UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-06669
Name of Fund: Merrill Lynch Fundamental Growth Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Merrill Lynch Fundamental Growth Fund, Inc., 800 Scudders Mill
Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011,
Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 08/31/06
Date of reporting period: 09/01/05 - 02/28/06
Item 1 - Report to Stockholders
Semi-Annual Report
February 28, 2006
Merrill Lynch
Fundamental Growth Fund, Inc.
(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 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and
(2) on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Fundamental Growth Fund, Inc.
Box 9011
Princeton, NJ 08543-9011
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A Letter From the President
Dear Shareholder
Financial markets began 2006 with a return to volatility following a fairly
uninspiring 2005. For the six- and 12-month periods ended February 28, 2006,
most major market indexes landed in positive territory:
Total Returns as of February 28, 2006 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 5.93% + 8.40%
Small cap U.S. equities (Russell 2000 Index) +10.24 +16.59
International equities (MSCI Europe, Australasia, Far East Index) +15.14 +17.41
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.11 + 2.74
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.99 + 3.87
High yield bonds (Credit Suisse High Yield Index) + 1.89 + 3.27
The Federal Reserve Board (the Fed) increased interest rates 200 basis points
(2.00%) over the past 12 months, bringing the target federal funds rate to
4.5%. Notably, Ben Bernanke replaced Alan Greenspan as Fed chairman in
January, a month after the central bank removed the critical word "measured"
from the description of its rate-hiking program. Still, most observers expect
at least one more interest rate hike before the Fed pauses in its tightening
campaign.
U.S. economic growth, which came in at 4.1% in the third quarter of 2005, fell
to 1.6% in the fourth quarter. Growth is expected to reaccelerate in the first
quarter of 2006, although the economy is likely to feel some pressure in the
quarters ahead as the consumer sector seems to be softening. Capital spending
by businesses, however, appears relatively strong. Overall corporate health,
including strong company balance sheets, helped prompt robust dividend-
distribution, share-buyback and merger-and-acquisition activity in 2005, a
trend that has continued in 2006. This, as well as reasonably good company
earnings and low core inflation, has been supportive of U.S. stocks despite
the headwinds of rising interest rates and high energy prices. Many
international equity markets have fared even better, thanks in part to higher
economic growth rates and low inflation.
In the U.S. bond market, short-term interest rates continued to move higher as
longer-term interest rates advanced more moderately. After flattening
dramatically in 2005, the Treasury curve recently has been toying with bouts
of inversion, whereby short-term yields have surpassed long-term yields. At
period-end, the six-month Treasury bill offered the highest yield on the curve
at 4.74%.
Amid the uncertainty inherent in the financial markets, we encourage you
to review your goals periodically with your financial advisor and to
make portfolio changes, as needed. For timely "food for thought" for
investors, we also invite you to visit Shareholder magazine at
www.mlim.ml.com/shareholdermagazine. As always, we thank you for trusting
Merrill Lynch Investment Managers with your investment assets, and we
look forward to continuing to serve your investment needs.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
We are pleased to present to you the management team of
Merrill Lynch Fundamental Growth Fund, Inc.
Larry Fuller, who joined Merrill Lynch Investment Managers in 1992, is the
Senior Portfolio Manager of Merrill Lynch Fundamental Growth Fund, Inc. He
received a bachelor's degree from Bates College and an MBA from Columbia
University. He is a member of the New York Society of Security Analysts and
the American Finance Association. Mr. Fuller's team includes Associate
Portfolio Manager Tom Burke and Analysts Karen Uzzolino and Mike Oberdorf.
Mr. Burke received a bachelor's degree from Pace University and is a CFA (R)
charterholder. He is also a member of the New York Society of Security
Analysts and the CFA Institute. Ms. Uzzolino graduated from the Stuart School
of Business Administration. Mr. Oberdorf holds a bachelor's degree from
Georgetown University and is a CFA charterholder.
Larry Fuller
Senior Portfolio Manager
Table of Contents Page
A Letter From the President 2
A Discussion With Your Fund's Portfolio Manager 4
Performance Data 6
Disclosure of Expenses 8
Announcement to Shareholders 9
Portfolio Information 9
Schedule of Investments 10
Financial Statements 12
Financial Highlights 15
Notes to Financial Statements 20
Disclosure of Investment Advisory Agreement 25
Officers and Directors 27
CFA (R) and Chartered Financial Analyst (R) are trademarks owned by the
CFA Institute.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
A Discussion With Your Fund's Portfolio Manager
The Fund significantly outperformed both of its benchmarks and its Lipper
category average for the six-month period, benefiting from a combination of
good stock selection and favorable sector weightings.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended February 28, 2006, Merrill Lynch Fundamental
Growth Fund, Inc.'s Class A, Class B, Class C, Class I and Class R Shares had
total returns of +7.57%, +7.13%, +7.13%, +7.67% and +7.37%, respectively. The
Fund outperformed the +5.93% return of the unmanaged Standard & Poor's (S&P)
500 Index and the +3.43% return of the unmanaged S&P 500/Citigroup Growth
Index for the same period. Fund returns also exceeded the +6.37% average
return of the Lipper Large Cap Growth Funds category, which represents the
performance of actively managed large cap growth funds. Fund returns for the
period include approximately 1.5% that correspond to a cash settlement on
October 28, 2005, in favor of the Fund for events that occurred prior to 2005.
Since these events are unrelated to the Fund's investments for the six months
ended February 28, 2006, the return of approximately 1.5% should not be seen
as the result of the Fund's management during the Fund's reporting period,
even though Fund holders at the time of settlement benefited fully from it.
The equity, bond and commodity markets continued to follow a relatively
unpredictable and volatile pattern during the six months ended February 28,
2006. Total returns varied among regions and sectors, with the S&P Utilities
Index returning +1.83%, for example, and the Morgan Stanley Capital
International Emerging Markets Latin America Index returning +41.70%. The
returns of large capitalization U.S. growth stocks (as represented by the
+3.43% return of the S&P 500/Citigroup Growth Index) were less than half of
large cap value stock returns (as represented by the +8.48% return of the S&P
500/Citigroup Value Index) during the reporting period. Small cap and mid cap
indexes also provided significantly better investment returns than their large
cap counterparts. It was a challenging period for a true large cap growth fund
to produce relatively attractive investment returns, which makes the Fund's
outperformance particularly gratifying. All references below to the Fund's
performance do not include the effect of the settlement.
