EX-17.D 8 efc1-0730_n30daprilex17d.txt Exhibit 17(d) (BULL LOGO) Semi-Annual Report February 28, 2001 Merrill Lynch Fundamental Growth 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 Fund unless accompanied or preceded by the Fund's current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. Merrill Lynch Fundamental Growth Fund, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. DEAR SHAREHOLDER Portfolio Matters For the six months ended February 28, 2001, Merrill Lynch Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class D Shares had total returns of -24.10%, -24.48%, -24.51% and -24.21%, respectively. (Investment results shown do not reflect sales charges and would be lower if sales charges were included. Complete performance information can be found on pages 3 and 4 of this report to shareholders.) Over the six-month period, the Fund declined less than the average return of comparable mutual funds as measured by the Lipper, Inc. Large Cap Growth Funds Average of -27.24%. Overall, the US equity markets have been in a declining value trend since the start of the six-month period ended February 28, 2001. The primary reason for the Fund's relative outperformance compared to other actively managed large cap growth funds is that we began to significantly reduce our exposure to technology stocks in late August 2000 and into September 2000. Prior to this, the percentage of the Fund's net assets invested in technology companies ranged from 40% to 50%. As of February 28, 2001, our exposure to companies in technology industries represented less than 3% of net assets. While moving away from technology companies, we shifted our focus to stocks of companies in the pharmaceutical, bank, insurance, beverage, media, food and drug retailing, multiline and specialty retail, and energy equipment and services industries. Our investments in the pharmaceutical, bank, insurance, food and drug retailing, beverage, and energy equipment and services areas contributed to the Fund's relative outperformance compared to other large cap growth funds. The Fund's five largest industries at February 28, 2001 were: pharmaceuticals, energy equipment and services, insurance, banks and media. Our ten largest equity holdings were: General Electric Company, Pfizer Inc., AOL Time Warner Inc., The Home Depot, Inc., Merck & Co., Inc., Wal-Mart Stores, Inc., American International Group, Inc., Enron Corp., Wells Fargo Company and PepsiCo, Inc. (For complete details, see page 19 of this report to shareholders.) Market Outlook The US Federal Reserve Board Open Market Committee finally took steps to ease monetary policy with two policy actions in January 2001. The Federal Reserve Board had started to tighten monetary policy in late June 1999. We believe that the duration and degree of the downturn in US stock prices over the past six months reflects this extended tightening bias and that the start of an easing program could be positive for the US stock market for the remainder of 2001. In addition, the new Administration in the White House is proposing reductions in personal income tax rates. If there is some front-end loading of these reductions, this policy change could mean a nearer-term positive uplift to rates of real growth and profitability for the US economy. Consequently, the fiscal and monetary policy environment could favorably support diversified US stock market investment returns in 2001. In Conclusion The six-month period ended February 28, 2001 was a challenging one, as the US stock markets were in a downtrend throughout the entire period. We believe the most optimistic factor in the outlook for the remainder of 2001 is the easing monetary policy by the Federal Reserve Board. Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 We thank you for your investment in Merrill Lynch Fundamental Growth Fund, Inc., and we look forward to sharing our outlook and strategies with you again in our annual report to shareholders. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Lawrence R. Fuller) Lawrence R. Fuller Senior Vice President and Portfolio Manager March 13, 2001 OFFICERS AND DIRECTORS Terry K. Glenn, President and Director Joe Grills, Director Walter Mintz, Director Robert S. Salomon Jr., Director Melvin R. Seiden, Director Stephen B. Swensrud, Director Robert C. Doll, Jr., Senior Vice President Lawrence R. Fuller, Senior Vice President and Portfolio Manager Donald C. Burke, Vice President and Treasurer Allan J. Oster, Secretary Arthur Zeikel, Director of Merrill Lynch Fundamental Growth Fund, Inc., has recently retired. The Fund's Board of Directors wishes Mr. Zeikel well in his retirement. Custodian The Chase Manhattan Bank Global Securities Services 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 Fundamental Growth Fund, Inc. February 28, 2001 PERFORMANCE DATA About Fund Performance Investors are able to purchase shares of the Fund through the Merrill Lynch Select Pricing SM System, which offers four pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution or account maintenance fees. Class A Shares are available only to eligible investors, as detailed in the Fund's prospectus. If you were a Class A shareholder prior to October 21, 1994, your Class A Shares were redesignated to Class D Shares on October 21, 1994. However, in the case of certain eligible investors, the shares were simultaneously exchanged for Class A Shares. * Class B Shares are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first year, decreasing 1% each year thereafter to 0% after the fourth year. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class D Shares after 8 years. (There is no initial sales charge for automatic share conversions.) If you were a Class B shareholder prior to October 21, 1994, your Class B Shares were redesignated to Class C Shares on October 21, 1994. * Class C Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. * Class D Shares incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). None of the past results shown should be considered a representation of future performance. Figures shown in the "Recent Performance Results" and "Average Annual Total Return" tables assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. Recent Performance Results
6 Month 12 Month Since Inception As of February 28, 2001 Total Return Total Return Total Return ML Fundamental Growth Fund, Inc. Class A Shares* -24.10% -20.90% +234.52% ML Fundamental Growth Fund, Inc. Class B Shares* -24.48 -21.69 +213.38 ML Fundamental Growth Fund, Inc. Class C Shares* -24.51 -21.74 +208.51 ML Fundamental Growth Fund, Inc. Class D Shares* -24.21 -21.12 +228.81 Standard & Poor's 500 Index** -17.84 - 8.20 +198.58/+231.95 *Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included. Total investment returns are based on changes in net asset values for the periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. The Fund's inception dates are from 10/21/94 for Class A & Class B Shares and from 12/24/92 for Class C & Class D Shares. **An unmanaged broad-based Index comprised of common stocks. Since inception total returns are from 10/21/94 and from 12/24/92, respectively.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 PERFORMANCE DATA (concluded) Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** Class A Shares* Year Ended 12/31/00 - 6.55% -11.45% Five Years Ended 12/31/00 +21.96 +20.65 Inception (10/21/94) through 12/31/00 +22.91 +21.85 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** Class B Shares* Year Ended 12/31/00 - 7.51% -10.92% Five Years Ended 12/31/00 +20.70 +20.70 Inception (10/21/94) through 12/31/00 +21.66 +21.66 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4 years. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Without CDSC With CDSC** Class C Shares* Year Ended 12/31/00 - 7.47% - 8.32% Five Years Ended 12/31/00 +20.70 +20.70 Inception (12/24/92) through 12/31/00 +16.13 +16.13 *Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge. % Return Without % Return With Sales Charge Sales Charge** Class D Shares* Year Ended 12/31/00 - 6.77% -11.67% Five Years Ended 12/31/00 +21.64 +20.34 Inception (12/24/92) through 12/31/00 +17.04 +16.25 *Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class D Shares (formerly Class A Shares) were offered at a higher than maximum sales charge. Thus, actual returns would have been somewhat lower than noted for the inception period.) **Assuming maximum sales charge. Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 SCHEDULE OF INVESTMENTS
