UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-3595
Name of Fund: Merrill Lynch Healthcare Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President,
Merrill Lynch Healthcare Fund, Inc., 800 Scudders Mill Road,
Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011,
Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 04/30/05
Date of reporting period: 05/01/04 - 10/31/04
Item 1 - Report to Stockholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
Merrill Lynch
Healthcare Fund, Inc.
Semi-Annual Report
October 31, 2004
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is
available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) at www.mutualfunds.ml.com;
and (3) on the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the
most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com; and (2) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
Merrill Lynch Healthcare Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
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Merrill Lynch Healthcare Fund, Inc.
Portfolio Information as of October 31, 2004
Percent of
Ten Largest Equity Holdings Net Assets
UnitedHealth Group Incorporated 5.8%
Sanofi-Aventis 5.4
Novartis AG (Registered Shares) 4.9
Aetna Inc. (New Shares) 4.9
Amgen Inc. 4.9
Boston Scientific Corporation 4.9
Anthem, Inc. 4.9
Abbott Laboratories 4.4
Roche Holding AG 4.4
Caremark Rx, Inc. 4.1
Percent of
Geographic Allocation Net Assets*
United States 74.3%
Switzerland 9.4
France 5.4
Belgium 3.1
Japan 3.1
Ireland 2.2
United Kingdom 1.1
India 0.9
Israel --**
* Total may not equal 100%.
** Amount is less than 0.1%.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
A Letter From the President
Dear Shareholder
As we ended the current reporting period, the financial markets were
facing a number of uncertainties. At the top of investors' minds
were questions about economic expansion, corporate earnings,
interest rates and inflation, politics, oil prices and terrorism.
After benefiting from aggressive monetary and fiscal policy
stimulus, some fear the U.S. economy has hit a "soft patch." In
fact, economic expansion has slowed somewhat in recent months, but
we believe it is easing into a pace of growth that is sustainable
and healthy. The favorable economic environment has served to
benefit American corporations, which have continued to post strong
earnings. Although the most impressive results were seen earlier in
the year, solid productivity, improved revenue growth and cost
discipline all point to a vital corporate sector.
In terms of inflation and interest rates, the Federal Reserve Board
(the Fed) has signaled its confidence in the economic recovery by
increasing the Federal Funds target rate four times in the past
several months, from 1% to 2% as of the November 10 Federal Open
Market Committee meeting. Inflation, for its part, has remained in
check. Investors and economists are focused on how quickly monetary
policy will move from here, anxiously absorbing every bit of
economic data and Fed innuendo.
With the presidential election now behind us, any politically
provoked market angst should subside to some extent. The effect of
oil prices, however, is more difficult to predict. At around $50 per
barrel, the price of oil is clearly a concern. However, on an
inflation-adjusted basis and considering modern usage levels, the
situation is far from the crisis proportions we saw in the 1980s.
Finally, although terrorism and geopolitical tensions are realities
we are forced to live with today, history has shown us that the
financial effects of any single event tend to be short-lived.
Amid the uncertainty, the Standard & Poor's 500 Index returned
+9.42% for the 12-month period and +2.96% for the six-month period
ended October 31, 2004. As always, our investment professionals
are closely monitoring the markets, the economy and the overall
environment in an effort to make well-informed decisions for the
portfolios they manage. For the individual investor, the key during
uncertain times is to remain focused on the big picture. While
tracking current events is important, investment success comes
not from reacting to short-term volatility, but from maintaining a
long-term perspective and adhering to the disciplines of asset
allocation, diversification and rebalancing. We encourage you to
work with your financial advisor to ensure these time-tested
techniques are incorporated into your investment plan.
We thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the
months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
A Discussion With Your Fund's Portfolio Manager
We continued to balance the upside potential of the more aggressive
biotechnology subsector with the downside support offered by the
more defensive areas of healthcare, such as managed care (HMO) and
selective pharmaceuticals.
How did the Fund perform during the period in light of the existing
market conditions?
For the six-month period ended October 31, 2004, Merrill Lynch
Healthcare Fund's Class A, Class B, Class C, Class I and Class R
Shares had total returns of -6.68%, -6.98%, -7.19%, -6.63% and
- -6.69%, respectively. (Fund results shown do not reflect sales
charges and would be lower if sales charges were included. Complete
performance information can be found on pages 6 and 7 of this report
to shareholders.) For the same period, the Standard and Poor's 500
Index, which represents the broader stock market rather than
healthcare stocks alone, returned +2.96%. The Fund's composite
benchmark*, which is composed of four Morgan Stanley Capital
International (MSCI) industries, returned -4.77% for the six months
ended October 31, 2004. Fund returns were in line with the Lipper
Health/Biotechnology Funds category, which measures the performance
of mutual funds that focus their investment on companies engaged in
healthcare and biotechnology. The Lipper Health/Biotechnology Funds
category provided an average return of -6.77% for the six-month
period.
The past six months were highlighted by concerns about the
sustainability of economic growth, possible deflation and the impact
of soaring energy prices. While U.S. gross domestic product (GDP)
grew at an annualized rate of 4.5% in the first quarter of 2004, the
growth rate moderated to 3.3% in the second quarter, causing some to
question the vigor of the economic recovery. A new concern arose in
late summer as oil prices soared above $50 per barrel. This
development, along with election uncertainties and continued
upheaval in Iraq, led to high stock market volatility throughout the
six-month period.
* The Fund's composite benchmark includes the following four MSCI
industries: health care equipment and supplies (15%), health
care providers and services (25%), biotechnology (25%) and
pharmaceuticals (35%).
The healthcare sector was further influenced by industry-specific
concerns, including clamor over the affordability of drug prices,
especially volatile during an election year; patent expirations and
legal challenges; intensified competition from generic drug
manufacturers; and relatively unproductive research and development.
