N-CSRS 1 ml7200.txt MERRILL LYNCH HEALTHCARE UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS 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: 04/30/05 Date of reporting period: 05/01/04 - 10/31/04 Item 1 - Report to Stockholders (BULL LOGO) Merrill Lynch Investment Managers www.mlim.ml.com Merrill Lynch Healthcare Fund, Inc. Semi-Annual Report October 31, 2004 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. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2) at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's Web site at http://www.sec.gov. Information about how the Fund voted proxies relating to securities held in the Fund's portfolio during the most recent 12-month period ended June 30 is available (1) at www.mutualfunds.ml.com; and (2) on the Securities and Exchange Commission's Web site at http://www.sec.gov. Merrill Lynch Healthcare Fund, Inc. Box 9011 Princeton, NJ 08543-9011 (GO PAPERLESS LOGO) It's Fast, Convenient, & Timely! To sign up today, go to www.icsdelivery.com/live. Merrill Lynch Healthcare Fund, Inc. Portfolio Information as of October 31, 2004 Percent of Ten Largest Equity Holdings Net Assets UnitedHealth Group Incorporated 5.8% Sanofi-Aventis 5.4 Novartis AG (Registered Shares) 4.9 Aetna Inc. (New Shares) 4.9 Amgen Inc. 4.9 Boston Scientific Corporation 4.9 Anthem, Inc. 4.9 Abbott Laboratories 4.4 Roche Holding AG 4.4 Caremark Rx, Inc. 4.1 Percent of Geographic Allocation Net Assets* United States 74.3% Switzerland 9.4 France 5.4 Belgium 3.1 Japan 3.1 Ireland 2.2 United Kingdom 1.1 India 0.9 Israel --** * Total may not equal 100%. ** Amount is less than 0.1%. MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 A Letter From the President Dear Shareholder As we ended the current reporting period, the financial markets were facing a number of uncertainties. At the top of investors' minds were questions about economic expansion, corporate earnings, interest rates and inflation, politics, oil prices and terrorism. After benefiting from aggressive monetary and fiscal policy stimulus, some fear the U.S. economy has hit a "soft patch." In fact, economic expansion has slowed somewhat in recent months, but we believe it is easing into a pace of growth that is sustainable and healthy. The favorable economic environment has served to benefit American corporations, which have continued to post strong earnings. Although the most impressive results were seen earlier in the year, solid productivity, improved revenue growth and cost discipline all point to a vital corporate sector. In terms of inflation and interest rates, the Federal Reserve Board (the Fed) has signaled its confidence in the economic recovery by increasing the Federal Funds target rate four times in the past several months, from 1% to 2% as of the November 10 Federal Open Market Committee meeting. Inflation, for its part, has remained in check. Investors and economists are focused on how quickly monetary policy will move from here, anxiously absorbing every bit of economic data and Fed innuendo. With the presidential election now behind us, any politically provoked market angst should subside to some extent. The effect of oil prices, however, is more difficult to predict. At around $50 per barrel, the price of oil is clearly a concern. However, on an inflation-adjusted basis and considering modern usage levels, the situation is far from the crisis proportions we saw in the 1980s. Finally, although terrorism and geopolitical tensions are realities we are forced to live with today, history has shown us that the financial effects of any single event tend to be short-lived. Amid the uncertainty, the Standard & Poor's 500 Index returned +9.42% for the 12-month period and +2.96% for the six-month period ended October 31, 2004. As always, our investment professionals are closely monitoring the markets, the economy and the overall environment in an effort to make well-informed decisions for the portfolios they manage. For the individual investor, the key during uncertain times is to remain focused on the big picture. While tracking current events is important, investment success comes not from reacting to short-term volatility, but from maintaining a long-term perspective and adhering to the disciplines of asset allocation, diversification and rebalancing. We encourage you to work with your financial advisor to ensure these time-tested techniques are incorporated into your investment plan. We thank you for trusting Merrill Lynch Investment Managers with your investment assets, and we look forward to serving you in the months and years ahead. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 A Discussion With Your Fund's Portfolio Manager We continued to balance the upside potential of the more aggressive biotechnology subsector with the downside support offered by the more defensive areas of healthcare, such as managed care (HMO) and selective pharmaceuticals. How did the Fund perform during the period in light of the existing market conditions? For the six-month period ended October 31, 2004, Merrill Lynch Healthcare Fund's Class A, Class B, Class C, Class I and Class R Shares had total returns of -6.68%, -6.98%, -7.19%, -6.63% and -6.69%, respectively. (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 6 and 7 of this report to shareholders.) For the same period, the Standard and Poor's 500 Index, which represents the broader stock market rather than healthcare stocks alone, returned +2.96%. The Fund's composite benchmark*, which is composed of four Morgan Stanley Capital International (MSCI) industries, returned -4.77% for the six months ended October 31, 2004. Fund returns were in line with the Lipper Health/Biotechnology Funds category, which measures the performance of mutual funds that focus their investment on companies engaged in healthcare and biotechnology. The Lipper Health/Biotechnology Funds category provided an average return of -6.77% for the six-month period. The past six months were highlighted by concerns about the sustainability of economic growth, possible deflation and the impact of soaring energy prices. While U.S. gross domestic product (GDP) grew at an annualized rate of 4.5% in the first quarter of 2004, the growth rate moderated to 3.3% in the second quarter, causing some to question the vigor of the economic recovery. A new concern arose in late summer as oil prices soared above $50 per barrel. This development, along with election uncertainties and continued upheaval in Iraq, led to high stock market volatility throughout the six-month period. * The Fund's composite benchmark includes the following four MSCI industries: health care equipment and supplies (15%), health care providers and services (25%), biotechnology (25%) and pharmaceuticals (35%). The healthcare sector was further influenced by industry-specific concerns, including clamor over the affordability of drug prices, especially volatile during an election year; patent expirations and legal challenges; intensified competition from generic drug manufacturers; and relatively unproductive research and development. As a result, the healthcare sector underperformed the broader stock market for the six-month period as investors flocked to cyclical industries that could benefit from a still-recovering economy. The Fund has endeavored to navigate through these problem areas by shifting its mix of healthcare subsector holdings. Pharmaceuticals were substantially underweighted, and biotechnology and HMOs (health maintenance organizations) were overweighted, throughout much of the period. We increased our holdings of European, Japanese and Indian drug companies, while U.S.