What factors most influenced Fund performance?
Numerous factors contributed to the Fund's above-average returns for the six-
month period. However, the most significant was favorable stock selection in
the underweighted consumer discretionary sector, where top performers included
Starbucks Corp., Wynn Resorts Ltd., Staples, Inc., Walt Disney Co., Nike, Inc.
and Coach, Inc.
A continuing positive for more than three years has been our investment
holdings in the overweighted energy sector. The major contributors during this
six-month period were repeat winners such as Schlumberger Ltd., Transocean,
Inc., Baker Hughes, Inc. and Halliburton Co. The industrials sector also aided
Fund performance, led by our positions in Caterpillar Inc., Lockheed Martin
Corp., 3M Co., MSC Industrial Direct Co., General Electric Co., Fluor Corp.
and Boeing Co.
In the materials sector, our positions in Air Products& Chemicals, Inc.,
Praxair, Inc. and E.I. DuPont de Nemours & Co. benefited performance. The
leading emerging economies in Asia have industrial development programs that
require enormous amounts of the products and services offered by these
companies.
Detracting most from the Fund's relative performance was our avoidance of a
number of financial services companies, including American International
Group, Inc. (AIG), Freddie Mac and American Express Co., which performed well
during the period. We believe that the Federal Reserve Board (the Fed) is
prepared to increase short-term interest rates several more times, which may
not bode well for the profits of these financial services companies. In
addition, we believe increased regulatory scrutiny will heighten pressure on
pricing of AIG's products and impact the long-term investment return available
to AIG shareholders.
What changes were made to the portfolio during the period?
In the information technology sector, we sold our position in Microsoft
Corporation and replaced it with investments in information technology
companies in India, where valuations appear reasonable and growth in revenue,
earnings and rates of return is much stronger than we are seeing among U.S.
information technology companies. Also during the period, we opted not to
invest in Dell, Inc. and Intel Corp., two of the leading technology companies
in the United States. This proved to be a positive in terms of relative
performance.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Overall, we continue to significantly underweight the information technology
sector relative to our benchmarks. We believe that companies in China, South
Korea and Taiwan are gaining the upper-hand in supplying both computing and
communication equipment systems to the world's major customers, both private
and public. In the information technology software and services sector, we
look to the investment opportunities among the leading companies in India. The
Indian companies added to the portfolio during the period were Cognizant
Technology Solutions Corp., Satyam Computer Services Ltd., Tata Consultancy
Services Ltd. and Infosys Technologies Ltd.
The Fund also is relatively underinvested in companies in the consumer
discretionary sector. In our view, the combination of higher interest rates
and more limited availability of residential real estate financing is reducing
the liquidity available to families to purchase or update new or existing
homes. Similarly, the higher cost of energy and public services is reducing
the discretionary income of households, further supporting our underweight
position in the consumer discretionary sector.
Our focus during the period continued to be on the energy sector, where
private companies and governments are increasing their spending in efforts to
find new reserves of oil and other energy resources. We were also attracted to
industrial companies providing new electric power generating equipment and
commercial aviation craft and other industrial and commercial equipment to the
rapidly growing economies in Asia, where China leads the capital investment
boom.
How would you characterize the Fund's position at the close of the period?
The Fund's overweight positions in the energy, industrials and materials
sectors reflect our view that global economic growth is relatively strong.
However, the strength in demand growth for both consumer and industrial
capital goods is lodged in the Asia-Pacific region, particularly in China,
where the nation's economic growth plans are resulting in economic growth
rates near 10%. The demand for products, materials, energy and services over
the next five years could be unprecedented in modern times. Secondarily, the
economic growth and development plans of the government of India are a
meaningful contributor to the demand for sophisticated industrial and
commercial products and systems, as many millions of people are drawn into the
middle-class sector of the society.
In the United States, we anticipate that demand for the services of HMOs
(health maintenance organizations) will remain strong over the intermediate-
term as these private organizations become major suppliers and administrators
of what traditionally have been public sector healthcare services. The
relative magnitude and growth in demand for healthcare services has
overwhelmed the federal and state governments, and the HMOs are being enlisted
as the providers of a rational delivery system for services. Also, we are
focused on biotechnology companies in the pharmaceutical area, where the
products are relatively moderate in price and efficacious at prolonging and
improving the quality of life. Against this backdrop, the health care sector
is an important part of our research efforts and our investments in this
sector are highly focused.
Lawrence R. Fuller
Vice President and Portfolio Manager
March 8, 2006
After a distinguished 38-year career, Portfolio Manager Larry Fuller announced
his retirement from the investment management business, effective March 31,
2006. Mr. Fuller began his career in 1968. He Joined Merrill Lynch Investment
Managers (MLIM) in October 1992 and was Senior Portfolio Manager of Merrill
Lynch Fundamental Growth Fund, Inc. since its inception that same year. He
also managed several other related portfolios. Mr. Fuller has been a
successful portfolio manager highly regarded for his experience, insights and
warmth. Thomas E. Burke, the Fund's associate portfolio manager who has worked
closely with Mr. Fuller for 13 years, has become Portfolio Manager of the
Fund, effective the same date. Mr. Fuller's colleagues at MLIM join the Fund's
Board of Directors in wishing Mr. Fuller well in his retirement.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
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. 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.
* Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or account
maintenance fees and are available only to eligible investors. Had the sales
charge been included, the Fund's Class I Shares' performance would have been
lower.
* 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 February 28, 2006 Total Return Total Return Total Return
ML Fundamental Growth Fund, Inc. Class A Shares* +7.57% +12.03% +119.04%
ML Fundamental Growth Fund, Inc. Class B Shares* +7.13 +11.17 +105.89
ML Fundamental Growth Fund, Inc. Class C Shares* +7.13 +11.14 +102.59
ML Fundamental Growth Fund, Inc. Class I Shares* +7.67 +12.29 +124.71
ML Fundamental Growth Fund, Inc. Class R Shares* +7.37 +11.75 +115.18
S&P 500 (R) Index** +5.93 + 8.40 +135.08
S&P 500/Citigroup Growth Index*** +3.43 + 4.86 +108.14
* 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.