As a result, the healthcare sector underperformed the broader stock
market for the six-month period as investors flocked to cyclical
industries that could benefit from a still-recovering economy.
The Fund has endeavored to navigate through these problem areas by
shifting its mix of healthcare subsector holdings. Pharmaceuticals
were substantially underweighted, and biotechnology and HMOs (health
maintenance organizations) were overweighted, throughout much of the
period. We increased our holdings of European, Japanese and Indian
drug companies, while U.S.-based pharmaceuticals were sold.
What changes were made to the portfolio during the period?
We continued to emphasize biotechnology in recognition of this
subsector's potential for robust growth. We view biotechnology as a
source of innovation and new drug discovery. We have emphasized
companies focused on serious and presently incurable illnesses,
especially cancer. We also stressed companies with products either
on the market or in late clinical study. By the close of the period,
the portfolio's weighting in biotechnology comprised 18.6% of net
assets.
At the same time, we sought to limit risk by investing in healthcare
service companies, particularly HMOs. In our view, these companies
provide predictability of earnings and should continue to generate
double-digit earnings growth from increased premiums and vigorous
cost control.
We underweighted large-capitalization pharmaceutical companies, a
defensive subgroup that is reasonably valued but has been a market
laggard during the economic recovery. Pharmaceutical companies face
important patent expirations, a thinning pipeline of new products
and increasingly intense competition from generic drug companies.
Later in the six-month period, we reduced our holdings of generic
drug companies as savage price cuts impacted profitability.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
How would you characterize the Fund's position at the close of the
period?
At October 31, 2004, the Fund's portfolio consisted of 59 holdings,
compared to 70 at April 30, 2004. We favored small cap and large-
capitalization holdings over mid cap positions at period-end,
reflecting our increased focus on biotechnology, HMOs and
pharmaceutical companies. At October 31, 2004, 25.7% of the Fund's
net assets were invested abroad. This represents an increase from
23.8% six months earlier. Our two most significant foreign holdings
were Novartis AG and Roche Holding AG. Both are Swiss-based,
multinational pharmaceutical companies.
Overall, we continue to pursue a growth-oriented investment
strategy. At the same time, we are sensitive to risk and continue to
seek diversification geographically and across all healthcare
subsectors. We believe the longer-term outlook for the healthcare
sector is optimistic, based on scientific discovery, new growth
opportunities in emerging market countries and favorable
demographics as populations age.
Jordan C. Schreiber
Vice President and Portfolio Manager
November 3, 2004
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Performance Data
About Fund Performance
Investors are able to purchase shares of the Fund through multiple
pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and an account maintenance fee of 0.25% per year (but
no distribution fee).
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% declining to 0% after six years. All Class B Shares
purchased prior to June 1, 2001 will maintain the four-year
schedule. In addition, Class B Shares are subject to a distribution
fee of 0.75% per year and an account maintenance fee of 0.25% per
year. These shares automatically convert to Class A Shares after
approximately eight years. (There is no initial sales charge for
automatic share conversions.) All returns for periods greater than
eight years reflect this conversion.
* Class C Shares are subject to a distribution fee of 0.75% per year
and an account maintenance fee of 0.25% per year. In addition, Class
C Shares are subject to a 1% contingent deferred sales charge if
redeemed within one year of purchase.
* Class I Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class I Shares are available only to eligible
investors.
* Class R Shares do not incur a maximum sales charge (front-end
load) or deferred sales charge. These shares are subject to a
distribution fee of 0.25% per year and an account maintenance fee of
0.25% per year. Class R Shares are available only to certain
retirement plans.
None of the past results shown should be considered a representation
of future performance. Current performance may be lower or higher
than the performance data quoted. Refer to www.mlim.ml.com to obtain
performance data current to the most recent month-end. Performance
results do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.
Figures shown in each of the following tables assume reinvestment of
all dividends and capital gain distributions, if any, at net asset
value on the ex-dividend date. Investment return and principal value
of shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception
As of October 31, 2004 Total Return Total Return Total Return
ML Healthcare Fund, Inc.--Class A Shares* -6.68% +2.13% +276.19%
ML Healthcare Fund, Inc.--Class B Shares* -6.98 +1.63 +254.39
ML Healthcare Fund, Inc.--Class C Shares* -7.19 +1.40 +248.38
ML Healthcare Fund, Inc.--Class I Shares* -6.63 +2.46 +286.04
ML Healthcare Fund, Inc.--Class R Shares* -6.69 +2.05 + 15.95
S&P 500 R Index** +2.96 +9.42 +184.11/+28.41
* Investment results shown do not reflect sales charges; results shown would be lower if a
sales charge was included. Total investment returns are based on changes in net asset values
for the periods shown, and assume reinvestment of all dividends and capital gains distributions
at net asset value on the ex-dividend date. The Fund's 10-year since inception periods are for
10 years for Class A, Class B, Class C and Class I Shares and from 1/03/03 for Class R Shares.
** This unmanaged index covers 500 industrial, utility, transportation and financial companies of the
U.S. markets (mostly NYSE issues) representing about 75% of NYSE market capitalization and 30% of
NYSE issues. Ten-year/since inception total returns are for 10 years and from 1/03/03, respectively.
S&P 500 is a registered trademark of the McGraw-Hill companies.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 10/31/04 + 2.13% - 3.24%
Five Years Ended 10/31/04 + 7.63 + 6.47
Ten Years Ended 10/31/04 +14.17 +13.55
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
Class B Shares*
One Year Ended 10/31/04 + 1.63% - 2.27%
Five Years Ended 10/31/04 + 6.85 + 6.54
Ten Years Ended 10/31/04 +13.49 +13.49
* Maximum contingent deferred sales charge is 4% and is reduced to
0% after six years.
