UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-03595
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: Robert C. Doll, Jr., Chief Executive
Officer, 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 - 04/30/05
Item 1 - Report to Stockholders
Merrill Lynch
Healthcare Fund, Inc.
Annual Report
April 30, 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 Healthcare Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
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Merrill Lynch Healthcare Fund, Inc.
Portfolio Information as of April 30, 2005
Percent of
Ten Largest Equity Holdings Net Assets
Roche Holding AG 7.1%
Caremark Rx, Inc. 6.7
Amgen, Inc. 6.1
Cerner Corp. 5.9
Sepracor, Inc. 5.8
WellPoint, Inc. 5.3
UnitedHealth Group, Inc. 5.1
Aetna, Inc. New Shares 4.6
Abbott Laboratories 4.1
PacifiCare Health Systems 3.8
Percent of
Total
Geographic Allocation Investments
United States 69.7%
Switzerland 6.9
United Kingdom 1.5
India 1.4
Japan 1.3
France 1.3
Netherlands 0.8
Other* 17.1
* Includes portfolio holdings in short-term investments.
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 HEALTHCARE FUND, INC., APRIL 30, 2005
A Letter From the President
Dear Shareholder
Financial markets faced a number of crosscurrents over the past several
months, but most major benchmarks managed to post positive returns for the
annual and semi-annual reporting periods ended April 30, 2005:
Total Returns as of April 30, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) +3.28% + 6.34%
Small-cap U.S. equities (Russell 2000 Index) -0.15% + 4.71%
International equities (MSCI Europe Australasia Far East Index) +8.71% +14.95%
Fixed income (Lehman Brothers Aggregate Bond Index) +0.98% + 5.26%
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +1.93% + 6.81%
High yield bonds (Credit Suisse First Boston High Yield Index) +0.65% + 6.92%
After expanding at an annualized rate of 4.4% in 2004, U.S. gross domestic
product growth for the first quarter of 2005 came in at an estimated 3.1%
(although that figure was later revised upward to 3.5%). Nevertheless, the
Federal Reserve Board continued increasing interest rates at a measured
pace to combat emergent inflation. The most recent hike came on May 3, and
brought the federal funds rate to 3%. Recently, signs of inflation have
taken the form of rising business costs and increasing consumer prices,
particularly in the areas of gasoline, healthcare, housing and education.
U.S. equities ended 2004 in a strong rally, but stumbled into negative
territory in 2005. The market weakness was largely fueled by the potential
for slowing economic and corporate earnings growth, renewed energy price
concerns and a lack of investor conviction. On the positive side, certain
sectors of the market have been performing well (particularly energy) and
corporate transactions, such as mergers and acquisitions, stock buy-backs
and dividend payouts, have all increased. International equities,
especially in Asia, have benefited from higher economic growth rates.
In the bond market, we witnessed a yield curve flattening trend over the
past several months as short-term yields increased and longer-term interest
rates remained more stable or fell. At the end of April 2005, the two-year
Treasury note yielded 3.66% and the 10-year Treasury note yielded 4.21%, a
difference of 55 basis points (.55%). This compared to a spread of 149 basis
points six months earlier and 222 basis points 12 months ago.
Looking ahead, the environment is likely to be a challenging one for
investors. 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 HEALTHCARE FUND, INC., APRIL 30, 2005
A Discussion With Your Fund's Portfolio Manager
In an effort to generate gains while containing risk, we remained focused on
our long-term strategy of balancing the upside potential of growth-oriented
subsectors with the downside support offered by the more defensive areas of
healthcare.
How did the Fund perform during the fiscal year in light of the existing
market conditions?
For the year ended April 30, 2005, Merrill Lynch Healthcare Fund, Inc.'s
Class A, Class B, Class C, Class I and Class R Shares had total returns of
+.74%, -.09%, -.09%, +.99% and +.54%, respectively. (Fund results shown do
not reflect sales charges and would be lower if sales charges were included.
Complete performance information can be found on pages 6 - 8 of this report
to shareholders.) For the same period, the Standard and Poor's 500 Index,
which represents the broader stock market rather than healthcare stocks
alone, returned +6.34%, while the Fund's composite benchmark, which
comprises four Morgan Stanley Capital International (MSCI) industries,*
returned +7.93%.
Fund returns outpaced the average of 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 -.79% for
the year ended April 30, 2005.
The past 12 months were marked by a sustainable economic recovery in the
United States. Gross domestic product (GDP) grew at an annualized rate of
4.4% for 2004, well ahead of the 3% annual growth rate registered in 2003.
As the economic expansion progressed, short-term interest rates rose from
their historically low levels as the Federal Reserve Board embarked on a
program of "measured" monetary tightening. At the same time, energy prices
soared as extraordinary growth in the Chinese economy boosted overall demand.
These increases started in May 2004 and continued for the remainder of the
period. As a result, energy and other commodity share prices rose to record
levels, as did share prices in these sectors.
* The Fund's composite benchmark comprises the following four
MSCI industries: health care equipment and supplies (15%), health
care providers and services (25%), biotechnology (25%) and
pharmaceuticals (35%).
Overall, equity market trading was confined to a fairly narrow range for much
of the fiscal year. A turning point came in November, when the Bush election
victory triggered a robust rally that lasted until March 2005. At that point,
it appeared that the cumulative impact of 12 months of rising interest rates
and energy costs had begun to pressure the economy and the equity market. An
advanced GDP figure for the first quarter of 2005 came in lower than expected
at 3.1%, although that figure was later revised upward to 3.5%.
During this 12-month period, health care was one of the poorest performing
industry sectors, which accounts for the Fund's underperformance of the broad-
market S&P 500 Index. Pharmaceuticals continued to suffer from an anemic new
product flow, as well as intense generic drug price pressure and attempts to
invalidate patents. While valuations on pharmaceutical stocks are reasonable,
both historically and relatively, the upside, in our judgment, appears
limited by negative public perception of the industry. This unfavorable
attitude has spilled over to the political and regulatory spheres. Several
recent, well-publicized drug marketing withdrawals and possible Congressional
action to ease imports from Canada illustrate the climate. In the United
States, there is now an adversarial climate between a highly safety-conscious
Food and Drug Administration (FDA) and the drug industry. The public antipathy
is largely based on the high cost of medications, especially when compared to
lower prices on the same drugs sold overseas. Biotechnology stocks, which are
always more risky, have been impacted by some of the same pressures, although
generic competition is limited. Only managed health care (HMO) stocks posted
gains during the year as the Republican victory positioned this subgroup as
the vehicle to administer the government's greatly expanded Medicare program.
