EX-17.(B) 8 e15840ex17b.txt ANNUAL REPORT (BULL LOGO) Merrill Lynch Investment Managers Semi-Annual Report February 28, 2003 Merrill Lynch Fundamental Growth Fund, Inc. www.mlim.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. Merrill Lynch Fundamental Growth Fund, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. DEAR SHAREHOLDER For the six-month period ended February 28, 2003, Merrill Lynch Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class D Shares had total returns of -9.90%, -10.36%, -10.45% and -10.05%, 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 3 and 4 of this report to shareholders.) This compares with a total return of -7.60% for the Lipper Large Cap Growth Funds Average for the same period. The Fund underperformed the unmanaged Standard & Poor's (S&P) 500 Index, which had a total return of -7.29% and the unmanaged S&P Barra Growth Index, which had a total return of -6.67%. During the six-month period ended February 28, 2003, major global stock markets continued in a downward trend with overall market indexes almost touching new lows in early October 2002. News media reports and investment community commentators almost continuously focused on the impending military confrontation with Iraq. It appears that this emphasis imposed a negative discount on overall equity valuations. The Fund continued to be overweighted in the consumer discretionary and consumer staples sectors. Overall, the negative stock investment returns in both of these sectors underperformed the total investment return for the S&P 500 Index. Some of the best comparative investment returns in the Fund during the period were Clear Channel Communications, Inc. and Fox Entertainment Group, Inc. in the media and entertainment industry and eBay Inc., Bed Bath & Beyond Inc., Lowe's Companies, Inc. and Brinker International, Inc. in retailing and restaurants. Stocks added to the Fund included Starbucks Corporation, eBay Inc., Autozone, Inc. and Fox Entertainment Group, Inc., Archer-Daniels-Midland Company and The Clorox Company. We sold Brown-Forman Corporation after the company reported an unanticipated lower earnings level and a decreased outlook for future earnings. In the biotechnology industry, shares of Amgen Inc., as well as companies in the health care equipment and supplies industries including Alcon, Inc., Boston Scientific Corporation, Stryker Corporation and Zimmer Holdings, Inc., had positive investment returns. We also added Medtronic, Inc. and Varian Medical Systems, Inc. to the Fund's investments. The Fund remained underweighted in the largest ethical drug companies because we anticipated further deterioration in pricing conditions as Federal and state officials attempted to reduce the soaring costs of government reimbursements for health care. Thus, we sold the Fund's holdings in Pfizer Inc. The Fund became relatively underweighted in the information technology sector where there was a broad-based and substantial improvement in stock prices during the six-month period ended February 28, 2003. Intel Corporation, International Business Machines Corporation and Cisco Systems, Inc., which were three of the largest investments in the Fund, had positive investment returns. We reduced the Fund's overall investment weighting by liquidating investment holdings in QUALCOMM Incorporated, Sun Microsystems, Inc., Applied Materials, Inc., KLA-Tencor Corporation, STMicroelectronics NV, Texas Instruments Incorporated, Oracle Corporation, SAP AG and Siebel Systems, Inc. After reporting the most recent quarterly financial results, the managements of International Business Machines Corporation, Intel Corporation, Microsoft Corporation and Cisco Systems, Inc. painted an uncertain and modest growth outlook for corporate and public sector spending on technology equipment and software. We continue to invest in the equities of these companies since we believe they are the best- managed technology companies for the long term. However, a substantial amount of time may pass before there is a robust cyclical upturn in capital spending on technology globally. There has been a cyclical upturn in U.S. capital spending on information technology equipment and software since the recession ended at the completion of the third quarter of 2001. In retrospect, there has been so much capacity to supply equipment and software services on a global basis that the cyclical upturn in spending has not evolved into an overall improvement in the growth of profits for information technology companies. Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 We sold the Fund's investments in the residential mortgage financing and consumer credit industries because of our concern about deteriorating credit quality reports. Fund equity investments in H & R Block, Inc., American Express Company, Fannie Mae, MBNA Corporation, Wells Fargo Company and Target Corporation were subsequently sold. Target Corporation is a multiline retailer that has derived a substantial percentage of its growth in earnings from the expansion of a credit card business to customers, but we are concerned about a potential deterioration in credit quality and rising loan loss expenses. In the insurance sector, we sold American International Group, Inc. and Lincoln National Corporation. After American International announced a surprising increase in loss reserves, we became aware of the potential for continued unanticipated increases in loss reserves in several important commercial insurance lines of business that historically had been very profitable. With respect to Lincoln National, we sold the holding after its management announced a substantial increase in reserves to support guaranteed