** Assuming payment of applicable contingent deferred sales charge.
Return Return
Without CDSC With CDSC**
Class C Shares*
One Year Ended 10/31/04 + 1.40% + 0.42%
Five Years Ended 10/31/04 + 6.77 + 6.77
Ten Years Ended 10/31/04 +13.29 +13.29
* Maximum contingent deferred sales charge is 1% and is reduced to
0% after one year.
** Assuming payment of applicable contingent deferred sales charge.
Return Without Return With
Sales Charge Sales Charge**
Class I Shares*
One Year Ended 10/31/04 + 2.46% - 2.92%
Five Years Ended 10/31/04 + 7.90 + 6.74
Ten Years Ended 10/31/04 +14.46 +13.85
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Class R Shares Return
One Year Ended 10/31/04 +2.05%
Inception (1/03/03) through 10/31/04 +8.45
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Disclosure of Expenses
Shareholders of this Fund may incur the following charges:
(a) expenses related to transactions, including sales charges,
redemption fees and exchange fees; and (b) operating expenses
including advisory fees, distribution fees including 12(b)-1 fees,
and other Fund expenses. The following example (which is based on a
hypothetical investment of $1,000 invested on May 1, 2004 and held
through October 31, 2004) is intended to assist shareholders both in
calculating expenses based on an investment in the Fund and in
comparing these expenses with similar costs of investing in other
mutual funds.
The first table below provides information about actual account
values and actual expenses. In order to estimate the expenses a
shareholder paid during the period covered by this report,
shareholders can divide their account value by $1,000 and then
multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before
expenses. In order to assist shareholders in comparing the ongoing
expenses of investing in this Fund and other funds, compare the 5%
hypothetical example with the 5% hypothetical examples that appear
in other funds' shareholder reports.
The expenses shown in the table are intended to highlight
shareholders' ongoing costs only and do not reflect any
transactional expenses, such as sales charges, redemption fees, or
exchange fees. Therefore, the second table is useful in comparing
ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these
transactional expenses were included, shareholder expenses would
have been higher.
Expenses Paid
Ending During the Period*
Beginning Account Value May 1, 2004 to
Account Value October 31, October 31,
May 1, 2004 2004 2004
Actual
Class A $1,000 $ 933.20 $ 7.64
Class B $1,000 $ 930.20 $11.39
Class C $1,000 $ 928.10 $11.42
Class I $1,000 $ 933.70 $ 6.43
Class R $1,000 $ 933.10 $ 8.84
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,017.10 $ 7.97
Class B $1,000 $1,013.20 $11.88
Class C $1,000 $1,013.15 $11.93
Class I $1,000 $1,018.35 $ 6.71
Class R $1,000 $1,015.85 $ 9.22
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.58% for Class A, 2.36% for Class B, 2.37% for Class C, 1.33% for Class I and 1.83% for Class R),
multiplied by the average account value over the period, multiplied by 182/364 (to reflect the
one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in the most
recent fiscal half-year divided by 364.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Schedule of Investments
Value
MIDDLE EAST Industry* Shares Held Common Stocks (in U.S. dollars)
Israel--0.0% Pharmaceutical-- 12,500 ++Taro Pharmaceutical Industries Ltd. $ 320,000
Generic--0.0%
Total Common Stocks in the Middle East--0.0% 320,000
NORTH AMERICA
United States-- Biotechnology Discovery 100,000 ++Charles River Laboratories International, Inc. 4,679,000
74.3% Tools & Platform 141,000 ++Covance Inc. 5,600,520
Technology--3.7% 553,600 ++Exelixis, Inc. 4,927,040
781,100 ++Medarex, Inc. (d) 5,944,171
---------------
21,150,731
Biotechnology 500,000 ++Amgen Inc. 28,400,000
Products--12.7% 60,000 ++AtheroGenics, Inc. 1,796,400
220,000 ++Biogen Idec Inc. 12,795,200
20,000 ++Cell Genesys, Inc. 131,200
260,000 ++Corgentech Inc. (d) 4,958,200
50,000 ++Dendreon Corporation 517,000
160,845 ++Dyax Corp. 923,250
100,000 ++Genentech, Inc. (d) 4,553,000
100,000 ++Genzyme Corporation 5,247,000
200,000 ++Gilead Sciences, Inc. 6,926,000
47,200 ++Incyte Genomics, Inc. 490,880
120,000 ++Isolagen Inc. (d) 817,200
100,000 ++Neurocrine Biosciences, Inc. (d) 4,655,000
49,700 ++Theravance, Inc. (d) 843,409
---------------
73,053,739
Health Care 400,000 Manor Care, Inc. 13,096,000
Facilities--4.7% 423,400 ++Triad Hospitals, Inc. 13,984,902
---------------
27,080,902
Health Care Information 485,400 ++Cerner Corporation (d) 21,915,810
& Technology--3.8%
Managed Health 300,000 Aetna Inc. (New Shares) 28,500,000
Care--15.6% 350,000 ++Anthem, Inc. (d) 28,140,000
460,000 UnitedHealth Group Incorporated 33,304,000
---------------
89,944,000