We believe the Fund performed satisfactorily in this climate. The stronger
performance of the composite benchmark largely reflects the absence in that
index of small biotechnology holdings, which were severely impacted by a lack
of "news flow" during May through October. News flow arises from scientific
meetings, which were not scheduled during the summer hiatus. Since these
biotechnology companies did not have earnings or dividends to support share
prices during a period of market weakness, the absence of news developments
was particularly meaningful. Also damaging to performance was the Fund's
position in biotechnology company Biogen Idec Inc., which was severely
impacted by the FDA's suspension of sales of the company's multiple sclerosis
treatment drug. We liquidated our position in Biogen.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
What changes were made to the portfolio during the year?
The Fund gradually adapted a more defensive stance during the 12-month
period. The total number of holdings was reduced from 80 to 58. We continued
to pursue a "barbell" strategy, seeking to balance risk and reward in the
portfolio. We emphasized HMOs and pharmaceuticals to provide downside support
in a fragile equity market. Non-U.S.-based pharmaceutical companies were an
investment focus. For upside potential, we continued to look to biotechnology
companies, especially those with important new discoveries in cancer
treatment. We did give greater weight to more mature biotechnology companies,
such as Genentech, Inc. and Amgen, Inc., with profitable products on the
market. We substantially reduced small cap biotechnology holdings. We took
profits on the Fund's hospital stocks, which provided a source of funds for
our new purchases.
The Fund's exposure to pharmaceutical stocks was largely unchanged. We
continued to avoid generic drug companies, with the exception of two Indian
companies - Sun Pharmaceuticals Industries Ltd. and Cadila Healthcare Ltd.,
both of which remained attractive given their competitive cost advantages.
Over the year, the Fund's U.S. holdings were increased from 76% of net assets
to 82% by period-end. Significant positions outside the United States
included Japanese drug company Takeda Pharmaceutical Co., Ltd.; the two major
Swiss-based pharmaceutical companies, Novartis AG and Roche Holding AG; and
the largest French drug company, Sanofi-Aventis.
How would you characterize the Fund's position at the close of the period?
As mentioned earlier, we shifted the portfolio to a more defensive posture in
the past year, although its subsector structure was little changed. In
addition to decreasing the total number of holdings in the portfolio, we
increased the Fund's position in large cap holdings from 49% of net assets to
71% by period-end. This included greater exposure to dividend-paying
pharmaceutical companies.
Notwithstanding the hills and valleys of the economic cycle, we believe
healthcare is a core long-term investment area driven by an aging population,
continued scientific discovery, and economic advances in China, India and
other less developed parts of the world. Overall, we continue to pursue a
growth-oriented investment strategy. At the same time, we are sensitive to
stock valuations and remain diversified across the breadth of health care
subsectors.
Jordan C. Schreiber
Vice President and Portfolio Manager
May 26, 2005
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 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.
* 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. Prior to inception,
Class R Share performance results are those of Class I Shares (which have no
distribution or account maintenance fees) restated for Class R Share fees.
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
6-Month 12-Month 10-Year
As of April 30, 2005 Total Return Total Return Total Return
ML Healthcare Fund, Inc.--Class A Shares* +7.95% +0.74% +286.43%
ML Healthcare Fund, Inc.--Class B Shares* +7.41 -0.09 +263.18
ML Healthcare Fund, Inc.--Class C Shares* +7.65 -0.09 +257.54
ML Healthcare Fund, Inc.--Class I Shares* +8.17 +0.99 +296.75
ML Healthcare Fund, Inc.--Class R Shares* +7.75 +0.54 +279.59
S&P 500 (R) Index** +3.28 +6.34 +165.62
* 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.
** 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.
S&P 500 is a registered trademark of the McGraw-Hill companies.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Performance Data (continued)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
Class A & Class B Shares
A line graph illustrating the growth of a $10,000 investment in ML Healthcare
Fund, Inc.++ Class A and Class B Shares* compared to a similar investment in
Standard & Poor's 500 Index++++. Values illustrated are as follows:
ML Healthcare Fund, Inc.++
Class A Shares*
Date Value
April 1995 $ 9,475.00
April 1996 $13,619.00
April 1997 $14,724.00
April 1998 $21,195.00
April 1999 $23,672.00
April 2000 $30,237.00
April 2001 $34,533.00
April 2002 $35,492.00
April 2003 $29,681.00
April 2004 $36,346.00
April 2005 $36,615.00
ML Healthcare Fund, Inc.++
Class B Shares*
Date Value
April 1995 $10,000.00
April 1996 $14,246.00
April 1997 $15,306.00
April 1998 $21,827.00
April 1999 $24,181.00
April 2000 $30,708.00
April 2001 $34,787.00
April 2002 $35,430.00
April 2003 $29,441.00
April 2004 $36,052.00
April 2005 $36,318.00
Standard & Poor's 500 Index++++
Date Value
April 1995 $10,000.00
April 1996 $13,021.00
April 1997 $16,294.00
April 1998 $22,985.00
April 1999 $28,001.00
April 2000 $30,837.00
April 2001 $26,837.00
April 2002 $23,449.00
April 2003 $20,328.00
April 2004 $24,979.00
April 2005 $26,562.00
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
++ ML Healthcare Fund, Inc. invests worldwide primarily in equity
securities of companies that, in the opinion of management, derive or
are expected to derive a substantial portion of their sales from
products or services in health care.
++++ 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.
Past performance is not indicative of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 4/30/05 + 0.74% - 4.55%
Five Years Ended 4/30/05 + 3.90 + 2.79
Ten Years Ended 4/30/05 +14.47 +13.86
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
Class B Shares*
One Year Ended 4/30/05 - 0.09% - 3.77%
Five Years Ended 4/30/05 + 3.09 + 2.80
Ten Years Ended 4/30/05 +13.77 +13.77
* Maximum contingent deferred sales charge is 4% and is reduced to
0% after six years.
** Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Performance Data (concluded)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
Class C, Class I & Class R Shares
A line graph illustrating the growth of a $10,000 investment in ML Healthcare
Fund, Inc.++ Class C, Class I and Class R Shares* compared to a similar
investment in Standard & Poor's 500 Index++++. Values illustrated are as
follows:
ML Healthcare Fund, Inc.++
Class C Shares*
Date Value
April 1995 $10,000.00
April 1996 $14,276.00
April 1997 $15,315.00
April 1998 $21,849.00
April 1999 $24,213.00
April 2000 $30,679.00
April 2001 $34,783.00
April 2002 $35,425.00
April 2003 $29,364.00
April 2004 $35,786.00
April 2005 $35,754.00
ML Healthcare Fund, Inc.++
Class I Shares*
Date Value
April 1995 $ 9,475.00
April 1996 $13,645.00
April 1997 $14,811.00
April 1998 $21,338.00
April 1999 $23,900.00
April 2000 $30,605.00
April 2001 $35,065.00
April 2002 $36,085.00
April 2003 $30,287.00
April 2004 $37,223.00
April 2005 $37,592.00
ML Healthcare Fund, Inc.++
Class R Shares*
Date Value
April 1995 $10,000.00
April 1996 $14,331.00
April 1997 $15,478.00
April 1998 $22,188.00
April 1999 $24,728.00
April 2000 $31,508.00
April 2001 $35,924.00
April 2002 $36,785.00
April 2003 $30,761.00
April 2004 $37,755.00
April 2005 $37,959.00
Standard & Poor's 500 Index++++
Date Value
April 1995 $10,000.00
April 1996 $13,021.00
April 1997 $16,294.00
April 1998 $22,985.00
April 1999 $28,001.00
April 2000 $30,837.00
April 2001 $26,837.00
April 2002 $23,449.00
April 2003 $20,328.00
April 2004 $24,979.00
April 2005 $26,562.00
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
++ ML Healthcare Fund, Inc. invests worldwide primarily in equity
securities of companies that, in the opinion of management, derive or
are expected to derive a substantial portion of their sales from
products or services in health care.
++++ 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.
Past performance is not indicative of future results.
Average Annual Total Return
Return Return
Without CDSC With CDSC**
Class C Shares*
One Year Ended 4/30/05 - 0.09% - 1.01%
Five Years Ended 4/30/05 + 3.11 + 3.11
Ten Years Ended 4/30/05 +13.59 +13.59
* 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 4/30/05 + 0.99% - 4.31%
Five Years Ended 4/30/05 + 4.20 + 3.08
Ten Years Ended 4/30/05 +14.78 +14.16
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Class R Shares Return
One Year Ended 4/30/05 + 0.54%
Five Years Ended 4/30/05 + 3.80
Ten Years Ended 4/30/05 +14.27
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 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 November 1, 2004 and held through April 30, 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 November 1, 2004 to
November 1, April 30, April 30,
2004 2005 2005
Actual
Class A $1,000 $1,079.50 $ 8.24
Class B $1,000 $1,074.10 $12.20
Class C $1,000 $1,076.50 $12.27
Class I $1,000 $1,081.70 $ 6.85
Class R $1,000 $1,077.50 $ 9.53
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,016.97 $ 8.00
Class B $1,000 $1,013.13 $11.84
Class C $1,000 $1,013.08 $11.89
Class I $1,000 $1,018.32 $ 6.64
Class R $1,000 $1,015.73 $ 9.25
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class (1.59% for Class A, 2.36%
for Class B, 2.37% for Class C, 1.32% for Class I and 1.84% for Class R), multiplied by the average account value over
the period, multiplied by 182/365.
** 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 HEALTHCARE FUND, INC., APRIL 30, 2005
Schedule of Investments (in U.S. dollars)
NORTH AMERICA Industry* Shares Held Common Stocks Value
United Biotechnology Discovery Tools 100,000 Charles River Laboratories International,
States--82.3% & Platform Technology--3.6% Inc. (c)(e) $ 4,737,000
220,000 Covance, Inc. (c) 10,040,800
220,000 Lexicon Genetics, Inc. (c) 963,600
200,000 Medarex, Inc. (c) 1,416,000
--------------
17,157,400
Biotechnology Products--12.1% 500,000 Amgen, Inc. (c) 29,105,000
53,400 Cypress Bioscience, Inc. (c) 549,486
100,000 Genentech, Inc. (c)(e) 7,094,000
200,000 Genzyme Corp. (c) 11,722,000
140,000 Gilead Sciences, Inc. (c) 5,194,000
40,000 Keryx Biopharmaceuticals, Inc. (c) 579,600
200,000 Progenics Pharmaceuticals, Inc. (c)(e) 3,562,000
--------------
57,806,086
Health Care Information 485,400 Cerner Corp. (c)(e) 28,182,324
& Technology--6.5% 180,000 Emageon, Inc. (c) 2,838,600
--------------
31,020,924
Managed Health Care-- 80,000 AMERIGROUP Corp. (c) 2,809,600
Medicaid--1.8% 80,000 Centene Corp. (c)(e) 2,228,000
120,000 WellCare Health Plans, Inc. (c)(e) 3,540,000
--------------
8,577,600
Managed Health Care-- 300,000 Aetna, Inc. New Shares 22,011,000
Multiline--15.1% 260,000 UnitedHealth Group, Inc. 24,572,600
200,000 WellPoint, Inc. (c) 25,550,000
--------------
72,133,600
Managed Health 160,000 Humana, Inc. (c) 5,544,000
Care--Regional--4.9% 300,000 PacifiCare Health Systems (c) 17,928,000
--------------
23,472,000
Medical Devices--10.5% 200,000 Cytyc Corp. (c) 4,262,000
154,200 DexCom, Inc. (c) 1,542,000
80,000 Diagnostic Products Corp. (c) 3,880,000
150,000 Intuitive Surgical, Inc. (c)(e) 6,441,000
120,000 Medtronic, Inc. 6,324,000
500,000 SonoSite, Inc. (c)(e) 14,552,500
220,000 St. Jude Medical, Inc. (c) 8,586,600
60,000 Stryker Corp. 2,913,000
20,000 Zimmer Holdings, Inc. (c) 1,628,400
--------------
50,129,500
Pharmaceutical-- 399,000 Abbott Laboratories 19,614,840
Diversified--5.1% 70,000 Johnson & Johnson 4,804,100
--------------
24,418,940
Pharmaceutical-- 100,000 Bristol-Myers Squibb Co. 2,600,000
Prescription--3.7% 100,000 Vicuron Pharmaceuticals, Inc. (c) 1,635,000
300,000 Wyeth 13,482,000
--------------
17,717,000
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Schedule of Investments (continued) (in U.S. dollars)
NORTH AMERICA
(concluded) Industry* Shares Held Common Stocks Value
United States Pharmaceutical-- 80,000 Amylin Pharmaceuticals, Inc. (c)(e) $ 1,360,000
(concluded) Specialty--11.9% 70,000 CV Therapeutics, Inc. (c) 1,387,400
320,000 Celgene Corp. (c) 12,131,200
100,000 Idenix Pharmaceuticals Inc. (c) 1,891,000
150,000 MGI Pharma, Inc. (c) 3,307,500
35,138 Myogen, Inc. (c)(e) 228,397
300,000 Nabi Biopharmaceuticals (c)(e) 3,270,000
120,000 OSI Pharmaceuticals, Inc. (c)(e) 5,680,200
460,000 Sepracor, Inc. (c)(e) 27,563,200
--------------
56,818,897
Pharmacy Benefit Managers--7.1% 793,700 Caremark Rx, Inc. (c) 31,787,685
40,000 Medco Health Solutions, Inc. (c) 2,038,800
--------------
33,826,485
Total Common Stocks in North America--82.3% 393,078,432
PACIFIC BASIN/ASIA
India--1.6% Pharmaceutical--Generic--1.2% 321,700 Cadila Healthcare Ltd. 3,220,340
200,000 Sun Pharmaceuticals Industries Ltd. 2,292,618
--------------
5,512,958
Pharmaceutical-- 200,000 Cipla Ltd. 1,214,289
Specialty--0.4% 187,025 Nicholas Piramal India Ltd. 932,762
