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 811-06669
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: Robert C. Doll, Jr., Chief
Executive Officer, 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: 08/31/05
Date of reporting period: 09/01/04 - 02/28/05
Item 1 - Report to Stockholders
Merrill Lynch
Fundamental Growth
Fund, Inc.
Semi-Annual Report
February 28, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered
a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are
subject to change.
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 Fundamental Growth Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
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A Letter From the President
Dear Shareholder
Financial markets broadly posted positive returns over the most
recent reporting period, with international equities providing some
of the most impressive results.
Total Returns as of February 28, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 9.99% + 6.98%
International equities (MSCI Europe Australasia Far East Index) +21.18 +18.68
Fixed income (Lehman Brothers Aggregate Bond Index) + 1.26 + 2.43
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 2.40 + 2.96
High yield bonds (Credit Suisse First Boston High Yield Index) + 7.53 +11.21
The U.S. economy has continued to show resilience in the face of
the Federal Reserve Board's (the Fed) continued interest rate hikes
and, more recently, higher oil prices. The Fed's measured tightening
program recently brought the federal funds rate to 2.75% en route
to a more "neutral" short-term interest rate target (relative to
inflation). Since the U.S. presidential election, progress has been
monitored on many fronts in Washington, although concerns remain
about the structural problems of debt and deficits, as reflected by
a significant decline in the U.S. dollar.
U.S. equities ended 2004 in a strong rally, but remained in a fairly
narrow trading range for the first two months of 2005. Divergences
were notable among sectors, with energy emerging as a clear leader.
On the positive side, corporations have accelerated their hiring
plans, capital spending remains reasonably robust and merger-and-
acquisition activity has increased. Offsetting the positives are
slowing corporate earnings growth, renewed energy price concerns and
the potential for an economic slowdown. International equities,
particularly in Asia, have benefited from higher economic growth
rates (China recorded growth of 9.3% in 2004), stronger currencies
and relatively reasonable valuations.
The major action in the bond market has been a flattening of the
yield curve. As short-term interest rates continued to rise, yields
on the long end of the curve remained relatively stable - even
declining at certain points since the Fed's monetary tightening
program began in June 2004. This phenomenon has been largely
attributed to continued foreign interest in U.S. bonds, which has
served to absorb much of the excess supply. By period-end, many
believed long-term yields were long overdue for a rise.
Looking ahead, the environment is likely to be a challenging one for
investors, with diversification and selectivity becoming
increasingly important themes. With this in mind, we encourage you
to meet with your financial advisor to review your goals and asset
allocation and to rebalance your portfolio, as necessary, to ensure
it remains aligned with your objectives and risk tolerance. As
always, 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,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
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. He is a member of 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
Disclosure of Expenses 9
Schedule of Investments 10
Financial Statements 13
Financial Highlights 16
Notes to Financial Statements 21
Portfolio Information 26
Officers and Directors 27
CFA R and Chartered Financial Analyst R are trademarks owned by the
Association for Investment Management and Research.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
A Discussion With Your Fund's Portfolio Manager
The Fund significantly outperformed both its benchmarks and its
Lipper category average, benefiting from favorable sector weightings
and good stock selection.
How did the Fund perform during the period in light of the existing
market conditions?
For the six-month period ended February 28, 2005, Merrill Lynch
Fundamental Growth Fund, Inc.'s Class A, Class B, Class C, Class I
and Class R Shares had total returns of +11.77%, +11.37%, +11.38%,
+11.92% and +11.69%, 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 - 8 of this report to shareholders.) The Fund outperformed the
+9.99% return of the unmanaged Standard & Poor's 500 (S&P 500) Index
and the +8.65% return of the S&P 500 Barra Growth Index for the same
period. Fund returns also exceeded the +8.80% average return of the
Lipper Large Cap Growth Funds category, which represents the
performance of actively managed large cap growth funds.
The equity, bond and commodity markets were relatively volatile over
the past six months. The value style of investing significantly
outpaced growth for the period, while small cap stocks outperformed
their large cap counterparts.
The most significant factor in the Fund's outperformance was
our overweighting of the consumer discretionary, industrials,
information technology and materials sectors, and above-market
exposure to selected stocks within these sectors. The top performers
were Marriott International, Inc., Starwood Hotels & Resorts
Worldwide Inc., Best Buy Co., Inc. and eBay, Inc. in consumer
discretionary; Monster Worldwide, Inc. and PACCAR, Inc. in
industrials; Oracle Corp. and Adobe Systems, Inc. in information
technology; and Air Products & Chemicals, Inc. in materials.
Stock selection and underweight positions in health care and
consumer staples also contributed positively to performance. In
health care, relative results benefited from our negligible exposure
to the major pharmaceutical companies, an area we have avoided for
fundamental business reasons since May 2001. In consumer staples,
our avoidance of several of the largest and best-known companies in
the sector was the most meaningful contributor to performance.
