MERRILL LYNCH
DISCIPLINED
EQUITY FUND, INC.
FUND LOGO
Annual Report
May 31, 2000
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
Disciplined Equity Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH DISCIPLINED EQUITY FUND, INC.
Worldwide
Investments
As of 5/31/00
Percent of
Ten Largest Holdings Net Assets
Tyco International Ltd. 6.1%
Fiserv, Inc. 4.8
Sybron International Corporation 4.0
Pfizer Inc. 3.9
Lowe's Companies, Inc. 3.9
American Power Conversion Corporation 3.8
Electronic Data Systems Corporation 2.9
Masco Corporation 2.9
Federal Home Loan Mortgage Association 2.6
Computer Sciences Corporation 2.6
Percent of
Breakdown of Stocks by Country Net Assets
United States 95.1%
Canada 1.2
Ireland 0.9
Singapore 0.6
Percent of
Ten Largest Industries Net Assets
Technology 23.3%
Healthcare 16.4
Financial Services 15.4
Capital Equipment 13.3
Consumer--Products & Services 9.4
Consumer--Products 8.6
Communications 3.3
Publishing 1.7
Energy 1.5
Electronic Components 1.4
Merrill Lynch Disciplined Equity Fund, Inc., May 31, 2000
DEAR SHAREHOLDER
Investment Environment
Since the beginning of the year, market volatility has increased
dramatically and has become an additional cost in achieving
investment returns. During volatile periods, investors can easily
lose sight of basic trends. Opinions quickly shift from too much
optimism to too much bearishness. A whipsaw effect develops that
tends to leave most investors taking too many losses over too short
a period of time. Based on the conditions that have caused this
increase in volatility, we believe the likelihood of it continuing
through the year is quite high. The gross overvaluation in about one-
third of the market, coupled with undervaluation in broad sectors of
the market, is contributing to this manic-depressive type of trading
frenzy. However, even while the volatility causes considerable
noise, basic market trends appear to be mixed, despite positive cash
flows going into the market during the first four months of the
year. This is not a particularly welcome investment sign.
Our economy continues to be strong. Retail sales are robust and
income growth is healthy. More importantly, production schedules are
in line with retail expansion so that inventory/sales ratios are
still well maintained. Market trends appear to have had little or no
impact on consumption. Historically, stock market declines have not
had great impact on consumption until the decline is significant and
prolonged and followed by a recessionary environment. Inflation in
the first quarter ran excessively high relative to past trends; when
food and energy are included, the rate is alarming. The core rate of
inflation ran at a little over 3%. The ripple effect from rising
energy costs is being felt, and energy prices are holding up
stubbornly. A robust economy may support this trend further and
inflation will continue to expand. Many manufacturers have hedged
commodity price increases this year; however, if there is no relief
in commodity price trends next year, manufacturers could be forced
to raise prices by 3% - 5%. The Federal Reserve Board is obviously
aware of this and recognizes that the best way to get commodity
price and inflation expectations down is to slow the economy by
continuing to raise interest rates. Unfortunately, it may require
much higher interest rates than foreseen.
Undoubtedly, investors believe that the Federal Reserve Board
intends to slow the economy and stop the inflationary pressures that
are building, and that interest rates will continue to rise until
that slowdown is apparent. Rising interest rates have historically
been a severe negative to very high price/earnings issues. The
economy remains strong, and the cash flows generated help offset the
negativism created by a tightening monetary policy. Clearly, the
risks remain the same. Interest rates will continue to rise until an
economic slowdown is clearly visible. Most importantly, we have to
remember that the seasonal flows of funds going into the market are
now receding and interest rate increases lie ahead. Basic trends are
down and are likely to continue that way for a while.
Fiscal Year in Review
Since inception (June 25, 1999) through May 31, 2000, the Fund's
Class A, Class B, Class C and Class D Shares had total returns of
+5.90%, +4.90%, +4.80% and +5.60%, respectively. This compares to
the +9.26% total return for the unmanaged Standard & Poor's 500 (S&P
500) Index and the +10.98% total return for the unmanaged Russell
1000 Index during the same period. The Lipper Multi Cap Core Average
had a total return of +7.74% from the period June 30, 1999 to May
31, 2000. (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 4 and 5 of this report to
shareholders.)