Medical Devices--14.3% 800,000 ++Boston Scientific Corporation 28,240,000
246,900 Cooper Companies, Inc. 17,369,415
100,000 Diagnostic Products Corporation 4,415,000
100,000 Guidant Corporation 6,662,000
120,000 ++Intuitive Surgical, Inc. 3,501,600
500,000 ++SonoSite, Inc. (d) 14,442,500
100,000 ++St. Jude Medical, Inc. 7,657,000
---------------
82,287,515
Pharmaceutical-- 600,000 Abbott Laboratories 25,578,000
Diversified--4.4%
Pharmaceutical-- 314,100 ++Bioenvision, Inc. 2,457,832
Prescription--1.9% 190,000 ++Pharmion Corp. 8,730,500
---------------
11,188,332
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Schedule of Investments (continued)
NORTH AMERICA Value
(concluded) Industry* Shares Held Common Stocks (in U.S. dollars)
United States Pharmaceutical-- 200,000 ++Amylin Pharmaceuticals, Inc. $ 4,260,000
(concluded) Specialty--9.1% 400,000 ++Celgene Corporation 11,848,000
70,000 ++DOV Pharmaceutical, Inc. 1,153,600
233,891 ++La Jolla Pharmaceutical Company 264,297
340,000 ++MGI Pharma, Inc. (d) 9,067,800
2,600 ++Memory Pharmaceuticals Corp. 16,510
280,000 ++Nabi Biopharmaceuticals 3,878,000
200,000 ++Noven Pharmaceuticals, Inc. 4,510,000
200,000 ++OSI Pharmaceuticals, Inc. 12,996,000
100,000 ++Sepracor Inc. (d) 4,593,000
---------------
52,587,207
Pharmacy Benefit 793,700 ++Caremark Rx, Inc. (d) 23,787,189
Managers--4.1%
Total Common Stocks in North America--74.3% 428,573,425
PACIFIC BASIN/ASIA
India--0.9% Pharmaceutical-- 322,847 Cadila Healthcare Limited 3,640,168
Generic--0.9% 100,000 Sun Pharmaceutical Industries Limited 973,217
51,316 Wockhardt Limited 372,950
---------------
4,986,335
Pharmaceutical-- 10,129 Nicholas Piramal Ltd. 226,158
Specialty--0.0%
Total Common Stocks in India 5,212,493
Japan--3.1% Pharmaceutical-- 365,700 Takeda Pharmaceutical Company Limited 17,632,395
Prescription--3.1%
Total Common Stocks in Japan 17,632,395
Total Common Stocks in the Pacific Basin/Asia--4.0% 22,844,888
WESTERN EUROPE
Belgium--3.1% Pharmaceutical-- 340,000 UCB SA 17,914,017
Prescription--3.1%
Total Common Stocks in Belgium 17,914,017
France--5.4% Pharmaceuticals--5.4% 430,000 Sanofi-Aventis 31,342,025
Total Common Stocks in France 31,342,025
Ireland--2.2% Biotechnology 500,000 ++Elan Corporation PLC (ADR) (a) 12,900,000
Products--2.2%
Total Common Stocks in Ireland 12,900,000
Switzerland--9.4% Pharmaceutical-- 600,000 Novartis AG (Registered Shares) 28,515,544
Prescription--9.4% 250,000 Roche Holding AG 25,469,225
Total Common Stocks in Switzerland 53,984,769
United Medical Devices--0.2% 140,000 Smith & Nephew PLC 1,186,415
Kingdom--1.1%
Pharmaceutical-- 1,700,000 ++Ark Therapeutics Group PLC 2,772,271
Specialty--0.9% 2,500,000 ++SkyePharma PLC 2,439,250
---------------
5,211,521
Total Common Stocks in the United Kingdom 6,397,936
Total Common Stocks in Western Europe--21.2% 122,538,747
Total Investments in Common Stocks
(Cost--$503,615,669)--99.5% 574,277,060
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Schedule of Investments (concluded)
Value
Beneficial Interest Short-Term Securities (in U.S. dollars)
$ 2,369,488 Merrill Lynch Liquidity Series, LLC Cash
Sweep Series I (b) $ 2,369,488
64,402,250 Merrill Lynch Liquidity Series, LLC Money
Market Series (b)(c) 64,402,250
Total Investments in Short-Term Securities
(Cost--$66,771,738)--11.6% 66,771,738
Total Investments (Cost--$570,387,407**)--111.1% 641,048,798
Liabilities in Excess of Other Assets--(11.1%) (64,051,463)
---------------
Net Assets--100.0% $ 576,997,335
===============
* For Fund compliance purposes, "Industry" means any one or more of
the industry sub-classifications used by one or more widely recognized
market indexes or ratings group indexes, and/or as defined by Fund
management. This definition may not apply for purposes of this report,
which may combine such industry sub-classifications for reporting ease.
** The cost and unrealized appreciation/depreciation of investments as
of October 31, 2004, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 571,000,277
==============
Gross unrealized appreciation $ 79,074,358
Gross unrealized depreciation (9,025,837)
--------------
Net unrealized appreciation $ 70,048,521
==============
++ Non-income producing security.
(a) American Depositary Receipts (ADR).
(b) Investments in companies considered to be an affiliate of the Fund
(such companies are defined as "Affiliated Companies" in Section
2(a)(3) of the Investment Company Act of 1940) were as follows:
Interest/
Net Dividend
Affiliate Activity Income
Merrill Lynch Liquidity Series,
LLC Cash Sweep Series I $ (5,254,429) $136,984
Merrill Lynch Liquidity Series,
LLC Money Market Series $(70,757,556) $146,092
Merrill Lynch Premier
Institutional Fund (45,053,269) $ 7,494
(c) Security was purchased with the cash proceeds from securities loans.
