N-CSR 1 ml7014.txt MERRILL LYNCH HEALTHCARE UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-3595 Name of Fund: Merrill Lynch Healthcare Fund, Inc. Fund Address: P.O. Box 9011 Princeton, NJ 08543-9011 Name and address of agent for service: Terry K. Glenn, President, Merrill Lynch Healthcare Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011 Registrant's telephone number, including area code: (609) 282-2800 Date of fiscal year end: 04/30/03 Date of reporting period: 05/01/02 - 04/30/03 Item 1 - Attach shareholder report (BULL LOGO) Merrill Lynch Investment Managers Annual Report April 30, 2003 Merrill Lynch Healthcare Fund, Inc. www.mlim.ml.com This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Company unless accompanied or preceded by the Company'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 Healthcare Fund, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper MERRILL LYNCH HEALTHCARE FUND, INC. Portfolio Information As of 4/30/03 (unaudited) Percent of Ten Largest Equity Holdings Net Assets WebMD Corporation 6.1% Amgen Inc. 5.8 Abbott Laboratories 4.5 Pfizer Inc. 4.4 Neurocrine Biosciences, Inc. 3.5 Wyeth 3.4 Diagnostic Products Corporation 3.1 Medtronic, Inc. 3.0 Zimmer Holdings, Inc. 3.0 Teva Pharmaceutical Industries Ltd. (ADR) 3.0 Percent of Five Largest Industries* Net Assets Biotechnology Products 21.0% Medical Devices 18.3 Pharmaceutical--Prescription 11.1 Pharmaceutical--Generic 8.8 Healthcare Information & Technology 7.3 *For Fund compliance purposes, "Industry" means any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub- classifications for reporting ease. These industry classifications are unaudited. Percent of Geographic Allocation Net Assets United States 81.0% Israel 4.8 Canada 2.9 United Kingdom 1.0 Japan 0.6 India 0.6 Merrill Lynch Healthcare Fund, Inc., April 30, 2003 DEAR SHAREHOLDER Effective April 14, 2003, the share class names for the Merrill Lynch family of mutual funds were changed to be consistent with the standard share classes of most other mutual fund families. As of that date, all Class A Shares were redesignated Class I Shares. At the same time, Class D Shares were redesignated Class A Shares. There were no changes to the Class B or Class C share class labels. Trading symbols have not been changed nor have current eligibility rules or pricing structures. This redesignation of share classes does not impact your investment in any way. Investment Environment As fiscal year 2003 closed on April 30, 2003, the stock market was in an ebullient state. The war with Iraq had successfully concluded. The Bush Administration was shifting its attention to legislation, including a tax cut, intended to stimulate the slowed economy. With a presidential election looming in 18 months, further actions were likely, if needed, to insure a resurgent economy. After a 12-month period in which the health care sector suffered a decline and underperformed the unmanaged Standard & Poor's (S&P) 500 Index, the outlook over the next year, while favorable in an absolute sense, suggested continued relative underperformance. Health care companies are generally little affected by economic developments and therefore, do not become direct beneficiaries of any recovery. Moreover, the problems that confronted the health care sector last year are most likely to continue. These issues include the low research and development productivity in the worldwide pharmaceutical industry that has led to a paucity of new drugs; intense generic pressure against patent-expired drugs; and underperformance in the hospital management group because of Medicare and Medicaid reimbursement issues. On the other hand, in the past six months, biotechnology stocks strongly rallied after a desultory fiscal year start. A new, activist Food and Drug Administration Commissioner, committed to streamlining the drug approval process, offers hope that a large number of biotechnology- derived products will soon reach the approval stage. We continue to view the prospects of the biotechnology sub-sector as excellent. Fiscal Year in Review For the 12-month period ended April 30, 2003, Merrill Lynch Healthcare Fund, Inc.'s Class A, Class B, Class C, and Class I Shares had total returns of -16.37%, -16.90%, -17.11% and -16.07, respectively. The Fund underperformed its peer group, the Lipper Health/Biotechnology Fund average, which had a -12.34% return. For the same 12-month period, the Fund's unmanaged benchmark, the S&P 500 Index, provided a return of -13.31%. (Fund results shown do not reflect sales charges and would be lower if sales charges were included. Complete performance information can be found on pages 4 - 6 of this report to shareholders.) As the success and quick conclusion to the Iraq war became evident, the broad market, as reflected in the S&P 500 Index, rallied. Investors focused on the likely shift of interest to stimulation of economic activity. Investors' interest in health care was largely as a source of funds; hence the underperformance for the sector. During the past 12 months, the Fund continued to underweight pharmaceutical holdings. While generic drug companies were added, there was an overall cutback of large pharmaceutical positions. We also made a sharp reduction of hospital management group holdings. At the same time, commitments in medical device companies were increased, especially those involved in cardiology and orthopedics. We also increased our biotechnology holdings, where we favor companies with late stage therapeutic compounds for treatment of life-threatening illness. Looking forward, we are especially optimistic about the prospects for biotechnology. Our augmented investment position in this sub- sector underscores the more aggressive investment position of the Fund as we enter a new fiscal year. In Conclusion We thank you for your investment in Merrill Lynch Healthcare Fund, Inc., and we look forward to serving your investment needs in the months and years ahead. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Jordan C. Schreiber) Jordan C. Schreiber Vice President and Portfolio Manager May 30, 2003 Merrill Lynch Healthcare Fund, Inc., April 30, 2003 PERFORMANCE DATA About Fund Performance Effective April 14, 2003, Class A Shares were redesignated Class I Shares and Class D Shares were redesignated Class A Shares. Investors are able to purchase shares of the Fund through multiple pricing alternatives: * Class A Shares incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). * Effective June 1, 2001, Class B Shares are subject to a maximum contingent deferred sales charge of 4% declining to 0% after six years. All Class B Shares purchased prior to June 1, 2001 will maintain the four-year schedule. 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 A Shares after approximately eight 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 I Shares incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution or account maintenance fees. Class I Shares are available only to eligible investors. * Class R Shares do not incur a maximum sales charge (front-end load) or deferred sales charge. These shares are subject to a distribution fee of 0.25% and an account maintenance fee of 0.25%. Class R Shares are available only to certain retirement plans. None of the past results shown should be considered a representation of future performance. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Figures shown in each of the following 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. Total Return Based on a $10,000 Investment A line graph illustrating the growth of a $10,000 investment in ML Healthcare Fund, Inc++ Class A and Class C Shares* compared to a similar investment in S&P 500 Index++++. Values illustrated are as follow: ML Healthcare Fund, Inc++ Class A Shares* Date Value 10/21/1994** $ 9,475.00 April 1995 $ 9,764.00 April 1996 $14,034.00 April 1997 $15,173.00 April 1998 $21,841.00 April 1999 $24,393.00 April 2000 $31,158.00 April 2001 $35,585.00 April 2002 $36,573.00 April 2003 $30,585.00 ML Healthcare Fund, Inc++ Class C Shares* Date Value 10/21/1994** $10,000.00 April 1995 $10,489.00 April 1996 $14,975.00 April 1997 $16,065.00 April 1998 $22,918.00 April 1999 $25,398.00 April 2000 $32,180.00 April 2001 $36,485.00 April 2002 $37,158.00 April 2003 $30,801.00 S&P 500 Index++++ Date Value April 1994 $10,000.00 April 1995 $11,231.00 April 1996 $14,624.00 April 1997 $18,299.00 April 1998 $25,814.00 April 1999 $31,447.00 April 2000 $34,632.00 April 2001 $30,140.00 April 2002 $26,334.00 April 2003 $22,830.00 A line graph illustrating the growth of a $10,000 investment in ML Healthcare Fund, Inc++ Class B and Class I Shares* compared to a similar investment in S&P 500 Index++++. Values illustrated are as follow: ML Healthcare Fund, Inc++ Class B Shares* Date Value April 1993 $10,000.00 April 1994 $10,725.00 April 1995 $11,292.00 April 1996 $16,086.00 April 1997 $17,283.00 April 1998 $24,647.00 April 1999 $27,306.00 April 2000 $34,676.00 April 2001 $39,282.00 April 2002 $40,008.00 April 2003 $33,245.00 ML Healthcare Fund, Inc++ Class I Shares* Date Value April 1993 $ 9,475.00 April 1994 $10,251.00 April 1995 $10,914.00 April 1996 $15,718.00 April 1997 $17,061.00 April 1998 $24,579.00 April 1999 $27,530.00 April 2000 $35,254.00 April 2001 $40,392.00 April 2002 $41,566.00 April 2003 $34,888.00 S&P 500 Index++++ Date Value April 1993 $10,000.00 April 1994 $10,532.00 April 1995 $12,371.00 April 1996 $16,109.00 April 1997 $20,158.00 April 1998 $28,436.00 April 1999 $34,642.00 April 2000 $38,150.00 April 2001 $33,201.00 April 2002 $29,009.00 April 2003 $25,149.00 *Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of operations. ++ML Healthcare Fund, Inc. invests worldwide primarily in equity securities of companies that, in the opinion of management, derive or are expected to derive a substantial portion of their sales from products or services in health care. ++++This unmanaged broad-based Index is comprised of common stocks. Past performance is not indicative of future results. Average Annual Total Return % Return Without % Return With Class A Shares* Sales Charge Sales Charge** One Year Ended 4/30/03 -16.37% -20.76% Five Years Ended 4/30/03 + 6.97 + 5.82 Inception (10/21/94) through 4/30/03 +14.74 +14.02 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. % Return % Return Class B Shares* Without CDSC With CDSC** One Year Ended 4/30/03 -16.90% -20.23% Five Years Ended 4/30/03 + 6.17 + 5.90 Ten Years Ended 4/30/03 +12.76 +12.76 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after six years. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Class C Shares* Without CDSC With CDSC** One Year Ended 4/30/03 -17.11% -17.94% Five Years Ended 4/30/03 + 6.09 + 6.09 Inception (10/21/94) through 4/30/03 +14.11 +14.11 *Maximum contingent deferred sales charge is 1% and is reduced to 0% after one year. **Assuming payment of applicable contingent deferred sales charge. % Return Without % Return With Class I Shares* Sales Charge Sales Charge** One Year Ended 4/30/03 -16.07% -20.47% Five Years Ended 4/30/03 + 7.26 + 6.11 Ten Years Ended 4/30/03 +13.92 +13.31 *Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class I Shares were offered at a higher sales charge. Thus, actual returns would have been lower than shown for the ten-year period.) **Assuming maximum sales charge. Aggregate Total Return % Return Without Sales Charge Class R Shares Inception (1/03/03) through 4/30/03 +1.24% Merrill Lynch Healthcare Fund, Inc., April 30, 2003 PERFORMANCE DATA (concluded) Recent Performance Results
Ten Years/ 6-Month 12-Month Since Inception As of April 30, 2003 Total Return Total Return Total Return ML Healthcare Fund, Inc.--Class A Shares* +1.17% -16.37% +222.80% ML Healthcare Fund, Inc.--Class B Shares* +0.74 -16.90 +232.45 ML Healthcare Fund, Inc.--Class C Shares* +0.74 -17.11 +208.01 ML Healthcare Fund, Inc.--Class I Shares* +1.27 -16.07 +268.21 ML Healthcare Fund, Inc.--Class R Shares* -- -- + 1.24 Standard & Poor's 500 Index** +4.48 -13.31 +151.49/+128.30/+1.50 *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 ten year/since inception periods are for ten years for Class B & Class I Shares, from 10/21/94 for Class A & Class C Shares and from 1/03/03 for Class R Shares. **This unmanaged broad-based Index is comprised of Common Stocks. Ten-year/since inception total returns are for ten years, from 10/21/94 and from 1/03/03, respectively.
