.9
-------------- -------------- ------
18,322,790 12,156,550 3.5
Insurance 112,500 Fubon Insurance Co., Ltd. (GDR)** 2,257,875 1,954,687 0.6
Total Long-Term Investments
in Taiwan 20,580,665 14,111,237 4.1
Thailand Banking 1,525,400 Bangkok Bank Public Company Limited 3,692,805 1,879,640 0.5
1,542,000 Thai Farmers Bank Public
Company Limited 2,420,679 1,361,126 0.4
-------------- -------------- ------
6,113,484 3,240,766 0.9
Industrial US$ 2,972,000 Banpu Public Co. Ltd., 2.75% due
4/10/2003 (a) 1,876,823 2,006,100 0.6
Oil & Gas 1,001,500 ++PTT Exploration and Production
Public Co., Ltd. (Foreign) 10,315,952 7,594,313 2.2
Publishing & 1,013,900 BEC World Public Company Limited 4,725,098 3,916,249 1.1
Broadcasting
Telecommuni- 622,600 Advanced Info Service Public Co.,
cations Ltd. 3,323,449 2,655,640 0.8
Utilities-- 2,096,800 ++Electricity Generating Public
Electric & Gas Company Limited 3,414,022 3,254,512 0.9
Total Long-Term Investments in
Thailand 29,768,828 22,667,580 6.5
Total Long-Term Investments 391,724,653 282,823,527 81.4
<CAPTION>
Face
Amount Short-Term Investments
<S> <S> <S> <C> <S> <C> <C> <C>
United Commercial US$ 5,000,000 Finova Capital Corp., 5.68%
States Paper*** due 7/16/1998 4,988,167 4,988,167 1.4
15,982,000 General Motors Acceptance Corp.,
6.50% due 7/01/1998 15,982,000 15,982,000 4.6
10,000,000 Lexington Parker Capital Company,
LLC, 5.52% due 7/06/1998 9,992,333 9,992,333 2.9
5,000,000 Park Avenue Receivables Corp.,
5.54% due 7/14/1998 4,989,997 4,989,997 1.5
7,000,000 Variable Funding Capital Corp.,
5.57% due 7/20/1998 6,979,422 6,979,422 2.0
Total Short-Term Investments 42,931,919 42,931,919 12.4
Total Investments $ 434,656,572 325,755,446 93.8
==============
Unrealized Depreciation on Forward Foreign Exchange Contracts++++ (1,607,237) (0.5)
Other Assets Less Liabilities 23,270,819 6.7
-------------- ------
Net Assets $ 347,419,028 100.0%
============== ======
<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)Convertible security.
++Non-income producing security.
++++Forward foreign exchange contracts as of June 30, 1998 were as follows:
Unrealized
Expiration Depreciation
Foreign Currency Sold Date (Note 1b)
HK$ 348,300,000 September 1998 $(1,607,237)
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$43,000,000) $(1,607,237)
===========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Dragon Fund, Inc., June 30, 1998
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of June 30, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$434,656,572)(Note 1a) $ 325,755,446
Foreign cash (Note 1c) 933,509
Receivables:
Securities sold $ 22,239,997
Forward foreign exchange contracts (Note 1b) 1,656,471
Capital shares sold 1,223,132
Dividends 801,108
Interest 64,647 25,985,355
--------------
Prepaid registration fees and other assets (Note 1f) 75,021
--------------
Total assets 352,749,331
--------------
Liabilities: Unrealized depreciation on forward foreign exchange
contracts (Note 1b) 1,607,237
Payables:
Capital shares redeemed 1,708,944
Securities purchased 361,886
Investment adviser (Note 2) 309,797
Distributor (Note 2) 244,495 2,625,122
--------------
Accrued expenses and other liabilities 1,097,944
--------------
Total liabilities 5,330,303
--------------
Net Assets: Net assets $ 347,419,028
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 272,888
Class B Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 3,789,677
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 289,987
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 1,222,619
Paid-in capital in excess of par 568,645,727
Undistributed investment income--net 1,619,473
Accumulated realized capital losses on investments and foreign
currency transactions--net (106,700,165)
Accumulated distributions in excess of realized capital gains
on investments and foreign currency transactions--net (Note 1g) (11,169,131)
Unrealized depreciation on investments and foreign currency
transactions--net (110,552,047)
--------------
Net assets $ 347,419,028
==============
Net Asset Class A--Based on net assets of $17,414,661 and 2,728,877
Value: shares outstanding $ 6.38
==============
Class B--Based on net assets of $234,470,245 and 37,896,767
shares outstanding $ 6.19
==============
Class C--Based on net assets of $17,679,321 and 2,899,869
shares outstanding $ 6.10
==============
Class D--Based on net assets of $77,854,801 and 12,226,188
shares outstanding $ 6.37
==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1998
<S> <S> <C> <C>
Investment Dividends (net of $49,290 foreign withholding tax) $ 6,751,038