-based pharmaceuticals were sold. What changes were made to the portfolio during the period? We continued to emphasize biotechnology in recognition of this subsector's potential for robust growth. We view biotechnology as a source of innovation and new drug discovery. We have emphasized companies focused on serious and presently incurable illnesses, especially cancer. We also stressed companies with products either on the market or in late clinical study. By the close of the period, the portfolio's weighting in biotechnology comprised 18.6% of net assets. At the same time, we sought to limit risk by investing in healthcare service companies, particularly HMOs. In our view, these companies provide predictability of earnings and should continue to generate double-digit earnings growth from increased premiums and vigorous cost control. We underweighted large-capitalization pharmaceutical companies, a defensive subgroup that is reasonably valued but has been a market laggard during the economic recovery. Pharmaceutical companies face important patent expirations, a thinning pipeline of new products and increasingly intense competition from generic drug companies. Later in the six-month period, we reduced our holdings of generic drug companies as savage price cuts impacted profitability. MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 How would you characterize the Fund's position at the close of the period? At October 31, 2004, the Fund's portfolio consisted of 59 holdings, compared to 70 at April 30, 2004. We favored small cap and large- capitalization holdings over mid cap positions at period-end, reflecting our increased focus on biotechnology, HMOs and pharmaceutical companies. At October 31, 2004, 25.7% of the Fund's net assets were invested abroad. This represents an increase from 23.8% six months earlier. Our two most significant foreign holdings were Novartis AG and Roche Holding AG. Both are Swiss-based, multinational pharmaceutical companies. Overall, we continue to pursue a growth-oriented investment strategy. At the same time, we are sensitive to risk and continue to seek diversification geographically and across all healthcare subsectors. We believe the longer-term outlook for the healthcare sector is optimistic, based on scientific discovery, new growth opportunities in emerging market countries and favorable demographics as populations age. Jordan C. Schreiber Vice President and Portfolio Manager November 3, 2004 MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Performance Data About Fund Performance Investors are able to purchase shares of the Fund through multiple pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 5.25% and an account maintenance fee of 0.25% per year (but no distribution fee). * 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% per year and an account maintenance fee of 0.25% per year. These shares automatically convert to Class A Shares after approximately eight years. (There is no initial sales charge for automatic share conversions.) All returns for periods greater than eight years reflect this conversion. * Class C Shares are subject to a distribution fee of 0.75% per year and an account maintenance fee of 0.25% per year. 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% per year and an account maintenance fee of 0.25% per year. Class R Shares are available only to certain retirement plans. None of the past results shown should be considered a representation of future performance. Current performance may be lower or higher than the performance data quoted. Refer to www.mlim.ml.com to obtain performance data current to the most recent month-end. 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 gain distributions, if any, 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. Recent Performance Results
10-Year/ 6-Month 12-Month Since Inception As of October 31, 2004 Total Return Total Return Total Return ML Healthcare Fund, Inc.--Class A Shares* -6.68% +2.13% +276.19% ML Healthcare Fund, Inc.--Class B Shares* -6.98 +1.63 +254.39 ML Healthcare Fund, Inc.--Class C Shares* -7.19 +1.40 +248.38 ML Healthcare Fund, Inc.--Class I Shares* -6.63 +2.46 +286.04 ML Healthcare Fund, Inc.--Class R Shares* -6.69 +2.05 + 15.95 S&P 500 R Index** +2.96 +9.42 +184.11/+28.41 * 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 10-year since inception periods are for 10 years for Class A, Class B, Class C and Class I Shares and from 1/03/03 for Class R Shares. ** This unmanaged index covers 500 industrial, utility, transportation and financial companies of the U.S. markets (mostly NYSE issues) representing about 75% of NYSE market capitalization and 30% of NYSE issues. Ten-year/since inception total returns are for 10 years and from 1/03/03, respectively. S&P 500 is a registered trademark of the McGraw-Hill companies.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Performance Data (concluded) Average Annual Total Return Return Without Return With Sales Charge Sales Charge** Class A Shares* One Year Ended 10/31/04 + 2.13% - 3.24% Five Years Ended 10/31/04 + 7.63 + 6.47 Ten Years Ended 10/31/04 +14.17 +13.55 * Maximum sales charge is 5.25%. ** Assuming maximum sales charge. Return Return Without CDSC With CDSC** Class B Shares* One Year Ended 10/31/04 + 1.63% - 2.27% Five Years Ended 10/31/04 + 6.85 + 6.54 Ten Years Ended 10/31/04 +13.49 +13.49 * 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 Without CDSC With CDSC** Class C Shares* One Year Ended 10/31/04 + 1.40% + 0.42% Five Years Ended 10/31/04 + 6.77 + 6.77 Ten Years Ended 10/31/04 +13.29 +13.29 * 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 Sales Charge Sales Charge** Class I Shares* One Year Ended 10/31/04 + 2.46% - 2.92% Five Years Ended 10/31/04 + 7.90 + 6.74 Ten Years Ended 10/31/04 +14.46 +13.85 * Maximum sales charge is 5.25%. ** Assuming maximum sales charge. Class R Shares Return One Year Ended 10/31/04 +2.05% Inception (1/03/03) through 10/31/04 +8.45 MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Disclosure of Expenses Shareholders of this Fund may incur the following charges: (a) expenses related to transactions, including sales charges, redemption fees and exchange fees; and (b) operating expenses including advisory fees, distribution fees including 12(b)-1 fees, and other Fund expenses. The following example (which is based on a hypothetical investment of $1,000 invested on May 1, 2004 and held through October 31, 2004) is intended to assist shareholders both in calculating expenses based on an investment in the Fund and in comparing these expenses with similar costs of investing in other mutual funds. The first table below provides information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 and then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Period." The second table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses. In order to assist shareholders in comparing the ongoing expenses of investing in this Fund and other funds, compare the 5% hypothetical example with the 5% hypothetical examples that appear in other funds' shareholder reports. The expenses shown in the table are intended to highlight shareholders' ongoing costs only and do not reflect any transactional expenses, such as sales charges, redemption fees, or exchange fees. Therefore, the second table is useful in comparing ongoing expenses only, and will not help shareholders determine the relative total expenses of owning different funds. If these transactional expenses were included, shareholder expenses would have been higher.