The leading detractor from Fund performance was the absence of any
investment in ExxonMobil Corp., which became part of the S&P 500
Barra Growth Index in December 2004 and represented a meaningful
weighting (6.6%) in the benchmark by period-end. The stock price
appreciated more than 23% in February 2005.
What changes were made to the portfolio during the period?
We made several adjustments to the portfolio in response to changes
in the relative valuations and business fundamentals of the
companies we own. In the consumer discretionary sector, valuations
rose while growth of U.S. consumer spending gradually slowed. In
response, we liquidated our positions at profits in Best Buy, eBay,
Nike, Inc. and Lowe's Companies, Inc. We also substantially reduced
our weighting in Coach, Inc. due to its relatively high valuation,
although the longer-term business prospects look very good. We sold
Rent-A-Center, Inc. and IAC/Interactive Corp. based on deteriorating
business fundamentals.
In the health care sector, we initiated positions in companies that
we believe could benefit as federal and state governments endeavor
to change the U.S. healthcare delivery system. We added Zimmer
Holdings, Inc. and St. Jude Medical, Inc. based on our belief that
federal reimbursement programs will favor medical devices focused on
rehabilitation and prevention of major cardiac problems that may
lead to permanent disability. We added to our positions in
WellPoint, Inc. and UnitedHealth Group, Inc., as we believe
governments will make a major effort to move Medicaid and Medicare
subscribers to private HMO plans over the next several years. We
added Caremark Rx, Inc. to the portfolio in light of both public and
private sector policies to move to mail order drug plans. We sold
Forest Laboratories, Inc. at a capital loss given our growing
concerns about the collapse of the company's anti-depressant drug
franchise, which might not be offset by its growing franchise in the
Alzheimer's drug market.
In the industrials sector, we liquidated our positions at profits
in Monster, PACCAR, Rockwell Automation, Inc., Cummins, Inc.,
Eaton Corp., Robert Half International, Inc. and Emerson Electric
Co. - all based on relatively high valuations. We added positions in
Boeing Co., Lockheed Martin Corp., Deere & Co. and Caterpillar, Inc.
In our opinion, the dramatic decline in the value of the U.S. dollar
over the past two years puts U.S. manufacturers of aerospace and
agricultural and industrial construction equipment in a position to
grow by taking market share from manufacturers in Europe and Asia.
Our exposure to this sector, as well as to health care, has
increased over the past six months.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
In contrast, we meaningfully reduced the Fund's exposure to the
information technology sector, selling out positions as the stocks
rose about twice as much as our benchmark in the fourth quarter of
2004 and into January on the basis of very good earnings reports. We
liquidated our positions in Oracle, Adobe, Cisco Systems, Inc.,
Hewlett-Packard Co., Lucent Technologies Inc., Texas Instruments
Inc., Motorola, Inc., Tektronix, Inc., Canon Inc., Avaya Inc.,
Agilent Technologies Inc., Analog Devices, Inc. and SanDisk Corp.
The Fund ended the period with an underweight exposure in the
information technology sector. We are concerned that there is too
much capacity to produce technology products across the board on a
global basis. In addition, Chinese and other Asian companies are
becoming the most aggressive competitors with a threshold for
profitability that is lower than their U.S. counterparts. This
does not appear to be a formula for materially higher profits,
profitability and higher stock valuations for most U.S. technology
companies.
In the materials sector, we shifted our focus from metals and mining
to chemicals by selling Phelps Dodge Corp. and Freeport-McMoRan
Copper & Gold, Inc. and adding Air Products, The Dow Chemical Co.,
Praxair, Inc. and E.I. DuPont de Nemours & Co. We are concerned
about the pricing and profitability of metals companies in 2005 as
new mining capacity is developed around the globe. On the other
hand, the decline in the U.S. dollar enhances the competitive
position and profit growth of U.S. companies in the industrial
chemicals and gases businesses.
For the first time in several years, we increased the Fund's
exposure to the financials sector, adding positions in Franklin
Resources, Inc., Bank of America Corp., Washington Mutual, Inc.,
Citigroup, Inc., U.S. Bancorp, Doral Financial Corp. and MBNA Corp.
Although the continued increase in the federal funds rate will put a
crimp on lending margins, we believe the recent acceleration of both
commercial and consumer loan demand will offset the impact of
narrower margins. The majority of these financial services companies
have relatively high dividend yields to cushion the downside of
stock prices as the Federal Reserve Board (the Fed) continues to
raise short-term interest rates.