Since the Fund's inception in late June 1999, the environment for
equity investing has been one of the most difficult and chaotic in
recent memory. Massive crosscurrents of tighter monetary policy,
strong corporate earnings trends, increased scrutiny of corporate
accounting, year 2000 computer worries, accelerating mutual fund
cash flows and rampant speculation in emerging growth sectors all
collided, causing sharp swings in sentiment during the period. Our
consistent adherence to core philosophies allowed the Fund to
weather the storm and perform creditably, despite the fact that for
the better part of the nine months ended in mid-March of this year,
equity markets were exceedingly narrow and extraordinarily
inhospitable to any investor with a valuation discipline.
Starting in mid-year 1999, tighter monetary policy by the Federal
Reserve Board and strong corporate earnings, especially in the
technology area, stimulated a major sentiment shift. Valuations in
defensive areas such as consumer, financial and health care declined
and those in high-growth areas exploded. The trends accelerated,
aided by major new cash flowing into aggressive growth mutual funds
and out of more conservative funds. Given the Fund's focus on
consistent proven growth at reasonable valuations, the backdrop was
challenging. While most of our companies performed at or close to
expectations, any minor shortfalls were penalized severely,
especially in the mid cap area. There were few positive offsets
available to us in our buyable universe (below a 25% premium to the
prevailing market average price/earnings multiple).
Our strategy in this environment was to find those stocks that fell
within our parameters in the technology group and give them large
weights. Stocks such as Symbol Technologies, Inc., ADC
Telecommunications, Inc., American Power Conversion Corporation and
Computer Sciences Corporation all served to positively offset some
of the Fund's core defensive holdings that languished. For the most
part, we retained weights in defensive areas and added weight to the
health care area where our stock selection, led by Forest
Laboratories, Inc. and Warner-Lambert Company, was good. We sold
several of these stocks after strong performance on valuation
grounds.
A major opportunity during the fiscal period emerged when stocks of
companies that employ acquisition and consolidation as a primary
business strategy became severely depressed in response to worries
over the quality of their accounting practices. Tyco International
Ltd., a core hold-ing, as well as Masco Corporation, Danaher
Corporation, Sybron International Corporation, Cardinal Health, Inc.
and SPX Corporation, declined because of this concern. We used this
weakness to add significantly to our positions, with Tyco
International becoming the Fund's largest holding by the end of
1999.
The adverse trends continued until mid-March, when they abruptly and
sharply reversed. At that point, the markets began rewarding growth
at reasonable valuations again, and the Fund's relative performance
improved substantially.
Portfolio Matters
For the six months ended May 31, 2000, the Fund's Class A, Class B,
Class C and Class D Shares had total returns of +11.59%, +11.01%,
+10.90% and +11.39%, respectively. This compares to the +2.9% total
return of the unmanaged S&P 500 Index, the +4.20% of the unmanaged
Russell 1000 Index and the +6.37% for the Lipper Multi Cap Core
Average during the same period.
The highly speculative environment that endured through the end of
1999 and into the beginning of this year reversed in March. The
Fund's positions in financial, healthcare, consumer and computer
services stocks held or gained ground, while large stocks in the
broader market, primarily highly valued technology companies, saw
their prices deflate substantially. In addition, most of the Fund's
top holdings, which by design represent a significant portion of
total assets, performed very well. In general, our addition to core
positions on weakness in early 2000 paid off handsomely toward the
end of the period. (For a complete listing of the Fund's ten largest
holdings, see page 1 of this report to shareholders.)
While there were no major sector shifts during the period, there was
a modest shift away from consumer staples and financials and into
healthcare. We began to trim large holdings as their prices emerged
from depressed levels, specifically Tyco International, Fiserv,
Inc., Sybron International and American Power Conversion. Large
positions in strong performers such as ADC Telecommunications,
Symbol Technologies and Forest Laboratories, Inc. were sold outright
early in the period when we viewed their valuations as too high. In
addition, we reduced our large positions in Federal Home Loan
Mortgage Association and Federal National Mortgage Association as
political risks may hamper valuations for an extended period.
New positions during the period included pharmaceutical stocks such
as Pfizer Inc., ALZA Corporation, Elan Corporation PLC and Biovail
Corporation; telecommunications equipment stock, Tellabs, Inc.;
computer service company, Electronic Data Systems Corporation; and
industrial companies, SPX and Martin Marietta Materials, Inc.
Overall, we are comfortable with the valuations on our core holdings
and that the environment for defensive growth stocks whose earnings
grow consistently at 15% - 20% will improve as monetary policy
becomes more neutral and corporate earnings growth slows to a more
modest pace. While the valuation spread between emerging growth and
traditional growth stocks has narrowed in the last two months, we
believe there are many opportunities still to be exploited,
especially in the mid cap area.