Expenses Paid Ending During the Period* Beginning Account Value May 1, 2004 to Account Value October 31, October 31, May 1, 2004 2004 2004 Actual Class A $1,000 $ 933.20 $ 7.64 Class B $1,000 $ 930.20 $11.39 Class C $1,000 $ 928.10 $11.42 Class I $1,000 $ 933.70 $ 6.43 Class R $1,000 $ 933.10 $ 8.84 Hypothetical (5% annual return before expenses)** Class A $1,000 $1,017.10 $ 7.97 Class B $1,000 $1,013.20 $11.88 Class C $1,000 $1,013.15 $11.93 Class I $1,000 $1,018.35 $ 6.71 Class R $1,000 $1,015.85 $ 9.22 * For each class of the Fund, expenses are equal to the annualized expense ratio for the class (1.58% for Class A, 2.36% for Class B, 2.37% for Class C, 1.33% for Class I and 1.83% for Class R), multiplied by the average account value over the period, multiplied by 182/364 (to reflect the one-half year period shown). ** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in the most recent fiscal half-year divided by 364.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Schedule of Investments
Value MIDDLE EAST Industry* Shares Held Common Stocks (in U.S. dollars) Israel--0.0% Pharmaceutical-- 12,500 ++Taro Pharmaceutical Industries Ltd. $ 320,000 Generic--0.0% Total Common Stocks in the Middle East--0.0% 320,000 NORTH AMERICA United States-- Biotechnology Discovery 100,000 ++Charles River Laboratories International, Inc. 4,679,000 74.3% Tools & Platform 141,000 ++Covance Inc. 5,600,520 Technology--3.7% 553,600 ++Exelixis, Inc. 4,927,040 781,100 ++Medarex, Inc. (d) 5,944,171 --------------- 21,150,731 Biotechnology 500,000 ++Amgen Inc. 28,400,000 Products--12.7% 60,000 ++AtheroGenics, Inc. 1,796,400 220,000 ++Biogen Idec Inc. 12,795,200 20,000 ++Cell Genesys, Inc. 131,200 260,000 ++Corgentech Inc. (d) 4,958,200 50,000 ++Dendreon Corporation 517,000 160,845 ++Dyax Corp. 923,250 100,000 ++Genentech, Inc. (d) 4,553,000 100,000 ++Genzyme Corporation 5,247,000 200,000 ++Gilead Sciences, Inc. 6,926,000 47,200 ++Incyte Genomics, Inc. 490,880 120,000 ++Isolagen Inc. (d) 817,200 100,000 ++Neurocrine Biosciences, Inc. (d) 4,655,000 49,700 ++Theravance, Inc. (d) 843,409 --------------- 73,053,739 Health Care 400,000 Manor Care, Inc. 13,096,000 Facilities--4.7% 423,400 ++Triad Hospitals, Inc. 13,984,902 --------------- 27,080,902 Health Care Information 485,400 ++Cerner Corporation (d) 21,915,810 & Technology--3.8% Managed Health 300,000 Aetna Inc. (New Shares) 28,500,000 Care--15.6% 350,000 ++Anthem, Inc. (d) 28,140,000 460,000 UnitedHealth Group Incorporated 33,304,000 --------------- 89,944,000 Medical Devices--14.3% 800,000 ++Boston Scientific Corporation 28,240,000 246,900 Cooper Companies, Inc. 17,369,415 100,000 Diagnostic Products Corporation 4,415,000 100,000 Guidant Corporation 6,662,000 120,000 ++Intuitive Surgical, Inc. 3,501,600 500,000 ++SonoSite, Inc. (d) 14,442,500 100,000 ++St. Jude Medical, Inc. 7,657,000 --------------- 82,287,515 Pharmaceutical-- 600,000 Abbott Laboratories 25,578,000 Diversified--4.4% Pharmaceutical-- 314,100 ++Bioenvision, Inc. 2,457,832 Prescription--1.9% 190,000 ++Pharmion Corp. 8,730,500 --------------- 11,188,332
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Schedule of Investments (continued)
NORTH AMERICA Value (concluded) Industry* Shares Held Common Stocks (in U.S. dollars) United States Pharmaceutical-- 200,000 ++Amylin Pharmaceuticals, Inc. $ 4,260,000 (concluded) Specialty--9.1% 400,000 ++Celgene Corporation 11,848,000 70,000 ++DOV Pharmaceutical, Inc. 1,153,600 233,891 ++La Jolla Pharmaceutical Company 264,297 340,000 ++MGI Pharma, Inc. (d) 9,067,800 2,600 ++Memory Pharmaceuticals Corp. 16,510 280,000 ++Nabi Biopharmaceuticals 3,878,000 200,000 ++Noven Pharmaceuticals, Inc. 4,510,000 200,000 ++OSI Pharmaceuticals, Inc. 12,996,000 100,000 ++Sepracor Inc. (d) 4,593,000 --------------- 52,587,207 Pharmacy Benefit 793,700 ++Caremark Rx, Inc. (d) 23,787,189 Managers--4.1% Total Common Stocks in North America--74.3% 428,573,425 PACIFIC BASIN/ASIA India--0.9% Pharmaceutical-- 322,847 Cadila Healthcare Limited 3,640,168 Generic--0.9% 100,000 Sun Pharmaceutical Industries Limited 973,217 51,316 Wockhardt Limited 372,950 --------------- 4,986,335 Pharmaceutical-- 10,129 Nicholas Piramal Ltd. 226,158 Specialty--0.0% Total Common Stocks in India 5,212,493 Japan--3.1% Pharmaceutical-- 365,700 Takeda Pharmaceutical Company Limited 17,632,395 Prescription--3.1% Total Common Stocks in Japan 17,632,395 Total Common Stocks in the Pacific Basin/Asia--4.0% 22,844,888 WESTERN EUROPE Belgium--3.1% Pharmaceutical-- 340,000 UCB SA 17,914,017 Prescription--3.1% Total Common Stocks in Belgium 17,914,017 France--5.4% Pharmaceuticals--5.4% 430,000 Sanofi-Aventis 31,342,025 Total Common Stocks in France 31,342,025 Ireland--2.2% Biotechnology 500,000 ++Elan Corporation PLC (ADR) (a) 12,900,000 Products--2.2% Total Common Stocks in Ireland 12,900,000 Switzerland--9.4% Pharmaceutical-- 600,000 Novartis AG (Registered Shares) 28,515,544 Prescription--9.4% 250,000 Roche Holding AG 25,469,225 Total Common Stocks in Switzerland 53,984,769 United Medical Devices--0.2% 140,000 Smith & Nephew PLC 1,186,415 Kingdom--1.1% Pharmaceutical-- 1,700,000 ++Ark Therapeutics Group PLC 2,772,271 Specialty--0.9% 2,500,000 ++SkyePharma PLC 2,439,250 --------------- 5,211,521 Total Common Stocks in the United Kingdom 6,397,936 Total Common Stocks in Western Europe--21.2% 122,538,747 Total Investments in Common Stocks (Cost--$503,615,669)--99.5% 574,277,060
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Schedule of Investments (concluded)
