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 811-6669
Name of Fund: Merrill Lynch Fundamental Growth 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 Fundamental Growth 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: 08/31/04
Date of reporting period: 09/01/03 - 02/29/04
Item 1 - Report to Stockholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
Merrill Lynch
Fundamental Growth
Fund, Inc.
Semi-Annual Report
February 29, 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) on www.mutualfunds.ml.com; and
(3) on the Securities and Exchange Commission's website at
http://www.sec.gov.
Merrill Lynch Fundamental Growth Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
A Letter From the President
Dear Shareholder
As I write to you at February month-end, the equity markets
maintained their positive momentum from year-end 2003. For the
six-month and 12-month periods ended February 29, 2004, the
Standard & Poor's (S&P) 500 Index returned +14.59% and +38.52%,
respectively. Much of the boost came from improving economic
conditions in the United States.
As we enter 2004, the major signposts indicate that we are seeing a
shift from economic growth fueled primarily by fiscal and monetary
stimulus to a broader-based, self-sustaining economic expansion.
U.S. gross domestic product growth, which peaked at an annualized
rate of 8.2% in the third quarter of 2003, was 4.1% in the fourth
quarter. A similar level of growth is expected in the first quarter
of 2004. For its part, the Federal Reserve Board has reiterated its
willingness to keep short-term interest rates at current low levels
to ensure the economy's strength.
Accompanying the increase in economic activity was an improvement in
corporate earnings. By February 10, 2004, 392 of the S&P 500
companies had reported their fourth-quarter 2003 results, and 67.6%
of those exceeded expectations. In the meantime, the American
consumer, who continued to spend despite the faltering economy, may
get further incentive from another round of Federal tax refunds this
year.
At Merrill Lynch Investment Managers, we believe the events and
efforts of 2003 leave us with a much stronger economy and that
recent optimism suggests it is time for investors to consider what
can go right in 2004. We encourage you to revisit your portfolio and
your asset allocation strategy to ensure you are well positioned to
take advantage of the opportuities that lie ahead.
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 FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
We are pleased to present to you the management team of
Merrill Lynch Fundamental Growth Fund, Inc.
Senior Portfolio Manager Larry Fuller joined Merrill Lynch
Investment Managers in 1992 and heads the Merrill Lynch Fundamental
Growth Fund team. He received a bachelor's degree from Bates College
and an MBA from Columbia University. His professional affiliations
include the New York Society of Security Analysts and the American
Finance Association. In addition to Mr. Fuller, the team includes
Associate Portfolio Manager Tom Burke and Analysts Karen Uzzolino
and Mike Oberdorf. Mr. Burke received a bachelor's degree from Pace
University and is a CFA R charterholder. He is also a member of the
New York Society of Security Analysts and the Association For
Investment Management and Research. Ms. Uzzolino graduated from the
Stuart School of Business Administration. Mr. Oberdorf holds a
bachelor's degree from Georgetown University. The team has a
combined 68 years of investment experience.
Larry Fuller
Senior Portfolio Manager
Table of Contents
A Letter From the President 2
A Discussion With Your Fund's Portfolio Manager 4
Performance Data 6
Portfolio Information 9
Schedule of Investments 10
Financial Statements 13
Financial Highlights 16
Notes to Financial Statements 21
Officers and Directors 26
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
A Discussion With Your Fund's Portfolio Manager
The Fund provided positive results for the six-month period and
outperformed the average return of its comparable Lipper category of
Large Cap Growth Funds.
How did the Fund perform during the period in light of the existing
market conditions?
For the six-month period ended February 29, 2004, Merrill Lynch
Fundamental Growth Fund, Inc.'s Class A, Class B, Class C, Class I
and Class R Shares had total returns of +11.28%, +10.86%, +10.87%,
+11.41% and +11.11%, 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 - 8 of this report to shareholders.) For the same period, the
unmanaged Standard & Poor's 500 (S&P 500) Index and the S&P
500/Barra Growth Index had respective returns of +14.59% and
+12.25%. The average total return for actively managed large cap
growth funds, as represented by the Lipper Large Cap Growth Funds
category, was +9.97% for the same six-month period. (Funds in
this Lipper category invest primarily in the stocks of large-
capitalization companies whose long-term earnings are expected to
grow significantly faster than the earnings of the stocks
represented in a major unmanaged stock index.)
The Fund focuses its investments on what we believe to be the
highest-quality and largest-capitalization growth stocks in our
benchmark index. As a group, these companies continued to provide
lower total returns than lower-quality, smaller-capitalization
growth stocks in the S&P 500/Barra Growth Index. This fact
contributed to the shortfall in the Fund's total return relative to
the S&P 500/Barra Growth Index over the past six months.
Specific stocks that had a negative absolute and relative impact on
the Fund's performance were General Dynamics Corporation and
Rockwell Automation, Inc. We eliminated our position in General
Dynamics, but maintained Rockwell in the portfolio in anticipation
of better earnings results and a rising stock price. Rockwell's
business outlook improved as capital investment continued to gain a
stronger foothold in America.