(d) Security, or a portion of security, is on loan.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Statement of Assets and Liabilities
As of October 31, 2004
Assets
Investments in unaffiliated securities, at value (including securities
loaned of $62,760,018) (identified cost--$503,615,669) $ 574,277,060
Investments in affiliated securities, at value (identified cost--$66,771,738) 66,771,738
Cash 17,208
Foreign cash (cost--$24,743) 24,917
Receivables:
Securities sold $ 4,045,290
Dividends 420,291
Capital shares sold 324,242
Securities lending--net 55,917
Interest from affiliates 15,891 4,861,631
---------------
Prepaid expenses 25,972
---------------
Total assets 645,978,526
---------------
Liabilities
Collateral on securities loaned, at value 64,402,250
Payables:
Capital shares redeemed 2,525,897
Securities purchased 880,772
Investment adviser 565,276
Other affiliates 226,426
Distributor 197,920
Deferred foreign capital gain tax 90,063 4,486,354
---------------
Accrued expenses 92,587
---------------
Total liabilities 68,981,191
---------------
Net Assets
Net assets $ 576,997,335
===============
Net Assets Consist of
Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized $ 2,484,262
Class B Shares of Common Stock, $.10 par value, 250,000,000 shares
authorized 3,099,218
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 1,639,553
Class I Shares of Common Stock, $.10 par value, 200,000,000 shares
authorized 3,595,368
Class R Shares of Common Stock, $.10 par value, 250,000,000 shares
authorized 22,107
Paid-in capital in excess of par 485,304,359
Accumulated investment loss--net $ (4,267,913)
Undistributed realized capital gains--net 14,537,128
Unrealized appreciation--net 70,583,253
---------------
Total accumulated earnings--net 80,852,468
---------------
Net Assets $ 576,997,335
===============
Net Asset Value
Class A--Based on net assets of $143,170,268 and 24,842,617 shares outstanding $ 5.76
===============
Class B--Based on net assets of $136,831,897 and 30,992,183 shares outstanding $ 4.42
===============
Class C--Based on net assets of $72,352,952 and 16,395,525 shares outstanding $ 4.41
===============
Class I--Based on net assets of $223,650,596 and 35,953,678 shares outstanding $ 6.22
===============
Class R--Based on net assets of $991,622 and 221,073 shares outstanding $ 4.49
===============
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Statement of Operations
For the Six Months Ended October 31, 2004
Investment Income
Dividends (net of $50,085 foreign withholding tax) $ 1,199,966
Securities lending--net 153,586
Interest from affiliates 136,984
---------------
Total income 1,490,536
---------------
Expenses
Investment advisory fees $ 3,150,053
Account maintenance and distribution fees--Class B 769,645
Account maintenance and distribution fees--Class C 388,007
Transfer agent fees--Class I 263,496
Account maintenance fees--Class A 186,347
Transfer agent fees--Class B 184,692
Transfer agent fees--Class A 158,901
Accounting services 118,501
Transfer agent fees--Class C 98,250
Custodian fees 87,114
Professional fees 35,977
Printing and shareholder reports 33,736
Registration fees 33,202
Directors' fees and expenses 23,273
Pricing fees 4,697
Account maintenance and distribution fees--Class R 1,530
Transfer agent fees--Class R 864
Other 30,096
---------------
Total expenses 5,568,381
---------------
Investment loss--net (4,077,845)
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net 15,298,224
Foreign currency transactions--net (148,149) 15,150,075
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (net of ($339,912) deferred foreign capital
gain tax) (58,816,624)
Foreign currency transactions--net 13,605 (58,803,019)
--------------- ---------------
Total realized and unrealized loss--net (43,652,944)
---------------
Net Decrease in Net Assets Resulting from Operations $ (47,730,789)
===============
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
October 31, April 30,
Increase (Decrease) in Net Assets: 2004 2004
Operations
Investment loss--net $ (4,077,845) $ (8,575,217)
Realized gain--net 15,150,075 67,464,854
Change in unrealized appreciation/depreciation--net (58,803,019) 78,787,298
--------------- ---------------
Net increase (decrease) in net assets resulting from operations (47,730,789) 137,676,935
--------------- ---------------
Distributions to Shareholders
Realized gain--net:
Class A (4,773,467) --
Class B (6,401,036) --
Class C (3,215,543) --
Class I (7,461,502) --
Class R (23,242) --
--------------- ---------------
Net decrease in net assets resulting from distributions to shareholders (21,874,790) --
--------------- ---------------
Capital Share Transactions
Net decrease in net assets derived from capital share transactions (53,587,988) (72,227,314)
--------------- ---------------
Net Assets
Total increase (decrease) in net assets (123,193,567) 65,449,621
Beginning of period 700,190,902 634,741,281
--------------- ---------------
End of period* $ 576,997,335 $ 700,190,902
=============== ===============
* Accumulated investment loss--net $ (4,267,913) $ (190,068)
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Financial Highlights
Class A
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
October 31, For the Year Ended April 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 6.38 $ 5.21 $ 6.23 $ 6.29 $ 6.63
------------ ---------- ---------- ---------- ----------
Investment loss--net** (.03) (.06) (.05) (.07) (.05)
Realized and unrealized gain (loss)--net (.40) 1.23 (.97) .24 1.05
------------ ---------- ---------- ---------- ----------
Total from investment operations (.43) 1.17 (1.02) .17 1.00
------------ ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.19) -- -- (.23) (1.34)
------------ ---------- ---------- ---------- ----------
Net asset value, end of period $ 5.76 $ 6.38 $ 5.21 $ 6.23 $ 6.29
============ ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share (6.68%)++++ 22.46% (16.37%) 2.78% 14.21%
============ ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.58%++ 1.55% 1.58% 1.52% 1.50%
============ ========== ========== ========== ==========
Investment loss--net (1.11%)++ (1.00%) (1.04%) (1.20%) (.80%)
============ ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 143,170 $ 160,443 $ 119,375 $ 146,714 $ 107,642
============ ========== ========== ========== ==========
Portfolio turnover 68.02% 141.46% 128.24% 81.36% 65.42%
============ ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
++ Annualized.