--------------
2,147,051
Total Common Stocks in India 7,660,009
Japan--1.5% Pharmaceutical-- 150,000 Takeda Pharmaceutical Co., Ltd. 7,295,222
Prescription--1.5%
Total Common Stocks in Japan 7,295,222
Total Common Stocks in the Pacific Basin/Asia--3.1% 14,955,231
WESTERN EUROPE
France--1.5% Pharmaceutical-- 80,000 Sanofi-Aventis 7,107,102
Prescription--1.5%
Total Common Stocks in France 7,107,102
Netherlands--1.0% Medical Devices--1.0% 94,679 Orthofix International NV (c) 4,449,913
Total Common Stocks in the Netherlands 4,449,913
Switzerland--8.1% Pharmaceutical-- 100,000 Novartis AG 4,886,917
Prescription--8.1% 280,000 Roche Holding AG 34,012,851
Total Common Stocks in Switzerland 38,899,768
United Medical Devices--0.3% 140,506 Smith & Nephew Plc 1,449,929
Kingdom--1.7% Pharmaceutical-- 1,700,000 Ark Therapeutics Group Plc (c) 3,733,838
Specialty--1.4% 100,000 Shire Pharmaceuticals Plc (a) 3,108,000
--------------
6,841,838
Total Common Stocks in the United Kingdom 8,291,767
Total Common Stocks in Western Europe--12.3% 58,748,550
Total Investments in Common Stocks
(Cost--$361,677,360)--97.7% 466,782,213
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Schedule of Investments (concluded) (in U.S. dollars)
Beneficial Interest Short-Term Securities Value
$12,025,393 Merrill Lynch Liquidity Series, LLC Cash
Sweep Series I (b) $ 12,025,393
84,757,350 Merrill Lynch Liquidity Series, LLC Money
Market Series (b)(d) 84,757,350
Total Investments in Short-Term Securities
(Cost--$96,782,743)--20.3% 96,782,743
Total Investments (Cost--$458,460,103**)--118.0% 563,564,956
Liabilities in Excess of Other Assets--(18.0%) (85,790,099)
--------------
Net Assets--100.0% $ 477,774,857
==============
* 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.
These industry classifications are unaudited.
** The cost and unrealized appreciation (depreciation) of investments as
of April 30, 2005, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 460,226,275
==============
Gross unrealized appreciation $ 110,435,532
Gross unrealized depreciation (7,096,851)
--------------
Net unrealized appreciation $ 103,338,681
==============
(a) Depositary Receipts.
(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 $ 4,401,476 $223,320
Merrill Lynch Liquidity Series,
LLC Money Market Series $(50,402,456) $193,529
Merrill Lynch Premier
Institutional Fund (45,053,269) $ 4,239
(c) Non-income producing security.
(d) Security was purchased with the cash proceeds from securities loans.
(e) Security, or a portion of security, is on loan.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Statement of Assets and Liabilities
As of April 30, 2005
Assets
Investments in unaffiliated securities, at value (including securities loaned
of $77,541,368) (identified cost--$361,677,360) $ 466,782,213
Investments in affiliated securities, at value (identified cost--$96,782,743) 96,782,743
Foreign cash (cost--$169,858) 170,214
Receivables:
Securities sold $ 5,684,580
Dividends 506,822
Capital shares sold 160,952
Interest from affiliates 13,303
Securities lending 5,992 6,371,649
---------------
Prepaid expenses and other assets 31,003
---------------
Total assets 570,137,822
---------------
Liabilities
Collateral on securities loaned, at value 84,757,350
Payables:
Securities purchased 5,572,460
Capital shares redeemed 1,158,792
Investment adviser 364,116
Other affiliates 178,817
Distributor 176,303
Custodian bank 69,205 7,519,693
---------------
Accrued expenses and other liabilities 85,922
---------------
Total liabilities 92,362,965
---------------
Net Assets
Net assets $ 477,774,857
===============
Net Assets Consist of
Class A Shares of Common Stock, $.10 par value, 100,000,000 shares authorized $ 2,362,639
Class B Shares of Common Stock, $.10 par value, 250,000,000 shares authorized 2,570,798
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 1,505,090
Class I Shares of Common Stock, $.10 par value, 200,000,000 shares authorized 2,244,411
Class R Shares of Common Stock, $.10 par value, 250,000,000 shares authorized 39,792
Paid-in capital in excess of par 352,718,526
Accumulated investment loss--net $ (250,563)
Undistributed realized capital gains--net 11,469,690
Unrealized appreciation--net 105,114,474
---------------
Total accumulated earnings--net 116,333,601
---------------
Net Assets $ 477,774,857
===============
Net Asset Value
Class A--Based on net assets of $142,774,205 and 23,626,385 shares outstanding $ 6.04
===============
Class B--Based on net assets of $117,481,991 and 25,707,979 shares outstanding $ 4.57
===============
Class C--Based on net assets of $68,742,748 and 15,050,903 shares outstanding $ 4.57
===============
Class I--Based on net assets of $146,922,471 and 22,444,112 shares outstanding $ 6.55
===============
Class R--Based on net assets of $1,853,442 and 397,921 shares outstanding $ 4.66
===============
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Statement of Operations
For the Year Ended April 30, 2005
Investment Income
Dividends (net of $129,054 foreign withholding tax) $ 2,157,156
Interest from affiliates 223,320
Securities lending--net 197,768
---------------
Total income 2,578,244
---------------
Expenses
Investment advisory fees $ 5,743,734
Account maintenance and distribution fees--Class B 1,424,592
Account maintenance and distribution fees--Class C 750,662
Transfer agent fees--Class I 429,223
Account maintenance fees--Class A 369,835
Transfer agent fees--Class B 341,826
Transfer agent fees--Class A 313,872
Accounting services 222,932
Transfer agent fees--Class C 189,067
Custodian fees 148,517
Professional fees 74,465
Registration fees 68,303
Printing and shareholder reports 63,472
Directors' fees and expenses 45,756
Pricing fees 7,824
Account maintenance and distribution fees--Class R 4,773
Transfer agent fees--Class R 2,226
Other 57,218
---------------
Total expenses 10,258,297
---------------
Investment loss--net (7,680,053)
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net 28,895,725
Foreign currency transactions--net (399,975) 28,495,750
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (including $429,975 deferred foreign capital gain tax credit) (24,283,099)
Foreign currency transactions--net 11,301 (24,271,798)
--------------- ---------------
Total realized and unrealized gain--net 4,223,952
---------------
Net Decrease in Net Assets Resulting from Operations $ (3,456,101)
===============
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Statements of Changes in Net Assets
For the Year Ended April 30,
Increase (Decrease) in Net Assets: 2005 2004
Operations
Investment loss--net $ (7,680,053) $ (8,575,217)
Realized gain--net 28,495,750 67,464,854
Change in unrealized appreciation/depreciation--net (24,271,798) 78,787,298
--------------- ---------------