*** This unmanaged Index is designed to provide a comprehensive measure of large-cap U.S. equity "growth"
performance. It is an unmanaged float adjusted market capitalization weighted index comprised of stocks
representing approximately half the market capitalization of the S&P 500 Index that have been identified
as being on the growth end of the growth-value spectrum.
S&P 500 is a registered trademark of the McGraw-Hill Companies.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 2/28/06 +12.03% +6.15%
Five Years Ended 2/28/06 - 1.54 -2.59
Ten Years Ended 2/28/06 + 8.16 +7.57
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Without Return With
CDSC CDSC**
Class B Shares*
One Year Ended 2/28/06 +11.17% +7.17%
Five Years Ended 2/28/06 - 2.31 -2.70
Ten Years Ended 2/28/06 + 7.49 +7.49
* Maximum contingent deferred sales charge is 4% and is reduced
to 0% after six years.
** Assuming payment of applicable contingent deferred sales
charge.
Return Without Return With
CDSC CDSC**
Class C Shares*
One Year Ended 2/28/06 +11.14% +10.14%
Five Years Ended 2/28/06 - 2.31 - 2.31
Ten Years Ended 2/28/06 + 7.32 + 7.32
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after one year.
** Assuming payment of applicable contingent deferred sales
charge.
Class I Shares Return
One Year Ended 2/28/06 +12.29%
Five Years Ended 2/28/06 - 1.30
Ten Years Ended 2/28/06 + 8.43
Class R Shares Return
One Year Ended 2/28/06 +11.75%
Five Years Ended 2/28/06 - 1.66
Ten Years Ended 2/28/06 + 7.96
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
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 12b-1 fees, and other Fund expenses. The following example (which is
based on a hypothetical investment of $1,000 invested on September 1, 2005 and
held through February 28, 2006) is intended to assist shareholders both in
calculating expenses based on an investment in the Fund and in comparing these
expenses with similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during
the period covered by this report, shareholders can divide their account value
by $1,000 and then multiply the result by the number in the first line under
the heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders'
ongoing costs only and do not reflect any transactional expenses, such as
sales charges, redemption fees or exchange fees. Therefore, the second table
is useful in comparing ongoing expenses only, and will not help shareholders
determine the relative total expenses of owning different funds. If these
transactional expenses were included, shareholder expenses would have been
higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value September 1, 2005
September 1, February 28, to February 28,
2005 2006 2006
Actual
Class A $1,000 $1,075.70 $ 6.07
Class B $1,000 $1,071.30 $10.07
Class C $1,000 $1,071.30 $10.12
Class I $1,000 $1,076.70 $ 4.79
Class R $1,000 $1,073.70 $ 7.35
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,018.95 $ 5.91
Class B $1,000 $1,015.08 $ 9.79
Class C $1,000 $1,015.03 $ 9.84
Class I $1,000 $1,020.19 $ 4.66
Class R $1,000 $1,017.71 $ 7.15
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.18% for Class A, 1.96% for Class B, 1.97% for Class C, .93% for Class I and 1.43% for Class R),
multiplied by the average account value over the period, multiplied by 181/365 (to reflect the
one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in the
most recent fiscal half year divided by 365.
During the period, the Fund incurred legal expense attributable to a settlement of litigation. If,
during the period, these expenses were not incurred, the annualized expense ratios would have been
approximately 1.14% for Class A, 1.91% for Class B, 1.92% for Class C, .89% for Class I and 1.39%
for Class R. The actual expenses paid would have been approximately $5.87, $9.81, $9.86, $4.58 and
$7.15, and the hypothetical expenses paid would have been approximately $5.71, $9.54, $9.59, $4.46
and $6.95, respectively.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with nearly $1 trillion in assets under management (based on combined
assets under management as of December 31, 2005). The transaction is expected
to close in the third quarter of 2006, at which time the new company will
operate under the BlackRock name. If approved by the Fund's Board of Directors
and Fund shareholders, the combined company that results from the transaction
is expected to become the investment adviser of the Fund.
Portfolio Information as of February 28, 2006
Percent of
Ten Largest Holdings Net Assets
Exxon Mobil Corp. 5.3%
Procter & Gamble Co. 4.0
Alcon, Inc. 4.0
General Electric Co. 3.9
Schlumberger Ltd. 3.1
3M Co. 3.0
WellPoint, Inc. 2.9
Transocean, Inc. 2.8
Halliburton Co. 2.7
Amgen, Inc. 2.6
Percent of
Five Largest Industries Net Assets
Energy Equipment & Services 12.6%
Chemicals 8.5
Health Care Providers & Services 7.7
Oil, Gas & Consumable Fuels 7.6
Industrial Conglomerates 6.8
Percent of
Total
Sector Representation Investments
Energy 17.7%
Health Care 15.3
Industrials 14.8
Consumer Discretionary 11.2
Information Technology 7.5
Materials 7.4
Consumer Staples 6.1
Financials 4.9
Other* 15.1
* Includes portfolio holdings in short-term investments.