In the energy sector, we took profits on many of the Fund's holdings
in exploration and development companies, selling Devon Energy
Corp., Apache Corp., Pioneer Natural Resources Inc. and Occidental
Petroleum Corp. Given the recent upturn in the stock prices of
almost all energy companies, it appears investors have recognized
the tremendous earnings growth of the S&P energy companies over the
past year. However, the increase in interest rates over the past
nine months, as well as higher energy costs, are more likely to slow
economic growth and cause lower energy prices and lower earnings.
Consequently, we have taken a cautionary view toward energy
companies dependent on energy prices over the intermediate term. The
Fund still has a meaningful exposure to the major companies that
provide the logistical intelligence, equipment and services for
private companies and governments to explore and develop new energy
reserves, which are obviously scarce. We have had a positive secular
view toward the energy sector during this decade. However, when
global economies experience a slowdown in real growth or a
recession, as occurred in the United States in 2001, energy prices
fall and the stocks generally decline.
How would you characterize the Fund's position at the close of the
period?
The Fund is positioned for a slowdown in U.S. economic growth. We
ended the period overweight in the industrials sector, assuming a
continuation of capital investment programs in the United States and
Asia, particularly China. U.S. manufacturers of industrial goods as
well as chemicals and gases should benefit from their increased
competitive position in the global markets.
Our focus in the consumer discretionary sector is on companies in
the services and entertainment segments, which we believe could do
well as consumers spend more on these services rather than on motor
vehicles, consumer electronics and home appliances. In the energy
sector, we expect a continued ramp-up of corporate and government
spending on exploration and development of new energy reserves. We
have anticipated this type of development for more than two years
given the substantial demand for energy and material goods from the
Chinese economy. Finally, a slowdown in consumer spending could
cause the Fed to stop or change the direction of its monetary
restraint program, which would benefit the large banks, savings and
loans, and credit card companies in the financial sector of the
Fund's portfolio.
Lawrence R. Fuller
Vice President and Portfolio Manager
March 24, 2005
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
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, 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% 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.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Performance Data (continued)
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception
As of February 28, 2005 Total Return Total Return Total Return
ML Fundamental Growth Fund, Inc. Class A Shares* +11.77% +3.14% +163.75%
ML Fundamental Growth Fund, Inc. Class B Shares* +11.37 +2.35 +147.82
ML Fundamental Growth Fund, Inc. Class C Shares* +11.38 +2.34 +143.84
ML Fundamental Growth Fund, Inc. Class I Shares* +11.92 +3.43 +170.76
ML Fundamental Growth Fund, Inc. Class R Shares* +11.69 +2.90 + 31.49
S&P 500 R Index** + 9.99 +6.98 +192.12/+37.62
S&P 500/Barra Growth Index*** + 8.65 +3.51 +177.10/+28.91
* Investment results shown do not reflect sales charges; results shown would be lower if a sales
charge was included. Cumulative 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 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.
*** 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. Ten-year/since inception total returns are for 10
years and from 1/03/03.
S&P 500 is a registered trademark of the McGraw-Hill Companies.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 2/28/05 + 3.14% -2.28%
Five Years Ended 2/28/05 - 8.21 -9.20
Ten Years Ended 2/28/05 +10.18 +9.59
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Without Return With
CDSC CDSC**
Class B Shares*
One Year Ended 2/28/05 +2.35% -1.65%
Five Years Ended 2/28/05 -8.92 -9.26
Ten Years Ended 2/28/05 +9.50 +9.50
* 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
CDSC CDSC**
Class C Shares*
One Year Ended 2/28/05 +2.34% +1.34%
Five Years Ended 2/28/05 -8.93 -8.93
Ten Years Ended 2/28/05 +9.32 +9.32
* 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 2/28/05 + 3.43% -2.00%
Five Years Ended 2/28/05 - 7.98 -8.96
Ten Years Ended 2/28/05 +10.47 9.88
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Class R Shares Return
One Year Ended 2/28/05 + 2.90%
Inception (1/03/03) through 2/28/05 +13.56