Shares Percent of Industries Held Stocks Cost Value Net Assets Banks 735,000 BB&T Corporation $ 26,791,033 $ 26,555,550 0.5% 1,280,000 Northern Trust Corporation 104,192,053 90,960,000 1.5 750,000 PNC Bank Corp. 54,304,662 52,125,000 0.9 3,825,000 Wells Fargo Company 179,187,087 189,873,000 3.2 -------------- -------------- ------ 364,474,835 359,513,550 6.1 Beverages 2,900,000 The Coca-Cola Company 171,507,227 153,787,000 2.6 3,890,000 PepsiCo, Inc. 186,676,313 179,251,200 3.0 -------------- -------------- ------ 358,183,540 333,038,200 5.6 Biotechnology 1,750,000 ++Amgen Inc. 116,028,106 126,000,000 2.1 Computers & 420,800 ++Palm, Inc. 7,202,385 7,285,100 0.1 Peripherals Diversified 1,000,000 Countrywide Credit Industries, Inc. 47,297,469 44,230,000 0.8 Financials 720,000 State Street Corporation 78,853,112 72,324,000 1.2 1,524,700 T. Rowe Price Group Inc. 58,689,822 54,317,437 0.9 -------------- -------------- ------ 184,840,403 170,871,437 2.9 Diversified 4,120,000 ++Infonet Services Corporation (Class B) 51,258,962 21,712,400 0.4 Telecommunication Services Energy Equipment 2,800,000 Baker Hughes Incorporated 88,764,633 109,760,000 1.9 & Services 1,620,000 Diamond Offshore Drilling, Inc. 59,142,458 67,878,000 1.2 3,025,000 Halliburton Company 139,260,978 120,455,500 2.0 680,000 ++Noble Drilling Corporation 28,693,447 31,654,000 0.5 2,050,000 ++Rowan Companies, Inc. 61,762,800 58,527,500 1.0 1,340,000 Transocean Sedco Forex Inc. 62,810,081 64,494,200 1.1 2,415,000 ++Weatherford International, Inc. 117,788,091 125,652,450 2.1 -------------- -------------- ------ 558,222,488 578,421,650 9.8 Food & Drug 2,640,920 CVS Corporation 140,554,863 161,096,120 2.7 Retailing 2,135,000 Koninklijke Ahold NV 66,070,996 68,795,644 1.2 2,822,500 Walgreen Co. 107,145,430 125,093,200 2.1 -------------- -------------- ------ 313,771,289 354,984,964 6.0 Food Products 300,000 The Quaker Oats Company 28,921,741 29,256,000 0.5 Gas Utilities 2,105,000 El Paso Corporation 106,707,670 147,981,500 2.5 Hotels, 730,000 McDonald's Corporation 23,811,832 21,462,000 0.4 Restaurants & Leisure Household 1,526,850 Sony Corporation (ADR)(a) 160,603,502 109,185,044 1.8 Durables Household 750,000 Colgate-Palmolive Company 42,083,011 44,287,500 0.8 Products Industrial 6,256,300 General Electric Company 222,048,793 290,917,950 4.9 Conglomerates Insurance 835,000 AFLAC Incorporated 60,046,907 50,233,600 0.8 2,475,000 American International Group, Inc. 205,728,607 202,455,000 3.4 900,000 Everest Re Group, Ltd. 62,826,063 56,925,000 1.0 3,240,000 Lincoln National Corporation 160,801,957 142,138,800 2.4 13,700 ++Markel Corporation 2,409,632 2,462,575 0.0 477,000 Marsh & McLennan Companies, Inc. 62,698,323 51,039,000 0.9 -------------- -------------- ------ 554,511,489 505,253,975 8.5
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 SCHEDULE OF INVESTMENTS (continued)
Shares Percent of Industries Held Stocks Cost Value Net Assets Internet & Catalog 250,000 ++Amazon.com, Inc. $ 9,018,920 $ 2,531,250 0.0% Retail Internet 2,050,000 ++Commerce One, Inc. 122,694,634 35,746,875 0.6 Software & 3,485,000 ++Exodus Communications, Inc. 161,622,128 50,968,125 0.9 Services -------------- -------------- ------ 284,316,762 86,715,000 1.5 Media 5,500,000 ++AOL Time Warner Inc. 239,767,678 242,165,000 4.1 1,243,300 ++Clear Channel Communications, Inc. 60,277,213 71,054,595 1.2 1,660,300 ++Hispanic Broadcasting Corporation 47,463,966 37,356,750 0.6 350,000 The Interpublic Group of Companies, Inc. 8,415,569 13,160,000 0.2 1,237,100 ++Viacom, Inc. (Class B) 44,152,324 61,483,870 1.0 3,412,300 The Walt Disney Company 120,473,479 105,610,685 1.8 -------------- -------------- ------ 520,550,229 530,830,900 8.9 Multi-Utilities 2,834,100 Enron Corp. 140,170,237 194,135,850 3.3 Multiline Retail 1,100,000 ++Kohl's Corporation 74,052,106 72,501,000 1.2 4,265,000 Wal-Mart Stores, Inc. 212,079,983 213,633,850 3.6 -------------- -------------- ------ 286,132,089 286,134,850 4.8 Personal 725,000 The Estee Lauder Companies Inc. (Class A) 30,950,145 28,014,000 0.5 Products 800,000 The Gillette Company 28,748,469 26,008,000 0.4 -------------- -------------- ------ 59,698,614 54,022,000 0.9 Pharmaceuticals 1,100,000 Aventis SA 94,590,245 88,612,656 1.5 2,603,900 Bristol-Myers Squibb Company 189,605,092 165,113,299 2.8 1,350,000 Eli Lilly and Company 124,407,506 107,271,000 1.8 2,835,000 ++Immunex Corporation 92,775,777 92,137,500 1.6 2,745,000 Merck & Co., Inc. 207,463,759 220,149,000 3.7 6,075,200 Pfizer Inc. 228,818,117 273,384,000 4.6 2,500,100 Pharmacia Corporation 146,800,938 129,255,170 2.2 1,500,000 Sanofi-Synthelabo SA 97,273,391 80,832,840 1.4 -------------- -------------- ------ 1,181,734,825 1,156,755,465 19.6 Semiconductor 400,000 ++ASM Lithography Holding NV 9,012,793 8,721,486 0.2 Equipment & 467,000 ++Transmeta Corporation 13,930,788 9,515,125 0.1 Products 22,943,581 18,236,611 0.3 Software 1,290,000 ++Rational Software Corporation 56,009,770 45,069,375 0.8 Specialty Retail 5,635,600 The Home Depot, Inc. 237,507,150 239,513,000 4.0 Wireless 1,000,000 Vodafone Group PLC (ADR)(a) 36,451,121 27,310,000 0.5 Telecommunication Services Total Stocks 5,927,203,344 5,741,425,571 97.0