For Fund compliance purposes, the Fund's industry and sector
classifications refer to any one or more of the industry and sector
sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund
management. This definition may not apply for purposes of this
report, which may combine industry and sector sub-classifications
for reporting ease.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Schedule of Investments
Shares
Industry Common Stocks Held Value
Aerospace & Defense--4.8%
Boeing Co. 1,375,100 $ 99,956,019
Lockheed Martin Corp. (e) 1,215,200 88,551,624
United Technologies Corp. 989,800 57,903,300
--------------
246,410,943
Beverages--1.2%
PepsiCo, Inc. 1,053,200 62,254,652
Biotechnology--4.3%
Amgen, Inc. (a) 1,753,600 132,379,264
Genzyme Corp. (a)(e) 1,314,800 91,168,232
--------------
223,547,496
Capital Markets--1.7%
Franklin Resources, Inc. 869,800 89,311,064
Chemicals--8.5%
Air Products & Chemicals, Inc. 1,483,400 95,174,944
The Dow Chemical Co. 2,990,700 128,689,821
E.I. du Pont de Nemours & Co. 1,764,600 71,007,504
Nalco Holding Co. (a) 1,956,000 34,230,000
Praxair, Inc. 1,974,700 106,594,306
--------------
435,696,575
Commercial Banks--2.6%
Bank of America Corp. 1,701,000 77,990,850
Sumitomo Mitsui Financial Group, Inc. 4,900 53,482,488
--------------
131,473,338
Communications Equipment--1.4%
Telefonaktiebolaget LM Ericsson (b)(e) 2,164,500 73,809,450
Construction & Engineering--0.6%
Fluor Corp. 212,300 18,321,490
Jacobs Engineering Group, Inc. (a) 164,500 14,104,230
--------------
32,425,720
Diversified Financial Services--1.2%
Citigroup, Inc. 1,384,300 64,189,991
Energy Equipment & Services--12.6%
Baker Hughes, Inc. (e) 1,501,700 102,070,549
Grant Prideco, Inc. (a) 865,800 35,038,926
Halliburton Co. (e) 2,014,900 137,013,200
National Oilwell Varco, Inc. (a)(e) 1,199,400 73,019,472
Schlumberger Ltd. (e) 1,376,000 158,240,000
Transocean, Inc. (a)(e) 1,958,000 145,244,440
--------------
650,626,587
Health Care Equipment & Supplies--5.2%
Alcon, Inc. (e) 1,776,500 204,581,740
Medtronic, Inc. 1,150,500 62,069,475
--------------
266,651,215
Shares
Industry Common Stocks Held Value
Health Care Providers & Services--7.7%
Caremark Rx, Inc. (a)(e) 1,406,800 $ 69,988,300
Covance, Inc. (a) 272,900 15,405,205
Sierra Health Services, Inc. (a) 820,200 34,194,138
UnitedHealth Group, Inc. 2,202,700 128,263,221
WellPoint, Inc. (a) 1,959,100 150,439,289
--------------
398,290,153
Hotels, Restaurants & Leisure--5.1%
Starbucks Corp. (a)(e) 3,175,500 115,334,160
Station Casinos, Inc. 236,600 16,195,270
Wynn Resorts Ltd. (a)(e) 1,062,900 70,629,705
Yum! Brands, Inc. 1,251,000 59,672,700
--------------
261,831,835
Household Products--4.0%
Procter & Gamble Co. 3,469,900 207,951,107
IT Services--4.4%
Cognizant Technology Solutions
Corp. (a) 1,074,300 61,890,423
Hewitt Associates, Inc. Class A (a) 854,100 23,052,159
Infosys Technologies Ltd. 834,100 52,910,180
Satyam Computer Services Ltd. 3,580,100 62,001,802
Tata Consultancy Services Ltd. 736,900 28,064,661
--------------
227,919,225
Industrial Conglomerates--6.8%
3M Co. 2,068,300 152,206,197
General Electric Co. 6,082,300 199,925,201
--------------
352,131,398
Internet & Catalog Retail--1.7%
eBay, Inc. (a)(e) 2,194,900 87,927,694
Internet Software & Services--2.7%
Google, Inc. Class A (a) 113,200 41,048,584
Yahoo!, Inc. (a)(e) 3,043,200 97,564,992
--------------
138,613,576
Machinery--4.2%
Caterpillar, Inc. (e) 1,264,100 92,380,428
ITT Industries, Inc. 1,210,000 63,525,000
Pall Corp. (e) 1,983,100 58,342,802
--------------
214,248,230
Media--1.3%
Walt Disney Co. (e) 2,360,700 66,075,993
Oil, Gas & Consumable Fuels--7.6%
ConocoPhillips 869,300 52,992,528
Exxon Mobil Corp. 4,577,900 271,789,923
Sunoco, Inc. 885,400 65,608,140
--------------
390,390,591
Pharmaceuticals--0.3%
MGI Pharma, Inc. (a) 715,500 12,614,265
Specialty Retail--2.2%
Staples, Inc. 4,515,600 110,812,824
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Schedule of Investments (concluded
Shares
Industry Common Stocks Held Value
Textiles, Apparel & Luxury Goods--2.5%
Coach, Inc. (a) 1,977,100 $ 70,622,012
Nike, Inc. Class B 692,700 60,112,506
--------------
130,734,518
Tobacco--1.7%
Altria Group, Inc. 1,230,900 88,501,710
Trading Companies & Distributors--0.4%
MSC Industrial Direct Co. Class A (e) 449,500 21,292,815
Total Common Stocks
(Cost--$4,099,847,374)--96.7% 4,985,732,965
Beneficial
Interest Short-Term Securities Value
$134,217,899 Merrill Lynch Liquidity Series, LLC, 4.42%,
Cash Sweep Series I (c)(f) $ 134,217,899
751,767,200 Merrill Lynch Liquidity Series, LLC, 4.53%,
Money Market Series (c)(d)(f) 751,767,200
Total Short-Term Securities
(Cost--$885,985,099)--17.2% 885,985,099
Total Investments
(Cost--$4,985,832,473*)--113.9% 5,871,718,064
Liabilities in Excess of Other Assets--(13.9%) (716,805,621)
--------------
Net Assets--100.0% $5,154,912,443
==============
* The cost and unrealized appreciation (depreciation) of investments
as of February 28, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 4,989,185,860
================
Gross unrealized appreciation $ 955,549,946
Gross unrealized depreciation (73,017,742)
----------------
Net unrealized appreciation $ 882,532,204
================
(a) Non-income producing security.
(b) Depositary receipts.
(c) Investments in companies considered to be an affiliate of the Fund,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC, 4.42%,
Cash Sweep Series I $ 78,760,346 $2,836,888
Merrill Lynch Liquidity Series, LLC, 4.53%,
Money Market Series $105,609,850 $ 632,491
(d) Security was purchased with the cash proceeds from securities loans.
(e) Security, or a portion of security, is on loan.