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
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 September 1, 2004 and
held through February 28, 2005) 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
Beginning Ending During the Period*
Account Value Account Value September 1, 2004
September 1, February 28, to February 28,
2004 2005 2005
Actual
Class A $1,000 $1,117.70 $ 6.09
Class B $1,000 $1,113.70 $10.17
Class C $1,000 $1,113.80 $10.22
Class I $1,000 $1,119.20 $ 4.78
Class R $1,000 $1,116.90 $ 7.40
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,019.05 $ 5.81
Class B $1,000 $1,015.18 $ 9.69
Class C $1,000 $1,015.13 $ 9.74
Class I $1,000 $1,020.29 $ 4.56
Class R $1,000 $1,017.81 $ 7.05
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.16% for Class A, 1.94% for Class B, 1.95% for Class C, .91% for Class I and 1.41% for Class R),
multiplied by the average account value over the period, multiplied by 181/365 (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 365.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Schedule of Investments (in U.S. dollars)
Industry++ Shares Held Common Stocks Value
Aerospace & Defense--2.5% 1,207,400 Boeing Co. $ 66,370,778
1,116,100 Lockheed Martin Corp. (b) 66,095,442
---------------
132,466,220
Beverages--1.6% 1,599,900 PepsiCo, Inc. 86,170,614
Biotechnology--3.3% 1,897,700 Celgene Corp. (b)(e) 51,949,537
3,597,700 Gilead Sciences, Inc. (e) 124,300,535
---------------
176,250,072
Capital Markets--1.2% 884,400 Franklin Resources, Inc. (b) 62,076,036
Chemicals--7.7% 1,362,900 Air Products & Chemicals, Inc. (b) 85,344,798
2,551,400 The Dow Chemical Co. 140,709,710
1,621,100 E.I. Du Pont de Nemours & Co. (b) 86,404,630
1,814,200 Praxair, Inc. 81,330,586
293,000 Sigma-Aldrich Corp. (b) 18,051,730
---------------
411,841,454
Commercial Banks--2.5% 1,671,100 Bank of America Corp. (b) 77,956,815
1,909,300 U.S. Bancorp 56,801,675
---------------
134,758,490
Communications 5,700,900 Corning, Inc. (e) 65,389,323
Equipment--2.3% 1,901,400 Telefonaktiebolaget LM Ericsson (a)(b) 55,730,034
---------------
121,119,357
Consumer Finance--0.9% 2,010,900 MBNA Corp. 51,016,533
Diversified Financial 1,176,700 Citigroup, Inc. 56,152,124
Services--1.0%
Energy Equipment & 269,000 BJ Services Co. 13,439,240
Services--7.4% 1,366,600 Baker Hughes, Inc. (b) 64,612,848
756,600 Grant Prideco, Inc. (e) 18,279,456
1,851,100 Halliburton Co. 81,411,378
1,717,900 Schlumberger Ltd. 129,615,555
1,798,900 Transocean, Inc. (e) 87,210,672
---------------
394,569,149
Food Products--2.3% 1,840,300 McCormick & Co., Inc. 69,912,997
824,900 Wm. Wrigley Jr. Co. 54,905,344
---------------
124,818,341
Health Care Equipment & 2,160,500 Alcon, Inc. (b) 186,559,175
Supplies--12.7% 3,034,300 Boston Scientific Corp. (e) 99,100,238
608,400 Dentsply International, Inc. (b) 33,443,748
682,900 Fisher Scientific International (b)(e) 41,417,885
2,024,500 Medtronic, Inc. 105,516,940
1,465,200 St. Jude Medical, Inc. (e) 57,289,320
1,713,200 Varian Medical Systems, Inc. (b)(e) 61,555,276
639,300 Waters Corp. (e) 31,229,805
749,100 Zimmer Holdings, Inc. (e) 64,347,690
---------------
680,460,077
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Schedule of Investments (continued) (in U.S. dollars)
Industry++ Shares Held Common Stocks Value
Health Care Providers & 1,467,100 Caremark Rx, Inc. (e) $ 56,160,588
Services--5.5% 1,439,300 UnitedHealth Group, Inc. 131,206,588
898,900 WellPoint, Inc. (e) 109,719,734
---------------
297,086,910
Hotels, Restaurants & 1,152,200 Carnival Corp. (b) 62,656,636
Leisure--8.1% 2,130,600 Marriott International, Inc. Class A 136,571,460
1,499,700 Starbucks Corp. (e) 77,699,457
1,519,900 Starwood Hotels & Resorts Worldwide, Inc. 86,999,076
976,200 Wynn Resorts Ltd. (b)(e) 69,866,634
---------------
433,793,263
Household Durables--1.3% 551,600 KB HOME 68,839,680
Household Products--2.6% 2,593,800 Procter & Gamble Co. 137,704,842
IT Services--4.1% 2,191,300 Accenture Ltd. Class A (e) 55,987,715
1,486,900 First Data Corp. 60,992,638
784,600 Hewitt Associates, Inc. Class A (b)(e) 24,118,604
2,379,400 Paychex, Inc. 75,974,242
---------------
217,073,199
Industrial 3,287,800 3M Co. 275,977,932
Conglomerates--12.0% 10,468,400 General Electric Co. 368,487,680
---------------
644,465,612
Internet Software & 3,094,700 Yahoo!, Inc. (e) 99,865,969
Services--1.9%
Machinery--2.2% 597,400 Caterpillar, Inc. 56,782,870
824,300 Deere & Co. 58,615,973
---------------
115,398,843
Media--1.1% 2,168,300 Walt Disney Co. 60,582,302
Personal Products--1.2% 1,483,800 Avon Products, Inc. 63,462,126
Semiconductors & 6,120,060 Intel Corp. 146,759,039
Semiconductor
Equipment--2.7%