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 SCHEDULE OF INVESTMENTS (concluded)
Shares Percent of Industries Held Short-Term Securities Cost Value Net Assets Commercial $50,000,000 CBA (Delaware) Finance, 5.46% Paper* due 3/05/2001 $ 49,969,667 $ 49,969,667 0.8% 39,887,000 General Motors Acceptance Corp., 5.56% due 3/01/2001 39,887,000 39,887,000 0.7 50,000,000 Morgan (J.P.) & Company, 5.50% due 3/01/2001 50,000,000 50,000,000 0.8 45,000,000 Verizon Global Funding, 5.33% due 4/16/2001 44,693,525 44,693,525 0.8 Total Short-Term Securities 184,550,192 184,550,192 3.1 Total Investments $6,111,753,536 5,925,975,763 100.1 ============== Liabilities in Excess of Other Assets (4,889,345) (0.1) --------------- ------ Net Assets $ 5,921,086,418 100.0% =============== ====== ++Non-income producing security. *Commercial Paper is traded on a discount basis; the interest rates shown reflect the discount rates paid at the time of purchase by the Fund. (a)American Depositary Receipts (ADR). See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION Statement of Assets and Liabilities as of February 28, 2001 Assets: Investments, at value (identified cost--$6,111,753,536) $5,925,975,763 Cash 773,119 Foreign cash 1,279 Receivables: Securities sold $ 52,050,553 Capital shares sold 45,630,052 Dividends 3,567,786 101,248,391 ------------- Prepaid registration fees and other assets 219,065 -------------- Total assets 6,028,217,617 -------------- Liabilities: Payables: Securities purchased 86,823,876 Capital shares redeemed 11,823,493 Distributor 2,960,935 Investment adviser 2,596,036 104,204,340 -------------- Accrued expenses and other liabilities 2,926,859 -------------- Total liabilities 107,131,199 -------------- Net Assets: Net assets $5,921,086,418 ============== Net Assets Class A Shares of capital stock, $.10 par value, Consist of: 100,000,000 shares authorized $ 49,126,759 Class B Shares of capital stock, $.10 par value, 250,000,000 shares authorized 143,042,022 Class C Shares of capital stock, $.10 par value, 100,000,000 shares authorized 31,454,824 Class D Shares of capital stock, $.10 par value, 100,000,000 shares authorized 71,176,520 Paid-in capital in excess of par 5,745,093,666 Accumulated investment loss--net (1,736,840) Undistributed realized capital gains on investments and foreign currency transactions--net 68,707,240 Unrealized depreciation on investments--net (185,777,773) -------------- Net assets $5,921,086,418 ============== Net Asset Value: Class A--Based on net assets of $1,028,534,852 and 49,126,759 shares outstanding $ 20.94 ============== Class B--Based on net assets of $2,800,424,387 and 143,042,022 shares outstanding $ 19.58 ============== Class C--Based on net assets of $619,472,942 and 31,454,824 shares outstanding $ 19.69 ============== Class D--Based on net assets of $1,472,654,237 and 71,176,520 shares outstanding $ 20.69 ============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Statement of Operations for the Six Months Ended February 28, 2001 Investment Dividends (net of $257,720 foreign withholding tax) $ 20,713,186 Income: Interest and discount earned 19,673,898 -------------- Total income 40,387,084 -------------- Expenses: Investment advisory fees $ 18,001,215 Account maintenance and distribution fees--Class B 14,798,487 Account maintenance and distribution fees--Class C 2,957,010 Account maintenance fees--Class D 1,912,333 Transfer agent fees--Class B 1,817,312 Transfer agent fees--Class D 798,728 Transfer agent fees--Class A 453,157 Transfer agent fees--Class C 386,007 Accounting services 364,409 Registration fees 231,208 Custodian fees 125,628 Printing and shareholder reports 95,780 Professional fees 67,714 Directors' fees and expenses 45,440 Pricing fees 16,038 Other 53,458 -------------- Total expenses 42,123,924 -------------- Investment loss--net (1,736,840) -------------- Realized & Realized gain (loss)from: Unrealized Gain Investments--net 91,376,206 (Loss) on Foreign currency transactions--net (1,102,204) 90,274,002 Investments & -------------- Foreign Currency Change in unrealized appreciation/depreciation: Transactions-- Investments--net (1,788,982,857) Net: Foreign