Income Interest and discount earned 2,101,403
(Notes 1d & 1e): --------------
Total income 8,852,441
--------------
Expenses: Investment advisory fees (Note 2) $ 2,267,328
Account maintenance and distribution fees--Class B (Note 2) 1,578,976
Transfer agent fees--Class B (Note 2) 611,551
Custodian fees 195,282
Transfer agent fees--Class D (Note 2) 155,330
Account maintenance fees--Class D (Note 2) 119,674
Account maintenance and distribution fees--Class C (Note 2) 114,124
Printing and shareholder reports 80,190
Professional fees 56,364
Registration fees (Note 1f) 53,493
Accounting services (Note 2) 48,612
Transfer agent fees--Class C (Note 2) 44,783
Transfer agent fees--Class A (Note 2) 30,599
Directors' fees and expenses 20,808
Pricing fees 2,346
Other 9,844
--------------
Total expenses 5,389,304
--------------
Investment income--net 3,463,137
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net (101,438,062)
(Loss) on Foreign currency transactions--net 2,816,469 (98,621,593)
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (29,193,659)
(Notes 1b, 1c, Foreign currency transactions--net (6,324,201) (35,517,860)
1e & 3): -------------- --------------
Net realized and unrealized loss on investments and
foreign currency transactions (134,139,453)
--------------
Net Decrease in Net Assets Resulting from Operations $ (130,676,316)
==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Dragon Fund, Inc., June 30, 1998
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
June 30, December 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ 3,463,137 $ (891,847)
Realized gain (loss) on investments and foreign currency
transactions--net (98,621,593) 62,637,681
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net (35,517,860) (518,730,983)
-------------- --------------
Net decrease in net assets resulting from operations (130,676,316) (456,985,149)
-------------- --------------
Distributions to Realized gain on investments--net:
Shareholders Class A -- (2,185,017)
(Note 1g): Class B -- (64,077,324)
Class C -- (3,632,309)
Class D -- (19,118,895)
In excess of realized gain on investments--net:
Class A -- (274,169)
Class B -- (8,040,215)
Class C -- (455,770)
Class D -- (2,398,977)
-------------- --------------
Net decrease in net assets resulting from distributions
to shareholders -- (100,182,676)
-------------- --------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (48,678,886) (483,237,127)
(Note 4): -------------- --------------
Net Assets: Total decrease in net assets (179,355,202) (1,040,404,952)
Beginning of period 526,774,230 1,567,179,182
-------------- --------------
End of period* $ 347,419,028 $ 526,774,230
============== ==============
<FN>
*Undistributed (accumulated distributions in excess of)
investment income--net $ 1,619,473 $ (1,843,664)
============== ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A++++
For the For the
The following per share data and ratios have Six Period
been derived from information provided in the Months Oct. 21,
financial statements. Ended For the Year 1994++ to
June 30, Ended December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.81 $ 18.09 $ 15.99 $ 15.05 $ 17.43
Operating -------- -------- ---------- -------- --------
Performance: Investment income--net .10 .12 .14 .12 .02
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (2.53) (7.51) 2.03 1.00 (1.91)
-------- -------- ---------- -------- --------
Total from investment operations (2.43) (7.39) 2.17 1.12 (1.89)
-------- -------- ---------- -------- --------
Less dividends and distributions:
In excess of investment income--net -- -- -- (.18) (.13)
Realized gain on investments--net -- (1.68) (.07) -- (.27)
In excess of realized gain on
investments--net -- (.21) -- -- (.09)
-------- -------- ---------- -------- --------
Total dividends and distributions -- (1.89) (.07) (.18) (.49)
-------- -------- ---------- -------- --------
Net asset value, end of period $ 6.38 $ 8.81 $ 18.09 $ 15.99 $ 15.05
======== ======== ========== ======== ========
Total Investment Based on net asset value per share (27.58%)+++ (40.77%) 13.59% 7.44% (10.82%)+++
Return:** ======== ======== ========== ======== ========
Ratios to Average Expenses 1.52%* 1.35% 1.33% 1.37% 1.54%*
Net Assets: ======== ======== ========== ======== ========
Investment income--net 2.44%* .73% .78% .74% .84%*
======== ======== ========== ======== ========
Supplemental Net assets, end of period (in thousands) $ 17,415 $ 14,431 $ 49,943 $ 31,591 $ 3,383
Data: ======== ======== ========== ======== ========