Software--4.8% 10,302,500 Microsoft Corp. 259,416,950
Specialty Retail--1.6% 2,765,000 Staples, Inc. 87,152,800
Textiles, Apparel & Luxury 1,215,000 Coach, Inc. (e) 67,468,950
Goods--1.3%
Thrifts & Mortgage 1,138,900 Doral Financial Corp. 45,168,774
Finance--1.9% 1,360,200 Washington Mutual, Inc. (b) 57,073,992
---------------
102,242,766
Trading Companies & 413,000 MSC Industrial Direct Co. Class A 13,360,550
Distributors--1.6% 3,506,000 Wolseley Plc 74,874,136
---------------
88,234,686
Total Investments in Common Stocks
(Cost--$4,710,582,724)--99.3% 5,321,246,404
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Schedule of Investments (concluded) (in U.S. dollars)
Beneficial Interest Short-Term Securities Value
$ 126,408,995 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (c) $ 126,408,995
351,227,200 Merrill Lynch Liquidity Series, LLC
Money Market Series (c)(d) 351,227,200
Total Investments in Short-Term Securities
(Cost--$477,636,195)--8.9% 477,636,195
Total Investments (Cost--$5,188,218,919*)--108.2% 5,798,882,599
Liabilities in Excess of Other Assets--(8.2%) (440,886,584)
---------------
Net Assets--100.0% $ 5,357,996,015
===============
(a) Depositary Receipts.
(b) Security, or portion of security, is on loan.
(c) 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 $ (64,896,876) $ 1,824,502
Merrill Lynch Liquidity Series,
LLC Money Market Series $(742,260,000) $ 259,361
Merrill Lynch Premier Institutional
Fund -- $ 276
(d) Security was purchased with the cash proceeds from securities loans.
(e) Non-income producing security.
++ For Fund compliance purposes, "Industry" means any one or more of the industry sub-classifications
used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by
Fund management. This definition may not apply for purposes of this report, which may combine such
industry sub-classifications for reporting ease.
* The cost and unrealized appreciation (depreciation) of investments as of February 28, 2005, as
computed for federal income tax purposes, were as follows:
Aggregate cost $ 5,204,452,198
================
Gross unrealized appreciation $ 683,485,385
Gross unrealized depreciation (89,054,984)
----------------
Net unrealized appreciation $ 594,430,401
================
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Statement of Assets and Liabilities
As of February 28, 2005
Assets
Investments in unaffiliated securities, at value (including securities
loaned of $339,087,274) (identified cost--$4,710,582,724) $ 5,321,246,404
Investments in affiliated securities, at value (identified cost--$477,636,195) 477,636,195
Cash 5,891
Receivables:
Capital shares sold $ 8,813,261
Dividends 7,530,502
Interest from affiliates 256,512
Securities lending 26,240 16,626,515
---------------
Prepaid expenses and other assets 138,192
---------------
Total assets 5,815,653,197
---------------
Liabilities
Collateral on securities loaned, at value 351,227,200
Payables:
Securities purchased 65,664,053
Capital shares redeemed 32,568,173
Other affiliates 3,240,699
Investment adviser 2,163,025
Distributor 1,967,455 105,603,405
---------------
Accrued expenses 826,577
---------------
Total liabilities 457,657,182
---------------
Net Assets
Net assets $ 5,357,996,015
===============
Net Assets Consist of
Class A Shares of capital stock, $.10 par value, 300,000,000 shares authorized $ 9,751,614
Class B Shares of capital stock, $.10 par value, 500,000,000 shares authorized 8,657,189
Class C Shares of capital stock, $.10 par value, 300,000,000 shares authorized 4,836,137
Class I Shares of capital stock, $.10 par value, 300,000,000 shares authorized 8,903,976
Class R Shares of capital stock, $.10 par value, 500,000,000 shares authorized 107,821
Paid-in capital in excess of par 7,114,012,705
Undistributed investment income--net $ 26,213,388
Accumulated realized capital losses--net (2,425,140,932)
Unrealized appreciation--net 610,654,117
---------------
Total accumulated losses--net (1,788,273,427)
---------------
Net Assets $ 5,357,996,015
===============
Net Asset Value
Class A--Based on net assets of $1,666,558,761 and 97,516,135 shares
outstanding $ 17.09
===============
Class B--Based on net assets of $1,356,802,755 and 86,571,894 shares
outstanding $ 15.67
===============
Class C--Based on net assets of $762,148,848 and 48,361,368 shares
outstanding $ 15.76
===============
Class I--Based on net assets of $1,555,288,641 and 89,039,757 shares
outstanding $ 17.47
===============
Class R--Based on net assets of $17,197,010 and 1,078,213 shares outstanding $ 15.95
===============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Statement of Operations
For the Six Months Ended February 28, 2005
Investment Income