(f) Variable rate security.
o For Fund compliance purposes, the Fund's industry classifications
refer to any one or more of the industry sub-classifications used
by one or more widely recognized market indexes or ratings group
indexes, and/or as defined by Fund management. This definition may
not apply for purposes of this report, which may combine industry
sub-classifications for reporting ease. Industries are shown as a
percentage of net assets.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Statement of Assets and Liabilities
As of February 28, 2006
Assets
Investments in unaffiliated securities, at value (including securities
loaned of $730,147,914) (identified cost--$4,099,847,374) $ 4,985,732,965
Investments in affiliated securities, at value (identified cost--$885,985,099) 885,985,099
Receivables:
Securities sold $ 40,521,004
Capital shares sold 7,387,959
Dividends 6,901,809
Securities lending 152,342 54,963,114
---------------
Prepaid expenses 371,251
---------------
Total assets 5,927,052,429
---------------
Liabilities
Collateral on securities loaned, at value 751,767,200
Deferred foreign capital gain tax 367,322
Payables:
Capital shares redeemed 13,123,186
Other affiliates 2,885,130
Investment adviser 2,166,194
Distributor 1,830,954 20,005,464
--------------- ---------------
Total liabilities 772,139,986
---------------
Net Assets
Net assets $ 5,154,912,443
===============
Net Assets Consist of
Class A Shares of capital stock, $.10 par value, 300,000,000 shares authorized $ 9,050,950
Class B Shares of capital stock, $.10 par value, 500,000,000 shares authorized 6,192,660
Class C Shares of capital stock, $.10 par value, 300,000,000 shares authorized 4,823,999
Class I Shares of capital stock, $.10 par value, 300,000,000 shares authorized 7,636,870
Class R Shares of capital stock, $.10 par value, 500,000,000 shares authorized 156,002
Paid-in capital in excess of par 6,369,456,375
Accumulated investment loss--net $ (2,631,160)
Accumulated realized capital losses--net (2,125,291,522)
Unrealized appreciation--net 885,518,269
---------------
Total accumulated losses--net (1,242,404,413)
---------------
Net Assets $ 5,154,912,443
===============
Net Asset Value
Class A--Based on net assets of $1,720,256,048 and 90,509,504 shares outstanding $ 19.01
===============
Class B--Based on net assets of $1,078,715,077 and 61,926,595 shares outstanding $ 17.42
===============
Class C--Based on net assets of $844,649,425 and 48,239,993 shares outstanding $ 17.51
===============
Class I--Based on net assets of $1,483,666,501 and 76,368,699 shares outstanding $ 19.43
===============
Class R--Based on net assets of $27,625,392 and 1,560,019 shares outstanding $ 17.71
===============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Statement of Operations
For the Six Months Ended February 28, 2006
Investment Income
Dividends $ 29,989,329
Interest from affiliates 2,836,888
Securities lending--net 632,491
---------------
Total income 33,458,708
---------------
Expenses
Investment advisory fees $ 15,675,031
Account maintenance and distribution fees--Class B 5,682,268
Account maintenance and distribution fees--Class C 4,054,465
Account maintenance fees--Class A 2,116,270
Transfer agent fees--Class A 1,900,891
Transfer agent fees--Class I 1,643,848
Professional fees 1,506,366
Transfer agent fees--Class B 1,439,335
Transfer agent fees--Class C 1,053,408
Accounting services 420,699
Custodian fees 175,573
Printing and shareholder reports 111,788
Directors' fees and expenses 77,618
Registration fees 70,260
Account maintenance and distribution fees--Class R 58,600
Transfer agent fees--Class R 26,159
Other 76,963
---------------
Total expenses 36,089,542
---------------
Investment loss--net (2,630,834)
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net 172,685,697
Foreign currency transactions--net (932,721)
Options written--net 1,081,360 172,834,336
---------------
Change in unrealized appreciation on investments (including $367,322 deferred foreign
capital gain tax)--net 196,958,688
---------------
Total realized and unrealized gain--net 369,793,024
---------------
Net Increase in Net Assets Resulting from Operations $ 367,162,190
===============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income (loss)--net $ (2,630,834) $ 25,193,914
Realized gain--net 172,834,336 287,074,286
Change in unrealized appreciation--net 196,958,688 485,339,356
--------------- ---------------
Net increase in net assets resulting from operations 367,162,190 797,607,556
--------------- ---------------
Dividends to Shareholders
Investment income--net:
Class A (11,376,016) --
Class C (221,265) --
Class I (13,212,756) --
Class R (129,656) --
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (24,939,693) --
--------------- ---------------
Capital Share Transactions
Net decrease in net assets derived from capital share transactions (343,222,917) (774,793,559)
--------------- ---------------
Net Assets
Total increase (decrease) in net assets (1,000,420) 22,813,997
Beginning of period 5,155,912,863 5,133,098,866
--------------- ---------------
End of period* $ 5,154,912,443 $ 5,155,912,863
=============== ===============
* Undistributed investment income/accumulated investment loss--net $ (2,631,160) $ 24,939,367
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Financial Highlights
Class A
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 17.80 $ 15.29 $ 14.89 $ 13.63 $ 17.23
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** .01 .12 (.06) (.04) (.05)
Realized and unrealized gain (loss)--net 1.32 2.39 .46 1.30 (3.55)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.33 2.51 .40 1.26 (3.60)
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.12) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 19.01 $ 17.80 $ 15.29 $ 14.89 $ 13.63
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 7.57%+++++ 16.42% 2.69% 9.24% (20.89%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.18%* 1.16% 1.16% 1.18% 1.18%
========== ========== ========== ========== ==========
Investment income (loss)--net .13%* .71% (.38%) (.29%) (.33%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $1,720,256 $1,651,135 $1,587,995 $1,544,751 $1,384,765
========== ========== ========== ========== ==========
Portfolio turnover 22.02% 87.68% 78.23% 108.34% 92.35%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
+++ Approximately 1.5% of the Fund's total return was attributable to proceeds received in a settlement
of litigation seeking recovery of investment losses previously realized by the Fund.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Financial Highlights (continued)
Class B
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 16.26 $ 14.07 $ 13.81 $ 12.74 $ 16.24
---------- ---------- ---------- ---------- ----------
Investment loss--net*** (.06) (.01) (.17) (.13) (.17)
Realized and unrealized gain (loss)--net 1.22 2.20 .43 1.20 (3.33)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.16 2.19 .26 1.07 (3.50)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 17.42 $ 16.26 $ 14.07 $ 13.81 $ 12.74
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 7.13%+++++ 15.57% 1.88% 8.40% (21.55%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.96%* 1.94% 1.93% 1.97% 1.96%
========== ========== ========== ========== ==========
Investment loss--net (.66%)* (.05%) (1.16%) (1.08%) (1.10%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $1,078,715 $1,193,442 $1,445,258 $1,685,904 $1,802,731
========== ========== ========== ========== ==========
Portfolio turnover 22.02% 87.68% 78.23% 108.34% 92.35%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
+++ Approximately 1.5% of the Fund's total return was attributable to proceeds received in a settlement
of litigation seeking recovery of investment losses previously realized by the Fund.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Financial Highlights (continued)
Class C
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 16.35 $ 14.15 $ 13.89 $ 12.82 $ 16.34
---------- ---------- ---------- ---------- ----------
Investment loss--net*** (.06) (.01) (.17) (.14) (.17)
Realized and unrealized gain (loss)--net 1.22 2.21 .43 1.21 (3.35)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.16 2.20 .26 1.07 (3.52)
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net --++++++ -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 17.51 $ 16.35 $ 14.15 $ 13.89 $ 12.82
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 7.13%+++++ 15.55% 1.87% 8.35% (21.54%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.97%* 1.95% 1.94% 1.98% 1.97%
========== ========== ========== ========== ==========
Investment loss--net (.66%)* (.10%) (1.17%) (1.09%) (1.11%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 844,649 $ 782,172 $ 692,924 $ 608,176 $ 596,871
========== ========== ========== ========== ==========
Portfolio turnover 22.02% 87.68% 78.23% 108.34% 92.35%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
+++ Approximately 1.5% of the Fund's total return was attributable to proceeds received in a settlement
of litigation seeking recovery of investment losses previously realized by the Fund.