returns on various life insurance annuity products. The life insurance industry in Europe, England and the United States for some time has been experiencing the necessity to continually reduce earnings estimates by using increased reserves because of the more than three-year downward trend in stock values around the world. In the media industry, we sold the Fund's holdings in The Interpublic Group of Companies, Inc. after its management announced that investments in commercial ventures in Europe and Asia were unprofitable. The advertising industry in the United States and Europe has experienced a cyclical upturn from the U.S. recession in 2001. However, this historically well-managed company was not reaping benefits from the turnaround. We sold the Fund's equity investment in The Walt Disney Company since there appeared to be a lack of any meaningful progress in corporate restructuring by management during the prior fiscal year. We sold Univision Communications Inc. (Class A) and Viacom, Inc. (Class B) because of our concerns about slower rates of growth in upcoming quarters as the geopolitical situation in the Middle East and the involvement of the United States caused corporations to reduce advertising budgets. Nextel Communications, Inc. (Class A) and Sprint Corporation (PCS Group) were sold after the unenthusiastic consumer response to new mobile phone service offerings and lower-than-anticipated per subscriber monthly service revenues. We added Verizon Communications to the Fund since we found the valuation very reasonable and believe that there will be further U.S. court action to deregulate wireline communication services and improve the corporate rates of return to previously relatively high levels. Market Outlook We anticipate that a resolution to the confrontation between the United States and Iraq may result in an upward trend in U.S. equity prices. (Similar developments took place shortly after the start of the Gulf War in 1991.) Alan Greenspan, Chairman of the Federal Reserve Board of Governors, stated in a recent public speech that it was likely that Americans raised $200 billion of liquidity in 2002 from the refinancing of residential mortgage obligations on appreciated homes. It would seem that consumers did not spend this increased liquidity during the year-end holiday season. Military conflict or the prospect for conflict has dampened consumer spending in the past. Therefore, we believe that a resolution to the confrontation will provide a boost to the rate of real growth of consumer spending and economic growth as well as higher corporate profits. These developments may be beneficial to the value of stocks, particularly given that the increased focus of an armed conflict in Iraq by the media and investment community appears to have been destructive to stock market values. Consequently, we focused on stock investments that we believe should benefit from a recovery in household spending. The last quarter of the period ended February 28, 2003, from a comparative investment return perspective for the Fund, was one of our recent best compared to other actively managed large cap growth funds. In our opinion, the results reflected our change in strategy during the period. Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 In Conclusion We thank you for your continued investment in Merrill Lynch Fundamental Growth Fund, Inc., and we look forward to discussing our outlook and strategy with you again in our next report to shareholders. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Lawrence R. Fuller) Lawrence R. Fuller Vice President and Portfolio Manager March 31, 2003 PERFORMANCE DATA About Fund Performance Investors are able to purchase shares of the Fund through five pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution or account maintenance fees. Class A Shares are available only to eligible investors, as detailed in the Fund's prospectus. If you were a Class A shareholder prior to October 21, 1994, your Class A Shares were redesignated to Class D Shares on October 21, 1994. However, in the case of certain eligible investors, the shares were simultaneously exchanged for Class A Shares. * Effective June 1, 2001, Class B Shares are subject to a maximum contingent deferred sales charge of 4% declining to 0% after six years. All Class B Shares purchased prior to June 1, 2001 will maintain the four-year schedule. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class D Shares after 8 years. (There is no initial sales charge for automatic share conversions.) If you were a Class B shareholder prior to October 21, 1994, your Class B Shares were redesignated to Class C Shares on October 21, 1994. * Class C Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. * Class D Shares incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). * Class R Shares do not incur a maximum sales charge (front-end load) or deferred sales charge. These shares are subject to a distribution fee of 0.25% and an account maintenance fee of 0.25%. Class R Shares are available only to certain retirement plans. None of the past results shown should be considered a representation of future performance. 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 gains distributions at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 PERFORMANCE DATA (concluded) Recent Performance Results
Ten-Year/ 6-Month 12-Month Since Inception As of February 28, 2003 Total Return Total Return Total Return ML Fundamental Growth Fund, Inc. Class A Shares* - 9.90% -28.46% +99.21% ML Fundamental Growth Fund, Inc. Class B Shares* -10.36 -29.20 +82.78 ML Fundamental Growth Fund, Inc. Class C Shares* -10.45 -29.27 +79.87 ML Fundamental Growth Fund, Inc. Class D Shares* -10.05 -28.64 +94.84 ML Fundamental Growth Fund, Inc. Class R Shares* -- -- - 5.61 Standard & Poor's 500 Index** - 7.29 -22.68 +129.29/+105.48/-1.50 Standard & Poor's Barra Growth Index*** - 6.67 -23.34 +130.06/+111.82/-0.30
*Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included. Total investment returns are based on changes in net asset values for the periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. The Fund's ten year/since inception dates are from 10/21/94 for Class A & Class B Shares, ten years for Class C & Class D Shares and from 1/03/03 for Class R Shares. **An unmanaged broad-based Index comprised of common stocks. Since inception total returns are for ten years from 10/31/94 and from 1/03/03, respectively. ***This unmanaged index is a capitalization-weighted index of all the stocks in the Standard & Poor's 500 Index that have higher price- to-book ratios. Since inception total returns are for ten years, from 10/31/94 and from 1/31/03, respectively. Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** Class A Shares* One Year Ended 2/28/03 -28.46% -32.21% Five Years Ended 2/28/03 - 2.75 - 3.80 Inception (10/21/94) through 2/28/03 + 8.60 + 7.90 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. % Return Without % Return With Sales Charge Sales Charge** Class B Shares* One Year Ended 2/28/03 -29.20% -32.03% Five Years Ended 2/28/03 - 3.75 - 4.07 Inception (10/21/94) through 2/28/03 + 7.48 + 7.48 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after six years. **Assuming payment of applicable contingent deferred sales charge. % Return Without % Return With Sales Charge Sales Charge** Class C Shares* One Year Ended 2/28/03 -29.27% -29.97% Five Years Ended 2/28/03 - 3.76 - 3.76 Ten Years Ended 2/28/03 + 6.57 + 6.57 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after four years. **Assuming payment of applicable contingent deferred sales charge. % Return Without % Return With Sales Charge Sales Charge** Class D Shares* One Year Ended 2/28/03 -28.64% -32.38% Five Years Ended 2/28/03 - 3.00 - 4.04 Ten Years Ended 2/28/03 + 7.41 + 6.84 *Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class D Shares (formerly Class A Shares) were offered at a higher-than- maximum sales charge. Thus, actual returns would have been somewhat lower than noted for the inception period.) **Assuming maximum sales charge. Aggregate Total Return % Return Without Sales Charge Class R Shares Inception (1/03/03) through 2/28/03 -5.61% Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 PORTFOLIO INFORMATION As of February 28, 2003 Percent of Ten Largest Holdings Net Assets Microsoft Corporation 6.3% Wal-Mart Stores, Inc. 5.3 The Proctor & Gamble Company 3.7 International Business Machines Corporation 3.4 The Coca-Cola Company 3.3 Amgen Inc. 3.3 Intel Corporation 3.1 Verizon Communications 2.9 HCA Inc. 2.8 Cisco Systems, Inc. 2.6 Percent of Geographic Allocation Net Assets++ United States 96.1% Netherlands 2.0 Switzerland 1.2 Canada 0.7 ++Total may not equal 100%. Percent of Five Largest Industries* Net Assets Health Care Equipment & Supplies 8.6% Software 7.6 Beverages 7.0 Multiline Retail 6.3 Household Products 6.1 *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. Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 SCHEDULE OF INVESTMENTS
Shares Percent of Industry* Held Common Stocks Value Net Assets Aerospace & 935,000 General Dynamics Corporation $ 55,408,100 1.3% Defense Air Freight & 1,571,600 United Parcel Service, Inc. (Class B) 90,429,864 2.1 Logistics Banks 2,223,900 Northern Trust Corporation 71,164,800 1.6 Beverages 2,226,800 Anheuser-Busch Companies, Inc. 103,546,200 2.4 3,635,100 The Coca-Cola Company 146,203,722 3.3 2,918,100 Coca-Cola Enterprises Inc. 58,887,258 1.3 -------------- ------ 308,637,180 7.0 Biotechnology 2,673,600 ++Amgen Inc. 145,898,352 3.3 Chemicals 1,130,600 Ecolab Inc. 55,455,930 1.3 Commercial 256,900 ++Apollo Group, Inc. (Class A) 11,909,884 0.3 Services & 2,319,300 First Data Corporation 80,363,745 1.8 Supplies -------------- ------ 92,273,629 2.1 Communications 8,269,008 ++Cisco Systems, Inc. 115,518,042 2.6 Equipment Computers & 1,891,500 International Business Machines Corporation 147,442,425 3.4 Peripherals
Containers & 292,600 Ball Corporation 15,589,728 0.4 Packaging Diversified 3,083,200 State Street Corporation 113,615,920 2.6 Financials 2,079,100 T. Rowe Price Group Inc. 53,474,452 1.2 -------------- ------ 167,090,372 3.8 Diversified 3,614,700 Verizon Communications 124,996,326 2.9 Telecommunication Services Energy Equipment & 532,600 ++BJ Services Company 18,305,462 0.4 Services 1,829,300 Baker Hughes Incorporated 56,744,886 1.3 -------------- ------ 75,050,348 1.7 Food & Drug 2,393,700 SYSCO Corporation 64,917,144 1.5 Retailing Food Products 920,300 Archer-Daniels-Midland Company 10,031,270 0.2 1,552,400 Unilever NV (NY Registered Shares) 87,990,032 2.0 -------------- ------ 98,021,302 2.2 Health Care 1,391,700 ++Alcon, Inc. 54,485,055 1.2 Equipment & 2,513,200 ++Boston Scientific Corporation 111,008,044 2.5 Supplies 1,982,600 Medtronic, Inc. 88,622,220 2.0 846,000 Stryker Corporation 55,159,200 1.3 234,600 ++Varian Medical Systems, Inc. 11,859,030 0.3 1,237,000 ++Zimmer Holdings, Inc. 54,910,430 1.3 -------------- ------ 376,043,979 8.6
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 SCHEDULE OF INVESTMENTS (continued)