currency transactions--net 20,894 (1,788,961,963) -------------- ---------------- Net Decrease in Net Assets Resulting from Operations $(1,700,424,801) ================ See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the SixFor the Months EndedYear Ended Increase (Decrease) in Net Assets: Feb. 28, 2001 Aug. 31, 2000 Operations: Investment loss--net $ (1,736,840) $ (30,703,211) Realized gain on investments--net 90,274,002 453,467,841 Change in unrealized appreciation/depreciation on investments--net (1,788,961,963) 1,358,782,507 --------------- --------------- Net increase (decrease) in net assets resulting from operations (1,700,424,801) 1,781,547,137 --------------- --------------- Distributions to Realized gain on investments--net: Shareholders: Class A (61,586,116) (43,750,779) Class B (219,451,798) (170,903,218) Class C (44,434,619) (26,261,623) Class D (118,505,419) (79,730,301) --------------- --------------- Net decrease in net assets resulting from distributions to shareholders (443,977,952) (320,645,921) --------------- --------------- Capital Share Net increase in net assets derived from Transactions: capital share transactions 1,432,220,808 1,595,773,254 --------------- --------------- Net Assets: Total increase (decrease) in net assets (712,181,945) 3,056,674,470 Beginning of period 6,633,268,363 3,576,593,893 --------------- --------------- End of period $ 5,921,086,418 $6,633,268,363 =============== ============== *Accumulated investment loss--net $ (1,736,840) $ -- =============== ============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Financial Highlights
Class A For the Six Months The following per share data and ratios have been derived Ended from information provided in the financial statements. Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, Operating beginning of period $ 29.98 $ 21.99 $ 16.19 $ 17.37 $ 13.60 Performance: --------- --------- --------- --------- --------- Investment income--net++ .07 .02 .13 .07 .07 Realized and unrealized gain (loss) on investments and foreign currency transactions--net (7.15) 9.91 6.37 1.09 4.95 --------- --------- --------- --------- --------- Total from investment operations (7.08) 9.93 6.50 1.16 5.02 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net (1.96) (1.94) (.70) (2.34) (1.25) --------- --------- --------- --------- --------- Net asset value, end of period $ 20.94 $ 29.98 $ 21.99 $ 16.19 $ 17.37 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 24.10%+++ 47.01% 41.08% 6.37% 39.24% Return:** ========= ========= ========= ========= ========= Ratios to Average Expenses .75%* .76% .81% .87% .99% Net Assets: ========= ========= ========= ========= ========= Investment income--net .60%* .09% .60% .37% .47% ========= ========= ========= ========= ========= Supplemental Net assets, end of period Data: (in thousands) $1,028,535 $ 882,072 $ 472,464 $ 167,133 $ 62,049 ========= ========= ========= ========= ========= Portfolio turnover 58.06% 98.71% 52.72% 40.27% 94.38% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class B For the Six Months The following per share data and ratios have been derived Ended from information provided in the financial statements. Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 28.06 $ 20.75 $ 15.39 $ 16.69 $ 13.14 Operating --------- --------- --------- --------- --------- Performance: Investment loss--net++ (.05) (.23) (.08) (.11) (.09) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (6.69) 9.32 6.05 1.05 4.79 --------- --------- --------- --------- --------- Total from investment operations (6.74) 9.09 5.97 .94 4.70 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net (1.74) (1.78) (.61) (2.24) (1.15) --------- --------- --------- --------- --------- Net asset value, end of period $ 19.58 $ 28.06 $ 20.75 $ 15.39 $ 16.69 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 24.48%+++ 45.55% 39.58% 5.21% 37.95% Return:** ========= ========= ========= ========= ========= Ratios to Average Expenses 1.76%* 1.77% 1.83% 1.88% 2.02% Net Assets: ========= ========= ========= ========= ========= Investment loss--net (.40%)* (.92%) (.41%) (.64%) (.59%) ========= ========= ========= ========= ========= Supplemental Net assets, end of period Data: (in thousands) $2,800,424 $3,411,474 $2,000,535 $ 641,688 $ 216,636 ========= ========= ========= ========= ========= Portfolio turnover 58.06% 98.71% 52.72% 40.27% 94.38% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class C For the Six Months The following per share data and ratios have been derived Ended from information provided in the financial statements. Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 28.26 $ 20.88 $ 15.45 $ 16.72 $ 13.14 Operating --------- --------- --------- --------- --------- Performance: Investment loss--net++ (.05) (.24) (.09) (.11) (.09) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (6.74) 9.39 6.10 1.05 4.79 --------- --------- --------- --------- --------- Total from investment operations (6.79) 9.15 6.01 .94 4.70 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net (1.78) (1.77) (.58) (2.21) (1.12) --------- --------- --------- --------- --------- Net asset value, end of period $ 19.69 $ 28.26 $ 20.88 $ 15.45 $ 16.72 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 24.51%+++ 45.53% 39.65% 5.19% 37.90% Return:** ========= ========= ========= ========= ========= Ratios to Average Expenses 1.77%* 1.78% 1.83% 1.89% 2.02% Net Assets: ========= ========= ========= ========= ========= Investment loss--net (.41%)* (.93%) (.43%) (.63%) (.58%) ========= ========= ========= ========= ========= Supplemental Net assets, end of period Data: (in thousands) $ 619,473 $ 627,021 $ 307,988 $ 130,652 $ 74,732 ========= ========= ========= ========= ========= Portfolio turnover 58.06% 98.71% 52.72% 40.27% 94.38% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
Class D For the Six Months The following per share data and ratios have been derived Ended from information provided in the financial statements. Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2001 2000 1999 1998 1997 Per Share Net asset value, beginning of period $ 29.63 $ 21.77 $ 16.06 $ 17.27 $ 13.54 Operating --------- --------- --------- --------- --------- Performance: Investment income (loss)--net++ .04 (.04) .08 .02 .03 Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (7.07) 9.80 6.31 1.09 4.93 --------- --------- --------- --------- --------- Total from investment operations (7.03) 9.76 6.39 1.11 4.96 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net (1.91) (1.90) (.68) (2.32) (1.23) --------- --------- --------- --------- --------- Net asset value, end of period $ 20.69 $ 29.63 $ 21.77 $ 16.06 $ 17.27 ========= ========= ========= ========= ========= Total Investment Based on net asset value per share 24.21%+++ 46.67% 40.67% 6.08% 38.90% Return:** ========= ========= ========= ========= ========= Ratios to Average Expenses .99%* 1.01% 1.05% 1.11% 1.24% Net Assets: ========= ========= ========= ========= ========= Investment income (loss)--net .37%* (.17%) .36% .12% .17% ========= ========= ========= ========= ========= Supplemental Net assets, end of period Data: (in thousands) $1,472,654 $1,712,701 $ 795,607 $ 157,899 $ 53,101 ========= ========= ========= ========= ========= Portfolio turnover 58.06% 98.71% 52.72% 40.27% 94.38% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a 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. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal, recurring nature. The Fund offers four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities that are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Securities traded in the over-the- counter market are valued at the last available bid price prior to the time of valuation. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Board of Directors as the primary market. Securities 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 value quotations are not available are valued at their fair value as determined in good faith by or under the direction of the Fund's Board of Directors. (b) Derivative financial instruments--The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. 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 contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or for the intended purchase of securities. 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. * Options--The Fund is authorized to write and purchase 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 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. Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 NOTES TO FINANCIAL STATEMENTS (continued) (c) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends, and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). 