In Conclusion
We thank you for your investment in Merrill Lynch Disciplined Equity
Fund, Inc., and we look forward to reviewing our investment strategy
with you again in our upcoming semi-annual report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(George H. Burwell)
George H. Burwell
Senior Vice President and
Portfolio Manager
June 23, 2000
Merrill Lynch Disciplined Equity Fund, Inc., May 31, 2000
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the fund through the
Merrill Lynch Select Pricing SM System, which offers four 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.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. 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 approximately 8 years. (There is no initial
sales charge for automatic share conversions.)
* 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).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Aggregate Total Return" 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.
Total Return
Based on a
$10,000
Investment
A line graph illustrating the growth of Class A and Class B
Shares in comparison to the Russell 1000 Index++
6/25/99** 5/00
ML Disciplined Equity Fund, Inc.++-
Class A Shares* $ 9,475 $10,034
ML Disciplined Equity Fund, Inc.++-
Class B Shares* $10,000 $10,090
Russell 1000 Index++ $10,000 $11,098
A line graph illustrating the growth of Class C and Class D
Shares in comparison to the Russell 1000 Index++
6/25/99** 5/00
ML Disciplined Equity Fund, Inc.++-
Class C Shares* $ 9,475 $10,380
ML Disciplined Equity Fund, Inc.++-
Class D Shares* $10,000 $10,006
Russell 1000 Index++ $10,000 $11,098
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++ML Disciplined Equity Fund invests primarily in income-producing
common stocks with a focus on companies likely to experience
earnings growth over time.
++++This unmanaged broad-based Index measures the performance of
the 1,000 largest US companies in the Russell 3000 Index, based on
total market capitalization.
Aggregate
Total
Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (6/25/99) through 3/31/00 +3.20% -2.22%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (6/25/99) through 3/31/00 +2.40% -1.60%
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (6/25/99) through 3/31/00 +2.40% +1.40%
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Inception (6/25/99) through 3/31/00 +3.00% -2.41%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<TABLE>
Recent
Performance
Results*
<CAPTION>
6 Month Since Inception
As of May 31, 2000 Total Return Total Return
<S> <C> <C>
ML Disciplined Equity Fund, Inc. Class A Shares +11.59% +5.90%
ML Disciplined Equity Fund, Inc. Class B Shares +11.01 +4.90
ML Disciplined Equity Fund, Inc. Class C Shares +10.90 +4.80
ML Disciplined Equity Fund, Inc. Class D Shares +11.39 +5.60
*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 commenced operations on 6/25/99.
</TABLE>
Merrill Lynch Disciplined Equity Fund, Inc., May 31, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Percent of
COUNTRY Industries Held Common Stocks Value Net Assets
<S> <S> <C> <S> <C> <C>
Canada Healthcare 21,500 ++Biovail Corporation $ 1,015,875 1.2%
Total Common Stocks in Canada 1,015,875 1.2
Ireland Healthcare 20,000 ++Elan Corporation PLC (ADR)(a) 796,250 0.9
Total Common Stocks in Ireland 796,250 0.9
Singapore Electronic Components 9,000 ++Flextronics International Ltd. 489,375 0.6
Total Common Stocks in Singapore 489,375 0.6
United States Basic Industries 20,000 Martin Marietta Materials, Inc. 978,750 1.2
Capital Equipment 90,900 ++American Power Conversion Corporation 3,221,269 3.8
43,700 Danaher Corporation 2,105,794 2.5
20,000 Pall Corporation 420,000 0.5
8,000 Symbol Technologies, Inc. 352,500 0.4
109,500 Tyco International Ltd. 5,153,344 6.1
------------ ------
11,252,907 13.3
Chemicals 24,900 Ecolab Inc. 952,425 1.1
Communications 15,000 ALLTEL Corporation 981,562 1.2
47,800 ++WorldCom, Inc. 1,795,488 2.1
------------ ------
2,777,050 3.3
Consumer--Products 20,200 Anheuser-Busch Companies, Inc. 1,565,500 1.8