Net increase (decrease) in net assets resulting from operations (3,456,101) 137,676,935
--------------- ---------------
Distributions to Shareholders
Realized gain--net:
Class A (9,134,235) --
Class B (11,655,113) --
Class C (6,066,998) --
Class I (11,767,593) --
Class R (63,939) --
--------------- ---------------
Net decrease in net assets resulting from distributions to shareholders (38,687,878) --
--------------- ---------------
Capital Share Transactions
Net decrease in net assets derived from capital share transactions (180,272,066) (72,227,314)
--------------- ---------------
Net Assets
Total increase (decrease) in net assets (222,416,045) 65,449,621
Beginning of year 700,190,902 634,741,281
--------------- ---------------
End of year* $ 477,774,857 $ 700,190,902
=============== ===============
* Accumulated investment loss--net $ (250,563) $ (190,068)
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Financial Highlights
Class A
The following per share data and ratios have been derived For the Year Ended April 30,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of year $ 6.38 $ 5.21 $ 6.23 $ 6.29 $ 6.63
---------- ---------- ---------- ---------- ----------
Investment loss--net** (.07) (.06) (.05) (.07) (.05)
Realized and unrealized gain (loss)--net .10 1.23 (.97) .24 1.05
---------- ---------- ---------- ---------- ----------
Total from investment operations .03 1.17 (1.02) .17 1.00
---------- ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.37) -- -- (.23) (1.34)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 6.04 $ 6.38 $ 5.21 $ 6.23 $ 6.29
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share .74% 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 (1.13%) (1.00%) (1.04%) (1.20%) (.80%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 142,774 $ 160,443 $ 119,375 $ 146,714 $ 107,642
========== ========== ========== ========== ==========
Portfolio turnover 126.81% 141.46% 128.24% 81.36% 65.42%
========== ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Financial Highlights (continued)
Class B
The following per share data and ratios have been derived For the Year Ended April 30,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of year $ 4.96 $ 4.08 $ 4.91 $ 5.05 $ 5.55
---------- ---------- ---------- ---------- ----------
Investment loss--net** (.09) (.08) (.08) (.10) (.09)
Realized and unrealized gain (loss)--net .07 .96 (.75) .19 .89
---------- ---------- ---------- ---------- ----------
Total from investment operations (.02) .88 (.83) .09 .80
---------- ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.37) -- -- (.23) (1.30)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 4.57 $ 4.96 $ 4.08 $ 4.91 $ 5.05
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share (.09%) 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 (1.91%) (1.78%) (1.83%) (1.97%) (1.57%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 117,482 $ 177,952 $ 194,543 $ 310,916 $ 331,683
========== ========== ========== ========== ==========
Portfolio turnover 126.81% 141.46% 128.24% 81.36% 65.42%
========== ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Financial Highlights (continued)
Class C
The following per share data and ratios have been derived For the Year Ended April 30,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of year $ 4.96 $ 4.07 $ 4.91 $ 5.05 $ 5.55
---------- ---------- ---------- ---------- ----------
Investment loss--net** (.09) (.08) (.08) (.10) (.09)
Realized and unrealized gain (loss)--net .07 .97 (.76) .19 .90
---------- ---------- ---------- ---------- ----------
Total from investment operations (.02) .89 (.84) .09 .81
---------- ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.37) -- -- (.23) (1.31)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 4.57 $ 4.96 $ 4.07 $ 4.91 $ 5.05
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share (.09%) 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 (1.92%) (1.79%) (1.84%) (1.99%) (1.58%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 68,743 $ 85,753 $ 76,606 $ 98,994 $ 66,028
========== ========== ========== ========== ==========
Portfolio turnover 126.81% 141.46% 128.24% 81.36% 65.42%
========== ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Financial Highlights (continued)
Class I
The following per share data and ratios have been derived For the Year Ended April 30,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of year $ 6.87 $ 5.59 $ 6.66 $ 6.70 $ 6.98
---------- ---------- ---------- ---------- ----------
Investment loss--net** (.06) (.05) (.04) (.06) (.04)
Realized and unrealized gain (loss)--net .11 1.33 (1.03) .25 1.12
---------- ---------- ---------- ---------- ----------
Total from investment operations .05 1.28 (1.07) .19 1.08
---------- ---------- ---------- ---------- ----------
Less distributions from realized gain--net (.37) -- -- (.23) (1.36)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 6.55 $ 6.87 $ 5.59 $ 6.66 $ 6.70
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share .99% 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 (.88%) (.75%) (.79%) (.95%) (.55%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 146,922 $ 275,570 $ 244,217 $ 311,288 $ 288,091
========== ========== ========== ========== ==========
Portfolio turnover 126.81% 141.46% 128.24% 81.36% 65.42%
========== ========== ========== ========== ==========
* Total investment returns exclude the effects of sales charges.
** Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Financial Highlights (concluded)
Class R
For the Period
January 3, 2003++
The following per share data and ratios have been derived For the Year Ended April 30, to April 30,
from information provided in the financial statements. 2005 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 5.02 $ 4.09 $ 4.04
------------ ------------ ------------
Investment loss--net** (.06) (.02) (.01)
Realized and unrealized gain--net .07 .95 .06
------------ ------------ ------------
Total from investment operations .01 .93 .05
------------ ------------ ------------
Less distributions from realized gain--net (.37) -- --
------------ ------------ ------------
Net asset value, end of period $ 4.66 $ 5.02 $ 4.09
============ ============ ============
Total Investment Return++++
Based on net asset value per share .54% 22.74% 1.24%++++++
============ ============ ============
Ratios to Average Net Assets
Expenses 1.83% 1.73% 1.84%*
============ ============ ============
Investment loss--net (1.37%) (1.15%) (.36%)*
============ ============ ============
Supplemental Data
Net assets, end of period (in thousands) $ 1,853 $ 473 --***
============ ============ ============
Portfolio turnover 126.81% 141.46% 128.24%
============ ============ ============
* Annualized.