Portfolio turnover 52.80% 21.11% 30.63% 24.52% 16.45%
======== ======== ========== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Dragon Fund, Inc., June 30, 1998
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Class B++++
For the
The following per share data and ratios have Six
been derived from information provided Months
in the financial statements. Ended For the Year
June 30, Ended December 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.58 $ 17.89 $ 15.98 $ 15.03 $ 18.74
Operating -------- -------- ---------- -------- --------
Performance: Investment income (loss)--net .05 (.04) (.04) (.03) (.07)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (2.44) (7.38) 2.02 1.00 (3.28)
-------- -------- ---------- -------- --------
Total from investment operations (2.39) (7.42) 1.98 .97 (3.35)
-------- -------- ---------- -------- --------
Less dividends and distributions:
In excess of investment income--net -- -- -- (.02) --
Realized gain on investments--net -- (1.68) (.07) -- (.27)
In excess of realized gain on
investments--net -- (.21) -- -- (.09)
-------- -------- ---------- -------- --------
Total dividends and distributions -- (1.89) (.07) (.02) (.36)
-------- -------- ---------- -------- --------
Net asset value, end of period $ 6.19 $ 8.58 $ 17.89 $ 15.98 $ 15.03
======== ======== ========== ======== ========
Total Investment Based on net asset value per share (27.86%)+++ (41.40%) 12.41% 6.49% (17.86%)
Return:** ======== ======== ========== ======== ========
Ratios to Average Expenses 2.59%* 2.39% 2.36% 2.41% 2.40%
Net Assets: ======== ======== ========== ======== ========
Investment income (loss)--net 1.33%* (.26%) (.24%) (.20%) (.42%)
======== ======== ========== ======== ========
Supplemental Net assets, end of period (in thousands) $234,470 $374,914 $1,157,944 $991,281 $917,384
Data: ======== ======== ========== ======== ========
Portfolio turnover 52.80% 21.11% 30.63% 24.52% 16.45%
======== ======== ========== ======== ========
<CAPTION>
Class C++++
For the For the
The following per share data and ratios have Six Period
been derived from information provided in the Months Oct. 21,
financial statements. Ended For the Year 1994++ to
June 30, Ended December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.46 $ 17.68 $ 15.79 $ 14.92 $ 17.29
Operating -------- -------- ---------- -------- --------
Performance: Investment income (loss)--net .05 (.04) (.04) (.04) (.01)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (2.41) (7.29) 2.00 1.00 (1.89)
-------- -------- ---------- -------- --------
Total from investment operations (2.36) (7.33) 1.96 .96 (1.90)
-------- -------- ---------- -------- --------
Less dividends and distributions:
In excess of investment income--net -- -- -- (.09) (.11)
Realized gain on investments--net -- (1.68) (.07) -- (.27)
In excess of realized gain on
investments--net -- (.21) -- -- (.09)
-------- -------- ---------- -------- --------
Total dividends and distributions -- (1.89) (.07) (.09) (.47)
-------- -------- ---------- -------- --------
Net asset value, end of period $ 6.10 $ 8.46 $ 17.68 $ 15.79 $ 14.92
======== ======== ========== ======== ========
Total Investment Based on net asset value per share (27.90%)+++ (41.38%) 12.43% 6.46% (10.98%)+++
Return:** ======== ======== ========== ======== ========
Ratios to Average Expenses 2.60%* 2.41% 2.37% 2.42% 2.57%*
Net Assets: ======== ======== ========== ======== ========
Investment income (loss)--net 1.38%* (.28%) (.23%) (.28%) (.17%)*
======== ======== ========== ======== ========
Supplemental Net assets, end of period (in thousands) $ 17,679 $ 22,111 $ 62,113 $ 29,042 $ 5,329
Data: ======== ======== ========== ======== ========
Portfolio turnover 52.80% 21.11% 30.63% 24.52% 16.45%
======== ======== ========== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Dragon Fund, Inc., June 30, 1998
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class D++
For the
The following per share data and ratios Six
have been derived from information provided in Months
the financial statements. Ended For the Year
June 30, Ended December 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.80 $ 18.11 $ 16.05 $ 15.08 $ 18.77
Operating -------- -------- ---------- -------- --------
Performance: Investment income--net .08 .09 .09 .09 .06
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net (2.51) (7.51) 2.04 1.02 (3.30)
-------- -------- ---------- -------- --------
Total from investment operations (2.43) (7.42) 2.13 1.11 (3.24)
-------- -------- ---------- -------- --------
Less dividends and distributions:
In excess of investment income--net -- -- -- (.14) (.09)
Realized gain on investments--net -- (1.68) (.07) -- (.27)
In excess of realized gain on
investments--net -- (.21) -- -- (.09)
-------- -------- ---------- -------- --------
Total dividends and distributions -- (1.89) (.07) (.14) (.45)
-------- -------- ---------- -------- --------
Net asset value, end of period $ 6.37 $ 8.80 $ 18.11 $ 16.05 $ 15.08
======== ======== ========== ======== ========
Total Investment Based on net asset value per share (27.61%)+++ (40.89%) 13.29% 7.35% (17.24%)
Return:** ======== ======== ========== ======== ========
Ratios to Average Expenses 1.78%* 1.61% 1.58% 1.63% 1.63%
Net Assets: ======== ======== ========== ======== ========
Investment income (loss)--net 2.04%* (.53%) .53% .59% .34%
======== ======== ========== ======== ========
Supplemental Net assets, end of period (in thousands) $ 77,855 $115,318 $ 297,179 $285,485 $249,903
Data: ======== ======== ========== ======== ========
Portfolio turnover 52.80% 21.11% 30.63% 24.52% 16.45%
======== ======== ========== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Dragon Fund, Inc., June 30, 1996
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Dragon Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, open-end
management investment company. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
The Fund offers four classes of shares under the Merrill Lynch
Select Pricing SM System. Shares of Class A and Class D are sold with
a front-end sales charge. Shares of Class B and Class C may be
subject to a contingent deferred sales charge. All classes of shares
have identical voting, dividend, liquidation and other rights and
the same terms and conditions, except that Class B, Class C and
Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded 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.
* 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 put and covered call
options and purchase put and call 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.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts as
a hedge against adverse changes in the interest rate. A futures
contract is an agreement between two parties to buy and sell a
security, respectively, for a set price at a future date. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
Merrill Lynch Dragon Fund, Inc., June 30, 1998
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.
(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) Prepaid registration fees--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 ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is 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 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, 1998, 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 $ 28 $ 564
Class D $12,521 $160,270
For the six months ended June 30, 1998, MLPF&S received contingent
deferred sales charges of $402,199 and $43,115 relating to
transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$58,953, relating to transactions subject to front end sales charge
waivers in Class D Shares.
In addition, MLPF&S received $170,170 in commissions on the
execution of portfolio security transactions for the Fund for the
six months ended June 30, 1998.
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, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1998 were $213,688,593 and
$269,387,624, respectively.
Net realized gains (losses) for the six months ended June 30, 1998
and net unrealized losses as of June 30, 1998 were as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $(101,438,631) $(108,901,126)
Short-term investments 569 --
Foreign currency transactions (1,073,953) (43,684)
Forward foreign exchange
contracts 3,890,422 (1,607,237)
------------- -------------
Total $ (98,621,593) $(110,552,047)
============= =============
As of June 30, 1998, net unrealized depreciation for Federal income
tax purposes aggregated $108,901,126, of which $7,901,166 related to
appreciated securities and $116,802,292 related to depreciated
securities. At June 30, 1998, the aggregate cost of investments for
Federal income tax purposes was $434,656,572.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
for the six months ended June 30, 1998 and for the year ended
December 31, 1997 was $48,678,886 and $483,237,127, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended June 30, 1998 Shares Amount
Shares sold 9,913,156 $ 74,632,644
Shares redeemed (8,822,348) (68,019,396)
------------- -------------
Net increase 1,090,808 $ 6,613,248
============= =============