++++++ Amount is less than $(.01) per share.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Financial Highlights (continued)
Class I
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 18.22 $ 15.61 $ 15.16 $ 13.84 $ 17.46
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** .04 .17 (.02) (.01) (.02)
Realized and unrealized gain (loss)--net 1.34 2.44 .47 1.33 (3.60)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.38 2.61 .45 1.32 (3.62)
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.17) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 19.43 $ 18.22 $ 15.61 $ 15.16 $ 13.84
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 7.67%+++++ 16.72% 2.97% 9.54% (20.73%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses .93%* .91% .91% .93% .94%
========== ========== ========== ========== ==========
Investment income (loss)--net .38%* .96% (.13%) (.04%) (.09%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $1,483,667 $1,508,098 $1,396,668 $1,284,423 $1,170,884
========== ========== ========== ========== ==========
Portfolio turnover 22.02% 87.68% 78.23% 108.34% 92.35%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effects of sales charges. Effective December 28, 2005,
Class I Shares are no longer subject to any front-end sales charge.
*** Based on average shares outstanding.
++ Aggregate total investment return.
+++ Approximately 1.5% of the Fund's total return was attributable to proceeds received in a settlement
of litigation seeking recovery of investment losses previously realized by the Fund.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Financial Highlights (concluded)
Class R
For the Period
For the Six January 3,
Months Ended For the Year Ended 2003++ to
The following per share data and ratios have been derived February 28, August 31, August 31,
from information provided in the financial statements. 2006 2005 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 16.60 $ 14.28 $ 13.95 $ 12.13
------------ ------------ ------------ ------------
Investment income (loss)--net** (.01) .06 (.09) (.02)
Realized and unrealized gain--net 1.22 2.26 .42 1.84
------------ ------------ ------------ ------------
Total from investment operations 1.21 2.32 .33 1.82
------------ ------------ ------------ ------------
Less dividends from investment income--net (.10) -- -- --
------------ ------------ ------------ ------------
Net asset value, end of period $ 17.71 $ 16.60 $ 14.28 $ 13.95
============ ============ ============ ============
Total Investment Return
Based on net asset value per share 7.37%+++++++ 16.25% 2.37% 15.00%+++
============ ============ ============ ============
Ratios to Average Net Assets
Expenses 1.43%* 1.41% 1.41% 1.42%*
============ ============ ============ ============
Investment income (loss)--net (.11%)* .39% (.60%) (.53%)*
============ ============ ============ ============
Supplemental Data
Net assets, end of period (in thousands) $ 27,625 $ 21,066 $ 10,254 $ 14
============ ============ ============ ============
Portfolio turnover 22.02% 87.68% 78.23% 108.34%
============ ============ ============ ============
* Annualized.
** Based on average shares outstanding.
++ Commencement of operations.
++++ Approximately 1.5% of the Fund's total return was attributable to proceeds received in a settlement
of litigation seeking recovery of investment losses previously realized by the Fund.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may
require the use of management accruals and estimates. Actual results may
differ from these estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim period. All such adjustments are
of a normal, recurring nature. The Fund offers multiple classes of shares.
Effective December 28, 2005, Class I Shares are no longer subject to any front-
end sales charge. Class A Shares 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 I Shares are sold only to certain eligible investors. Class R
Shares are sold only to certain retirement plans. All classes of shares have
identical voting, dividend, liquidation and other rights and the same terms
and conditions, except that Class A, Class B, Class C and Class R Shares bear
certain expenses related to the account maintenance of such shares, and Class
B, Class C and Class R Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to its account maintenance and distribution
expenditures (except that Class B shareholders may vote on material changes to
the Class A distribution plan). Income, expenses (other than expenses
attributable to a specific class) and realized and unrealized gains and losses
are allocated daily to each class based on its relative net assets. The
following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments--Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available
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 based upon quoted fair
valuations received daily by the Fund from a pricing service or counterparty.
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, money market instruments and certain fixed income securities, is
substantially completed each day at various times prior to the close of
business on the New York Stock Exchange ("NYSE"). The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates also are
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that may not be reflected in the computation of the Fund's net
asset value. If events (for example, a company announcement, market volatility
or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Fund's Board of
Directors or by the Investment Adviser using a pricing service and/or
procedures approved by the Fund's Board of Directors.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued)
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts. Futures contracts are
contracts for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund deposits
and maintains as collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the Fund agrees
to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
* Options--The Fund may write and purchase call and put options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current value of the option
written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to the
extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are the
result of settling (realized) or valuing (unrealized) assets or liabilities
expressed in foreign currencies into U.S. dollars. Realized and unrealized
gains or losses from investments include the effects of foreign exchange rates
on investments. The Fund invests in foreign securities, which may involve a
number of risk factors and special considerations not present with investments
in securities of U.S. corporations.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed
are subsequently recorded when the Fund has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
(f) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued)
(h) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on loaned securities but does not receive the income on
the collateral. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, the Fund could experience
delays and costs in gaining access to the collateral. The Fund also could
suffer a loss where the value of the collateral falls below the market value
of the borrowed securities, in the event of borrower default or in the event
of losses on investments made with cash collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch
& Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plan with FAM
Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLIM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at the annual rate of .65% of the average net assets of the Fund
not exceeding $1 billion, .625% of average net assets of the Fund in excess of
$1 billion but not exceeding $1.5 billion, .60% of net assets in excess of
$1.5 billion but not exceeding $5 billion, .575% of net assets in excess of
$5 billion but not exceeding $7.5 billion and .55% of net assets in excess of
$7.5 billion. MLIM has entered into a Sub-Advisory Agreement with Merrill
Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM,
pursuant to which MLAM U.K. provides investment advisory services to MLIM
with respect to the Fund. There is no increase in the aggregate fees paid by
the Fund for these services.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of
the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Class R .25% .25%
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of MLIM, also provides
account maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B, Class C and Class R shareholders.