SCHEDULE OF INVESTMENTS
MIDDLE Shares Percent of EAST Industry++++ Held Common Stocks Value Net Assets Israel Pharmaceutical--Generic 254,200 ++Taro Pharmaceutical Industries, Ltd. $ 11,632,192 1.8% 400,000 Teva Pharmaceutical Industries, Ltd. (ADR)* 18,680,000 3.0 Total Common Stocks in the Middle East 30,312,192 4.8 NORTH AMERICA Canada Pharmaceutical--Generic 500,000 ++Biovail Corporation 18,075,000 2.9 Total Common Stocks in Canada 18,075,000 2.9 United States Biotechnology 1,460,000 ++Emisphere Technologies, Inc. (a) 4,423,800 0.7 Discovery Tools & 780,000 ++Lexicon Genetics Incorporated 3,900,000 0.6 Platform Technologies 350,000 ++Medarex, Inc. 1,459,500 0.3 ------------- ------ 9,783,300 1.6 Biotechnology Products 600,000 ++Amgen Inc. 36,786,000 5.8 1,007,500 ++AtheroGenics, Inc. 9,168,250 1.4 420,000 ++BioMarin Pharmaceutical Inc. 4,611,600 0.7 200,000 ++CV Therapeutics, Inc. 3,996,000 0.6 300,000 ++Celgene Corporation 7,983,000 1.3 50,000 ++Cell Genesys, Inc. 446,000 0.1 250,000 ++Cubist Pharmaceuticals, Inc. 2,307,500 0.4 40,000 ++Genentech, Inc. 1,519,600 0.2 400,000 ++Genzyme Corporation 16,112,000 2.5 200,000 ++Gilead Sciences, Inc. 9,228,000 1.5 100,000 ++MedImmune, Inc. 3,527,000 0.6 600,000 ++Millennium Pharmaceuticals, Inc. 6,600,000 1.0 489,400 ++Neurocrine Biosciences, Inc. 22,145,350 3.5 380,595 ++Repligen Corporation 2,378,719 0.4 141,600 ++Trimeris, Inc. 6,285,624 1.0 ------------- ------ 133,094,643 21.0 Health Care Distributors 300,000 AmerisourceBergen Corporation 17,355,000 2.7 Health Care Facilities 200,000 HCA Inc. 6,420,000 1.0 500,000 ++Manor Care, Inc. 9,725,000 1.5 200,000 ++Triad Hospitals, Inc. 4,402,000 0.7 ------------- ------ 20,547,000 3.2 Health Care 400,000 ++Cerner Corporation 7,992,000 1.2 Information & 4,000,000 ++WebMD Corporation 38,560,000 6.1 Technology ------------- ------ 46,552,000 7.3 Managed Health Care 50,000 Aetna Inc. (New Shares) 2,490,000 0.4 100,000 ++Anthem, Inc. 6,864,000 1.1 200,000 ++Mid Atlantic Medical Services, Inc. 8,710,000 1.4 200,000 UnitedHealth Group Incorporated 18,426,000 2.9 100,000 ++WellPoint Health Networks, Inc. 7,594,000 1.2 ------------- ------ 44,084,000 7.0 Medical Devices 100,000 Biomet, Inc. 3,046,000 0.5 400,000 ++Boston Scientific Corporation 17,220,000 2.7 500,000 Diagnostic Products Corporation 19,750,000 3.1 400,000 Medtronic, Inc. 19,096,000 3.0 300,000 ++St. Jude Medical, Inc. 15,738,000 2.5 89,400 Stryker Corporation 5,990,694 0.9 840,000 ++Thoratec Laboratories Corporation 11,550,000 1.8 400,000 ++Zimmer Holdings, Inc. 18,760,000 3.0 ------------- ------ 111,150,694 17.5
Merrill Lynch Healthcare Fund, Inc., April 30, 2003 SCHEDULE OF INVESTMENTS (concluded)
NORTH AMERICA Shares Percent of (concluded) Industry++++ Held Common Stocks Value Net Assets United States Medical Technology 103,200 ++CTI Molecular Imaging, Inc. $ 1,894,752 0.3% (concluded) Pharmaceutical-- 700,000 Abbott Laboratories 28,441,000 4.5 Diversified 40,000 Johnson & Johnson 2,254,400 0.3 ------------- ------ 30,695,400 4.8 Pharmaceutical--Generic 150,000 ++K-V Pharmaceutical Company (Class A) 3,373,500 0.5 Pharmaceutical-- 542,100 ++The Medicines Company 11,140,155 1.8 Prescription 100,000 ++Medicis Pharmaceutical (Class A) 5,764,000 0.9 900,000 Pfizer, Inc. 27,675,000 4.4 500,000 Wyeth 21,765,000 3.4 ------------- ------ 66,344,155 10.5 Pharmaceutical-- 100,000 Allergan, Inc. 7,025,000 1.1 Specialty 160,000 ++Forest Laboratories, Inc. 8,275,200 1.3 ------------- ------ 15,300,200 2.4 Pharmacy Benefit 700,000 ++Caremark Rx, Inc. 13,937,000 2.2 Managers Total Common Stocks in the United States 514,111,644 81.0 Total Common Stocks in North America 532,186,644 83.9 PACIFIC BASIN/ ASIA Japan Pharmaceutical-- 232,000 Fujisawa Pharmaceutical Co., Ltd. 3,929,566 0.6 Prescription Total Common Stocks in Japan 3,929,566 0.6 India Pharmaceutical--Generic 250,000 ++Ranbaxy Laboratories (Sponsored GDR)** 3,875,000 0.6 Total Common Stocks in India 3,875,000 0.6 Total Common Stocks in the Pacific Basin/Asia 7,804,566 1.2 WESTERN EUROPE United Medical Devices 800,000 Smith & Nephew PLC 5,334,961 0.8 Kingdom Pharmaceutical-- 1,500,000 ++SkyePharma PLC 1,186,701 0.2 Specialty Total Common Stocks in Western Europe 6,521,662 1.0 Total Common Stocks (Cost--$526,227,813) 576,825,064 90.9 SHORT-TERM SECURITIES Short-Term Securities 70,024,119 Merrill Lynch Premier Institutional Fund (b)(c) 70,024,119 11.0 Beneficial Interest $ 58,285,481 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (b) 58,285,481 9.2 105,036,181 Merrill Lynch Liquidity Series, LLC Money Market Series (b)(c) 105,036,181 16.5 ------------- ------ 163,321,662 25.7 Total Short-Term Securities (Cost--$233,345,781) 233,345,781 36.7 Total Investments (Cost--$759,573,594) 810,170,845 127.6 Liabilities in Excess of Other Assets (175,429,564) (27.6) ------------- ------ Net Assets $ 634,741,281 100.0% ============= ====== *American Depositary Receipts (ADR). **Global Depositary Receipts (GDR). ++Non-income producing security. ++++For Fund compliance purposes, "Industry" means any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub- classifications for reporting ease. These industry classifications are unaudited. (a)Investment in companies 5% or more of whose outstanding securities are held by the Trust (such companies are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940) are as follows: Net Share Purchase Sales Realized Dividend Affiliate Activity Cost Cost Loss Income Emisphere 460,000 $(4,159,170) $6,044,648 $(5,536,904) ++ Technologies, Inc. ++Non-income producing security. (b)Investments in companies considered to be an affiliate of the Fund (such companies are defined as "Affiliated Companies" in Section 2 (a)(3) of the Investment Company Act of 1940) are as follows: Dividend/ Net Interest Affiliate Activity Income Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $ 58,285,481 $222,396 Merrill Lynch Liquidity Series, LLC Money Market Series $105,036,181 75,642 Merrill Lynch Premier Institutional Fund 70,024,119 103,444 Merrill Lynch Institutional Fund -- 8,417 (c)Security was purchased with the cash proceeds from securities loans. See Notes to Financial Statements.