Value Beneficial Interest Short-Term Securities (in U.S. dollars) $ 2,369,488 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (b) $ 2,369,488 64,402,250 Merrill Lynch Liquidity Series, LLC Money Market Series (b)(c) 64,402,250 Total Investments in Short-Term Securities (Cost--$66,771,738)--11.6% 66,771,738 Total Investments (Cost--$570,387,407**)--111.1% 641,048,798 Liabilities in Excess of Other Assets--(11.1%) (64,051,463) --------------- Net Assets--100.0% $ 576,997,335 =============== * 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. ** The cost and unrealized appreciation/depreciation of investments as of October 31, 2004, as computed for federal income tax purposes, were as follows: Aggregate cost $ 571,000,277 ============== Gross unrealized appreciation $ 79,074,358 Gross unrealized depreciation (9,025,837) -------------- Net unrealized appreciation $ 70,048,521 ============== ++ Non-income producing security. (a) American Depositary Receipts (ADR). (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) were as follows: Interest/ Net Dividend Affiliate Activity Income Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $ (5,254,429) $136,984 Merrill Lynch Liquidity Series, LLC Money Market Series $(70,757,556) $146,092 Merrill Lynch Premier Institutional Fund (45,053,269) $ 7,494 (c) Security was purchased with the cash proceeds from securities loans. (d) Security, or a portion of security, is on loan. See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Statement of Assets and Liabilities
As of October 31, 2004 Assets Investments in unaffiliated securities, at value (including securities loaned of $62,760,018) (identified cost--$503,615,669) $ 574,277,060 Investments in affiliated securities, at value (identified cost--$66,771,738) 66,771,738 Cash 17,208 Foreign cash (cost--$24,743) 24,917 Receivables: Securities sold $ 4,045,290 Dividends 420,291 Capital shares sold 324,242 Securities lending--net 55,917 Interest from affiliates 15,891 4,861,631 --------------- Prepaid expenses 25,972 --------------- Total assets 645,978,526 --------------- Liabilities Collateral on securities loaned, at value 64,402,250 Payables: Capital shares redeemed 2,525,897 Securities purchased 880,772 Investment adviser 565,276 Other affiliates 226,426 Distributor 197,920 Deferred foreign capital gain tax 90,063 4,486,354 --------------- Accrued expenses 92,587 --------------- Total liabilities 68,981,191 --------------- Net Assets Net assets $ 576,997,335 =============== Net Assets Consist of Class A Shares of Common Stock, $.10 par value, 100,000,000 shares authorized $ 2,484,262 Class B Shares of Common Stock, $.10 par value, 250,000,000 shares authorized 3,099,218 Class C Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 1,639,553 Class I Shares of Common Stock, $.10 par value, 200,000,000 shares authorized 3,595,368 Class R Shares of Common Stock, $.10 par value, 250,000,000 shares authorized 22,107 Paid-in capital in excess of par 485,304,359 Accumulated investment loss--net $ (4,267,913) Undistributed realized capital gains--net 14,537,128 Unrealized appreciation--net 70,583,253 --------------- Total accumulated earnings--net 80,852,468 --------------- Net Assets $ 576,997,335 =============== Net Asset Value Class A--Based on net assets of $143,170,268 and 24,842,617 shares outstanding $ 5.76 =============== Class B--Based on net assets of $136,831,897 and 30,992,183 shares outstanding $ 4.42 =============== Class C--Based on net assets of $72,352,952 and 16,395,525 shares outstanding $ 4.41 =============== Class I--Based on net assets of $223,650,596 and 35,953,678 shares outstanding $ 6.22 =============== Class R--Based on net assets of $991,622 and 221,073 shares outstanding $ 4.49 =============== See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Statement of Operations
For the Six Months Ended October 31, 2004 Investment Income Dividends (net of $50,085 foreign withholding tax) $ 1,199,966 Securities lending--net 153,586 Interest from affiliates 136,984 --------------- Total income 1,490,536 --------------- Expenses Investment advisory fees $ 3,150,053 Account maintenance and distribution fees--Class B 769,645 Account maintenance and distribution fees--Class C 388,007 Transfer agent fees--Class I 263,496 Account maintenance fees--Class A 186,347 Transfer agent fees--Class B 184,692 Transfer agent fees--Class A 158,901 Accounting services 118,501 Transfer agent fees--Class C 98,250 Custodian fees 87,114 Professional fees 35,977 Printing and shareholder reports 33,736 Registration fees 33,202 Directors' fees and expenses 23,273 Pricing fees 4,697 Account maintenance and distribution fees--Class R 1,530 Transfer agent fees--Class R 864 Other 30,096 --------------- Total expenses 5,568,381 --------------- Investment loss--net (4,077,845) --------------- Realized & Unrealized Gain (Loss)--Net Realized gain (loss) on: Investments--net 15,298,224 Foreign currency transactions--net (148,149) 15,150,075 --------------- Change in unrealized appreciation/depreciation on: Investments--net (net of ($339,912) deferred foreign capital gain tax) (58,816,624) Foreign currency transactions--net 13,605 (58,803,019) --------------- --------------- Total realized and unrealized loss--net (43,652,944) --------------- Net Decrease in Net Assets Resulting from Operations $ (47,730,789) =============== See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Statements of Changes in Net Assets