Dividends (net of $31,156 foreign withholding tax) $ 61,967,386
Interest from affiliates 1,824,502
Securities lending--net 259,637
---------------
Total income 64,051,525
---------------
Expenses
Investment advisory fees $ 16,422,637
Account maintenance and distribution fees--Class B 7,148,201
Account maintenance and distribution fees--Class C 3,692,138
Account maintenance fees--Class A 2,094,730
Transfer agent fees--Class I 1,960,296
Transfer agent fees--Class B 1,902,399
Transfer agent fees--Class A 1,789,365
Transfer agent fees--Class C 1,011,036
Professional fees 941,304
Accounting services 430,069
Printing and shareholder reports 155,799
Custodian fees 130,445
Directors' fees and expenses 70,258
Account maintenance and distribution fees--Class R 35,836
Pricing fees 24,837
Transfer agent fees--Class R 16,648
Other 5,886
---------------
Total expenses 37,831,884
---------------
Investment income--net 26,219,641
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss)on:
Investments--net 160,520,065
Foreign currency transactions--net (167,610) 160,352,455
---------------
Change in unrealized appreciation (depreciation) on:
Investments--net 407,443,455
Foreign currency transactions--net (9,563) 407,433,892
--------------- ---------------
Total realized and unrealized gain--net 567,786,347
---------------
Net Increase in Net Assets Resulting from Operations $ 594,005,988
===============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 2005 2004
Operations
Investment income (loss)--net $ 26,219,641 $ (35,832,052)
Realized gain--net 160,352,455 541,118,775
Change in unrealized appreciation (depreciation)--net 407,433,892 (389,219,523)
--------------- ---------------
Net increase in net assets resulting from operations 594,005,988 116,067,200
--------------- ---------------
Capital Share Transactions
Net decrease in net assets derived from capital share transactions (369,108,839) (106,236,353)
--------------- ---------------
Net Assets
Total increase in net assets 224,897,149 9,830,847
Beginning of period 5,133,098,866 5,123,268,019
--------------- ---------------
End of period* $ 5,357,996,015 $ 5,133,098,866
=============== ===============
* Undistributed investment income (accumulated investment loss)--net $ 26,213,388 $ (6,253)
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Financial Highlights
Class A
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 15.29 $ 14.89 $ 13.63 $ 17.23 $ 29.63
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** .10 (.06) (.04) (.05) .03
Realized and unrealized gain (loss)--net 1.70 .46 1.30 (3.55) (10.52)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.80 .40 1.26 (3.60) (10.49)
---------- ---------- ---------- ---------- ----------
Less distributions in excess of realized
gain--net -- -- -- -- (1.91)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 17.09 $ 15.29 $ 14.89 $ 13.63 $ 17.23
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 11.77%++ 2.69% 9.24% (20.89%) (36.88%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.16%* 1.16% 1.18% 1.18% 1.04%
========== ========== ========== ========== ==========
Investment income (loss)--net 1.22%* (.38%) (.29%) (.33%) .14%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $1,666,559 $1,587,995 $1,544,751 $1,384,765 $1,296,787
========== ========== ========== ========== ==========
Portfolio turnover 61.59% 78.23% 108.34% 92.35% 149.86%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Financial Highlights (continued)
Class B
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 14.07 $ 13.81 $ 12.74 $ 16.24 $ 28.06
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** .03 (.17) (.13) (.17) (.13)
Realized and unrealized gain (loss)--net 1.57 .43 1.20 (3.33) (9.95)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.60 .26 1.07 (3.50) (10.08)
---------- ---------- ---------- ---------- ----------
Less distributions in excess of realized
gain--net -- -- -- -- (1.74)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 15.67 $ 14.07 $ 13.81 $ 12.74 $ 16.24
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 11.37%++ 1.88% 8.40% (21.55%) (37.36%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.94%* 1.93% 1.97% 1.96% 1.81%
========== ========== ========== ========== ==========
Investment income (loss)--net .43%* (1.16%) (1.08%) (1.10%) (.62%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $1,356,803 $1,445,258 $1,685,904 $1,802,731 $2,299,511
========== ========== ========== ========== ==========
Portfolio turnover 61.59% 78.23% 108.34% 92.35% 149.86%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Financial Highlights (continued)
Class C
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 14.15 $ 13.89 $ 12.82 $ 16.34 $ 28.26