Merrill Lynch Healthcare Fund, Inc., April 30, 2003 STATEMENT OF ASSETS AND LIABILITIES
As of April 30, 2003 Assets: Investments, at value (including securities loaned of $170,486,112) (identified cost--$759,573,594) $ 810,170,845 Receivables: Securities sold $ 4,649,714 Capital shares sold 824,125 Dividends 234,442 Interest 49,305 Securities lending--net 3,740 5,761,326 -------------- Prepaid registration fees 34,549 -------------- Total assets 815,966,720 -------------- Liabilities: Collateral on securities loaned, at value 175,060,300 Payables: Securities purchased 3,563,035 Capital shares redeemed 1,468,918 Investment adviser 562,164 Other affiliates 261,411 Distributor 242,750 6,098,278 -------------- Accrued expenses and other liabilities 66,861 -------------- Total liabilities 181,225,439 -------------- Net Assets: Net assets $ 634,741,281 ============== Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000 Consist of: shares authorized $ 2,292,182 Class B Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 4,772,662 Class C Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 1,879,901 Class I Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 4,371,313 Class R Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 2 Paid-in capital in excess of par 617,271,558 Undistributed investment income--net $ 8,555 Accumulated realized capital losses on investments and foreign currency transactions--net (46,453,866) Unrealized appreciation on investments and foreign currency transactions--net 50,598,974 -------------- Total accumulated earnings--net 4,153,663 -------------- Net assets $ 634,741,281 ============== Net Asset Class A--Based on net assets of $119,374,670 and 22,921,816 Value: shares outstanding $ 5.21 ============== Class B--Based on net assets of $194,543,346 and 47,726,621 shares outstanding $ 4.08 ============== Class C--Based on net assets of $76,605,911 and 18,799,011 shares outstanding $ 4.07 ============== Class I--Based on net assets of $244,217,253 and 43,713,128 shares outstanding $ 5.59 ============== Class R--Based on net assets of $101.31 and 24.752 shares outstanding $ 4.09 ============== See Notes to Financial Statements.
STATEMENT OF OPERATIONS
For the Year Ended April 30, 2003 Investment Dividends (net of $48,762 foreign withholding tax) $ 2,820,430 Income: Interest 619,726 Securities lending--net 187,503 -------------- Total income 3,627,659 -------------- Expenses: Investment advisory fees $ 6,826,433 Account maintenance and distribution fees--Class B 2,256,392 Account maintenance and distribution fees--Class C 805,026 Transfer agent fees--Class B 580,124 Transfer agent fees--Class I 572,936 Account maintenance fees--Class A 306,868 Transfer agent fees--Class A 277,313 Accounting services 241,770 Transfer agent fees--Class C 219,575 Professional fees 120,802 Registration fees 84,250 Printing and shareholder reports 65,518 Custodian fees 63,746 Directors' fees and expenses 51,454 Pricing fees 10,462 Other 54,593 -------------- Total expenses 12,537,262 -------------- Investment loss--net (8,909,603) -------------- Realized & Realized loss on: Unrealized Investments--net (30,305,228) Gain (Loss) Foreign currency transactions--net (99,740) (30,404,968) On Investments & -------------- Foreign Currency Change in unrealized appreciation on: Transactions--Net: Investments--net (107,307,242) Foreign currency transactions--net 4,972 (107,302,270) -------------- -------------- Total realized and unrealized loss on investments and foreign currency transactions--net (137,707,238) -------------- Net Decrease in Net Assets Resulting from Operations $(146,616,841) ============== See Notes to Financial Statements.
Merrill Lynch Healthcare Fund, Inc., April 30, 2003 STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended April 30, Increase (Decrease) in Net Assets: 2003 2002 Operations: Investment loss--net $ (8,909,603) $ (12,316,875) Realized loss on investments and foreign currency transactions--net (30,404,968) (1,488,251) Change in unrealized appreciation on investments and foreign currency transactions--net (107,302,270) 33,193,706 -------------- -------------- Net increase (decrease) in net assets resulting from operations (146,616,841) 19,388,580 -------------- -------------- Distributions to Realized gain on investments--net: Shareholders: Class A -- (4,492,685) Class B -- (14,949,634) Class C -- (3,438,059) Class I -- (10,090,226) -------------- -------------- Net decrease in net assets resulting from distributions to shareholders -- (32,970,604) -------------- -------------- Capital Share Net increase (decrease) in net assets derived from capital share Transactions: transactions (86,554,209) 88,049,914 -------------- -------------- Net Assets: Total increase (decrease) in net assets (233,171,050) 74,467,890 Beginning of year 867,912,331 793,444,441 -------------- -------------- End of year* $ 634,741,281 $ 867,912,331 ============== ============== *Undistributed (accumulated) investment income (loss)--net $ 8,555 $ (14,379) ============== ============== See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
Class A** The following per share data and ratios have been derived from information provided in the financial statements. For the Year Ended April 30, Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999 Per Share Net asset value, beginning of year $ 6.23 $ 6.29 $ 6.63 $ 5.36 $ 5.62 Operating --------- --------- --------- --------- --------- Performance: Investment loss--net++ (.05) (.07) (.05) (.04) (.04) Realized and unrealized gain (loss) on investments and foreign currency transactions--net (.97) .24 1.05 1.49 .64 --------- --------- --------- --------- --------- Total from investment operations (1.02) .17 1.00 1.45 .60 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net -- (.23) (1.34) (.18) (.86) --------- --------- --------- --------- --------- Net asset value, end of year $ 5.21 $ 6.23 $ 6.29 $ 6.63 $ 5.36 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share (16.37%) 2.78% 14.21% 27.73% 11.69% Return:* ========= ========= ========= ========= ========= Ratios to Expenses 1.58% 1.52% 1.50% 1.51% 1.52% Average ========= ========= ========= ========= ========= Net Assets: Investment loss--net (1.04%) (1.20%) (.80%) (.71%) (.72%) ========= ========= ========= ========= ========= Supplemental Net assets, end of year (in thousands) $ 119,375 $ 146,714 $ 107,642 $ 59,029 $ 43,700 Data: ========= ========= ========= ========= ========= Portfolio turnover 128.24% 81.36% 65.42% 109.88% 91.26% ========= ========= ========= ========= ========= *Total investment returns exclude the effects of sales charges. **Effective April 14, 2003, Class D Shares were redesignated Class A Shares. ++Based on average shares outstanding. See Notes to Financial Statements.