Shares Percent of Industry* Held Common Stocks Value Net Assets Health Care 2,962,600 HCA Inc. $ 122,177,624 2.8% Providers & 3,066,800 Health Management Associates, Inc. (Class A) 54,957,056 1.2 Services 2,339,500 ++Tenet Healthcare Corporation 42,508,715 1.0 -------------- ------ 219,643,395 5.0 Hotels, 860,800 ++Brinker International, Inc. 23,861,376 0.6 Restaurants & 980,400 ++Starbucks Corporation 23,000,184 0.5 Leisure 3,156,800 ++YUM! Brands, Inc. 75,163,408 1.7 -------------- ------ 122,024,968 2.8 Household Products 1,290,700 The Clorox Company 54,609,517 1.2 1,014,900 Colgate-Palmolive Company 51,059,619 1.2 1,985,300 The Procter & Gamble Company 162,516,658 3.7 -------------- ------ 268,185,794 6.1 Industrial 857,000 3M Co. 107,442,090 2.5 Conglomerates Insurance 1,634,000 Everest Re Group, Ltd. 87,255,600 2.0 1,326,900 Marsh & McLennan Companies, Inc. 54,004,830 1.2 -------------- ------ 141,260,430 3.2 Internet & 299,500 ++eBay Inc. 23,480,800 0.5 Catalog Retail Media 7,675,600 ++AOL Time Warner Inc. 86,887,792 2.0 2,589,100 ++Clear Channel Communications, Inc. 94,528,041 2.2 1,817,400 ++Fox Entertainment Group, Inc. (Class A) 48,579,102 1.1 3,347,600 ++Rogers Communications, Inc. 'B' 30,896,429 0.7 -------------- ------ 260,891,364 6.0 Multiline Retail 856,600 ++Kohl's Corporation 41,887,740 1.0 4,838,000 Wal-Mart Stores, Inc. 232,514,280 5.3 -------------- ------ 274,402,020 6.3 Oil & Gas 2,762,800 ++TransMontaigne Inc. (a) 10,774,920 0.2 Semiconductor 7,832,960 Intel Corporation 135,118,560 3.1 Equipment & Products Software 1,106,700 ++Electronic Arts Inc. 58,422,693 1.3 11,678,200 Microsoft Corporation 276,890,122 6.3 -------------- ------ 335,312,815 7.6 Specialty Retail 337,900 ++AutoZone, Inc. 22,233,820 0.5 1,635,100 ++Bed Bath & Beyond Inc. 54,007,353 1.2 2,350,400 Lowe's Companies, Inc. 92,370,720 2.1 2,733,700 The TJX Companies, Inc. 43,930,559 1.0 -------------- ------ 212,542,452 4.8 Total Common Stocks (Cost--$4,992,113,047) 4,115,017,129 93.9
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 SCHEDULE OF INVESTMENTS (concluded)
Shares Percent of Held Short-Term Securities Value Net Assets 411,716,610 Merrill Lynch Premier Institutional Fund (b)(c) $ 411,716,610 9.4%
Beneficial Interest $ 302,488,803 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (c) 302,488,803 6.9 503,209,191 Merrill Lynch Liquidity Series, LLC Money Market Series (b)(c) 503,209,191 11.5 -------------- ------ 805,697,994 18.4 Total Short-Term Securities (Cost--$1,217,414,604) 1,217,414,604 27.8 Total Investments (Cost--$6,209,527,651) 5,332,431,733 121.7 Liabilities in Excess of Other Assets (948,024,858) (21.7) -------------- ------ Net Assets $4,384,406,875 100.0% ============== ====== *For Fund compliance purposes, "Industry" means any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub- classifications for reporting ease. ++Non-income producing security. (a)Investments in companies 5% or more of whose outstanding securities are held by the Fund (such companies are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940) are as follows: Net Share Net Dividend Industry Affiliate Activity Cost Income Oil & Gas TransMontaigne Inc. (154,400) $(849,200) ++ ++Non-income producing security. (b)Security was purchased with the cash proceeds from securities loans. (c)Investments in companies considered to be an affiliate of the Fund (such companies are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940) are as follows: Dividend/ Net Interest Affiliate Activity Income Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $302,488,803 $853,446 Merrill Lynch Liquidity Series, LLC Money Market Series $503,209,191 16,667 Merrill Lynch Premier Institutional Fund 411,716,610 18,136 See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 FINANCIAL INFORMATION
Statement of Assets and Liabilities as of February 28, 2003 Assets: Investments, at value (including securities loaned of $897,325,221) (identified cost--$6,209,527,651) $ 5,332,431,733 Cash 2,939 Foreign cash (cost--$270,818) 298,956 Receivables: Securities sold $ 5,195,131 Capital shares sold 3,956,082 Dividends 3,076,031 Interest 296,572 Security lending--net 34,803 12,558,619 --------------- Prepaid registration fees 132,879 --------------- Total assets 5,345,425,126 --------------- Liabilities: Collateral on securities loaned, at value 914,925,801 Payables: Securities purchased 28,967,431 Capital shares redeemed 9,513,357 Investment adviser 2,066,392 Distributor 1,790,185 42,337,365 --------------- Accrued expenses and other liabilities 3,755,085 --------------- Total liabilities 961,018,251 --------------- Net Assets: Net assets $ 4,384,406,875 =============== Net Assets Class A Shares of capital stock, $.10 par value, 150,000,000 Consist of: shares authorized $ 8,925,220 Class B Shares of capital stock, $.10 par value, 500,000,000 shares authorized 13,059,001 Class C Shares of capital stock, $.10 par value, 300,000,000 shares authorized 4,547,838 Class D Shares of capital stock, $.10 par value, 300,000,000 shares authorized 10,265,571 Class R Shares of capital stock, $.10 par value, 500,000,000 shares authorized 1 Paid-in capital in excess of par 7,812,273,778 Accumulated investment loss--net $ (13,985,068) Accumulated realized capital losses on investments and foreign currency transactions--net (2,573,611,686) Unrealized depreciation on investments and foreign currency transactions--net (877,067,780) --------------- Total accumulated losses--net (3,464,664,534) --------------- Net assets $ 4,384,406,875 ===============
Net Asset Class A--Based on net assets of $1,112,629,028 and 89,252,201 Value: shares outstanding $ 12.47 =============== Class B--Based on net assets of $1,491,149,955 and 130,590,005 shares outstanding $ 11.42 =============== Class C--Based on net assets of $522,280,220 and 45,478,383 shares outstanding $ 11.48 =============== Class D--Based on net assets of $1,258,347,578 and 102,655,713 shares outstanding $ 12.26 =============== Class R--Based on net assets of $94.38 and 8.244 shares outstanding $ 11.45 =============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 FINANCIAL INFORMATION (continued)