A number of stocks in the consumer discretionary sector hindered
Fund results. These included InterActiveCorp, Krispy Kreme
Doughnuts, Inc., Lowe's Companies, Inc., Bed Bath & Beyond Inc.,
Best Buy Co., Inc., Fox Entertainment Group, Inc., AutoZone, Inc.,
Rent A Center Inc. and Brinker International, Inc. We sold our
holdings in Brinker, AutoZone Inc., Fox Entertainment and Bed Bath &
Beyond with capital gains. We chose to liquidate these positions
based on each company's deteriorating business fundamentals.
The most positive absolute and relative investment returns came
from our investments in the health care, energy and information
technology sectors. In the health care sector, Forest Laboratories,
Inc., Varian Medical Systems, Inc., Boston Scientific Corporation,
WellPoint Health Networks Inc., Alcon Inc., UnitedHealth Group
Incorporated, Amgen Inc. and Genentech Inc. were the major positive
contributors to Fund performance. We sold WellPoint, UnitedHealth
Group and Genentech out of the portfolio at a profit.
In the energy sector, oil service companies Schlumberger Ltd.,
Apache Corporation and BJ Services Company made significant
contributions to performance. Declining reserves and high demand
for oil benefited the energy service sector.
The information technology (IT) sector benefited from increased
spending and outsourcing of corporate IT. In this area, Nortel
Networks Corporation, Infosys Technologies Ltd., Nokia Corp., SAP AG
and Hewitt Associates, Inc. provided a positive boost to Fund
results. We sold our position in Infosys Technologies based on its
strong performance and relatively high stock valuation.
What changes were made to the portfolio during the period?
We made no major changes in the sector weightings or the investment
strategy of the Fund. In the health care sector, we continued to
avoid the large-capitalization pharmaceutical companies based on our
belief that the Federal legislation on Medicare reform and drug
benefits will not support the profits of these companies. We also
remain concerned about a continued erosion of pricing power as
Federal and state regulators continue to reduce the cost of
pharmaceuticals in an effort to manage the overall cost of
national health care. In addition, we are not impressed with the
pipeline of new drugs.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
We were underweight in the financial and consumer staples sectors,
as we see better growth opportunities in other areas of the
marketplace. These include the consumer discretionary and IT
sectors. Our overweight in consumer discretionary arises from our
belief that tax relief should encourage consumer spending, and that
the sector will be further supported by continued low interest rates
and an improving economy. The Fund also has a large position, fairly
consistent with the benchmark weighting, in the IT sector.
How would you characterize the portfolio's position at the close of
the period?
We expect to see a shift in U.S. economic growth propelled by
consumer spending in the first half of 2004 to economic growth
fueled by increased capital spending later in the year. Many
forecasters have articulated a negative outlook on consumer
spending, citing a decline in retailing stock prices in
December 2003 and January 2004. However, reports in February and
March 2004 have shown a substantial rise in real and nominal
consumer spending. We believe this was prompted by the start of the
Federal disbursement of tax rebate checks for the over-withholding
of 2003 individual income taxes (that is, taxes paid prior to the
passage of the Federal tax cut).
Orders for capital goods have grown in recent months, partly
because of the accelerated depreciation incentive passed by Federal
legislators in 2003. This could result in improved employment in the
manufacturing sector and higher profits for information technology
and industrial goods companies in 2004. For 2003, even before the
reporting of fourth-quarter results, taxable corporate profits, cash
flow and reported profits - as measured by the U.S. Department of
Commerce - were at absolute record levels. In addition, interest
rates remain at historic lows. Still, stock market levels have not
come close to their most recent historic highs.
Against this backdrop, we have positioned the Fund to take advantage
of the profit opportunities that may arise from a continued real
economic expansion, with the majority of the growth generated from
capital investment rather than from consumer spending on durable
goods. A continuation of above-average real economic growth could
result in moderately rising inflation and somewhat higher interest
rates.
Lawrence R. Fuller
Vice President and Portfolio Manager
March 10, 2004
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Performance Data
About Fund Performance
Effective April 14, 2003, Class A Shares were redesignated Class I
Shares and Class D Shares were redesignated Class A Shares.
Investors are able to purchase shares of the Fund through multiple
pricing alternatives:
* Class A Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% declining to 0% after six years. All Class B Shares
purchased prior to June 1, 2001 will maintain the four-year
schedule. In addition, Class B Shares are subject to a distribution
fee of 0.75% and an account maintenance fee of 0.25%. These shares
automatically convert to Class A Shares after approximately eight
years. (There is no initial sales charge for automatic share
conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class I Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class I Shares are available only to eligible
investors, as detailed in the Fund's prospectus.
* Class R Shares do not incur a maximum sales charge (front-end
load) or deferred sales charge. These shares are subject to a
distribution fee of 0.25% and an account maintenance fee of 0.25%.
Class R Shares are available only to certain retirement plans.
None of the past results shown should be considered a representation
of future performance. Current performance may be lower or higher
than the performance data quoted. Refer to www.mlim.ml.com to obtain
more current performance information. 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.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Performance Data (continued)
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception
As of February 29, 2004 Total Return Total Return Total Return
ML Fundamental Growth Fund, Inc. Class A Shares* +11.28% +35.16% +156.16%
ML Fundamental Growth Fund, Inc. Class B Shares* +10.86 +34.06 +145.04
ML Fundamental Growth Fund, Inc. Class C Shares* +10.87 +34.15 +136.79
ML Fundamental Growth Fund, Inc. Class I Shares* +11.41 +35.45 +169.82
ML Fundamental Growth Fund, Inc. Class R Shares* +11.11 +35.37 + 27.78
Standard & Poor's 500 Index** +14.59 +38.52 +193.18/+189.36/+28.65
Standard & Poor's 500/Barra Growth Index*** +12.25 +32.41 +193.05/+184.45/+24.54
*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 dates are 10 years for Class A &
Class C Shares, from 10/21/94 for Class B & Class I Shares, and from
1/03/03 for Class R Shares.