** Based on average shares outstanding.
*** Amount is less than $1,000.
++ Commencement of operations.
++++ Total investment returns exclude the effects of sales charges.
++++++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
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. 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
certain 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
asked 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 asked 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
asked 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., APRIL 30, 2005
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.
(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.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Notes to Financial Statements (continued)
(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.
(i) Custodian bank--The Fund recorded an amount payable to the custodian bank
reflecting an overnight overdraft, which resulted from a failed trade that
settled the next day.
(j) Reclassifications--U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the
current year, $8,019,533 has been reclassified between paid-in capital in
excess of par and accumulated net investment loss and $399,975 has been
reclassified between accumulated net investment loss and undistributed net
realized capital gains as a result of permanent differences attributable to
net operating losses, foreign currency transactions and non-deductible
expenses. These reclassifications have no effect on net assets or net asset
values per share.
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,
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 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.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Notes to Financial Statements (continued)
For the year ended April 30, 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 $ 3,056 $ 38,168
Class I $ 70 $ 913
For the year ended April 30, 2005, MLPF&S received contingent deferred sales
charges of $193,924 and $7,550 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 April 30, 2005, the Fund lent securities with a value of
$5,121,948 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 year
ended April 30, 2005, MLIM, LLC received $84,942 in securities lending agent
fees.
In addition, MLPF&S received $818,400 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
April 30, 2005.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Fund's transfer agent.
For the year ended April 30, 2005, the Fund reimbursed MLIM $12,553 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
year ended April 30, 2005 were $713,559,608 and $946,900,425, respectively.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$180,272,066 and $72,227,314 for the years ended April 30, 2005 and
April 30, 2004, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 2,840,992 $ 17,026,680
Automatic conversion of shares 2,538,742 15,235,649
Shares issued to shareholders in
reinvestment of distributions 1,345,733 7,908,862
--------------- ----------------
Total issued 6,725,467 40,171,191
Shares redeemed (8,228,619) (49,224,908)
--------------- ----------------
Net decrease (1,503,152) $ (9,053,717)
=============== ================
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
=============== ================
Class B Shares for the Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 2,194,158 $ 10,113,067
Shares issued to shareholders in
reinvestment of distributions 2,296,589 10,280,937
--------------- ----------------
Total issued 4,490,747 20,394,004
--------------- ----------------
Shares redeemed (11,362,052) (51,790,118)
Automatic conversion of shares (3,306,410) (15,235,649)
--------------- ----------------
Total redeemed (14,668,462) (67,025,767)
--------------- ----------------
Net decrease (10,177,715) $ (46,631,763)
=============== ================
Class B Shares for the Year Dollar
Ended April 30, 2004 Shares Amount
Shares sold 4,858,391 $ 22,694,707
--------------- ----------------
Automatic conversion of shares (6,102,911) (29,349,565)
Shares redeemed (10,596,407) (49,517,621)
--------------- ----------------
Total redeemed (16,699,318) (78,867,186)
--------------- ----------------
Net decrease (11,840,927) $ (56,172,479)
=============== ================
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Notes to Financial Statements (concluded)
Class C Shares for the Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 1,680,859 $ 7,724,596
Shares issued to shareholders in
reinvestment of distributions 1,201,784 5,387,888
--------------- ----------------
Total issued 2,882,643 13,112,484
Shares redeemed (5,132,233) (23,414,159)
--------------- ----------------
Net decrease (2,249,590) $ (10,301,675)
=============== ================
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 Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 2,119,737 $ 13,738,441
Shares issued to shareholders in
reinvestment of distributions 1,696,873 10,649,607
--------------- ----------------
Total issued 3,816,610 24,388,048
Shares redeemed (21,504,553) (140,059,954)
--------------- ----------------
Net decrease (17,687,943) $ (115,671,906)
=============== ================
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 Year Dollar
Ended April 30, 2005 Shares Amount
Shares sold 364,470 $ 1,671,887
Shares issued to shareholders in
reinvestment of distributions 13,862 63,939
--------------- ----------------
Total issued 378,332 1,735,826
Shares redeemed (74,722) (348,831)
--------------- ----------------
Net increase 303,610 $ 1,386,995
=============== ================
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 .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 year ended April 30, 2005. On November 26,
2004, the credit agreement was renewed for one year under substantially the
same terms.
6. Commitments:
At April 30, 2005, the Fund had outstanding foreign exchange contracts, under
which it agreed to purchase a foreign currency with an approximate value of
$1,173,000.
7. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended
April 30, 2005 and April 30, 2004 was as follows:
4/30/2005 4/30/2004
Distributions paid from:
Net long-term capital gains $ 38,687,878 $ --
--------------- ----------------
Total taxable distributions $ 38,687,878 $ --
=============== ================
As of April 30, 2005, the components of accumulated earnings on a tax
basis were as follows:
Undistributed ordinary income--net $ --
Undistributed long-term capital gains--net 13,235,862
----------------
Total undistributed earnings--net 13,235,862
Capital loss carryforward --
Unrealized gains--net 103,097,739*
----------------
Total accumulated earnings--net $ 116,333,601
================
* The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on
wash sales and the deferral of post-October currency losses for
tax purposes.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of Merrill Lynch Healthcare Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Healthcare Fund, Inc.
as of April 30, 2005, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of
material misstatement. The Fund is not required to have, nor were we engaged
to perform, an audit of internal control over financial reporting. Our
audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of April 30, 2005, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Healthcare Fund, Inc. as of April 30, 2005, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for each
of the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
June 17, 2005
Important Tax Information (unaudited)
Merrill Lynch Healthcare Fund, Inc. paid long-term capital gain distributions
of $.189870 and $.181324 per share to shareholders of record on July 21, 2004
and December 15, 2004, respectively.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Robert C. Doll, Jr.* President 2005 to President of MLIM/FAM-advised funds since 124 Funds None
P.O. Box 9011 and present 2005; President of MLIM and FAM since 2001; 163 Portfolios
Princeton, Director Co-Head (Americas Region) thereof from 2000
NJ 08543-9011 to 2001 and Senior Vice President from 1999
Age: 50 to 2001; President and Director of Princeton
Services, Inc. ("Princeton Services") since 2001;
President of Princeton Administrators, L.P.
("Princeton Administrators") since 2001; Chief
Investment Officer of Oppenheimer Funds, Inc.
in 1999 and Executive Vice President thereof
from 1991 to 1999.