Statement of Operations for the Six Months Ended February 28, 2003 Investment Dividends (net of $133,375 foreign withholding tax) $ 19,242,322 Income: Interest 1,619,799 Securities lending--net 643,895 --------------- Total income 21,506,016 --------------- Expenses: Investment advisory fees $ 14,340,216 Account maintenance and distribution fees--Class B 8,180,669 Account maintenance and distribution fees--Class C 2,798,012 Transfer agent fees--Class B 2,655,478 Transfer agent fees--Class D 1,885,392 Account maintenance fees--Class D 1,660,924 Transfer agent fees--Class A 1,632,196 Transfer agent fees--Class C 940,044 Accounting services 389,587 Professional fees 365,290 Printing and shareholder reports 146,619 Custodian fees 118,971 Directors' fees and expenses 62,837 Registration fees 57,810 Pricing fees 46,080 Other 103,861 --------------- Total expenses 35,383,986 --------------- Investment loss--net (13,877,970) --------------- Realized & Realized losson: Unrealized Investments--net (633,475,334) Gain (Loss) on Foreign currency transactions--net (181,625) (633,656,959) Investments & --------------- Foreign Change in unrealized appreciation/depreciation on: Currency Investments--net 140,706,624 Transactions-- Foreign currency transactions--net 18,762 140,725,386 Net: --------------- --------------- Total realized and unrealized loss on investments and foreign currency transactions--net (492,931,573) --------------- Net Decrease in Net Assets Resulting from Operations $ (506,809,543) =============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets For the Six For the Months Ended Year Ended February 28, August 31, Increase (Decrease) in Net Assets: 2003 2002 Operations: Investment loss--net $ (13,877,970) $ (38,864,498) Realized loss on investments and foreign currency transactions--net (633,656,959) (929,479,009) Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net 140,725,386 (429,942,276) --------------- --------------- Net decrease in net assets resulting from operations (506,809,543) (1,398,285,783) --------------- --------------- Capital Share Net increase (decrease) in net assets derived from capital share Transactions: transactions (64,034,158) 1,189,916,446 --------------- --------------- Net Assets: Total decrease in net assets (570,843,701) (208,369,337) Beginning of period 4,955,250,576 5,163,619,913 --------------- --------------- End of period* $ 4,384,406,875 $ 4,955,250,576 =============== =============== *Accumulated investment loss--net $ (13,985,068) $ (107,098) =============== =============== See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 FINANCIAL INFORMATION (continued)
Financial Highlights Class A The following per share data and ratios For the have been derived from information Six Months provided in the financial statements. Ended Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999 Per Share Net asset value, beginning of period $ 13.84 $ 17.46 $ 29.98 $ 21.99 $ 16.19 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income (loss)--net++ --+++++ (.02) .08 .02 .13 Realized and unrealized gain (loss) on investments and foreign currency transactions--net (1.37) (3.60) (10.64) 9.91 6.37 ---------- ---------- ---------- ---------- ---------- Total from investment operations (1.37) (3.62) (10.56) 9.93 6.50 ---------- ---------- ---------- ---------- ---------- Less distributions: Realized gain on investments--net -- -- -- (1.94) (.70) In excess of realized gain on investments--net -- -- (1.96) -- -- ---------- ---------- ---------- ---------- ---------- Total distributions -- -- (1.96) (1.94) (.70) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 12.47 $ 13.84 $ 17.46 $ 29.98 $ 21.99 ========== ========== ========== ========== ========== Total Based on net asset value per share (9.90%)+++ (20.73%) (36.71%) 47.01% 41.08% Investment ========== ========== ========== ========== ========== Return:** Ratios to Expenses .95%* .94% .80% .76% .81% Average ========== ========== ========== ========== ========== Net Assets: Investment income (loss)--net (.03%)* (.09%) .35% .09% .60% ========== ========== ========== ========== ========== Supplemental Net assets, end of period (in thousands) $1,112,629 $1,170,884 $ 950,922 $ 882,072 $ 472,464 Data: ========== ========== ========== ========== ========== Portfolio turnover 44.13% 92.35% 149.86% 98.71% 52.72% ========== ========== ========== ========== ========== *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. +++++Amount is less than $.01 per share. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 FINANCIAL INFORMATION (continued)
Financial Highlights (continued) Class B The following per share data and ratios For the have been derived from information Six Months provided in the financial statements. Ended Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999 Per Share Net asset value, beginning of period $ 12.74 $ 16.24 $ 28.06 $ 20.75 $ 15.39 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment loss--net++ (.06) (.17) (.13) (.23) (.08) Realized and unrealized gain (loss) on investments and foreign currency transactions--net (1.26) (3.33) (9.95) 9.32 6.05 ---------- ---------- ---------- ---------- ---------- Total from investment operations (1.32) (3.50) (10.08) 9.09 5.97 ---------- ---------- ---------- ---------- ---------- Less distributions: Realized gain on investments--net -- -- -- (1.78) (.61) In excess of realized gain on investments--net -- -- (1.74) -- -- ---------- ---------- ---------- ---------- ---------- Total distributions -- -- (1.74) (1.78) (.61) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 11.42 $ 12.74 $ 16.24 $ 28.06 $ 20.75 ========== ========== ========== ========== ========== Total Based on net asset value per share (10.36%)+++ (21.55%) (37.36%) 45.55% 39.58% Investment ========== ========== ========== ========== ========== Return:** Ratios to Expenses 1.99%* 1.96% 1.81% 1.77% 1.83% Average ========== ========== ========== ========== ========== Net Assets: Investment loss--net (1.08%)* (1.10%) (.62%) (.92%) (.41%) ========== ========== ========== ========== ========== Supplemental Net assets, end of period (in thousands) $1,491,150 $1,802,731 $2,299,511 $3,411,474 $2,000,535 Data: ========== ========== ========== ========== ========== Portfolio turnover 44.13% 92.35% 149.86% 98.71% 52.72% ========== ========== ========== ========== ========== *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 FINANCIAL INFORMATION (continued)
Financial Highlights (continued) Class C The following per share data and ratios For the have been derived from information Six Months provided in the financial statements. Ended Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999 Per Share Net asset value, beginning of period $ 12.82 $ 16.34 $ 28.26 $ 20.88 $ 15.45 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment loss--net++ (.07) (.17) (.13) (.24) (.09) Realized and unrealized gain (loss) on investments and foreign currency transactions--net (1.27) (3.35) (10.01) 9.39 6.10 ---------- ---------- ---------- ---------- ---------- Total from investment operations (1.34) (3.52) (10.14) 9.15 6.01 ---------- ---------- ---------- ---------- ---------- Less distributions: Realized gain on investments--net -- -- -- (1.77) (.58) In excess of realized gain on investments--net -- -- (1.78) -- -- ---------- ---------- ---------- ---------- ---------- Total distributions -- -- (1.78) (1.77) (.58) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 11.48 $ 12.82 $ 16.34 $ 28.26 $ 20.88 ========== ========== ========== ========== ========== Total Based on net asset value per share (10.45%)+++ (21.54%) (37.35%) 45.53% 39.65% Investment ========== ========== ========== ========== ========== Return:** Ratios to Expenses 2.00%* 1.97% 1.83% 1.78% 1.83% Average ========== ========== ========== ========== ========== Net Assets: Investment loss--net (1.09%)* (1.11%) (.66%) (.93%) (.43%) ========== ========== ========== ========== ========== Supplemental Net assets, end of period (in thousands) $ 522,280 $ 596,871 $ 616,400 $ 627,021 $ 307,988 Data: ========== ========== ========== ========== ========== Portfolio turnover 44.13% 92.35% 149.86% 98.71% 52.72% ========== ========== ========== ========== ========== *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class D The following per share data and ratios For the have been derived from information Six Months provided in the financial statements. Ended Feb. 28, For the Year Ended August 31, Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999 Per Share Net asset value, beginning of period $ 13.63 $ 17.23 $ 29.63 $ 21.77 $ 16.06 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income (loss)--net++ (.02) (.05) .03 (.04) .08 Realized and unrealized gain (loss) on investments and foreign currency transactions--net (1.35) (3.55) (10.52) 9.80 6.31 ---------- ---------- ---------- ---------- ---------- Total from investment operations (1.37) (3.60) (10.49) 9.76 6.39 ---------- ---------- ---------- ---------- ---------- Less distributions: Realized gain on investments--net -- -- -- (1.90) (.68) In excess of realized gain on investments--net -- -- (1.91) -- -- ---------- ---------- ---------- ---------- ---------- Total distributions -- -- (1.91) (1.90) (.68) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 12.26 $ 13.63 $ 17.23 $ 29.63 $ 21.77 ========== ========== ========== ========== ========== Total Based on net asset value per share (10.05%)+++ (20.89%) (36.88%) 46.67% 40.67% Investment ========== ========== ========== ========== ========== Return:** Ratios to Expenses 1.20%* 1.18% 1.04% 1.01% 1.05% Average ========== ========== ========== ========== ========== Net Assets: Investment income (loss)--net (.28%)* (.33%) .14% (.17%) .36% ========== ========== ========== ========== ========== Supplemental Net assets, end of period (in thousands) $1,258,348 $1,384,765 $1,296,787 $1,712,701 $ 795,607 Data: ========== ========== ========== ========== ========== Portfolio turnover 44.13% 92.35% 149.86% 98.71% 52.72% ========== ========== ========== ========== ========== *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
Class R For the Period January 3, The following per share data and ratios have been derived 2003++ to from information provided in the financial statements. February 28, Increase (Decrease) in Net Asset Value: 2003 Per Share Net asset value, beginning of period $ 12.13 Operating ---------- Performance: Investment loss--net++++ --+++++ Realized and unrealized loss on investments and foreign currency transactions--net (.68) ---------- Total from investment operations (.68) ---------- Net asset value, end of period $ 11.45 ========== Total Based on net asset value per share (5.61%)+++ Investment ========== Return:** Ratios to Expenses 1.44%* Average ========== Net Assets: Investment loss--net (.47%)* ========== Supplemental Net assets, end of period (in thousands) $ --++++++ Data: ========== Portfolio turnover 44.13% ========== *Annualized. **Total investment returns exclude the effects of sales charges. ++Commencement of operations. ++++Based on average shares outstanding. ++++++Amount is less than $1,000. +++Aggregate total investment return. +++++Amount is less than $.01 per share. See Notes to Financial Statements.
Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 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 a diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal, recurring nature. The Fund offers five classes of shares. Shares of Class A and Class D 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 B, Class C, Class D and Class R Shares bear certain expenses related to the account maintenance of such shares, and Class B, Class C and Class R Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses on investments and foreign currency transactions are allocated daily to each class based on its relative net assets. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities that are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Securities traded in the over-the- counter market are valued at the last available bid price prior to the time of valuation. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Board of Directors as the primary market. Securities that are traded both in the over-the- counter market and on a stock exchange are valued according to the broadest and most representative market. Options written or purchased are valued at the last sale price in the case of exchange- traded options. In the case of options traded in the over-the- counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term securities are valued at amortized cost, which approximates market value. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market value quotations are not available are valued at their fair value as determined in good faith by or under the direction of the Fund's Board of Directors. Occasionally, events affecting the values of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the market on which such security trades) and the close of business on the NYSE. If events (for example, company announcement, natural disasters, market volatility) occur during such periods that are expected to materially affect the value for such securities, those securities may be valued at their fair market 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 Board of Directors of the Fund. (b) Derivative financial instruments--The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. 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 for the purpose of hedging the market risk on existing securities or the intended purchase of securities. 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. Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 NOTES TO FINANCIAL STATEMENTS (continued) * Options--The Fund is authorized to write and purchase call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. (c) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into U.S. dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income is recognized on the accrual basis. (f) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and distributions--Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. (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. Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLIM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at the annual rate of .65% of the average net assets of the Fund not exceeding $1 billion, .625% of average net assets of the Fund in excess of $1 billion but not exceeding $1.5 billion, .60% of net assets in excess of $1.5 billion but not exceeding $5 billion, .575% of net assets in excess of $5 billion but not exceeding $7.5 billion and .55% of net assets in excess of $7.5 billion. MLIM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM, pursuant to which MLAM U.K. provides investment advisory services to MLIM with respect to the Fund. There is no increase in the aggregate fees paid by the Fund for these services. Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Maintenance Distribution Fee Fee Class B .25% .75% Class C .25% .75% Class D .25% -- Class R .25% .25% Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C, Class D 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, 2003, FAMD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: FAMD MLPF&S Class A $ 1,293 $ 6,491 Class D $10,268 $159,156 For the six months ended February 28, 2003, MLPF&S received contingent deferred sales charges of $1,141,844 and $103,564 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $535 relating to transactions subject to front-end sales charge waivers in Class D Shares. The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to MLPF&S or its affiliates. As of February 28, 2003, the Fund lent securities with a value of $295,325,196 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, 2003, MLIM, LLC received $235,075 in securities lending agent fees. Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 NOTES TO FINANCIAL STATEMENTS (concluded) In addition, MLPF&S received $770,783 in commissions on the execution of portfolio security transactions for the Fund for the six months ended February 28, 2003. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. For the six months ended February 28, 2003, the Fund reimbursed MLIM $52,787 for certain accounting services. Certain officers and/or directors of the Fund are officers and/or directors of MLIM, FDS, PSI, MLAM U.K., FAMD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended February 28, 2003 were $1,995,511,255 and $2,246,347,644, respectively. Net realized gains (losses) for the six months ended February 28, 2003 and net unrealized gains (losses) as of February 28, 2003 were as follows: Realized Unrealized Gains Gains (Losses) (Losses) Long-term investments $ (633,506,819) $ (877,095,918) Short-term investments 31,485 -- Foreign currency transactions (181,625) 28,138 --------------- --------------- Total $ (633,656,959) $ (877,067,780) =============== =============== As of February 28, 2003, net unrealized depreciation for Federal income tax purposes aggregated $886,376,365, of which $60,168,816 related to appreciated securities and $946,545,181 related to depreciated securities. At February 28, 2003, the aggregate cost of investments for Federal income tax purposes was $5,303,882,297. 