++++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Financial Highlights (continued)
Class B
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
October 31, For the Year Ended April 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 4.96 $ 4.08 $ 4.91 $ 5.05 $ 5.55
------------ ---------- ---------- ---------- ----------
Investment loss--net** (.04) (.08) (.08) (.10) (.09)
Realized and unrealized gain (loss)--net (.31) .96 (.75) .19 .89
------------ ---------- ---------- ---------- ----------
Total from investment operations (.35) .88 (.83) .09 .80
------------ ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.19) -- -- (.23) (1.30)
------------ ---------- ---------- ---------- ----------
Net asset value, end of period $ 4.42 $ 4.96 $ 4.08 $ 4.91 $ 5.05
============ ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share (6.98%)++++ 21.57% (16.90%) 1.85% 13.28%
============ ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.36%++ 2.32% 2.36% 2.29% 2.26%
============ ========== ========== ========== ==========
Investment loss--net (1.88%)++ (1.78%) (1.83%) (1.97%) (1.57%)
============ ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 136,832 $ 177,952 $ 194,543 $ 310,916 $ 331,683
============ ========== ========== ========== ==========
Portfolio turnover 68.02% 141.46% 128.24% 81.36% 65.42%
============ ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
++ Annualized.
++++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Financial Highlights (continued)
Class C
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
October 31, For the Year Ended April 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 4.96 $ 4.07 $ 4.91 $ 5.05 $ 5.55
------------ ---------- ---------- ---------- ----------
Investment loss--net** (.04) (.08) (.08) (.10) (.09)
Realized and unrealized gain (loss)--net (.32) .97 (.76) .19 .90
------------ ---------- ---------- ---------- ----------
Total from investment operations (.36) .89 (.84) .09 .81
------------ ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.19) -- -- (.23) (1.31)
------------ ---------- ---------- ---------- ----------
Net asset value, end of period $ 4.41 $ 4.96 $ 4.07 $ 4.91 $ 5.05
============ ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share (7.19%)++++ 21.87% (17.11%) 1.85% 13.38%
============ ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.37%++ 2.33% 2.37% 2.30% 2.28%
============ ========== ========== ========== ==========
Investment loss--net (1.90%)++ (1.79%) (1.84%) (1.99%) (1.58%)
============ ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 72,353 $ 85,753 $ 76,606 $ 98,994 $ 66,028
============ ========== ========== ========== ==========
Portfolio turnover 68.02% 141.46% 128.24% 81.36% 65.42%
============ ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
++ Annualized.
++++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Financial Highlights (continued)
Class I
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
October 31, For the Year Ended April 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 6.87 $ 5.59 $ 6.66 $ 6.70 $ 6.98
------------ ---------- ---------- ---------- ----------
Investment loss--net** (.03) (.05) (.04) (.06) (.04)
Realized and unrealized gain (loss)--net (.43) 1.33 (1.03) .25 1.12
------------ ---------- ---------- ---------- ----------
Total from investment operations (.46) 1.28 (1.07) .19 1.08
------------ ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.19) -- -- (.23) (1.36)
------------ ---------- ---------- ---------- ----------
Net asset value, end of period $ 6.22 $ 6.87 $ 5.59 $ 6.66 $ 6.70
============ ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share (6.63%)++++ 22.90% (16.07%) 2.91% 14.57%
============ ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.33%++ 1.29% 1.33% 1.27% 1.24%
============ ========== ========== ========== ==========
Investment loss--net (.86%)++ (.75%) (.79%) (.95%) (.55%)
============ ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 223,651 $ 275,570 $ 244,217 $ 311,288 $ 288,091
============ ========== ========== ========== ==========
Portfolio turnover 68.02% 141.46% 128.24% 81.36% 65.42%
============ ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
++ Annualized.
++++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Financial Highlights (concluded)
Class R
The following per share data and ratios have been derived For the Six For the For the Period
from information provided in the financial statements. Months Ended Year Ended January 3, 2003++
October 31, April 30, to April 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 5.02 $ 4.09 $ 4.04
------------- ------------ ------------
Investment loss--net*** (.03) (.02) (.01)
Realized and unrealized gain (loss)--net (.31) .95 .06
------------- ------------ ------------
Total from investment operations (.34) .93 .05
------------- ------------ ------------
Less distributions from realized gain--net (.19) -- --
------------- ------------ ------------
Net asset value, end of period $ 4.49 $ 5.02 $ 4.09
============= ============ ============
Total Investment Return**
Based on net asset value per share (6.69%)++++++ 22.74% 1.24%++++++
============= ============ ============
Ratios to Average Net Assets
Expenses 1.83%* 1.73% 1.84%*
============= ============ ============
Investment loss--net (1.36%)* (1.15%) (.36%)*
============= ============ ============
Supplemental Data
Net assets, end of period (in thousands) $ 992 $ 473 --++++
============= ============ ============
Portfolio turnover 68.02% 141.46% 128.24%
============= ============ ============
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
++ Commencement of operations.
++++ Amount is less than $1,000.
++++++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Healthcare Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a non-
diversified, open-end management investment company. The Fund's
financial statements are prepared in conformity with U.S. generally
accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from
these estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to
present a fair statement of the results for the interim period. All
such adjustments are of a normal, recurring nature. The Fund offers
multiple classes of shares. Shares of Class A and Class I are sold
with a front-end sales charge. Shares of Class B and Class C may be
subject to a contingent deferred sales charge. Class R Shares are
sold only to certain retirement plans. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class A, Class B, Class C
and Class R Shares bear certain expenses related to the account
maintenance of such shares, and Class B, Class C and Class R Shares
also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures (except that Class B shareholders may vote on material
changes to the Class A distribution plan). Income, expenses (other
than expenses attributable to a specific class) and realized and
unrealized gains and losses on investments and foreign currency
transactions are allocated daily to each class based on its relative
net assets. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of securities--Equity securities that are held by the
Fund that are traded on stock exchanges or the Nasdaq National
Market are valued at the last sale price or official close price on
the exchange, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for
short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange
designated as the primary market by or under the authority of the
Board of Directors of the Fund. Long positions traded in the over-
the-counter ("OTC") market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price or yield equivalent obtained
from one or more dealers or pricing services approved by the Board
of Directors of the Fund. Short positions traded in the OTC market
are valued at the last available ask price. Portfolio securities
that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC
market, the last ask price. Options purchased are valued at their
last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last bid price. Swap
agreements are valued daily based upon quotations from market
makers. Financial futures contracts and options thereon, which are
traded on exchanges, are valued at their last sale price as of the
close of such exchanges. Obligations with remaining maturities of 60
days or less are valued at amortized cost unless the Investment
Adviser believes that this method no longer produces fair
valuations.