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 exdividend date may have passed are subsequently recorded when the Fund has determined the exdividend date. Interest income is recognized on the accrual basis. The Fund will adopt the provisions to amortize all premiums and discounts on debt securities effective September 1, 2001, as now required under the new AICPA Audit and Accounting Guide for Investment Companies. The cumulative effect of this accounting change will have no impact on the total net assets of the Fund. The impact of this accounting change has not been determined, but will result in an adjustment to the cost of securities and a corresponding adjustment to net unrealized appreciation/depreciation, based on securities held as of August 31, 2001. (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) Security loans--The Fund receives compensation in the form of fees, or it retains a portion of the interest on the investment of any cash received as collateral. The Fund also continues to receive interest or dividends on the securities loaned. The loans are secured by collateral at least equal, at all times, to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. 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 the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at the annual rate of .65% of the average net assets of the Fund not exceeding $1 billion, .625% of average net assets of the Fund in excess of $1 billion but not exceeding $1.5 billion, .60% of net assets in excess of $1.5 billion but not exceeding $5 billion, .575% of net assets in excess of $5 billion but not exceeding $7.5 billion and .55% of net assets in excess of $7.5 billion. 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 B .25% .75% Class C .25% .75% Class D .25% -- Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 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 B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the six months ended February 28, 2001, FAMD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: FAMD MLPF&S Class A $ 1,057 $ 15,107 Class D $79,139 $1,189,409 For the six months ended February 28, 2001, MLPF&S received contingent deferred sales charges of $1,047,558 and $61,132 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $1,474 relating to transactions subject to front-end sales charge waivers in Class D Shares. In addition, MLPF&S received $855,409 in commissions on the execution of portfolio security transactions for the Fund for the six months ended February 28, 2001. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services were provided to the Fund by MLIM through December 31, 2000. Up to this date, the Fund reimbursed MLIM $226,724 for these services. As of January 1, 2001, accounting services are provided for the Fund by State Street Bank and Trust Company ("State Street") pursuant to an agreement between State Street and the Fund. The Fund will pay the cost of these services. In addition, the Fund will reimburse MLIM for the cost of certain additional accounting services. Certain officers and/or directors of the Fund are officers and/or directors of MLIM, FDS, PSI, FAMD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended February 28, 2001 were $4,962,711,385 and $3,142,146,378, respectively. Net realized gains (losses) for the six months ended February 28, 2001 and net unrealized losses as of February 28, 2001 were as follows: Realized Unrealized Gains (Losses) Losses Long-term investments $ 91,290,509 $(185,777,773) Short-term investments 85,697 -- Foreign currency transactions (1,102,204) -- ------------ ------------- Total $ 90,274,002 $(185,777,773) ============ ============= As of February 28, 2001, net unrealized depreciation for Federal income tax purposes aggregated $185,777,773, of which $474,201,810 related to appreciated securities and $659,979,583 related to depreciated securities. At February 28, 2001, the aggregate cost of investments for Federal income tax purposes was $6,111,753,536. 