4. Capital Share Transactions: Net increase (decrease) in net assets derived from capital share transactions was $(64,034,158) for the six months ended February 28, 2003, and $1,189,916,446 for the year ended August 31, 2002. Transactions in capital shares for each class were as follows: Class A Shares for the Six Months Dollar Ended February 28, 2003 Shares Amount Shares sold 18,248,692 $ 240,380,032 Automatic conversion of shares 324 4,359 --------------- --------------- Total issued 18,249,016 240,384,391 Shares redeemed (13,588,993) (176,846,305) --------------- --------------- Net increase 4,660,023 $ 63,538,086 =============== =============== Class A Shares for the Year Dollar Ended August 31, 2002 Shares Amount Shares sold 34,717,222 $ 583,277,596 Shares issued resulting from reorganization 19,487,126 344,060,907 --------------- --------------- Total issued 54,204,348 927,338,503 Shares redeemed (24,076,905) (388,632,466) --------------- --------------- Net increase 30,127,443 $ 538,706,037 =============== =============== Class B Shares for the Six Months Dollar Ended February 28, 2003 Shares Amount Shares sold 13,558,506 $ 163,333,752 Automatic conversion of shares (4,070,976) (49,539,681) Shares redeemed (20,348,556) (244,053,215) --------------- --------------- Net decrease (10,861,026) $ (130,259,144) =============== =============== Class B Shares for the Year Dollar Ended August 31, 2002 Shares Amount Shares sold 30,347,369 $ 469,938,109 Shares issued resulting from reorganization 28,546,496 467,486,105 --------------- --------------- Total issued 58,893,865 937,424,214 Automatic conversion of shares (11,431,398) (177,848,673) Shares redeemed (47,590,133) (720,768,369) --------------- --------------- Net increase (decrease) (127,666) $ 38,807,172 =============== =============== Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 Class C Shares for the Six Months Dollar Ended February 28, 2003 Shares Amount Shares sold 5,324,156 $ 64,918,858 Shares redeemed (6,408,930) (77,220,325) --------------- --------------- Net decrease (1,084,774) $ (12,301,467) =============== =============== Class C Shares for the Year Dollar Ended August 31, 2002 Shares Amount Shares sold 18,368,346 $ 288,911,732 Shares issued resulting from reorganization 2,529,131 41,661,129 --------------- --------------- Total issued 20,897,477 330,572,861 Shares redeemed (12,062,719) (181,589,481) --------------- --------------- Net increase 8,834,758 $ 148,983,380 =============== =============== Class D Shares for the Six Months Dollar Ended February 28, 2003 Shares Amount Shares sold 12,420,361 $ 159,943,038 Automatic conversion of shares 3,800,615 49,539,681 --------------- --------------- Total issued 16,220,976 209,482,719 Shares redeemed (15,180,526) (194,490,093) Automatic conversion of shares (328) (4,359) --------------- --------------- Net increase 1,040,122 $ 14,988,267 =============== =============== Class D Shares for the Year Dollar Ended August 31, 2002 Shares Amount Shares sold 23,587,473 $ 385,998,425 Automatic conversion of shares 10,735,327 177,848,673 Shares issued resulting from reorganization 20,927,326 364,424,777 --------------- --------------- Total issued 55,250,126 928,271,875 Shares redeemed (28,888,207) (464,852,018) --------------- --------------- Net increase 26,361,919 $ 463,419,857 =============== =============== Class R Shares for the Period January 3, 2003++ Dollar to February 28, 2003 Shares Amount Shares sold 8 $ 100 --------------- --------------- Net increase 8 $ 100 =============== =============== ++Commencement of operations. 5. Short-Term Borrowings: The Fund, along with certain other funds managed by MLIM and its affiliates, is a party to a $500,000,000 credit agreement with Bank One, N.A. and certain other lenders. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of .09% per annum based on the Fund's pro rata share of the unused portion of the credit agreement. Amounts borrowed under the credit agreement bear interest at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or a base rate as determined by Bank One, N.A. On November 29, 2002, the credit agreement was renewed for one year under the same terms, except that the total commitment was reduced from $1,000,000,000 to $500,000,000. The Fund did not borrow under the credit agreement during the six months ended February 28, 2003. 6. Capital Loss Carryforward: On August 31, 2002, the Fund had a net capital loss carryforward of $1,168,023,497, of which $98,873,827 expires in 2008, $99,588,881 expires in 2009 and $969,560,789 expires in 2010. This amount will be used to offset like amounts of any future taxable gains. Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003 OFFICERS AND DIRECTORS Terry K. Glenn, President and Director James H. Bodurtha, Director Joe Grills, Director Herbert I. London, Director Andre F. Perold, Director Roberta Cooper Ramo, Director Robert S. Salomon, Jr., Director Stephen B. Swensrud, Director Robert C. Doll, Jr., Senior Vice President Lawrence R. Fuller, Vice President and Portfolio Manager Donald C. Burke, Vice President and Treasurer Susan B. Baker, Secretary Melvin R. Seiden, Director of Merrill Lynch Fundamental Growth Fund, Inc. has recently retired. The Fund's Board of Directors wishes Mr. Seiden well in his retirement. Custodian J.P. Morgan Chase Bank 4 Chase MetroTech Center, 18th Floor Brooklyn, NY 11245 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 800-637-3863