**This unmanaged Index covers 500 industrial, utility, transporta-
tion and financial companies of the U.S. markets (mostly NYSE
issues) representing about 75% of NYSE market capitalization and 30%
of NYSE issues. Since inception total returns are for 10 years, from
10/21/94 and from 1/03/03, respectively.
***This unmanaged Index is a capitalization-weighted index of all
the stocks in the Standard & Poor's 500 Index that have higher price-
to-book ratios. Since inception total returns are for 10 years, from
10/21/94 and from 1/03/03, respectively.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 2/29/04 +35.16% +28.06%
Five Years Ended 2/29/04 - 1.94 - 3.00
Ten Years Ended 2/29/04 + 9.86 + 9.27
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Return Without Return With
Sales Charge Sales Charge**
Class B Shares*
One Year Ended 2/29/04 +34.06% +30.06%
Five Years Ended 2/29/04 - 2.71 - 3.05
Inception (10/21/94)
through 2/29/04 +10.05 +10.05
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after six years.
**Assuming payment of applicable contingent deferred sales charge.
Return Without Return With
Sales Charge Sales Charge**
Class C Shares*
One Year Ended 2/29/04 +34.15% +33.15%
Five Years Ended 2/29/04 - 2.72 - 2.72
Ten Years Ended 2/29/04 + 9.00 + 9.00
*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 2/29/04 +35.45% +28.33%
Five Years Ended 2/29/04 - 1.70 - 2.75
Inception (10/21/94)
through 2/29/04 +11.19 +10.55
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Return Without
Sales Charge
Class R Shares
One Year Ended 2/29/04 +35.37%
Inception (1/03/03) through 2/29/04 +23.68
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Portfolio Information
As of February 29, 2004
Percent of
Ten Largest Holdings Net Assets
General Electric Company 5.8%
Intel Corporation 4.8
Cisco Systems, Inc. 4.4
3M Co. 3.6
Lowe's Companies, Inc. 2.8
Forest Laboratories, Inc. 2.5
Schlumberger Limited 2.4
Boston Scientific Corporation 2.3
Medtronic, Inc. 2.2
Texas Instruments Incorporated 2.1
Percent of
Geographic Allocation Net Assets++
United States 88.5%
Switzerland 2.0
Germany 1.3
Finland 1.2
Canada 1.1
Japan 0.9
++Total may not equal 100%.
Percent of
Five Largest Industries* Net Assets
Specialty Retail 9.9%
Industrial Conglomerates 9.4
Semiconductors & Semiconductor Equipment 9.2
Health Care Equipment & Supplies 8.0
Communications Equipment 7.8
*For Fund compliance purposes, "Industries" 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 industry sub-
classifications for reporting ease.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Schedule of Investments
Percent of
Industry* Shares Held Common Stocks Value Net Assets
Biotechnology 1,097,700 ++Biogen Idec Inc. $ 60,867,465 1.1%
1,450,900 ++Gilead Sciences, Inc. 78,653,289 1.3
---------------- ------
139,520,754 2.4
Chemicals 1,152,000 Air Products and Chemicals, Inc. 55,572,480 1.0
2,185,100 Ecolab Inc. 59,675,081 1.1
1,533,200 Praxair, Inc. 55,685,824 0.9
---------------- ------
170,933,385 3.0
Commercial Services 905,200 ++Apollo Group, Inc. (Class A) 68,930,980 1.2
& Supplies
Communications 10,836,008 ++Cisco Systems, Inc. 250,311,785 4.4
Equipment 17,268,200 ++Lucent Technologies Inc. 72,353,758 1.2
3,198,900 Nokia Oyj 'A' (ADR) (a) 69,640,053 1.2
7,612,500 ++Nortel Networks Corporation 60,747,750 1.0
---------------- ------
453,053,346 7.8
Computers & Peripherals 6,369,300 ++EMC Corporation 91,208,376 1.6
4,527,900 Hewlett-Packard Company 102,828,609 1.7
1,699,200 ++SanDisk Corporation 43,091,712 0.8
---------------- ------
237,128,697 4.1
Consumer Finance 1,852,500 American Express Company 98,960,550 1.7
Diversified Financial 1,215,400 Citigroup Inc. 61,086,004 1.1
Services
Electrical Equipment 2,108,800 Rockwell Automation, Inc. 64,234,048 1.1
Electronic 1,703,500 ++Agilent Technologies, Inc. 58,242,665 1.1
Equipment 1,893,500 Tektronix, Inc. 60,686,675 1.0
& Instruments ---------------- ------
118,929,340 2.1
Energy Equipment 1,670,200 Baker Hughes Incorporated 62,832,924 1.1