Merrill Lynch Healthcare Fund, Inc., April 30, 2003 FINANCIAL HIGHLIGHTS (continued)
Class B The following per share data and ratios have been derived from information provided in the financial statements. For the Year Ended April 30, Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999 Per Share Net asset value, beginning of year $ 4.91 $ 5.05 $ 5.55 $ 4.54 $ 4.91 Operating --------- --------- --------- --------- --------- Performance: Investment loss--net++ (.08) (.10) (.09) (.07) (.07) Realized and unrealized gain (loss) on investments and foreign currency transactions--net (.75) .19 .89 1.26 .55 --------- --------- --------- --------- --------- Total from investment operations (.83) .09 .80 1.19 .48 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net -- (.23) (1.30) (.18) (.85) --------- --------- --------- --------- --------- Net asset value, end of year $ 4.08 $ 4.91 $ 5.05 $ 5.55 $ 4.54 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share (16.90%) 1.85% 13.28% 26.99% 10.79% Return:* ========= ========= ========= ========= ========= Ratios to Expenses 2.36% 2.29% 2.26% 2.28% 2.29% Average ========= ========= ========= ========= ========= Net Assets: Investment loss--net (1.83%) (1.97%) (1.57%) (1.49%) (1.49%) ========= ========= ========= ========= ========= Supplemental Net assets, end of year (in thousands) $ 194,543 $ 310,916 $ 331,683 $ 273,530 $ 256,000 Data: ========= ========= ========= ========= ========= Portfolio turnover 128.24% 81.36% 65.42% 109.88% 91.26% ========= ========= ========= ========= ========= Class C The following per share data and ratios have been derived from information provided in the financial statements. For the Year Ended April 30, Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999 Per Share Net asset value, beginning of year $ 4.91 $ 5.05 $ 5.55 $ 4.55 $ 4.92 Operating --------- --------- --------- --------- --------- Performance: Investment loss--net++ (.08) (.10) (.09) (.07) (.07) Realized and unrealized gain (loss) on investments and foreign currency transactions--net (.76) .19 .90 1.25 .55 --------- --------- --------- --------- --------- Total from investment operations (.84) .09 .81 1.18 .48 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net -- (.23) (1.31) (.18) (.85) --------- --------- --------- --------- --------- Net asset value, end of year $ 4.07 $ 4.91 $ 5.05 $ 5.55 $ 4.55 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share (17.11%) 1.85% 13.38% 26.70% 10.82% Return:* ========= ========= ========= ========= ========= Ratios to Expenses 2.37% 2.30% 2.28% 2.30% 2.30% Average ========= ========= ========= ========= ========= Net Assets: Investment loss--net (1.84%) (1.99%) (1.58%) (1.50%) (1.50%) ========= ========= ========= ========= ========= Supplemental Net assets, end of year (in thousands) $ 76,606 $ 98,994 $ 66,028 $ 38,622 $ 31,295 Data: ========= ========= ========= ========= ========= Portfolio turnover 128.24% 81.36% 65.42% 109.88% 91.26% ========= ========= ========= ========= ========= Class I** The following per share data and ratios have been derived from information provided in the financial statements. For the Year Ended April 30, Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999 Per Share Net asset value, beginning of year $ 6.66 $ 6.70 $ 6.98 $ 5.62 $ 5.84 Operating --------- --------- --------- --------- --------- Performance: Investment loss--net++ (.04) (.06) (.04) (.03) (.03) Realized and unrealized gain (loss) on investments and foreign currency transactions--net (1.03) .25 1.12 1.57 .67 --------- --------- --------- --------- --------- Total from investment operations (1.07) .19 1.08 1.54 .64 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net -- (.23) (1.36) (.18) (.86) --------- --------- --------- --------- --------- Net asset value, end of year $ 5.59 $ 6.66 $ 6.70 $ 6.98 $ 5.62 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share (16.07%) 2.91% 14.57% 28.06% 12.01% Return:* ========= ========= ========= ========= ========= Ratios to Expenses 1.33% 1.27% 1.24% 1.26% 1.27% Average ========= ========= ========= ========= ========= Net Assets: Investment loss--net (.79%) (.95%) (.55%) (.47%) (.46%) ========= ========= ========= ========= ========= Supplemental Net assets, end of year (in thousands) $ 244,217 $ 311,288 $ 288,091 $ 219,499 $ 176,491 Data: ========= ========= ========= ========= ========= Portfolio turnover 128.24% 81.36% 65.42% 109.88% 91.26% ========= ========= ========= ========= ========= *Total investment returns exclude the effects of sales charges. **Effective April 14, 2003, Class A Shares were redesignated Class I Shares. ++Based on average shares outstanding. See Notes to Financial Statements.