Repurchase agreements are valued at cost plus accrued interest. The
Fund employs pricing services to provide certain securities prices
for the Fund. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good
faith by or under the direction of the Board of Directors of the
Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations.
The procedures of a pricing service and its valuations are reviewed
by the officers of the Fund under the general supervision of the
Fund's Board of Directors. Such valuations and procedures will be
reviewed periodically by the Board of Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government
securities and money market instruments, is substantially completed
each day at various times prior to the close of business on the New
York Stock Exchange ("NYSE"). The values of such securities used in
computing the net asset value of the Fund's shares are determined as
of such times. Foreign currency exchange rates also are generally
determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and
the close of business on the NYSE that may not be reflected in the
computation of the Fund's net asset value. If events (for example, a
company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value
of such securities, those securities may be valued at their fair
value as determined in good faith by the Fund's Board of Directors
or by the Investment Adviser using a pricing service and/or
procedures approved by the Fund's Board of Directors.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Notes to Financial Statements (continued)
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into U.S. dollars. Realized and unrealized gains or
losses from investments include the effects of foreign exchange
rates on investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies both to increase the return of the
Fund and to hedge, or protect, its exposure to interest rate
movements and movements in the securities markets. Losses may arise
due to changes in the value of the contract or if the counterparty
does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contacts and options on such futures contracts.
Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures
as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Forward foreign exchange contracts--The Fund may enter into
forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. The contract is marked-
to-market daily and the change in market value is recorded by the
Fund as an unrealized gain or loss. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between
the value at the time it was opened and the value at the time it was
closed.
* Options--The Fund may purchase and write call and put options.
When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked-to-
market to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Notes to Financial Statements (continued)
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend
date. Interest income is recognized on the accrual basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Securities lending--The Fund may lend securities to financial
institutions that provide cash or securities issued or guaranteed by
the U.S. government as collateral, which will be maintained at all
times in an amount equal to at least 100% of the current market
value of the loaned securities. The market value of the loaned
securities is determined at the close of business of the Fund and
any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral
for the loaned securities, the Fund typically receives the income on
both the loaned securities and the collateral and, as a result, the
Fund's yield may increase. Where the Fund receives cash collateral,
it may invest such collateral and retain the amount earned on such
investment, net of any amount rebated to the borrower. The Fund may
receive a flat fee for its loans. Loans of securities are terminable
at any time and the borrower, after notice, is required to return
borrowed securities within five business days. The Fund may pay
reasonable finder's, lending agent, administrative and custodial
fees in connection with its loans. In the event that the borrower
defaults on its obligation to return borrowed securities because of
insolvency or for any other reason, the fund could experience delays
and costs in gaining access to the collateral. The Fund also could
suffer a loss where the value of the collateral falls below the
market value of the borrowed securities, in the event of borrower
default or in the event of losses on investments made with cash
collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Investment Managers, L.P. ("MLIM"). The general
partner of MLIM is Princeton Services, Inc. ("PSI"), an indirect,
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors,
Inc. ("FAMD" or the "Distributor"), which is a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLIM is responsible for the management of the Fund's portfolio and
provides, or arranges for affiliates to provide, the administrative
services necessary for the operation of the Fund. As compensation
for its services to the Fund, MLIM receives monthly compensation at
the annual rate of 1.0% of the average daily net assets of the Fund.
MLIM has entered into a Sub-Advisory Agreement with Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM,
pursuant to which MLAM U.K. provides investment advisory services to
MLIM with respect to the Fund. There is no increase in the aggregate
fees paid by the Fund for these services.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Class R .25% .25%
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Notes to Financial Statements (continued)
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of
ML & Co., also provides account maintenance and distribution
services to the Fund. The ongoing account maintenance fee
compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B, Class C and Class R
shareholders. The ongoing distribution fee compensates the
Distributor and MLPF&S for providing shareholder and distribution-
related services to Class B, Class C and Class R shareholders.
For the six months ended October 31, 2004, FAMD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class I Shares as
follows:
FAMD MLPF&S
Class A $ 1,397 $ 17,945
Class I $ 45 $ 485
For the six months ended October 31, 2004, MLPF&S received
contingent deferred sales charges of $108,372 and $3,704 relating
to transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges
of $192 relating to transactions subject to front-end sales charge
waivers in Class A Shares.
The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
MLPF&S or its affiliates. As of October 31, 2004, the Fund lent
securities with a value of $575,283 to MLPF&S or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, as the
securities lending agent for a fee based on a share of the returns
on investment of cash collateral. MLIM, LLC may, on behalf of the
Fund, invest cash collateral received by the Fund for such loans,
among other things, in a private investment company managed by MLIM,
LLC or in registered money market funds advised by MLIM or its
affiliates. For the six months ended October 31, 2004, MLIM, LLC
received $67,323 in securities lending agent fees.