& Service 2,204,100 Schlumberger Limited 142,142,409 2.4
---------------- ------
204,975,333 3.5
Food & Staples 1,446,600 SUPERVALU Inc. 40,938,780 0.8
Retailing 1,862,800 SYSCO Corporation 73,860,020 1.2
---------------- ------
114,798,800 2.0
Health Care 1,827,200 Alcon, Inc. 114,857,792 2.0
Equipment 3,318,400 ++Boston Scientific Corporation 135,556,640 2.3
& Supplies 1,125,800 DENTSPLY International Inc. 49,321,298 0.8
2,641,800 Medtronic, Inc. 123,900,420 2.2
487,700 ++Varian Medical Systems, Inc. 40,839,998 0.7
---------------- ------
464,476,148 8.0
Hotels, Restaurants 1,212,000 ++Krispy Kreme Doughnuts, Inc. 46,613,520 0.8
& Leisure 2,473,700 ++Starbucks Corporation 92,541,117 1.6
---------------- ------
139,154,637 2.4
IT Services 2,152,600 First Data Corporation 88,213,548 1.5
611,700 ++Hewitt Associates, Inc. (Class A) 19,910,835 0.3
2,017,300 Paychex, Inc. 64,896,541 1.2
---------------- ------
173,020,924 3.0
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Schedule of Investments (continued)
Percent of
Industry* Shares Held Common Stocks Value Net Assets
Industrial Conglomerates 2,667,200 3M Co. $ 208,094,944 3.6%
10,254,300 General Electric Company 333,469,836 5.8
---------------- ------
541,564,780 9.4
Internet & Catalog 1,742,000 ++eBay Inc. 119,954,120 2.1
Retail 1,982,700 ++InterActiveCorp 64,576,539 1.1
---------------- ------
184,530,659 3.2
Internet Software 1,508,300 ++Yahoo! Inc. 66,968,520 1.2
& Services
Metals & Mining 1,416,500 Freeport-McMoRan Copper & Gold, Inc. (Class B) 60,413,725 1.0
400,300 ++Phelps Dodge Corporation 34,529,878 0.6
---------------- ------
94,943,603 1.6
Office Electronics 1,056,000 Canon, Inc. 51,514,552 0.9
Oil & Gas 1,725,300 Apache Corporation 71,030,601 1.2
1,343,700 Devon Energy Corporation 76,295,286 1.3
1,898,700 ++TransMontaigne Inc. 12,721,290 0.3
---------------- ------
160,047,177 2.8
Pharmaceuticals 1,943,400 ++Forest Laboratories, Inc. 146,687,832 2.5
Semiconductors 3,096,200 ++Altera Corporation 68,364,096 1.2
& Semiconductor 1,224,100 Analog Devices, Inc. 61,082,590 1.1
Equipment 9,508,260 Intel Corporation 277,926,440 4.8
3,970,600 Texas Instruments Incorporated 121,698,890 2.1
---------------- ------
529,072,016 9.2
Software 2,606,700 ++Citrix Systems, Inc. 55,209,906 1.0
1,944,300 ++Electronic Arts Inc. 91,693,188 1.6
1,222,500 ++Mercury Interactive Corporation 59,340,150 1.0
8,668,500 ++Oracle Corporation 111,650,280 2.0
1,841,900 SAP AG (Systeme, Anwendungen, Produkte in der
Datenverarbeitung) (ADR) (a) 72,939,240 1.2
---------------- ------
390,832,764 6.8
Specialty Retail 1,822,500 Best Buy Co., Inc. 97,048,125 1.7
2,895,000 Lowe's Companies, Inc. 162,120,000 2.8
2,503,800 PETsMART, Inc. 67,953,132 1.2
1,603,750 ++Rent A Center Inc. 52,137,913 0.9
2,539,900 Ross Stores, Inc. 81,403,795 1.4
2,441,600 ++Staples, Inc. 64,018,752 1.1
1,150,200 Tiffany & Co. 48,365,910 0.8
---------------- ------
573,047,627 9.9
Textiles, Apparel 2,883,000 ++Coach, Inc. 114,253,290 2.0
& Luxury Goods 1,604,500 Nike, Inc. (Class B) 117,529,625 2.0
---------------- ------
231,782,915 4.0
Total Common Stocks
(Cost--$4,668,373,015) 5,480,195,391 94.9
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Schedule of Investments (concluded)
Beneficial Interest/ Percent of
Shares Held Short-Term Securities Value Net Assets
$149,833,369 Merrill Lynch Liquidity Series, LLC Cash
Sweep Series I (b) $ 149,833,369 2.6%
$618,642,225 Merrill Lynch Liquidity Series, LLC Money
Market Series (b)(c) 618,642,225 10.7
206,214,075 Merrill Lynch Premier Institutional Fund (b)(c) 206,214,075 3.6
Total Short-Term Securities
(Cost--$974,689,669) 974,689,669 16.9
Total Investments (Cost--$5,643,062,684) 6,454,885,060 111.8
Liabilities in Excess of Other Assets (678,727,116) (11.8)
---------------- ------
Net Assets $ 5,776,157,944 100.0%
================ ======
*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 industry sub-
classifications for reporting ease.