Merrill Lynch Healthcare Fund, Inc., April 30, 2003 FINANCIAL HIGHLIGHTS (concluded)
Class R For the Period The following per share data and ratios have been derived January 3, from information provided in the financial statements. 2003++ to April 30, Increase (Decrease) in Net Asset Value: 2003 Per Share Net asset value, beginning of period $ 4.04 Operating --------- Performance: Investment loss--net++++ (.01) Realized and unrealized gain on investments and foreign currency transactions--net .06 --------- Total from investment operations .05 --------- Net asset value, end of period $ 4.09 ========= Total Investment Based on net asset value per share 1.24%+++ Return:** ========= Ratios to Expenses 1.84%* Average ========= Net Assets: Investment loss--net (.36%)* ========= Supplemental Net assets, end of period (in thousands) $ --*** Data: ========= Portfolio turnover 128.24% ========= *Annualized. **Total investment returns exclude the effects of sales charges. ***Amount is less than $1,000. ++Commencement of operations. ++++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Healthcare Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a non-diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. The Fund offers multiple classes of shares. Effective April 14, 2003, Class A Shares were redesignated Class I Shares and Class D Shares were redesignated Class A Shares. The Fund's financial statements and financial highlights contained within this report reflect the new share class redesignation. Shares of Class A and Class I are sold with a front- end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. Class R Shares are sold only to certain retirement plans. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class A, Class B, Class C and Class R Shares bear certain expenses related to the account maintenance of such shares, and Class B, Class C and Class R 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. Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses on investments and foreign currency transactions are allocated daily to each class based on its relative net assets. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of securities--Portfolio securities that are traded on stock exchanges or NASDAQ National are valued at the last sale price or official closing 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 for long positions, and at the last available ask price for short positions. 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 that 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 or purchased are valued at the last sale price in the case of exchange-traded options. In the case of options traded in the over-the-counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term securities are valued at amortized cost, which approximates market value. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market quotations are not available are valued at fair value as determined in good faith by or under the direction of the Fund's Board of Directors. Occasionally, events affecting the values of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the market on which such securities trade) and the close of business on the NYSE. If events (for example, company announcement, natural disasters, market volatility) occur during such periods that are expected to materially affect the value for such securities, those securities may be valued at their fair market value as determined in good faith by the Fund's Board of Directors or by the investment adviser using a pricing service and/or procedures approved by the Board of Directors of the Fund. (b) 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 U.S. dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (c) Derivative financial instruments--The Fund may engage in various portfolio investment strategies both to increase the return of the Fund and to hedge, or protect, its exposure to interest rate movement and movements in the securities markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Fund may also purchase or sell financial futures contracts and options on such futures contracts. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. 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. * 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-U.S. 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. * 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. The contract is marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. Merrill Lynch Healthcare Fund, Inc., April 30, 2003 NOTES TO FINANCIAL STATEMENTS (continued) * Options--The Fund is authorized to write covered put and call options and purchase put and call options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. (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). Realized gains and losses on security transactions are determined on the identified cost basis. 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 is recognized on the accrual 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. (h) Securities lending--The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the U.S. government as collateral, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. Where the Fund receives securities as collateral for the loaned securities, the Fund typically receives the income on both the loaned securities and the collateral and, as a result, the Fund's yield may increase. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. The Fund may receive a flat fee for its loans. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder's, lending agent, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the fund could experience delays and costs in gaining access to the collateral. The Fund also could suffer a loss where the value of the collateral falls below the market value of the borrowed securities, in the event of borrower default or in the event of losses on investments made with cash collateral. (i) Reclassification--Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, the current year's permanent book/tax differences of $9,032,277 has been reclassified between paid-in capital in excess of par and undistributed net investment income and $99,740 has been reclassified between undistributed net investment income and accumulated net realized capital losses. 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 Investment Managers, L.P. ("MLIM"). The general partner of MLIM 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 FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLIM is responsible for the management of the Fund's portfolio and provides, or arranges for affiliates to provide, the administrative services necessary for the operation of the Fund. As compensation for its services to the Fund, MLIM receives monthly compensation at the annual rate of 1.0% of the average daily net assets of the Fund. MLIM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM, pursuant to which MLAM U.K. provides investment advisory services to MLIM, with respect to the Fund. There is no increase to the aggregate fees paid by the Fund for these services. 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 A .25% -- Class B .25% .75% Class C .25% .75% Class R .25% .25% Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("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 A, Class B, Class C and Class R shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution- related services to Class B, Class C and Class R shareholders. For the year ended April 30, 2003, FAMD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class I Shares as follows: FAMD MLPF&S Class A $6,036 $86,040 Class I $ 436 $ 3,026 For the year ended April 30, 2003, MLPF&S received contingent deferred sales charges of $492,160 and $38,933 relating to transactions in Class B and Class C Shares, respectively. The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to MLPF&S or its affiliates. As of April 30, 2003, the Fund lent securities with a value of $54,274,196 to MLPF&S or its affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, as the securities lending agent for a fee based on a share of the returns on investment of cash collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by MLIM, LLC or in registered money market funds advised by MLIM or its affiliates. For the year ended April 30, 2003, MLIM, LLC received $79,890 in securities lending agent fees. In addition, MLPF&S received $854,400 in commissions on the execution of portfolio security transactions for the Fund for the year ended April 30, 2003. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. For the year ended April 30, 2003, the Fund reimbursed MLIM $16,782 for certain accounting services. Certain officers and/or directors of the Fund are officers and/or directors of MLIM, PSI, FDS, FAMD, MLAM U.K., and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended April 30, 2003 were $838,650,636 and $883,544,694, respectively. Net realized losses for the year ended April 30, 2003 and net unrealized gains as of April 30, 2003 were as follows: Realized Unrealized Losses Gains Long-term investments $ (30,305,125) $ 50,597,251 Short-term investments (103) -- Foreign currency transactions (99,740) 1,723 -------------- -------------- Total $ (30,404,968) $ 50,598,974 ============== ============== As of April 30, 2003, net unrealized appreciation for Federal income tax purposes aggregated $47,698,749, of which $110,136,373 related to appreciated securities and $62,437,624 related to depreciated securities. The aggregate cost of investments at April 30, 2003 for Federal income tax purposes was $762,472,096. 4. Capital Share Transactions: Net increase (decrease) in net assets derived from capital share transactions was $(86,554,209) and $88,049,914 for the years ended April 30, 2003 and April 30, 2002, respectively. Transactions in capital shares for each class were as follows: Class A Shares for the Year Dollar Ended April 30, 2003++ Shares Amount Shares sold 3,548,341 $ 19,069,461 Automatic conversion of shares 3,785,084 20,127,478 -------------- -------------- Total issued 7,333,425 39,196,939 Shares redeemed (7,967,938) (41,518,050) -------------- -------------- Net decrease (634,513) $ (2,321,111) ============== ============== ++Effective April 14, 2003, Class D Shares were redesignated Class A Shares. Merrill Lynch Healthcare Fund, Inc., April 30, 2003 NOTES TO FINANCIAL STATEMENTS (concluded) Class A Shares for the Year Dollar Ended April 30, 2002++ Shares Amount Shares sold 5,140,152 $ 31,977,791 Automatic conversion of shares 5,981,195 36,910,326 Shares issued to shareholders in reinvestment of distributions 647,283 3,996,660 -------------- -------------- Total issued 11,768,630 72,884,777 Shares redeemed (5,319,896) (32,980,990) -------------- -------------- Net increase 6,448,734 $ 39,903,787 ============== ============== ++Effective April 14, 2003, Class D Shares were redesignated Class A Shares. Class B Shares for the Year Dollar Ended April 30, 2003 Shares Amount Shares sold 6,795,271 $ 28,741,477 Automatic conversion of shares (4,814,702) (20,127,478) Shares redeemed (17,534,030) (72,112,842) -------------- -------------- Net decrease (15,553,461) $ (63,498,843) ============== ============== Class B Shares for the Year Dollar Ended April 30, 2002 Shares Amount Shares sold 16,600,213 $ 82,131,524 Shares issued to shareholders in reinvestment of distributions 2,678,221 13,133,300 -------------- -------------- Total issued 19,278,434 95,264,824 Automatic conversion of shares (7,524,902) (36,910,326) Shares redeemed (14,151,003) (69,705,874) -------------- -------------- Net decrease (2,397,471) $ (11,351,376) ============== ============== Class C Shares for the Year Dollar Ended April 30, 2003 Shares Amount Shares sold 3,864,785 $ 16,346,399 Shares redeemed (5,217,038) (21,381,414) -------------- -------------- Net decrease (1,352,253) $ (5,035,015) ============== ============== Class C Shares for the Year Dollar Ended April 30, 2002 Shares Amount Shares sold 9,996,865 $ 49,209,812 Shares issued to shareholders in reinvestment of distributions 624,631 3,063,315 -------------- -------------- Total issued 10,621,496 52,273,127 Shares redeemed (3,545,417) (17,448,885) -------------- -------------- Net increase 7,076,079 $ 34,824,242 ============== ============== Class I Shares for the Year Dollar Ended April 30, 2003++ Shares Amount Shares sold 7,899,517 $ 45,265,112 Shares redeemed (10,891,825) (60,964,452) -------------- -------------- Net decrease (2,992,308) $ (15,699,340) ============== ============== ++Effective April 14, 2003, Class A Shares were redesignated Class I Shares. Class I Shares for the Year Dollar Ended April 30, 2002++ Shares Amount Shares sold 11,239,078 $ 74,475,884 Shares issued to shareholders in reinvestment of distributions 1,415,947 9,332,034 -------------- -------------- Total issued 12,655,025 83,807,918 Shares redeemed (8,939,874) (59,134,657) -------------- -------------- Net increase 3,715,151 $ 24,673,261 ============== ============== ++Effective April 14, 2003, Class A Shares were redesignated Class I Shares. Class R Shares for the Period Dollar Jan. 3, 2003++ to April 30, 2003 Shares Amount Shares sold 25 $ 100 -------------- -------------- Net increase 25 $ 100 ============== ============== ++Commencement of operations. 5. Short-Term Borrowings: The Fund, along with certain other funds managed by MLIM and its affiliates, is a party to a $500,000,000 credit agreement with Bank One, N.A. and certain other lenders. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of .09% per annum based on the Fund's pro rata share of the unused portion of the credit agreement. Amounts borrowed under the credit agreement bear interest at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or a base rate as determined by Bank One, N.A. On November 29, 2002, the credit agreement was renewed for one year under the same terms, except that the commitment was reduced from $1,000,000,000 to $500,000,000. The Fund did not borrow under the credit agreement during the year ended April 30, 2003. 6. Commitments: At April 30, 2003, the Fund had entered into foreign exchange contracts under which it had agreed to sell foreign currency with an approximate value of $700,000. 7. Distributions to Shareholders: The tax character of distributions paid during the fiscal years ended April 30, 2003 and April 30, 2002 was as follows: 4/30/2003 4/30/2002 Distributions paid from: Net long-term capital gains $ -- $ 32,970,064 -------------- -------------- Total taxable distributions $ -- $ 32,970,604 ============== ============== As of April 30, 2003, the components of accumulated earnings on a tax basis were as follows: Undistributed ordinary income--net $ -- Undistributed long-term capital gains--net -- -------------- Total undistributed earnings--net -- Capital loss carryforward (6,034,534)* Unrealized gains--net 10,188,197** -------------- Total accumulated earnings--net $ 4,153,663 ============== *On April 30, 2003, the Fund had a net capital loss carryforward of $6,034,534, all of which expires in 2011. This amount will be available to offset like amounts of any future taxable gains. **The difference between book-basis and tax-basis net unrealized gains is attributable primarily to the tax deferral of losses on wash sales, the realization for tax purposes of unrealized gains (losses) on certain foreign currency contracts and the deferral of post-October capital losses for tax purposes. INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Merrill Lynch Healthcare Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Merrill Lynch Healthcare Fund, Inc. as of April 30, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for the respective periods then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and 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 as of April 30, 2003, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Merrill Lynch Healthcare Fund, Inc. as of April 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for the respective periods then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Princeton, New Jersey June 6, 2003 Merrill Lynch Healthcare Fund, Inc., April 30, 2003 OFFICERS AND DIRECTORS