For the Six For the Months Ended Year Ended October 31, April 30, Increase (Decrease) in Net Assets: 2004 2004 Operations Investment loss--net $ (4,077,845) $ (8,575,217) Realized gain--net 15,150,075 67,464,854 Change in unrealized appreciation/depreciation--net (58,803,019) 78,787,298 --------------- --------------- Net increase (decrease) in net assets resulting from operations (47,730,789) 137,676,935 --------------- --------------- Distributions to Shareholders Realized gain--net: Class A (4,773,467) -- Class B (6,401,036) -- Class C (3,215,543) -- Class I (7,461,502) -- Class R (23,242) -- --------------- --------------- Net decrease in net assets resulting from distributions to shareholders (21,874,790) -- --------------- --------------- Capital Share Transactions Net decrease in net assets derived from capital share transactions (53,587,988) (72,227,314) --------------- --------------- Net Assets Total increase (decrease) in net assets (123,193,567) 65,449,621 Beginning of period 700,190,902 634,741,281 --------------- --------------- End of period* $ 576,997,335 $ 700,190,902 =============== =============== * Accumulated investment loss--net $ (4,267,913) $ (190,068) =============== =============== See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Financial Highlights
Class A The following per share data and ratios have been derived For the Six from information provided in the financial statements. Months Ended October 31, For the Year Ended April 30, Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001 Per Share Operating Performance Net asset value, beginning of period $ 6.38 $ 5.21 $ 6.23 $ 6.29 $ 6.63 ------------ ---------- ---------- ---------- ---------- Investment loss--net** (.03) (.06) (.05) (.07) (.05) Realized and unrealized gain (loss)--net (.40) 1.23 (.97) .24 1.05 ------------ ---------- ---------- ---------- ---------- Total from investment operations (.43) 1.17 (1.02) .17 1.00 ------------ ---------- ---------- ---------- ---------- Less distributions from realized gain--net (.19) -- -- (.23) (1.34) ------------ ---------- ---------- ---------- ---------- Net asset value, end of period $ 5.76 $ 6.38 $ 5.21 $ 6.23 $ 6.29 ============ ========== ========== ========== ========== Total Investment Return* Based on net asset value per share (6.68%)++++ 22.46% (16.37%) 2.78% 14.21% ============ ========== ========== ========== ========== Ratios to Average Net Assets Expenses 1.58%++ 1.55% 1.58% 1.52% 1.50% ============ ========== ========== ========== ========== Investment loss--net (1.11%)++ (1.00%) (1.04%) (1.20%) (.80%) ============ ========== ========== ========== ========== Supplemental Data Net assets, end of period (in thousands) $ 143,170 $ 160,443 $ 119,375 $ 146,714 $ 107,642 ============ ========== ========== ========== ========== Portfolio turnover 68.02% 141.46% 128.24% 81.36% 65.42% ============ ========== ========== ========== ========== * Total investment returns exclude the effects of sales charges. ** Based on average shares outstanding. ++ Annualized. ++++ Aggregate total investment return. See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Financial Highlights (continued)
Class B The following per share data and ratios have been derived For the Six from information provided in the financial statements. Months Ended October 31, For the Year Ended April 30, Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001 Per Share Operating Performance Net asset value, beginning of period $ 4.96 $ 4.08 $ 4.91 $ 5.05 $ 5.55 ------------ ---------- ---------- ---------- ---------- Investment loss--net** (.04) (.08) (.08) (.10) (.09) Realized and unrealized gain (loss)--net (.31) .96 (.75) .19 .89 ------------ ---------- ---------- ---------- ---------- Total from investment operations (.35) .88 (.83) .09 .80 ------------ ---------- ---------- ---------- ---------- Less distributions from realized gain--net (.19) -- -- (.23) (1.30) ------------ ---------- ---------- ---------- ---------- Net asset value, end of period $ 4.42 $ 4.96 $ 4.08 $ 4.91 $ 5.05 ============ ========== ========== ========== ========== Total Investment Return* Based on net asset value per share (6.98%)++++ 21.57% (16.90%) 1.85% 13.28% ============ ========== ========== ========== ========== Ratios to Average Net Assets Expenses 2.36%++ 2.32% 2.36% 2.29% 2.26% ============ ========== ========== ========== ========== Investment loss--net (1.88%)++ (1.78%) (1.83%) (1.97%) (1.57%) ============ ========== ========== ========== ========== Supplemental Data Net assets, end of period (in thousands) $ 136,832 $ 177,952 $ 194,543 $ 310,916 $ 331,683 ============ ========== ========== ========== ========== Portfolio turnover 68.02% 141.46% 128.24% 81.36% 65.42% ============ ========== ========== ========== ========== * Total investment returns exclude the effects of sales charges. ** Based on average shares outstanding. ++ Annualized. ++++ Aggregate total investment return. See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Financial Highlights (continued)