++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) are as
follows:
Interest/
Net Dividend
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $ (61,241,599) $ 1,235,450
Merrill Lynch Liquidity Series, LLC Money Market Series $ (139,446,464) $ 362,042
Merrill Lynch Premier Institutional Fund (299,178,384) $ 142,827
(c)Security was purchased with the cash proceeds from securities
loans.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Statement of Assets and Liabilities
As of February 29, 2004
Assets
Investments, at value (including securities loaned of $800,933,794)
(identified cost--$5,643,062,684) $ 6,454,885,060
Receivables:
Securities sold $ 243,055,252
Capital shares sold 7,445,345
Dividends 4,836,134
Interest from affiliates 154,434
Securities lending--net 59,113 255,550,278
---------------
Prepaid registration fees and other assets 136,935
---------------
Total assets 6,710,572,273
---------------
Liabilities
Collateral on securities loaned, at value 824,856,300
Payables:
Securities purchased 90,649,593
Capital shares redeemed 10,525,074
Investment adviser 2,417,422
Other affiliates 2,264,150
Distributor 2,264,144
Reorganization costs 134,862 108,255,245
---------------
Accrued expenses and other liabilities 1,302,784
---------------
Total liabilities 934,414,329
---------------
Net Assets
Net assets $ 5,776,157,944
===============
Net Assets Consist of
Class A Shares of capital stock, $.10 par value, 300,000,000
shares authorized $ 10,483,894
Class B Shares of capital stock, $.10 par value, 500,000,000
shares authorized 11,563,666
Class C Shares of capital stock, $.10 par value, 300,000,000
shares authorized 4,718,522
Class I Shares of capital stock, $.10 par value, 150,000,000
shares authorized 9,087,559
Class R Shares of capital stock, $.10 par value, 500,000,000
shares authorized 43,683
Paid-in capital in excess of par 7,738,008,031
Accumulated investment loss--net $ (17,650,811)
Accumulated realized capital losses on investments and foreign currency
transactions--net (2,791,912,873)
Unrealized appreciation on investments and foreign currency
transactions--net 811,816,273
---------------
Total accumulated losses--net (1,997,747,411)
---------------
Net Assets $ 5,776,157,944
===============
Net Asset Value
Class A--Based on net assets of $1,736,960,252 and 104,838,942
shares outstanding $ 16.57
===============
Class B--Based on net assets of $1,770,785,899 and 115,636,655
shares outstanding $ 15.31
===============
Class C--Based on net assets of $726,639,479 and 47,185,217
shares outstanding $ 15.40
===============
Class I--Based on net assets of $1,535,000,820 and 90,875,587
shares outstanding $ 16.89
===============
Class R--Based on net assets of $6,771,494 and 436,825 shares outstanding $ 15.50
===============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Statement of Operations
For the Six Months Ended February 29, 2004
Investment Income
Dividends (net of $22,873 foreign withholding tax) $ 19,245,365
Interest from affiliates 1,235,450
Securities lending--net 504,869
---------------
Total income 20,985,684
---------------
Expenses
Investment advisory fees $ 16,422,163
Account maintenance and distribution fees--Class B 8,613,807
Account maintenance and distribution fees--Class C 3,281,330
Transfer agent fees--Class B 2,258,703
Account maintenance fees--Class A 2,049,592
Transfer agent fees--Class A 1,892,003
Transfer agent fees--Class I 1,576,898
Transfer agent fees--Class C 889,760
Professional fees 711,464
Accounting services 411,427
Custodian fees 134,884
Printing and shareholder reports 134,539
Registration fees 72,842
Directors' fees and expenses 66,430
Pricing fees 21,197
Account maintenance and distribution fees--Class R 5,836
Transfer agent fees--Class R 2,607
Other 72,253
---------------
Total expenses 38,617,735
---------------
Investment loss--net (17,632,051)
---------------
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net
Realized gain (loss)from:
Investments--net 359,467,070
Foreign currency transactions--net (331,098) 359,135,972
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 219,076,764
Foreign currency transactions--net 299,761 219,376,525
--------------- ---------------
Total realized and unrealized gain on investments and foreign currency
transactions--net 578,512,497
---------------
Net Increase in Net Assets Resulting from Operations $ 560,880,446
===============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 29, August 31,
Increase (Decrease) in Net Assets: 2004 2003
Operations
Investment loss--net $ (17,632,051) $ (27,920,171)
Realized gain (loss) on investments and foreign currency
transactions--net 359,135,972 (1,150,039,960)
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 219,376,525 1,588,985,564
--------------- ---------------
Net increase in net assets resulting from operations 560,880,446 411,025,433
--------------- ---------------
Capital Share Transactions
Net increase (decrease) in net assets derived from capital share
transactions 92,009,479 (243,007,990)
--------------- ---------------
Net Assets
Total increase in net assets 652,889,925 168,017,443
Beginning of period 5,123,268,019 4,955,250,576
--------------- ---------------
End of period* $ 5,776,157,944 $ 5,123,268,019
=============== ===============
*Accumulated investment loss--net $ (17,650,811) $ (18,760)
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 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
February 29, For the Year Ended August 31,++
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
Per Share Operating Performance
Net asset value, beginning of period $ 14.89 $ 13.63 $ 17.23 $ 29.63 $ 21.77
----------- ----------- ----------- ----------- -----------
Investment income (loss)--net*** (.03) (.04) (.05) .03 (.04)
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.71 1.30 (3.55) (10.52) 9.80
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.68 1.26 (3.60) (10.49) 9.76
----------- ----------- ----------- ----------- -----------
Less distributions:
Realized gain on investments--net -- -- -- -- (1.90)
In excess of realized gain on
investments--net -- -- -- (1.91) --
----------- ----------- ----------- ----------- -----------
Total distributions -- -- -- (1.91) (1.90)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 16.57 $ 14.89 $ 13.63 $ 17.23 $ 29.63
=========== =========== =========== =========== ===========
Total Investment Return**
Based on net asset value per share 11.28%+++ 9.24% (20.89%) (36.88%) 46.67%
=========== =========== =========== =========== ===========
Ratios to Average Net Assets
Expenses 1.15%* 1.18% 1.18% 1.04% 1.01%
=========== =========== =========== =========== ===========
Investment income (loss)--net (.37%)* (.29%) (.33%) .14% (.17%)
=========== =========== =========== =========== ===========
Supplemental Data
Net assets, end of period (in thousands) $ 1,736,960 $ 1,544,751 $ 1,384,765 $ 1,296,787 $ 1,712,701
=========== =========== =========== =========== ===========
Portfolio turnover 51.33% 108.34% 92.35% 149.86% 98.71%
=========== =========== =========== =========== ===========
*Annualized.