Class A Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
Shares sold 6,015,713 $ 88,275,915
Shares issued to shareholders
in reinvestment of distributions 236,924 2,065,973
------------- -------------
Total issued 6,252,637 90,341,888
Shares redeemed (7,375,072) (115,587,006)
------------- -------------
Net decrease (1,122,435) $ (25,245,118)
============= =============
Class B Shares for the Six Months Dollar
Ended June 30, 1998 Shares Amount
Shares sold 11,007,379 $ 82,965,408
Shares redeemed (16,604,620) (125,569,659)
Automatic conversion of shares (193,871) (1,484,660)
------------- -------------
Net decrease (5,791,112) $ (44,088,911)
============= =============
Class B Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
Shares sold 14,731,989 $ 221,129,612
Shares issued to shareholders
in reinvestment of distributions 7,005,794 59,549,243
------------- -------------
Total issued 21,737,783 280,678,855
Shares redeemed (42,518,325) (642,737,859)
Automatic conversion of shares (250,913) (3,997,661)
------------- -------------
Net decrease (21,031,455) $(366,056,665)
============= =============
Class C Shares for the Six Months Dollar
Ended June 30, 1998 Shares Amount
Shares sold 7,261,484 $ 53,695,993
Shares redeemed (6,975,398) (52,888,686)
------------- -------------
Net increase 286,086 $ 807,307
============= =============
Merrill Lynch Dragon Fund, Inc., June 30, 1996
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
Shares sold 16,303,336 $ 241,289,351
Shares issued to shareholders
in reinvestment of distributions 411,551 3,448,796
------------- -------------
Total issued 16,714,887 244,738,147
Shares redeemed (17,613,299) (265,825,401)
------------- -------------
Net decrease (898,412) $ (21,087,254)
============= =============
Class D Shares for the Six Months Dollar
Ended June 30, 1998 Shares Amount
Shares sold 12,771,631 $ 96,022,866
Automatic conversion of shares 188,831 1,484,660
------------- -------------
Total issued 12,960,462 97,507,526
Shares redeemed (13,845,730) (109,518,056)
------------- -------------
Net decrease (885,268) $ (12,010,530)
============= =============
Class D Shares for the Year Dollar
Ended December 31, 1997 Shares Amount
Shares sold 22,513,372 $ 330,483,403
Automatic conversion of shares 246,834 3,997,661
Shares issued to shareholders
in reinvestment of distributions 2,016,701 17,565,462
------------- -------------
Total issued 24,776,907 352,046,526
Shares redeemed (28,070,639) (422,894,616)
------------- -------------
Net decrease (3,293,732) $ (70,848,090)
------------- -------------
5. Commitments:
On June 30, 1998, 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 sell foreign currency with
the approximate value of $21,230,000.
EQUITY PORTFOLIO CHANGES
For the Quarter Ended June 30, 1998
Additions
*BEC World Public Company Limited 'Local'
Bangkok Bank Public Company Limited
*Development Bank of Singapore Ltd.
(Class A)
Electricity Generating Public Company
Limited
Fubon Insurance Co., Ltd. (GDR)
Huaneng Power International, Inc. (ADR)
International Container Terminal Services,
Inc. (ICTSI)
Kookmin Bank
Korea Electric Power Corporation
*Pitt Exploration
Samsung Electronics Co., Ltd.
Telekom Malaysia BHD
Thai Farmers Bank Public Company
Limited
Zhejiang Expressway Co. Ltd. (Class H)
Deletions
*BEC World Public Company Limited 'Local'
Citic Pacific Ltd.
*Development Bank of Singapore Ltd.
(Class A)
Guandong Investments, Ltd.
I.J.M. Corp. BHD
New World Infrastructure, Ltd.
*Pitt Exploration
Venture Manufacturing (Singapore) Ltd.
[FN]
*Added and deleted in the same quarter.
PORTFOLIO INFORMATION
Investments
As of 6/30/98
Ten Largest Equity Holdings Percent of
Represented in the Portfolio Net Assets
HSBC Holdings, Ltd. 7.3 %
Hong Kong Telecommunications Ltd. 7.0
Hutchison Whampoa, Ltd. 6.4
CLP Holdings, Ltd. 3.6
Cheung Kong Holdings Ltd. 3.5
Sun Hung Kai Properties, Ltd. 3.1
SM Prime Holdings, Inc. 2.4
PTT Exploration and Production
Public Co., Ltd. (Foreign) 2.2
Singapore Press Holdings Ltd. (Foreign) 2.0
Singapore Airlines Ltd. (Foreign) 1.9
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Banking 11.7 %
Telecommunications 10.2
Conglomerates 10.0
Utilities--Electric & Gas 9.4
Real Estate 9.3
Electronics 9.1
Publishing & Broadcasting 5.4
Oil & Gas 3.5
Retail 2.4
Airlines 1.9
Merrill Lynch Dragon Fund, Inc., June 30, 1998
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
Kara W.Y. Tan Bhala, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
James W. Harshaw, Secretary
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