Class C The following per share data and ratios have been derived For the Six from information provided in the financial statements. Months Ended October 31, For the Year Ended April 30, Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001 Per Share Operating Performance Net asset value, beginning of period $ 4.96 $ 4.07 $ 4.91 $ 5.05 $ 5.55 ------------ ---------- ---------- ---------- ---------- Investment loss--net** (.04) (.08) (.08) (.10) (.09) Realized and unrealized gain (loss)--net (.32) .97 (.76) .19 .90 ------------ ---------- ---------- ---------- ---------- Total from investment operations (.36) .89 (.84) .09 .81 ------------ ---------- ---------- ---------- ---------- Less distributions from realized gain--net (.19) -- -- (.23) (1.31) ------------ ---------- ---------- ---------- ---------- Net asset value, end of period $ 4.41 $ 4.96 $ 4.07 $ 4.91 $ 5.05 ============ ========== ========== ========== ========== Total Investment Return* Based on net asset value per share (7.19%)++++ 21.87% (17.11%) 1.85% 13.38% ============ ========== ========== ========== ========== Ratios to Average Net Assets Expenses 2.37%++ 2.33% 2.37% 2.30% 2.28% ============ ========== ========== ========== ========== Investment loss--net (1.90%)++ (1.79%) (1.84%) (1.99%) (1.58%) ============ ========== ========== ========== ========== Supplemental Data Net assets, end of period (in thousands) $ 72,353 $ 85,753 $ 76,606 $ 98,994 $ 66,028 ============ ========== ========== ========== ========== Portfolio turnover 68.02% 141.46% 128.24% 81.36% 65.42% ============ ========== ========== ========== ========== * Total investment returns exclude the effects of sales charges. ** Based on average shares outstanding. ++ Annualized. ++++ Aggregate total investment return. See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Financial Highlights (continued)
Class I The following per share data and ratios have been derived For the Six from information provided in the financial statements. Months Ended October 31, For the Year Ended April 30, Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001 Per Share Operating Performance Net asset value, beginning of period $ 6.87 $ 5.59 $ 6.66 $ 6.70 $ 6.98 ------------ ---------- ---------- ---------- ---------- Investment loss--net** (.03) (.05) (.04) (.06) (.04) Realized and unrealized gain (loss)--net (.43) 1.33 (1.03) .25 1.12 ------------ ---------- ---------- ---------- ---------- Total from investment operations (.46) 1.28 (1.07) .19 1.08 ------------ ---------- ---------- ---------- ---------- Less distributions from realized gain--net (.19) -- -- (.23) (1.36) ------------ ---------- ---------- ---------- ---------- Net asset value, end of period $ 6.22 $ 6.87 $ 5.59 $ 6.66 $ 6.70 ============ ========== ========== ========== ========== Total Investment Return* Based on net asset value per share (6.63%)++++ 22.90% (16.07%) 2.91% 14.57% ============ ========== ========== ========== ========== Ratios to Average Net Assets Expenses 1.33%++ 1.29% 1.33% 1.27% 1.24% ============ ========== ========== ========== ========== Investment loss--net (.86%)++ (.75%) (.79%) (.95%) (.55%) ============ ========== ========== ========== ========== Supplemental Data Net assets, end of period (in thousands) $ 223,651 $ 275,570 $ 244,217 $ 311,288 $ 288,091 ============ ========== ========== ========== ========== Portfolio turnover 68.02% 141.46% 128.24% 81.36% 65.42% ============ ========== ========== ========== ========== * Total investment returns exclude the effects of sales charges. ** Based on average shares outstanding. ++ Annualized. ++++ Aggregate total investment return. See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Financial Highlights (concluded)
Class R The following per share data and ratios have been derived For the Six For the For the Period from information provided in the financial statements. Months Ended Year Ended January 3, 2003++ October 31, April 30, to April 30, Increase (Decrease) in Net Asset Value: 2004 2004 2003 Per Share Operating Performance Net asset value, beginning of period $ 5.02 $ 4.09 $ 4.04 ------------- ------------ ------------ Investment loss--net*** (.03) (.02) (.01) Realized and unrealized gain (loss)--net (.31) .95 .06 ------------- ------------ ------------ Total from investment operations (.34) .93 .05 ------------- ------------ ------------ Less distributions from realized gain--net (.19) -- -- ------------- ------------ ------------ Net asset value, end of period $ 4.49 $ 5.02 $ 4.09 ============= ============ ============ Total Investment Return** Based on net asset value per share (6.69%)++++++ 22.74% 1.24%++++++ ============= ============ ============ Ratios to Average Net Assets Expenses 1.83%* 1.73% 1.84%* ============= ============ ============ Investment loss--net (1.36%)* (1.15%) (.36%)* ============= ============ ============ Supplemental Data Net assets, end of period (in thousands) $ 992 $ 473 --++++ ============= ============ ============ Portfolio turnover 68.02% 141.46% 128.24% ============= ============ ============ * Annualized. ** Total investment returns exclude the effects of sales charges. *** Based on average shares outstanding. ++ Commencement of operations. ++++ Amount is less than $1,000. ++++++ Aggregate total investment return. See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 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 amended, as a non- diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with U.S. generally accepted accounting principles, which may require the use of management accruals and estimates. Actual results may differ from these estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim period. All such adjustments are of a normal, recurring nature. The Fund offers multiple classes of shares. 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 (except that Class B shareholders may vote on material changes to the Class A distribution plan). 