Number of Other Portfolios in Director- Position(s) Length Fund Complex ships Held of Time Overseen by Held by Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director Interested Director Terry K. Glenn* President 1999 to President and Chairman of Merrill Lynch 116 Funds None P.O.Box 9011 and present Investment Managers, L.P. ("MLIM")/Fund 161 Portfolios Princeton, Director and Asset Management, L.P. ("FAM")--Advised NJ 08543-9011 1983 to Funds since 1999; Chairman (Americas Age: 62 present Region) of MLIM from 2000 to 2002; Executive Vice President of MLIM and FAM (which terms as used herein include their corporate predecessors) from 1983 to 2002; President of FAM Distributors. Inc. ("FAMD") from 1986 to 2002 and Director thereof from 1991 to 2002; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") from 1993 to 2002; President of Princeton Administrators, L.P. from 1989 to 2002; Director of Financial Data Services, Inc. from 1985 to 2002. *Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLIM acts as investment adviser. Mr. Glenn is an "interested person" as described in the Investment Company Act, of the Fund based on his former positions with FAM, MLIM, FAMD, Princeton Services and Princeton Administrators, L.P. The Director's term is unlimited. Directors serve until their resignation, removal, or death, or until December 31 of the year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors. Independent Directors* Ronald W. Forbes Director 2000 to Professor Emeritus of Finance, 44 Funds None P.O. Box 9095 present School of Business, State University 50 Portfolios Princeton, of New York at Albany since 2000 and NJ 08543-9095 Professor thereof from 1989 to 2000; Age: 62 International Consultant, Urban Institute from 1995 to 1999. Cynthia A. Montgomery Director 2000 to Professor, Harvard Business School since 44 Funds Unum P.O. Box 9095 present 1989; Director, Unum Provident Corporation 50 Portfolios Provident Princeton, since 1990; Director, Newell Rubbermaid, Corpora- NJ 08543-9095 Inc. since 1995. tion; Age: 50 Newell Rubber- maid, Inc. Charles C. Reilly Director 1990 to Self-employed financial consultant since 44 Funds None P.O. Box 9095 present 1990; Partner of Small Cities Cable 50 Portfolios Princeton, Television from 1986 to 1997. NJ 08543-9095 Age: 71 Kevin A. Ryan Director 2000 to Founder and Director Emeritus of The Boston 44 Funds None P.O. Box 9095 present University Center for the Advancement of 50 Portfolios Princeton, Ethics and Character; Professor of Education NJ 08543-9095 at Boston University from 1982 to 1999 and Age: 70 Professor Emeritus since 1999. Roscoe S. Suddarth Director 2000 to President, Middle East Institute from 1995 44 Funds None P.O. Box 9095 present to 2001; Foreign Service Officer, United 50 Portfolios Princeton, States Foreign Service from 1961 to 1995; NJ 08543-9095 Career Minister from 1989 to 1995; Deputy Age: 67 Inspector General, U.S. Department of State from 1991 to 1994; U.S. Ambassador to the Hashemite Kingdom of Jordan from 1987 to 1990. Richard R. West Director 1983 to Dean Emeritus of New York University, 44 Funds Bowne & P.O. Box 9095 present Leonard N. Stern School of Business 50 Portfolios Co., Inc.; Princeton, Administration since 1994. Vornado NJ 08543-9095 Operating Age: 65 Company; Vornado Realty Trust; Alexander's, Inc. Edward D. Zinbarg Director 1994 to Self-employed financial consultant since 44 Funds None P.O. Box 9095 present 1994. 50 Portfolios Princeton, NJ 08543-9095 Age: 68 *The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. Position(s) Length Held of Time Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Fund Officers* Donald C. Burke Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof P.O. Box 9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services Princeton, and and since 1999; Vice President of FAMD since 1999; Director of MLIM Taxation NJ 08543-9011 Treasurer 1999 to since 1990. Age: 42 present Robert C. Doll, Jr. Senior 1999 to President and Global Chief Investment Officer of MLIM and member of the P.O. Box 9011 Vice present Executive Management Committee of ML & Co., Inc. since 2001; Chief Princeton, President Investment Officer, Senior Vice President and Co-Head of MLIM Americas NJ 08543-9011 from 1999 to 2001; Chief Investment Officer of Oppenheimer Funds, Inc. Age: 48 from 1987 to 1999 and Executive Vice President from 1991 to 1999. Jordan C. Schreiber Vice 1983 to Managing Director of MLIM since 2000 and Director (Equities) of MLIM P.O. Box 9011 President present from 1997 to 2000. Princeton, NJ 08543-9011 Age: 73 Phillip S. Gillespie Acting 2003 to First Vice President of MLIM since 2001; Director (Legal Advisory) of MLIM P.O. Box 9011 Secretary present from 2000 to 2001; Vice President of MLIM from 1999 to 2000 and Attorney Princeton, associated with MLIM since 1998; Assistant General Counsel of Chancellor NJ 08543-9011 LGT Asset Management, Inc. from 1997 to 1998. Age: 39 *Officers of the Fund serve at the pleasure of the Board of Directors.
Custodian J.P. Morgan Chase Bank Global Securities Services 4 Chase Metrotech Center, 18th Floor Brooklyn, NY 11245 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 800-637-3863 Further information about the Fund's Officers and Directors is available in the Fund's Statement of Additional Information, which can be obtained without charge by calling 1-800-MER-FUND. Item 2 - Did registrant adopt a code of ethics, as of the end of the period covered by this report, that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party? If not, why not? Briefly describe any amendments or waivers that occurred during the period. State here if code of ethics/amendments/waivers are on website and give website address-. State here if fund will send code of ethics to shareholders without charge upon request--N/A (not answered until July 15, 2003 and only annually for funds) Item 3 - Did the registrant's board of directors determine that the registrant either: (i) has at least one audit committee financial expert serving on its audit committee; or (ii) does not have an audit committee financial expert serving on its audit committee? If yes, disclose name of financial expert and whether he/she is "independent," (fund may, but is not required, to disclose name/independence of more than one financial expert) If no, explain why not. -N/A (not answered until July 15, 2003 and only annually for funds) Item 4 - Disclose annually only (not answered until December 15, 2003) (a) Audit Fees - Disclose aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. N/A. (b) Audit-Related Fees - Disclose aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (c) Tax Fees - Disclose aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (d) All Other Fees - Disclose aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A. (e)(2) Disclose the percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. N/A. (f) If greater than 50%, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. N/A. (g) Disclose the aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant. N/A. (h) Disclose whether the registrant's audit committee has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any subadviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. N/A. Item 5 - If the registrant is a listed issuer as defined in Rule 10A- 3 under the Exchange Act, state whether or not the registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. If the registrant has such a committee, however designated, identify each committee member. If the entire board of directors is acting as the registrant's audit committee in Section 3(a)(58)(B) of the Exchange Act, so state. If applicable, provide the disclosure required by Rule 10A-3(d) under the Exchange Act regarding an exemption from the listing standards for audit committees. (Listed issuers must be in compliance with the new listing rules by the earlier of their first annual shareholders meeting after January 2004, or October 31, 2004 (annual requirement)) Item 6 - Reserved Item 7 - For closed-end funds that contain voting securities in their portfolio, describe the policies and procedures that it uses to determine how to vote proxies relating to those portfolio securities. N/A (not answered until July 1, 2003) Item 8--Reserved Item 9(a) - The registrant's certifying officers have reasonably designed such disclosure controls and procedures to ensure material information relating to the registrant is made known to us by others particularly during the period in which this report is being prepared. The registrant's certifying officers have determined that the registrant's disclosure controls and procedures are effective based on our evaluation of these controls and procedures as of a date within 90 days prior to the filing date of this report. Item 9(b)--There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 10 - Exhibits 10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or amendments/waivers is on website or offered to shareholders upon request without charge. N/A. 10(b) - Attach certifications pursuant to Section 302 of the Sarbanes-Oxley Act. Attached hereto. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Merrill Lynch Healthcare Fund, Inc. By: _/s/ Terry K. Glenn_______ Terry K. Glenn, President of Merrill Lynch Healthcare Fund, Inc. Date: June 23, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: _/s/ Terry K. Glenn________ Terry K. Glenn, President of Merrill Lynch Healthcare Fund, Inc. Date: June 23, 2003 By: _/s/ Donald C. Burke________ Donald C. Burke, Chief Financial Officer of Merrill Lynch Healthcare Fund, Inc. Date: June 23, 2003 Attached hereto as an exhibit are the certifications pursuant to Section 906 of the Sarbanes-Oxley Act.