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** .03 (.17) (.14) (.17) (.13)
Realized and unrealized gain (loss)--net 1.58 .43 1.21 (3.35) (10.01)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.61 .26 1.07 (3.52) (10.14)
---------- ---------- ---------- ---------- ----------
Less distributions in excess of realized
gain--net -- -- -- -- (1.78)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 15.76 $ 14.15 $ 13.89 $ 12.82 $ 16.34
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 11.38%++ 1.87% 8.35% (21.54%) (37.35%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.95%* 1.94% 1.98% 1.97% 1.83%
========== ========== ========== ========== ==========
Investment income (loss)--net .42%* (1.17%) (1.09%) (1.11%) (.66%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 762,149 $ 692,924 $ 608,176 $ 596,871 $ 616,400
========== ========== ========== ========== ==========
Portfolio turnover 61.59% 78.23% 108.34% 92.35% 149.86%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Financial Highlights (continued)
Class I
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 15.61 $ 15.16 $ 13.84 $ 17.46 $ 29.98
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** .12 (.02) (.01) (.02) .08
Realized and unrealized gain (loss)--net 1.74 .47 1.33 (3.60) (10.64)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.86 .45 1.32 (3.62) (10.56)
---------- ---------- ---------- ---------- ----------
Less distributions in excess of realized
gain--net -- -- -- -- (1.96)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 17.47 $ 15.61 $ 15.16 $ 13.84 $ 17.46
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 11.92%++ 2.97% 9.54% (20.73%) (36.71%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses .91%* .91% .93% .94% .80%
========== ========== ========== ========== ==========
Investment income (loss)--net 1.47%* (.13%) (.04%) (.09%) .35%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $1,555,289 $1,396,668 $1,284,423 $1,170,884 $ 950,922
========== ========== ========== ========== ==========
Portfolio turnover 61.59% 78.23% 108.34% 92.35% 149.86%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Financial Highlights (concluded)
Class R
For the For the For the Period
Six Months Year January 3,
Ended Ended 2003++ to
The following per share data and ratios have been derived February 28, August 31, August 31,
from information provided in the financial statements. 2005 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 14.28 $ 13.95 $ 12.13
---------- ---------- ----------
Investment income (loss)--net*** .08 (.09) (.02)
Realized and unrealized gain--net 1.59 .42 1.84
---------- ---------- ----------
Total from investment operations 1.67 .33 1.82
---------- ---------- ----------
Net asset value, end of period $ 15.95 $ 14.28 $ 13.95
========== ========== ==========
Total Investment Return**
Based on net asset value per share 11.69%+++ 2.37% 15.00%+++
========== ========== ==========
Ratios to Average Net Assets
Expenses 1.41%* 1.41% 1.42%*
========== ========== ==========
Investment income (loss)--net .99%* (.60%) (.53%)*
========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 17,197 $ 10,254 $ 14
========== ========== ==========
Portfolio turnover 61.59% 78.23% 108.34%
========== ========== ==========
* Annualized.
** Total investment returns exclude 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 28, 2005
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 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 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 28, 2005
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 28, 2005
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 Plan 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 Plan 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"), an affiliate of
MLIM, 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 28, 2005, 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 $ 26,223 $ 327,573
Class I $ 219 $ 2,895
For the six months ended February 28, 2005, MLPF&S received
contingent deferred sales charges of $643,453 and $52,200 relating
to transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$268 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 February 28, 2005, the Fund lent
securities with a value of $15,606,878 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 28, 2005, MLIM,
LLC received $109,707 in securities lending agent fees.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Notes to Financial Statements (continued)
In addition, MLPF&S received $740,821 in commissions on the
execution of portfolio security transactions for the Fund for the
six months ended February 28, 2005.