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--Equity securities that are held by the Fund that are traded on stock exchanges or the Nasdaq National Market are valued at the last sale price or official close price on the exchange, 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. In cases where equity securities are traded on more than one exchange, the securities are valued on the exchange designated as the primary market by or under the authority of the Board of Directors of the Fund. Long positions traded in the over- the-counter ("OTC") market, Nasdaq Small Cap or Bulletin Board are valued at the last available bid price or yield equivalent obtained from one or more dealers or pricing services approved by the Board of Directors of the Fund. Short positions traded in the OTC market are valued at the last available ask price. Portfolio securities that are traded both in the OTC 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 OTC market, the last ask price. Options purchased are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Swap agreements are valued daily based upon quotations from market makers. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges. Obligations with remaining maturities of 60 days or less are valued at amortized cost unless the Investment Adviser believes that this method no longer produces fair valuations. Repurchase agreements are valued at cost plus accrued interest. The Fund employs pricing services to provide certain securities prices for the Fund. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by the pricing services retained by the Fund, which may use a matrix system for valuations. The procedures of a pricing service and its valuations are reviewed by the officers of the Fund under the general supervision of the Fund's Board of Directors. Such valuations and procedures will be reviewed periodically by the Board of Directors of the Fund. Generally, trading in foreign securities, as well as U.S. government securities and money market instruments, is substantially completed each day at various times prior to the close of business on the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates also are generally determined prior to the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that may not be reflected in the computation of the Fund's net asset value. If events (for example, a company announcement, market volatility or a natural disaster) occur during such periods that are expected to materially affect the value of such securities, those securities may be valued at their fair 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 Fund's Board of Directors. MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Notes to Financial Statements (continued) (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 movements 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 purchase or sell financial futures contacts 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 may 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. * Options--The Fund may purchase and write call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked-to- market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. (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. MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Notes to Financial Statements (continued) (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. 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 in 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 Maintenance Distribution Fee Fee Class A .25% -- Class B .25% .75% Class C .25% .75% Class R .25% .25% MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Notes to Financial Statements (continued) 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 six months ended October 31, 2004, 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 $ 1,397 $ 17,945 Class I $ 45 $ 485 For the six months ended October 31, 2004, MLPF&S received contingent deferred sales charges of $108,372 and $3,704 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $192 relating to transactions subject to front-end sales charge waivers in Class A Shares. 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 October 31, 2004, the Fund lent securities with a value of $575,283 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 six months ended October 31, 2004, MLIM, LLC received $67,323 in securities lending agent fees. In addition, MLPF&S received $470,802 in commissions on the execution of portfolio security transactions for the Fund for the six months ended October 31, 2004. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. For the six months ended October 31, 2004, the Fund reimbursed MLIM $6,815 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 six months ended October 31, 2004 were $419,583,103 and $497,539,210, respectively. 4. Capital Share Transactions: Net decrease in net assets derived from capital share transactions was $53,587,988 and $72,227,314 for the six months ended October 31, 2004 and the year ended April 30, 2004, respectively. Transactions in capital shares for each class were as follows: Class A Shares for the Six Months Ended Dollar October 31, 2004 Shares Amount Shares sold 1,358,972 $ 8,003,395 Automatic conversion of shares 1,587,983 9,391,278 Shares issued to shareholders in reinvestment of distributions 732,404 4,130,756 -------------- --------------- Total issued 3,679,359 21,525,429 Shares redeemed (3,966,279) (23,194,905) -------------- --------------- Net decrease (286,920) $ (1,669,476) ============== =============== Class A Shares for the Year Dollar Ended April 30, 2004 Shares Amount Shares sold 3,548,971 $ 21,466,372 Automatic conversion of shares 4,753,957 29,349,565 -------------- --------------- Total issued 8,302,928 50,815,937 Shares redeemed (6,095,207) (36,859,042) -------------- --------------- Net increase 2,207,721 $ 13,956,895 ============== =============== MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Notes to Financial Statements (concluded) Class B