**Total Investment returns exclude the effects of sales charges.
***Based on average shares outstanding.
++Effective April 14, 2003, Class D Shares were redesignated Class A
Shares.
+++Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 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
February 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
Per Share Operating Performance
Net asset value, beginning of period $ 13.81 $ 12.74 $ 16.24 $ 28.06 $ 20.75
----------- ----------- ----------- ----------- -----------
Investment loss--net*** (.08) (.13) (.17) (.13) (.23)
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.58 1.20 (3.33) (9.95) 9.32
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.50 1.07 (3.50) (10.08) 9.09
----------- ----------- ----------- ----------- -----------
Less distributions:
Realized gain on investments--net -- -- -- -- (1.78)
In excess of realized gain on
investments--net -- -- -- (1.74) --
----------- ----------- ----------- ----------- -----------
Total distributions -- -- -- (1.74) (1.78)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 15.31 $ 13.81 $ 12.74 $ 16.24 $ 28.06
=========== =========== =========== =========== ===========
Total Investment Return**
Based on net asset value per share 10.86%++ 8.40% (21.55%) (37.36%) 45.55%
=========== =========== =========== =========== ===========
Ratios to Average Net Assets
Expenses 1.93%* 1.97% 1.96% 1.81% 1.77%
=========== =========== =========== =========== ===========
Investment loss--net (1.15%)* (1.08%) (1.10%) (.62%) (.92%)
=========== =========== =========== =========== ===========
Supplemental Data
Net assets, end of period (in thousands) $ 1,770,786 $ 1,685,904 $ 1,802,731 $ 2,299,511 $ 3,411,474
=========== =========== =========== =========== ===========
Portfolio turnover 51.33% 108.34% 92.35% 149.86% 98.71%
=========== =========== =========== =========== ===========
*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 29, 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
February 29, For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
Per Share Operating Performance
Net asset value, beginning of period $ 13.89 $ 12.82 $ 16.34 $ 28.26 $ 20.88
----------- ----------- ----------- ----------- -----------
Investment loss--net*** (.08) (.14) (.17) (.13) (.24)
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.59 1.21 (3.35) (10.01) 9.39
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.51 1.07 (3.52) (10.14) 9.15
----------- ----------- ----------- ----------- -----------
Less distributions:
Realized gain on investments--net -- -- -- -- (1.77)
In excess of realized gain on
investments--net -- -- -- (1.78) --
----------- ----------- ----------- ----------- -----------
Total distributions -- -- -- (1.78) (1.77)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 15.40 $ 13.89 $ 12.82 $ 16.34 $ 28.26
=========== =========== =========== =========== ===========
Total Investment Return**
Based on net asset value per share 10.87%++ 8.35% (21.54%) (37.35%) 45.53%
=========== =========== =========== =========== ===========
Ratios to Average Net Assets
Expenses 1.94%* 1.98% 1.97% 1.83% 1.78%
=========== =========== =========== =========== ===========
Investment loss--net (1.16%)* (1.09%) (1.11%) (.66%) (.93%)
=========== =========== =========== =========== ===========
Supplemental Data
Net assets, end of period (in thousands) $ 726,639 $ 608,176 $ 596,871 $ 616,400 $ 627,021
=========== =========== =========== =========== ===========
Portfolio turnover 51.33% 108.34% 92.35% 149.86% 98.71%
=========== =========== =========== =========== ===========
*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 29, 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
February 29, For the Year Ended August 31,++
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
Per Share Operating Performance
Net asset value, beginning of period $ 15.16 $ 13.84 $ 17.46 $ 29.98 $ 21.99
----------- ----------- ----------- ----------- -----------
Investment income (loss)--net*** (.01) (.01) (.02) .08 .02
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.74 1.33 (3.60) (10.64) 9.91
----------- ----------- ----------- ----------- -----------
Total from investment operations 1.73 1.32 (3.62) (10.56) 9.93
----------- ----------- ----------- ----------- -----------
Less distributions:
Realized gain on investments--net -- -- -- -- (1.94)
In excess of realized gain on
investments--net -- -- -- (1.96) --
----------- ----------- ----------- ----------- -----------
Total distributions -- -- -- (1.96) (1.94)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 16.89 $ 15.16 $ 13.84 $ 17.46 $ 29.98
=========== =========== =========== =========== ===========
Total Investment Return**
Based on net asset value per share 11.41%+++ 9.54% (20.73%) (36.71%) 47.01%
=========== =========== =========== =========== ===========
Ratios to Average Net Assets
Expenses .90%* .93% .94% .80% .76%
=========== =========== =========== =========== ===========
Investment income (loss)--net (.12%)* (.04%) (.09%) .35% .09%
=========== =========== =========== =========== ===========
Supplemental Data
Net assets, end of period (in thousands) $ 1,535,001 $ 1,284,423 $ 1,170,884 $ 950,922 $ 882,072
=========== =========== =========== =========== ===========
Portfolio turnover 51.33% 108.34% 92.35% 149.86% 98.71%
=========== =========== =========== =========== ===========
*Annualized.