* Mr. Doll is a director, trustee or member of an advisory board of certain other
investment companies for which MLIM or FAM acts as investment adviser. Mr. Doll
is an "interested person," as defined in the Investment Company Act, of the Fund
based on his current positions with MLIM, FAM, Princeton Services and Princeton
Administrators, L.P. Directors serve until their resignation, removal or death,
or until December 31 of the year in which they turn 72. As Fund President,
Mr. Doll serves at the pleasure of the Board of Directors.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Officers and Directors (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors*
Ronald W. Forbes Director 2000 to Professor Emeritus of Finance, School of 48 Funds None
P.O. Box 9095 present Business, State University of New York at 48 Portfolios
Princeton, Albany since 2000 and Professor thereof from
NJ 08543-9095 1989 to 2000; International Consultant, Urban
Age: 64 Institute, Washington D.C. from 1995 to 1999.
Cynthia A. Montgomery Director 2000 to Professor, Harvard Business School since 48 Funds Newell
P.O. Box 9095 present 1989; Associate Professor, J.L. Kellogg 48 Portfolios Rubbermaid, Inc.
Princeton, Graduate School of Management, Northwestern (manufacturing)
NJ 08543-9095 University from 1985 to 1989; Associate
Age: 52 Professor, Graduate School of Business
Administration, University of Michigan from
1979 to 1985; Director, Harvard Business
School of Publishing since 2005.
Jean Margo Reid Director 2004 to Self-employed consultant since 2001; Counsel 48 Funds None
P.O. Box 9095 present of Alliance Capital Management (investment 48 Portfolios
Princeton, adviser) in 2000; General Counsel, Director
NJ 08543-9095 and Secretary of Sanford C. Bernstein & Co.,
Age: 59 Inc. (investment adviser/broker-dealer) from
1997 to 2000; Secretary, Sanford C. Bernstein
Fund, Inc. from 1994 to 2000; Director and
Secretary of SCB, Inc. since 1998; Director
and Secretary of SCB Partners, Inc. since 2000;
Director of Covenant House from 2001 to 2004.
Roscoe S. Suddarth Director 2000 to President, Middle East Institute from 1995 48 Funds None
P.O. Box 9095 present to 2001; Foreign Service Officer, United 48 Portfolios
Princeton, States Foreign Service from 1961 to 1995;
NJ 08543-9095 Career Minister from 1989 to 1995; Deputy
Age: 69 Inspector General, U.S. Department of State
from 1991 to 1994; U.S. Ambassador to The
Hashemite Kingdom of Jordan from 1987 to 1990.
Richard R. West Director 1983 to Professor of Finance from 1984 to 1995, 48 Funds Bowne & Co.,
P.O. Box 9095 present Dean from 1984 to 1993 and since 1995 48 Portfolios Inc. (financial
Princeton, Dean Emeritus of New York University Leonard printers);
NJ 08543-9095 N. Stern School of Business Administration. Vornado Realty
Age: 67 Trust (real estate
company);
Alexander's, Inc.
(real estate
company)
Edward D. Zinbarg Director 1994 to Self-employed financial consultant since 48 Funds None
P.O. Box 9095 present 1994; Executive Vice President of The 48 Portfolios
Princeton, Prudential Insurance Company of America from
NJ 08543-9095 1988 to 1994; former Director of Prudential
Age: 70 Reinsurance Company and former Trustee of the
Prudential Foundation.
* Directors serve until their resignation, removal or death, or until
December 31 of the year in which they turn 72.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name, Address & Age Funds Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
P.O. Box 9011 President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
Princeton, and and since 2004; Vice President of FAMD since 1999; Vice President of MLIM and FAM
NJ 08543-9011 Treasurer 1999 to from 1990 to 1997; Director of Taxation of MLIM from 1990 to 2001; Vice
Age: 44 present President, Treasurer and Secretary of the IQ Funds since 2004.
Jordan C. Schreiber Vice 1983 to Managing Director of MLIM since 2000; Director of MLIM from 1997 to 2000.
P.O. Box 9011 President present
Princeton,
NJ 08543-9011
Age: 75
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
P.O. Box 9011 Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief
Princeton, Officer Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
NJ 08543-9011 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Age: 53 Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance
Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the
Commission's Division of Enforcement in Washington, D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999
P.O. Box 9011 present to 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
Princeton, and Princeton Services since 2004.
NJ 08543-9011
Age: 45
* Officers of the Fund serve at the pleasure of the Board of Directors.
Further information about the Fund's Officers and Directors is available in
the Fund's Statement of Additional Information, which can be obtained without
charge by calling 1-800-MER-FUND.
Custodian
JPMorgan 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
Effective January 1, 2005, Terry K. Glenn, President and Director and Kevin
A. Ryan, Director of Merrill Lynch Healthcare Fund, Inc. retired. The Fund's
Board of Directors wishes Messrs. Glenn and Ryan well in their retirements.
Effective January 1, 2005, Robert C. Doll, Jr. became President and Director
of the Fund.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director
whose only affiliation with Merrill Lynch Investment Managers, L.P. (the
"Investment Adviser") or other Merrill Lynch affiliates is as a director of
the Fund and certain other funds advised by the Investment Adviser or its
affiliates. The Chairman of the Board is also an independent director. New
director nominees are chosen as nominees by a Nominating Committee comprised
of independent directors. All independent directors also are members of the
Board's Audit Committee and the independent directors meet in executive
session at each in person Board meeting. The Board and the Audit Committee
meet in person for at least two days each quarter and conduct other in person
and telephone meetings throughout the year, some of which are formal board
meetings, and some of which are informational meetings. The independent
counsel to the independent directors attends all in person Board and Audit
Committee meetings and other meetings at the independent directors' request.
Investment Advisory Agreement--Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board also annually
reviews and considers approval of the sub-advisory agreement on behalf of
the Fund between the Investment Adviser and an affiliate. The Board assesses
the nature, scope and quality of the services provided to the Fund by the
personnel of the Investment Adviser, the sub-adviser and their affiliates,
including administrative services, shareholder services, oversight of fund
accounting, marketing services and assistance in meeting legal and regulatory
requirements. The Board also receives and assesses information regarding the
services provided to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by
the Investment Adviser and its affiliates, including the sub-adviser. Among
the matters considered are: (a) fees (in addition to management fees) paid
to the Investment Adviser and its affiliates by the Fund, such as transfer
agency fees and fees for marketing and distribution; (b) Fund operating
expenses paid to third parties; (c) the resources devoted to and compliance
reports relating to the Fund's investment objective, policies and
restrictions, and its compliance with its Code of Ethics and the Investment
Adviser's compliance policies and procedures; and (d) the nature, cost and
character of non-investment management services provided by the Investment
Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided
by the Investment Adviser to be generally of high quality. The Board also
believes that the Investment Adviser is financially sound and well managed
and notes that the Investment Adviser is affiliated with one of America's
largest financial firms. The Board works closely with the Investment Adviser
in overseeing the Investment Adviser's efforts to achieve good performance.