4. Capital Share Transactions: Net increase in net assets derived from capital share transactions was $1,432,220,808 and $1,595,773,254 for the six months ended February 28, 2001 and for the year ended August 31, 2000, respectively. Transactions in capital shares for each class were as follows: Class A Shares for the Six Months Ended Dollar February 28, 2001 Shares Amount Shares sold 21,233,214 $ 479,845,876 Shares issued to shareholders in reinvestment of distributions 2,082,703 47,006,601 -------------- ------------- Total issued 23,315,917 526,852,477 Shares redeemed (3,607,499) (85,952,634) -------------- ------------- Net increase 19,708,418 $ 440,899,843 ============== ============= Class A Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 13,954,826 $ 374,057,263 Shares issued to shareholders in reinvestment of distributions 1,247,247 30,869,352 -------------- ------------- Total issued 15,202,073 404,926,615 Shares redeemed (7,273,977) (192,459,722) -------------- ------------- Net increase 7,928,096 $ 212,466,893 ============== ============= Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 NOTES TO FINANCIAL STATEMENTS (concluded) Class B Shares for the Six Months Ended Dollar February 28, 2001 Shares Amount Shares sold 26,742,988 $ 601,089,032 Shares issued to shareholders in reinvestment of distributions 9,397,456 198,756,190 -------------- ------------- Total issued 36,140,444 799,845,222 Automatic conversion of shares (2,730,697) (62,737,297) Shares redeemed (11,927,486) (266,573,161) -------------- ------------- Net increase 21,482,261 $ 470,534,764 ============== ============= Class B Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 46,742,875 $1,183,282,271 Shares issued to shareholders in reinvestment of distributions 6,702,197 156,429,267 -------------- ------------- Total issued 53,445,072 1,339,711,538 Automatic conversion of shares (6,990,131) (171,422,234) Shares redeemed (21,307,246) (528,575,323) -------------- ------------- Net increase 25,147,695 $ 639,713,981 ============== ============= Class C Shares for the Six Months Ended Dollar February 28, 2001 Shares Amount Shares sold 9,584,056 $ 215,236,943 Shares issued to shareholders in reinvestment of distributions 1,883,024 40,070,750 -------------- ------------- Total issued 11,467,080 255,307,693 Shares redeemed (2,196,655) (48,997,468) -------------- ------------- Net increase 9,270,425 $ 206,310,225 ============== ============= Class C Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 9,791,460 $ 253,121,222 Shares issued to shareholders in reinvestment of distributions 1,005,364 23,636,119 -------------- ------------- Total issued 10,796,824 276,757,341 Shares redeemed (3,363,502) (83,902,865) -------------- ------------- Net increase 7,433,322 $ 192,854,476 ============== ============= Class D Shares for the Six Months Ended Dollar February 28, 2001 Shares Amount Shares sold 12,661,886 $ 303,412,504 Automatic conversion of shares 2,584,516 62,737,297 Shares issued to shareholders in reinvestment of distributions 4,891,364 109,175,246 -------------- ------------- Total issued 20,137,766 475,325,047 Shares redeemed (6,759,544) (160,849,071) -------------- ------------- Net increase 13,378,222 $ 314,475,976 ============== ============= Class D Shares for the Year Dollar Ended August 31, 2000 Shares Amount Shares sold 21,376,393 $ 562,677,915 Automatic conversion of shares 6,644,211 171,422,234 Shares issued to shareholders in reinvestment of distributions 2,964,749 72,666,009 -------------- ------------- Total issued 30,985,353 806,766,158 Shares redeemed (9,735,407) (256,028,254) -------------- ------------- Net increase 21,249,946 $ 550,737,904 ============== ============= 5. Short-Term Borrowings: On December 1, 2000, the Fund, along with certain other funds managed by MLIM and its affiliates, renewed and amended a $1,000,000,000 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 facility. Amounts borrowed under the facility 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. The Fund did not borrow under the facility during the six months ended February 28, 2001. 6. Security Loans: At February 28, 2001, the Fund held collateral having an aggregate value of approximately $24,987,000 for portfolio securities loaned having a market value of approximately $24,160,000. Merrill Lynch Fundamental Growth Fund, Inc. February 28, 2001 PORTFOLIO INFORMATION As of February 28, 2001 Percent of Ten Largest Holdings Net Assets General Electric Company 4.9% Pfizer Inc. 4.6 AOL Time Warner Inc. 4.1 The Home Depot, Inc. 4.0 Merck & Co., Inc. 3.7 Wal-Mart Stores, Inc. 3.6 American International Group, Inc. 3.4 Enron Corp. 3.3 Wells Fargo Company 3.2 PepsiCo, Inc. 3.0 Percent of Geographic Allocation Net Assets++ United States 90.4% France 2.9 Japan 1.8 Netherlands 1.4 United Kingdom 0.5 ++Total may not equal 100%. Percent of Ten Largest Industries Net Assets Pharmaceuticals 19.6% Energy Equipment & Services 9.8 Media 8.9 Insurance 8.5 Banks 6.1 Food & Drug Retailing 6.0 Beverages 5.6 Industrial Conglomerates 4.9 Multiline Retail 4.8 Specialty Retail 4.0