In addition, MLPF&S received $470,802 in commissions on the
execution of portfolio security transactions for the Fund for the
six months ended October 31, 2004.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
For the six months ended October 31, 2004, the Fund reimbursed MLIM
$6,815 for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, PSI, FDS, FAMD, MLAM U.K. and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended October 31, 2004 were $419,583,103 and
$497,539,210, respectively.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $53,587,988 and $72,227,314 for the six months ended October 31,
2004 and the year ended April 30, 2004, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
October 31, 2004 Shares Amount
Shares sold 1,358,972 $ 8,003,395
Automatic conversion of shares 1,587,983 9,391,278
Shares issued to shareholders in
reinvestment of distributions 732,404 4,130,756
-------------- ---------------
Total issued 3,679,359 21,525,429
Shares redeemed (3,966,279) (23,194,905)
-------------- ---------------
Net decrease (286,920) $ (1,669,476)
============== ===============
Class A Shares for the Year Dollar
Ended April 30, 2004 Shares Amount
Shares sold 3,548,971 $ 21,466,372
Automatic conversion of shares 4,753,957 29,349,565
-------------- ---------------
Total issued 8,302,928 50,815,937
Shares redeemed (6,095,207) (36,859,042)
-------------- ---------------
Net increase 2,207,721 $ 13,956,895
============== ===============
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Notes to Financial Statements (concluded)
Class B Shares for the
Six Months Ended Dollar
October 31, 2004 Shares Amount
Shares sold 1,168,136 $ 5,369,424
Shares issued to shareholders in
reinvestment of distributions 1,306,275 5,656,169
-------------- ---------------
Total issued 2,474,411 11,025,593
Shares redeemed (5,312,670) (23,791,195)
Automatic conversion of shares (2,055,252) (9,391,278)
-------------- ---------------
Net decrease (4,893,511) $ (22,156,880)
============== ===============
Class B Shares for the Year Dollar
Ended April 30, 2004 Shares Amount
Shares sold 4,858,391 $ 22,694,707
Shares redeemed (10,596,407) (49,517,621)
Automatic conversion of shares (6,102,911) (29,349,565)
-------------- ---------------
Net decrease (11,840,927) $ (56,172,479)
============== ===============
Class C Shares for the
Six Months Ended Dollar
October 31, 2004 Shares Amount
Shares sold 795,298 $ 3,637,957
Shares issued to shareholders in
reinvestment of distributions 660,128 2,858,354
-------------- ---------------
Total issued 1,455,426 6,496,311
Shares redeemed (2,360,394) (10,579,946)
-------------- ---------------
Net decrease (904,968) $ (4,083,635)
============== ===============
Class C Shares for the Year Dollar
Ended April 30, 2004 Shares Amount
Shares sold 3,027,451 $ 14,171,991
Shares redeemed (4,525,969) (21,296,318)
-------------- ---------------
Net decrease (1,498,518) $ (7,124,327)
============== ===============
Class I Shares for the
Six Months Ended Dollar
October 31, 2004 Shares Amount
Shares sold 1,301,507 $ 8,346,151
Shares issued to shareholders in
reinvestment of distributions 1,133,116 6,889,342
-------------- ---------------
Total issued 2,434,623 15,235,493
Shares redeemed (6,613,000) (41,483,433)
-------------- ---------------
Net decrease (4,178,377) $ (26,247,940)
============== ===============
Class I Shares for the Year Dollar
Ended April 30, 2004 Shares Amount
Shares sold 5,776,882 $ 37,022,644
Shares redeemed (9,357,955) (60,361,693)
-------------- ---------------
Net decrease (3,581,073) $ (23,339,049)
============== ===============
Class R Shares for the
Six Months Ended Dollar
October 31, 2004 Shares Amount
Shares sold 139,687 $ 630,241
Shares issued to shareholders in
reinvestment of dividends 5,294 23,242
-------------- ---------------
Total issued 144,981 653,483
Shares redeemed (18,219) (83,540)
-------------- ---------------
Net increase 126,762 $ 569,943
============== ===============
Class R Shares for the Year Dollar
Ended April 30, 2004 Shares Amount
Shares sold 110,216 $ 532,188
Shares redeemed (15,930) (80,542)
-------------- ---------------
Net increase 94,286 $ 451,646
============== ===============
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by MLIM and its
affiliates, is a party to a $500,000,000 credit agreement with a
group of lenders. The Fund may borrow under the credit agreement to
fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount
allowable under the Fund's current prospectus and statement of
additional information, subject to various other legal, regulatory
or contractual limits. The Fund pays a commitment fee of .09% per
annum based on the Fund's pro rata share of the unused portion of
the credit agreement. Amounts borrowed under the credit agreement
bear interest at a rate equal to, at each fund's election, the
Federal Funds rate plus .50% or a base rate as defined in the credit
agreement. The Fund did not borrow under the credit agreement during
the six months ended October 31, 2004. On November 26, 2004, the
credit agreement was renewed for one year under substantially the
same terms.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Officers and Directors
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Kevin A. Ryan, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Robert C. Doll, Jr., Senior Vice President
Jordan C. Schreiber, Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
J.P. Morgan Chase Bank
Global Securities Services
4 Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are
available on the SEC's Web site at http://www.sec.gov. The Fund's
Forms N-Q may also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Electronic Delivery
The Fund offers electronic delivery of communications to its
shareholders. In order to receive this service, you must
register your account and provide us with e-mail information.
To sign up for this service, simply access this Web site
http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification
number (PIN). You will need this PIN should you wish to update your
e-mail address, choose to discontinue this service and/or make any
other changes to the service. This service is not available for
certain retirement accounts at this time.
MERRILL LYNCH HEALTHCARE FUND, INC., OCTOBER 31, 2004
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this
semi-annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to
this semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies - Not Applicable
Item 8 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 10 - Controls and Procedures
10(a) - The registrant's certifying officers have reasonably
designed such disclosure controls and procedures to ensure material
information relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
10(b) - There were no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
Item 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - Not Applicable to this semi-annual
report
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Merrill Lynch Healthcare Fund, Inc.
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
Merrill Lynch Healthcare Fund, Inc.
Date: December 13, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: _/s/ Terry K. Glenn________
Terry K. Glenn,
President of
Merrill Lynch Healthcare Fund, Inc.
Date: December 13, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Healthcare Fund, Inc.
Date: December 13, 2004