As part of this effort, the Board discusses portfolio manager effectiveness
and, when performance is not satisfactory, discusses with the Investment
Adviser taking steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the
Investment Advisory Agreement and the sub-advisory agreement, the Board
requests and receives materials specifically relating to the Fund's Investment
Advisory Agreement and/or the sub-advisory agreement. These materials include
(a) information compiled by Lipper Inc. ("Lipper") on the fees and expenses
and the investment performance of the Fund as compared to a comparable group
of funds as classified by Lipper; (b) sales and redemption data for the Fund;
(c) a discussion by the Fund's portfolio management team of investment
strategies used by the Fund during its most recent fiscal year; (d)
information on the profitability to the Investment Adviser and its
affiliates of the Investment Advisory Agreement, the sub-advisory agreement
and other relationships with the Fund; and (e) information provided by
the Investment Adviser concerning investment advisory fees charged to other
clients, such as offshore funds with similar investment mandates and
generally to institutional clients. The Board also considers other matters
it deems important to the approval process such as payments made to the
Investment Adviser or its affiliates relating to the distribution of Fund
shares, services related to the valuation and pricing of Fund portfolio
holdings, allocation of Fund brokerage fees (including the related benefits
to the Investment Adviser of "soft dollars"), the Fund's portfolio turnover
statistics, and direct and indirect benefits to the Investment Adviser and
the sub-adviser and their affiliates from their relationship with the Fund.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment
Advisory Agreement and the sub-advisory agreement in November 2004, the
independent directors' and Board's review included the following:
Services Provided by the Investment Adviser--The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including
the investment advisory services and the resulting performance of the Fund,
and the sub-adviser. The Board focused primarily on the Investment Adviser's
investment advisory services and the Fund's investment performance, having
concluded that the other services provided to the Fund by the Investment
Adviser were satisfactory. The Board compared Fund performance - both
including and excluding the effects of the Fund's fees and expenses - to
the performance of a comparable group of mutual funds, and the performance
of a relevant index or combination of indexes. While the Board reviews
performance data at least quarterly, consistent with the Investment Adviser's
investment goals, the Board attaches importance to performance over
relatively long periods of time, typically three to five years. The Fund's
performance after fees and expenses ranked below the median of its comparable
group for the one year period, above the median for the three year period and
slightly below the median for the five year period. Considering these factors,
the Board concluded that the Fund's performance supported the continuation
of the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process--The Board
reviews at least annually the Fund's investment objectives and strategies.
The Board discusses with senior management of the Investment Adviser
responsible for investment operations and the senior management of the
Investment Adviser's equity investing group the strategies being used to
achieve the stated objectives. Among other things, the Board considers the
size, education and experience of the Investment Adviser's investment
staff, its use of technology, and the Investment Adviser's approach to
training and retaining portfolio managers and other research, advisory and
management personnel. The Board also reviews the Investment Adviser's
compensation policies and practices with respect to the Fund's portfolio
manager. The Board also considered the experience of the Fund's portfolio
manager and noted that Mr. Schreiber has more than twenty years' experience
in portfolio management; moreover, the Investment Adviser and its investment
staff have extensive experience in analyzing and managing the types of
investments used by the Fund. The Board concluded that the Fund benefits
from that expertise.
Management Fees and Other Expenses--The Board reviews the Fund's
contractual management fee rate and actual management fee rate as a
percentage of total assets at common asset levels - the actual rate
includes advisory and administrative service fees and the effects of any
fee waivers - compared to the other funds in its Lipper category. It also
compares the Fund's total expenses to those of other, comparable funds. The
Board considered the services provided to and the fees charged by the
Investment Adviser to other types of clients such as offshore funds with
similar investment mandates and noted that the fees charged by the Investment
Adviser in those cases typically exceeded those being charged to the Fund.
The Board also noted that, as a general matter, fees charged to institutional
clients were lower than the fees charged to the Fund, but believed that less
extensive services were being provided to such clients. While the Fund's
contractual and actual management fee rates ranked above the median of the
eight comparable funds classified by Lipper for the last fiscal year, the
Board noted that the Fund's overall expense ratio was at the median of the
comparable funds. The Board has concluded that the Fund's management fee
and fee rate and overall expense ratio are reasonable compared to those
of other comparable funds.
Profitability--The Board considers the cost of the services provided to the
Fund by the Investment Adviser, and the Investment Adviser's and its
affiliates' profits relating to the management and distribution of the Fund
and the MLIM/FAM-advised funds. As part of its analysis, the Board reviewed
the Investment Adviser's methodology in allocating its costs to the
management of the Fund and concluded that there was a reasonable basis for
the allocation. The Board believes the Investment Adviser's profits are
reasonable in relation to the nature and quality of services provided.
Economies of Scale--The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether
there should be changes in the management fee rate or structure in order to
enable the Fund to participate in these economies of scale. While there was
no evidence to date that the Fund's assets have reached a level where such
economies are effectively available, the Board will continue to seek
information relating to economies of scale.
Conclusion
After the independent directors deliberated in executive session, the
entire Board, including all of the independent directors, approved the
renewal of the existing Investment Advisory Agreement and sub-advisory
agreement, concluding that the advisory fee was reasonable in relation to
the services provided and that a contract renewal was in the best interests
of the shareholders.
MERRILL LYNCH HEALTHCARE FUND, INC., APRIL 30, 2005
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as
of the end of the period covered by this report, that applies to
the registrant's principal executive officer, principal financial
officer and principal accounting officer, or persons performing
similar functions. A copy of the code of ethics is available
without charge upon request by calling toll-free 1-800-MER-FUND
(1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of
directors has determined that (i) the registrant has the following
audit committee financial experts serving on its audit committee
and (ii) each audit committee financial expert is independent: (1)
Ronald W. Forbes, (2) Richard R. West, and (3) Edward D. Zinbarg.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending April 30, 2005 - $36,000
Fiscal Year Ending April 30, 2004 - $34,000
(b) Audit-Related Fees - Fiscal Year Ending April 30, 2005 - $0
Fiscal Year Ending April 30, 2004 - $0
(c) Tax Fees - Fiscal Year Ending April 30, 2005 - $5,700
Fiscal Year Ending April 30, 2004 - $5,200
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending April 30, 2005 - $0
Fiscal Year Ending April 30, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or $50,000
for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending April 30, 2005 - $9,780,582
Fiscal Year Ending April 30, 2004 - $17,002,957
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $945,000, 0%
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 second 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 - See Item 2
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 Healthcare Fund, Inc.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Healthcare Fund, Inc.
Date: June 20, 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 Healthcare Fund, Inc.
Date: June 20, 2005
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Healthcare Fund, Inc.
Date: June 20, 2005