The ongoing distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B, Class C
and Class R shareholders.
For the six months ended February 28, 2006, 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 $ 30,681 $ 379,878
Class I $ 2,683 $ 49,599
For the six months ended February 28, 2006, MLPF&S received contingent
deferred sales charges of $343,174 and $42,863 relating to transactions in
Class B and Class C Shares, respectively. Furthermore, MLPF&S received
contingent deferred sales charges of $397 relating to transactions subject to
front-end sales charge waivers in Class A Shares.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued)
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S or its
affiliates. As of February 28, 2006, the Fund lent securities with a value of
$349,990,385 to MLPF&S or its affiliates. Pursuant to that order, the Fund
also has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an
affiliate of MLIM, as the securities lending agent for a fee based on a share
of the returns on investment of cash collateral. MLIM, LLC may, on behalf of
the Fund, invest cash collateral received by the Fund for such loans, among
other things, in a private investment company managed by MLIM, LLC or in
registered money market funds advised by MLIM or its affiliates. For the six
months ended February 28, 2006, MLIM, LLC received $272,416 in securities
lending agent fees.
In addition, MLPF&S received $276,816 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended February
28, 2006.
The Fund received approximately $76,400,000 in settlement of litigation
seeking recovery of losses from various defendants involving previously
written off investment securities. The amount is included in realized gain on
investments in the Statement of Operations.
For the six months ended February 28, 2006, the Fund reimbursed MLIM $58,815
for certain accounting services.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Fund's transfer agent.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, FDS, PSI, MLAM U.K., FAMD, ML & Co., and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
merge ML & Co.'s investment management business, including MLIM, with the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
six months ended February 28, 2006 were $1,109,969,776 and $1,433,753,824,
respectively.
Transactions in call options written for the six months ended February 28,
2006 were as follows:
Number of Premiums
Contracts Received
Options written 2,246 $ 1,081,360
Options expired (2,246) (1,081,360)
--------------- ---------------
Outstanding call options written,
end of period -- --
=============== ===============
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$343,222,917 and $774,793,559 for the six months ended February 28, 2006 and
for the year ended August 31, 2005, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
February 28, 2006 Shares Amount
Shares sold 6,799,788 $ 126,667,165
Automatic conversion of shares 4,582,845 84,689,845
Shares issued to shareholders in
reinvestment of dividends 609,641 10,473,631
--------------- ---------------
Total issued 11,992,274 221,830,641
Shares redeemed (14,225,196) (264,869,865)
--------------- ---------------
Net decrease (2,232,922) $ (43,039,224)
=============== ===============
Class A Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 16,184,766 $ 271,957,651
Automatic conversion of shares 7,528,380 127,252,940
--------------- ---------------
Total issued 23,713,146 399,210,591
Shares redeemed (34,848,778) (588,888,158)
--------------- ---------------
Net decrease (11,135,632) $ (189,677,567)
=============== ===============
Class B Shares for the
Six Months Ended Dollar
February 28, 2006 Shares Amount
Shares sold 4,163,829 $ 70,915,926
--------------- ---------------
Automatic conversion of shares (4,997,177) (84,689,845)
Shares redeemed (10,624,316) (180,529,280)
--------------- ---------------
Total redeemed (15,621,493) (265,219,125)
--------------- ---------------
Net decrease (11,457,664) $ (194,303,199)
=============== ===============
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Notes to Financial Statements (concluded)
Class B Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 11,204,965 $ 172,917,581
--------------- ---------------
Automatic conversion of shares (8,207,396) (127,252,940)
Shares redeemed (32,306,774) (499,319,170)
--------------- ---------------
Total redeemed (40,514,170) (626,572,110)
--------------- ---------------
Net decrease (29,309,205) $ (453,654,529)
=============== ===============
Class C Shares for the
Six Months Ended Dollar
February 28, 2006 Shares Amount
Shares sold 5,830,611 $ 100,007,543
Shares issued to shareholders in
reinvestment of dividends 12,464 197,936
--------------- ---------------
Total issued 5,843,075 100,205,479
Shares redeemed (5,435,508) (92,816,805)
--------------- ---------------
Net increase 407,567 $ 7,388,674
=============== ===============
Class C Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 14,049,842 $ 217,937,491
Shares redeemed (15,180,014) (235,799,878)
--------------- ---------------
Net decrease (1,130,172) $ (17,862,387)
=============== ===============
Class I Shares for the
Six Months Ended Dollar
February 28, 2006 Shares Amount
Shares sold 8,060,909 $ 154,696,768
Shares issued to shareholders in
reinvestment of dividends 688,159 12,077,182
--------------- ---------------
Total issued 8,749,068 166,773,950
Shares redeemed (15,153,961) (285,117,107)
--------------- ---------------
Net decrease (6,404,893) $ (118,343,157)
=============== ===============
Class I Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 21,213,921 $ 359,847,700
Shares redeemed (27,940,399) (482,078,390)
--------------- ---------------
Net decrease (6,726,478) $ (122,230,690)
=============== ===============
Class R Shares for the
Six Months Ended Dollar
February 28, 2006 Shares Amount
Shares sold 549,263 $ 9,530,044
Shares issued to shareholders in
reinvestment of dividends 8,090 129,598
--------------- ---------------
Total issued 557,353 9,659,642
Shares redeemed (266,720) (4,585,653)
--------------- ---------------
Net increase 290,633 $ 5,073,989
=============== ===============
Class R Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 953,895 $ 15,021,287
Shares redeemed (402,314) (6,389,673)
--------------- ---------------
Net increase 551,581 $ 8,631,614
=============== ===============
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by MLIM and its affiliates,
is a party to a $500,000,000 credit agreement with a group of lenders. The
Fund may borrow under the credit agreement to fund shareholder redemptions and
for other lawful purposes other than for leverage. The Fund may borrow up to
the maximum amount allowable under the Fund's current prospectus and statement
of additional information, subject to various other legal, regulatory or
contractual limits. The Fund pays a commitment fee of .07% per annum based on
the Fund's pro rata share of the unused portion of the credit agreement.