Shares for the Six Months Ended Dollar October 31, 2004 Shares Amount Shares sold 1,168,136 $ 5,369,424 Shares issued to shareholders in reinvestment of distributions 1,306,275 5,656,169 -------------- --------------- Total issued 2,474,411 11,025,593 Shares redeemed (5,312,670) (23,791,195) Automatic conversion of shares (2,055,252) (9,391,278) -------------- --------------- Net decrease (4,893,511) $ (22,156,880) ============== =============== Class B Shares for the Year Dollar Ended April 30, 2004 Shares Amount Shares sold 4,858,391 $ 22,694,707 Shares redeemed (10,596,407) (49,517,621) Automatic conversion of shares (6,102,911) (29,349,565) -------------- --------------- Net decrease (11,840,927) $ (56,172,479) ============== =============== Class C Shares for the Six Months Ended Dollar October 31, 2004 Shares Amount Shares sold 795,298 $ 3,637,957 Shares issued to shareholders in reinvestment of distributions 660,128 2,858,354 -------------- --------------- Total issued 1,455,426 6,496,311 Shares redeemed (2,360,394) (10,579,946) -------------- --------------- Net decrease (904,968) $ (4,083,635) ============== =============== Class C Shares for the Year Dollar Ended April 30, 2004 Shares Amount Shares sold 3,027,451 $ 14,171,991 Shares redeemed (4,525,969) (21,296,318) -------------- --------------- Net decrease (1,498,518) $ (7,124,327) ============== =============== Class I Shares for the Six Months Ended Dollar October 31, 2004 Shares Amount Shares sold 1,301,507 $ 8,346,151 Shares issued to shareholders in reinvestment of distributions 1,133,116 6,889,342 -------------- --------------- Total issued 2,434,623 15,235,493 Shares redeemed (6,613,000) (41,483,433) -------------- --------------- Net decrease (4,178,377) $ (26,247,940) ============== =============== Class I Shares for the Year Dollar Ended April 30, 2004 Shares Amount Shares sold 5,776,882 $ 37,022,644 Shares redeemed (9,357,955) (60,361,693) -------------- --------------- Net decrease (3,581,073) $ (23,339,049) ============== =============== Class R Shares for the Six Months Ended Dollar October 31, 2004 Shares Amount Shares sold 139,687 $ 630,241 Shares issued to shareholders in reinvestment of dividends 5,294 23,242 -------------- --------------- Total issued 144,981 653,483 Shares redeemed (18,219) (83,540) -------------- --------------- Net increase 126,762 $ 569,943 ============== =============== Class R Shares for the Year Dollar Ended April 30, 2004 Shares Amount Shares sold 110,216 $ 532,188 Shares redeemed (15,930) (80,542) -------------- --------------- Net increase 94,286 $ 451,646 ============== =============== 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 a group of 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 defined in the credit agreement. The Fund did not borrow under the credit agreement during the six months ended October 31, 2004. On November 26, 2004, the credit agreement was renewed for one year under substantially the same terms. MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Officers and Directors Terry K. Glenn, President and Director Ronald W. Forbes, Director Cynthia A. Montgomery, Director Jean Margo Reid, Director Kevin A. Ryan, Director Roscoe S. Suddarth, Director Richard R. West, Director Edward D. Zinbarg, Director Robert C. Doll, Jr., Senior Vice President Jordan C. Schreiber, Vice President and Portfolio Manager Donald C. Burke, Vice President and Treasurer Jeffrey Hiller, Chief Compliance Officer Alice A. Pellegrino, Secretary 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 MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Availability of Quarterly Schedule of Investments The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Electronic Delivery The Fund offers electronic delivery of communications to its shareholders. In order to receive this service, you must register your account and provide us with e-mail information. To sign up for this service, simply access this Web site http://www.icsdelivery.com/live and follow the instructions. When you visit this site, you will obtain a personal identification number (PIN). You will need this PIN should you wish to update your e-mail address, choose to discontinue this service and/or make any other changes to the service. This service is not available for certain retirement accounts at this time. MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004 Item 2 - Code of Ethics - Not Applicable to this semi-annual report Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual report Item 4 - Principal Accountant Fees and Services - Not Applicable to this semi-annual report Item 5 - Audit Committee of Listed Registrants - Not Applicable Item 6 - Schedule of Investments - Not Applicable Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies - Not Applicable Item 8 - Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers - Not Applicable Item 9 - Submission of Matters to a Vote of Security Holders - Not Applicable Item 10 - Controls and Procedures 10(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. 10(b) - There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 11 - Exhibits attached hereto 11(a)(1) - Code of Ethics - Not Applicable to this semi-annual report 11(a)(2) - Certifications - Attached hereto 11(a)(3) - Not Applicable 11(b) - Certifications - 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: December 13, 2004 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: December 13, 2004 By: _/s/ Donald C. Burke________ Donald C. Burke, Chief Financial Officer of Merrill Lynch Healthcare Fund, Inc. Date: December 13, 2004