**Total Investment returns exclude the effects of sales charges.
***Based on average shares outstanding.
++Effective April 14, 2003, Class A Shares were redesignated Class I
Shares.
+++Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Financial Highlights (concluded)
Class R
For the For the
Six Period
The following per share data and ratios have been derived Months January 3,
from information provided in the financial statements. Ended 2003++ to
February 29, August 31,
Increase (Decrease) in Net Asset Value: 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 13.95 $ 12.13
----------- -----------
Investment loss--net*** (.04) (.02)
Realized and unrealized gain on investments and foreign currency
transactions--net 1.59 1.84
----------- -----------
Total from investment operations 1.55 1.82
----------- -----------
Net asset value, end of period $ 15.50 $ 13.95
=========== ===========
Total Investment Return**
Based on net asset value per share 11.11%+++ 15.00%+++
=========== ===========
Ratios to Average Net Assets
Expenses 1.39%* 1.42%*
=========== ===========
Investment loss--net (.52%)* (.53%)*
=========== ===========
Supplemental Data
Net assets, end of period (in thousands) $ 6,771 $ 14
=========== ===========
Portfolio turnover 51.33% 108.34%
=========== ===========
*Annualized.
**Total investment returns excludes the effects of sales charges.
***Based on average shares outstanding.
++Commencement of operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
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 amended, 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 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. 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 investments--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 FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Notes to Financial Statements (continued)
(b) 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 contracts and options on such futures contracts.
Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
* Options--The Fund may 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.
(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 U.S. 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 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.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Notes to Financial Statements (continued)
(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, it collects a fee from the borrower. The
Fund typically receives the income on loaned securities but does not
receive the income on the collateral. 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. 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 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. 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%
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 February 29, 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 $17,457 $224,329
Class I $ 631 $ 9,587
For the six months ended February 29, 2004, MLPF&S received
contingent deferred sales charges of $899,334 and $121,159 relating
to transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$186 relating to transactions subject to front-end sales charge
waivers in Class A Shares.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Notes to Financial Statements (continued)
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 February 29, 2004, the Fund lent
securities with a value of $43,594,310 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 February 29, 2004, MLIM, LLC
received $229,046 in securities lending agent fees.
In addition, MLPF&S received $1,123,923 in commissions on the
execution of portfolio security transactions for the Fund for the
six months ended February 29, 2004.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
For the six months ended February 29, 2004, the Fund reimbursed MLIM
$53,504 for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, FDS, PSI, MLAM U.K., FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended February 29, 2004 were $2,658,984,476 and
$2,764,089,666, respectively.
Net realized gains (losses) for the six months ended February 29,
2004 and net unrealized gains (losses) as of February 29, 2004 were
as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 359,467,070 $ 811,822,376
Foreign currency transactions (331,098) (6,103)
--------------- ---------------
Total $ 359,135,972 $ 811,816,273
=============== ===============
As of February 29, 2004, net unrealized appreciation for Federal
income tax purposes aggregated $783,412,241, of which $844,332,526
related to appreciated securities and $60,920,285 related to
depreciated securities. At February 29, 2004, the aggregate cost of
investments for Federal income tax purposes was $5,671,472,819.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $92,009,479 and $(243,007,990) for the six months
ended February 29, 2004 and for the year ended August 31, 2003,
respectively.