For the six months ended February 28, 2005, the Fund reimbursed MLIM
$58,226 for certain accounting services.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
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 28, 2005 were $3,238,389,476 and
$3,428,583,665, respectively.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $369,108,839 and $106,236,353 for the six months ended February
28, 2005 and for the year ended August 31, 2004.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 9,130,357 $ 150,534,896
Automatic conversion of shares 3,863,074 63,915,413
-------------- ---------------
Total issued 12,993,431 214,450,309
Shares redeemed (19,355,354) (322,320,417)
-------------- ---------------
Net decrease (6,361,923) $ (107,870,108)
============== ===============
Class A Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 17,766,615 $ 284,562,848
Shares issued resulting from
reorganization 303,903 5,126,703
Automatic conversion of shares 8,127,236 130,283,733
-------------- ---------------
Total issued 26,197,754 419,973,284
Shares redeemed (26,077,331) (417,131,861)
-------------- ---------------
Net increase 120,423 $ 2,841,423
============== ===============
Class B Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 6,049,598 $ 91,805,559
-------------- ---------------
Automatic conversion of shares (4,204,312) (63,915,413)
Shares redeemed (17,966,856) (273,531,480)
-------------- ---------------
Total redeemed (22,171,168) (337,446,893)
-------------- ---------------
Net decrease (16,121,570) $ (245,641,334)
============== ===============
Class B Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 16,590,641 $ 244,662,832
Shares issued resulting from
reorganization 3,740,939 58,381,960
-------------- ---------------
Total issued 20,331,580 303,044,792
-------------- ---------------
Automatic conversion of shares (8,792,896) (130,283,733)
Shares redeemed (30,886,156) (455,863,255)
-------------- ---------------
Total redeemed (39,679,052) (586,146,988)
-------------- ---------------
Net decrease (19,347,472) $ (283,102,196)
============== ===============
Class C Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 7,850,123 $ 119,916,036
Shares redeemed (8,451,353) (129,256,842)
-------------- ---------------
Net decrease (601,230) $ (9,340,806)
============== ===============
Class C Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 13,724,469 $ 204,267,701
Shares issued resulting from
reorganization 2,519,070 39,535,287
-------------- ---------------
Total issued 16,243,539 243,802,988
Shares redeemed (11,057,204) (163,910,711)
-------------- ---------------
Net increase 5,186,335 $ 79,892,277
============== ===============
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Notes to Financial Statements (concluded)
Class I Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 13,964,120 $ 232,657,354
Shares redeemed (14,424,433) (244,469,609)
-------------- ---------------
Net decrease (460,313) $ (11,812,255)
============== ===============
Class I Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 24,896,870 $ 410,881,363
Shares issued resulting from
reorganization 147,273 2,532,155
-------------- ---------------
Total issued 25,044,143 413,413,518
Shares redeemed (20,270,196) (330,110,284)
-------------- ---------------
Net increase 4,773,947 $ 83,303,234
============== ===============
Class R Shares for the
Six Months Ended Dollar
February 28, 2005 Shares Amount
Shares sold 536,664 $ 8,305,447
Shares redeemed (176,256) (2,749,783)
-------------- ---------------
Net increase 360,408 $ 5,555,664
============== ===============
Class R Shares for the Year Dollar
Ended August 31, 2004 Shares Amount
Shares sold 872,209 $ 13,191,530
Shares redeemed (155,422) (2,362,621)
-------------- ---------------
Net increase 716,787 $ 10,828,909
============== ===============
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 .07% 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 February 28, 2005. On November 26, 2004, the
credit agreement was renewed for one year under substantially the
same terms.
6. Capital Loss Carryforward:
On August 31, 2004, the Fund had a net capital loss carryforward of
$2,569,260,108, of which $98,873,827 expires in 2008, $126,733,281
expires in 2009, $975,197,323 expires in 2010, $1,300,237,466
expires in 2011 and $68,218,211 expires in 2012. This amount will be
available to offset like amounts of any future taxable gains.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Portfolio Information
As of February 28, 2005
Percent of
Ten Largest Holdings Net Assets
General Electric Co. 6.9%
3M Co. 5.2
Microsoft Corp. 4.8
Alcon, Inc. 3.5
Intel Corp. 2.7
The Dow Chemical Co. 2.6
Procter & Gamble Co. 2.6
Marriott International, Inc. Class A 2.5
UnitedHealth Group, Inc. 2.4
Schlumberger Ltd. 2.4
Percent of
Five Largest Industries* Net Assets
Health Care Equipment & Supplies 12.7%
Industrial Conglomerates 12.0
Hotels, Restaurants & Leisure 8.1
Chemicals 7.7
Energy Equipment and Services 7.4
* 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.
Percent of
Total
Sector Representation Investments
Health Care 19.9%
Industrials 16.9
Information Technology 14.6
Consumer Discretionary 12.4
Consumer Staples 7.1
Materials 7.1
Financials 7.0
Energy 6.8
Other* 8.2
* Includes portfolio holdings in short-term investments.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC., FEBRUARY 28, 2005
Officers and Directors
Robert C. Doll, Jr., President and Director
James H. Bodurtha, Director
Joe Grills, Director
Herbert I. London, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Lawrence R. Fuller, Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
JP 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
Andre F. Perold resigned as a Director of Merrill Lynch Fundamental
Growth Fund, Inc. effective October 22, 2004.
Effective January 1, 2005, Terry K. Glenn retired as President and
Director of the Fund. The Fund's Board of Directors wishes Mr. Glenn
well in his retirement.
Effective January 1, 2005, Robert C. Doll, Jr. became President and
Director of the Fund.
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.
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 at
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 28, 2005
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 - Portfolio Managers of Closed-End Management Investment
Companies - Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 11 - Controls and Procedures
11(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.
11(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 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual
report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(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/ Robert C. Doll, Jr._______
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Fundamental Growth Fund, Inc.
Date: April 22, 2005
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/ Robert C. Doll, Jr.________
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Fundamental Growth Fund, Inc.
Date: April 22, 2005
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Fundamental Growth Fund, Inc.
Date: April 22, 2005