Amounts borrowed under the credit agreement bear interest at a rate equal to,
at each fund's election, the federal funds rate plus .50% or a base rate as
defined in the credit agreement. The Fund did not borrow under the credit
agreement during the six months ended February 28, 2006. On November 23, 2005
the credit agreement was renewed for one year under substantially the same
terms.
6. Capital Loss Carryforward:
On August 31, 2005, the Fund had a net capital loss carryforward of
$2,294,772,471, of which $19,341,544 expires in 2009, $906,975,250 expires in
2010, $1,300,237,466 expires in 2011 and $68,218,211 expires in 2012. This
amount will be available to offset like amounts of any future taxable gains.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Disclosure of Investment Advisory Agreement
Activities 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 "Manager")
or other Merrill Lynch affiliates is as a director of the Fund and as a
trustee or director of certain other funds advised by the Manager or its
affiliates. The Co-chairmen of the Board are also independent directors. 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.
Management Agreement--Matters Considered by the Board
Every year, the Board considers approval of the Fund's Management Agreement
(the "Management Agreement"). The Board also annually reviews and considers
approval of the sub-advisory agreement on behalf of the Fund between the
Manager and Merrill Lynch Asset Management U.K. Limited (the "sub-adviser").
The Board assesses the nature, scope and quality of the services provided to
the Fund by the personnel of the Manager, 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
Manager and its affiliates, including the sub-adviser. Among the matters
considered are: (a) fees (in addition to management fees) paid to the Manager
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 compliance policies and procedures; and (d) the nature,
cost and character of non-investment management services provided by the
Manager and its affiliates.
The Board believes that the Manager is one of the most experienced global
asset management firms and considers the overall services provided by the
Manager to be of high quality. The Board also believes that the Manager is
financially sound and well managed and notes that the Manager is affiliated
with one of America's largest financial firms. The Board works closely with
the Manager in overseeing the Manager'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 Manager 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 Management
Agreement and the sub-advisory agreement, the Board requests and receives
materials specifically relating to the Fund's Management 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 Manager and its affiliates of the Management Agreement, the sub-advisory
agreement and other relationships with the Fund; and (e) information provided
by the Manager concerning investment advisory fees charged to other clients
under similar investment mandates. Since the sub-advisory services are
provided by an affiliate of the Manager, and no additional fee is paid for
these services, the Board considered the sub-advisory agreement and Management
Agreement together. The Board also considers other matters it deems important
to the approval process such as payments made to the Manager 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 Manager of "soft dollars"), the Fund's
portfolio turnover statistics, and direct and indirect benefits to the Manager
and the sub-adviser and their affiliates from their relationship with the
Fund.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Disclosure of Investment Advisory Agreement (continued)
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Management Agreement
and the sub-advisory agreement in February, 2006, the independent directors'
and Board's review included the following:
Services Provided by the Manager--The Board reviewed the nature, extent and
quality of services provided by the Manager and the sub-adviser, focusing on
investment advisory services and the resulting performance of the Fund. The
Board uses data provide by Lipper and by the Manager in its review of advisory
services. 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 Manager's investment goals, the Board attaches
more importance to performance over relatively long periods of time, typically
three to five years. The Board concluded that the comparative data indicated
that performance was satisfactory. Considering all these factors, the Board
concluded that the nature and quality of the services provided supported the
continuation of the Management Agreement with the Manager.
The Manager'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 Manager responsible for investment operations
and the senior management of the Manager'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 Manager's
investment staff, its use of technology, and the Manager's approach to
training and retaining portfolio and other research, advisory and management
personnel. The Board also reviews the Manager'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
Lawrence Fuller is the Fund's portfolio manager and is primarily responsible
for the day-to-day management of the Fund's portfolio and the selection of its
investments. Thomas Burke is the associate portfolio manager of the Fund. Mr.
Fuller has more than thirty-eight years' experience in portfolio management
and Mr. Burke has more than twenty-five years' experience in portfolio
management. Moreover, the Manager 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 reviewed 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 considered comparable by Lipper. The Board 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 Manager to other types of
clients with similar investment mandates, including sub-advised funds. The
Board noted that the fees charged to the sub-advised funds were less than
those being charged to the Fund. The Board also noted that MLIM provides a
number of services to mutual funds that MLIM does not provide to sub-advised
funds. The Board determined that the Fund's contractual management fee rate
and actual management fees, as well as total expenses, were competitive with
those of comparable funds. The Board has concluded that the Fund's management
fee rate and overall expense ratio are reasonable when compared to those of
other comparable funds.
Profitability--The Board considers the cost of the services provided to the
Fund by the Manager, and the Manager'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 Manager'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 concluded that the
profits of the Manager and its affiliates are acceptable in relation to the
nature and quality of services provided and given the level of fees and
expenses overall.
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. The Board noted that the
Fund's management fee rate includes a breakpoint schedule that reduces the
Fund's management fee rate as the Fund's assets increase. The Board determined
that the management fee structure was reasonable and that no changes were
currently necessary.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Disclosure of Investment Advisory Agreement (concluded)
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Management 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.
Officers and Directors
Robert C. Doll, Jr., President and Director
James H. Bodurtha, Director
Kenneth A. Froot, Director
Joe Grills, Director
Herbert I. London, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
JPMorgan Chase Bank, N.A.
3 Chase Metrotech Center
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
Effective January 1, 2006, Stephen B. Swensrud retired as Director of
Merrill Lynch Fundamental Growth Fund, Inc. The Fund's Board of Directors
wishes Mr. Swensrud well in his retirement.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. FEBRUARY 28, 2006
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-
annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined
that the registrant's disclosure controls and procedures are
effective based on our evaluation of these controls and procedures
as of a date within 90 days prior to the filing date of this
report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch Fundamental Growth Fund, Inc.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Fundamental Growth Fund, Inc.
Date: April 20, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Fundamental Growth Fund, Inc.
Date: April 20, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Fundamental Growth Fund, Inc.
Date: April 20, 2006