Transactions in capital shares for each class was as follows:
Class A Shares for the
Six Months Ended Dollar
February 29, 2004 Shares Amount
Shares sold 9,833,456 $ 156,902,795
Shares issued resulting
from reorganization 303,903 5,126,703
Automatic conversion of shares 4,055,620 64,638,399
--------------- ---------------
Total issued 14,192,979 226,667,897
Shares redeemed (13,111,672) (208,654,191)
--------------- ---------------
Net increase 1,081,307 $ 18,013,706
=============== ===============
Class A Shares for the Year Dollar
Ended August 31, 2003 Shares Amount
Shares sold 22,425,385 $ 293,619,876
Automatic conversion of shares 7,486,562 98,927,166
--------------- ---------------
Total issued 29,911,947 392,547,042
Shares redeemed (27,769,903) (363,118,102)
--------------- ---------------
Net increase 2,142,044 $ 29,428,940
=============== ===============
Class B Shares for the
Six Months Ended Dollar
February 29, 2004 Shares Amount
Shares sold 9,183,465 $ 134,870,699
Shares issued resulting from
reorganization 3,740,939 58,381,960
--------------- ---------------
Total issued 12,924,404 193,252,659
Automatic conversion of shares (4,379,616) (64,638,399)
Shares redeemed (14,949,069) (219,712,297)
--------------- ---------------
Net decrease (6,404,281) $ (91,098,037)
=============== ===============
Class B Shares for the Year Dollar
Ended August 31, 2003 Shares Amount
Shares sold 24,939,568 $ 305,264,542
Automatic conversion of shares (8,035,783) (98,927,166)
Shares redeemed (36,313,880) (443,021,423)
--------------- ---------------
Net decrease (19,410,095) $ (236,684,047)
=============== ===============
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Notes to Financial Statements (concluded)
Class C Shares for the
Six Months Ended Dollar
February 29, 2004 Shares Amount
Shares sold 6,081,372 $ 90,685,392
Shares issued resulting
from reorganization 2,519,070 39,535,287
--------------- ---------------
Total issued 8,600,442 130,220,679
Shares redeemed (5,191,488) (77,044,963)
--------------- ---------------
Net increase 3,408,954 $ 53,175,716
=============== ===============
Class C Shares for the Year Dollar
Ended August 31, 2003 Shares Amount
Shares sold 8,966,905 $ 110,844,522
Shares redeemed (11,753,799) (144,506,299)
--------------- ---------------
Net decrease (2,786,894) $ (33,661,777)
=============== ===============
Class I Shares for the
Six Months Ended Dollar
February 29, 2004 Shares Amount
Shares sold 15,585,109 $ 258,019,691
Shares issued resulting
from reorganization 147,273 2,532,155
--------------- ---------------
Total issued 15,732,382 260,551,846
Shares redeemed (9,582,918) (155,241,531)
--------------- ---------------
Net increase 6,149,464 $ 105,310,315
=============== ===============
Class I Shares for the Year Dollar
Ended August 31, 2003 Shares Amount
Shares sold 29,848,049 $ 397,428,942
Shares redeemed (29,714,104) (399,533,672)
--------------- ---------------
Net increase (decrease) 133,945 $ (2,104,730)
=============== ===============
Class R Shares for the
Six Months Ended Dollar
February 29, 2004 Shares Amount
Shares sold 445,918 $ 6,763,798
Shares redeemed (10,111) (156,019)
--------------- ---------------
Net increase 435,807 $ 6,607,779
=============== ===============
Class R Shares for the
Period January 3, 2003++ Dollar
to August 31, 2003 Shares Amount
Shares sold 1,018 $ 13,624
--------------- ---------------
Net increase 1,018 $ 13,624
=============== ===============
++Commencement of operations.
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by MLIM and its
affiliates, is a party to a $500,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the
credit agreement to fund shareholder redemptions and for other
lawful purposes other than for leverage. The Fund may borrow up to
the maximum amount allowable under the Fund's current prospectus
and statement of additional information, subject to various other
legal, regulatory or contractual limits. The Fund pays a commitment
fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the credit agreement. Amounts borrowed under the
credit agreement bear interest at a rate equal to, at each fund's
election, the Federal Funds rate plus .50% or a base rate as
determined by Bank One, N.A. On November 28, 2003, the credit
agreement was renewed for one year under the same terms. The Fund
did not borrow under the credit agreement during the six months
ended February 29, 2004.
6. Capital Loss Carryforward:
On August 31, 2003, the Fund had a net capital loss carryforward of
$2,464,226,725, of which $98,873,827 expires in 2008, $99,588,881
expires in 2009, $970,361,937 expires in 2010 and $1,295,402,080
expires in 2011. This amount will be available to offset like
amounts of any future taxable gains.
7. Acquisition of Mercury Growth Opportunity Fund:
On January 20, 2004, the Fund acquired substantially all of the
assets and the liabilities of Mercury Growth Opportunity Fund
pursuant to a plan of reorganization. The acquisition was
accomplished by a tax-free exchange of 8,550,236 shares of Common
Stock of Mercury Growth Opportunity Fund for 6,711,185 shares of
Common Stock of the Fund. Mercury Growth Opportunity Fund's net
assets on that date of $105,576,105, including $21,247,350 of net
unrealized appreciation and $61,255,035 of accumulated net realized
capital losses were combined with those of the Fund. The aggregate
net assets immediately after the acquisition amounted to
$5,822,583,376.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 2004
Officers and Directors
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Joe Grills, Director
Herbert I. London, Director
Andre F. Perold, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Robert C. Doll, Jr., Senior Vice President
Lawrence R. Fuller, Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Phillip S. Gillespie, Secretary
Custodian
J.P. Morgan Chase Bank
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 FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 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 website
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 FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 29, 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 Fundamental Growth Fund, Inc.
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
Merrill Lynch Fundamental Growth Fund, Inc.
Date: April 16, 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 Fundamental Growth Fund, Inc.
Date: April 16, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Fundamental Growth Fund, Inc.
Date: April 16, 2004