32,400 Cardinal Health, Inc. 2,101,950 2.5
58,000 ++The Kroger Co. 1,152,750 1.4
123,300 Masco Corporation 2,427,469 2.9
------------ ------
7,247,669 8.6
Consumer--Products & 6,000 ++CDW Computer Centers, Inc 699,000 0.8
Services 60,000 ++Cendant Corporation 795,000 0.9
15,000 The Interpublic Group of Companies, Inc. 644,062 0.8
33,000 Intimate Brands, Inc. 777,562 0.9
71,100 Lowe's Companies, Inc. 3,310,594 3.9
18,000 RadioShack Corporation 763,875 0.9
20,500 Young & Rubicam Inc. 978,875 1.2
------------ ------
7,968,968 9.4
Electronic Components 6,500 ++Amphenol Corp. (Class A) 299,000 0.3
6,500 ++Sanmina Corporation 413,563 0.5
------------ ------
712,563 0.8
Energy 42,000 Tosco Corporation 1,286,250 1.5
Financial Services 19,300 AFLAC Incorporated 997,569 1.2
12,125 American International Group, Inc. 1,364,820 1.6
14,000 ++The BISYS Group, Inc. 920,500 1.1
37,300 The Bank of New York Company, Inc. 1,750,769 2.1
30,000 Charter One Financial, Inc. 682,500 0.8
50,100 Federal Home Loan Mortgage Association 2,229,450 2.6
30,500 Federal National Mortgage Association 1,833,812 2.2
7,600 Marshall & Ilsley Corporation 368,600 0.4
35,000 ++MetLife, Inc. 717,500 0.8
11,000 Providian Financial Corporation 978,312 1.1
3,000 SEI Investments Company 420,375 0.5
18,000 Wells Fargo Company 814,500 1.0
------------ ------
13,078,707 15.4
Healthcare 16,000 ++ALZA Corporation 813,000 1.0
27,300 Biomet, Inc. 982,800 1.2
24,000 HCA-The Healthcare Corporation 648,000 0.8
75,000 Pfizer Inc. 3,342,187 3.9
44,200 Schering-Plough Corporation 2,138,175 2.5
107,500 ++Sybron International Corporation 3,406,406 4.0
17,500 ++Watson Pharmaceuticals, Inc. 772,188 0.9
------------ ------
12,102,756 14.3
Machinery & 9,500 ++SPX Corporation 1,000,469 1.2
Machine Tools
Publishing 30,000 Leggett & Platt, Incorporated 601,875 0.7
25,000 ++Valassis Communications, Inc. 825,000 1.0
------------ ------
1,426,875 1.7
Technology 62,000 ++Affiliated Computer Services, Inc. (Class A) 2,111,875 2.5
5,000 ++Black Box Corporation 391,875 0.5
35,000 Computer Associates International, Inc. 1,802,500 2.1
22,700 ++Computer Sciences Corporation 2,177,781 2.6
40,000 ++Concord EFS, Inc. 970,000 1.1
39,000 Electronic Data Systems Corporation 2,508,187 2.9
86,800 ++Fiserv, Inc. 4,057,900 4.8
6,000 Intel Corporation 748,125 0.9
14,500 International Business Machines Corporation 1,556,031 1.8
9,500 ++Solectron Corporation 314,094 0.4
39,800 ++Sungard Data Systems Inc. 1,350,713 1.6
20,000 ++Tellabs, Inc. 1,297,500 1.5
10,000 ++Zebra Technologies Corporation (Class A) 480,000 0.6
------------ ------
19,766,581 23.3
Total Common Stocks in the United States 80,551,970 95.1
Total Investments in Common Stocks
(Cost--$76,728,683) 82,853,470 97.8
Face Amount Short-Term Securities
Commercial US$ 2,376,000 General Motors Acceptance Corp.,
Paper* 6.81% due 6/01/2000 2,376,000 2.8
Total Investments in Short-Term Securities
(Cost--$2,376,000) 2,376,000 2.8
Total Investments (Cost--$79,104,683) 85,229,470 100.6
Liabilities in Excess of Other Assets (485,293) (0.6)
------------ ------
Net Assets $ 84,744,177 100.0%
============ ======
(a)American Depositary Receipts (ADR).
*Commercial Paper is traded on a discount basis; the interest rate
shown reflects the discount rate paid at the time of purchase by the
Fund.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Disciplined Equity Fund, Inc., May 31, 2000
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$79,104,683) $ 85,229,470
Receivables:
Securities sold $ 95,853
Capital shares sold 87,538
Dividends 43,625 227,016
------------
Prepaid registration fees and other assets 98,371
------------
Total assets 85,554,857
------------
Liabilities: Payables:
Custodian bank 311,871
Capital shares redeemed 249,171
Distributor 62,758
Investment adviser 38,450 662,250
------------
Accrued expenses and other liabilities 148,430
------------
Total liabilities 810,680
------------
Net Assets: Net assets $ 84,744,177
============
Net Assets Class A Shares of Common Stock, $.10 par value,
Consist of: 100,000,000 shares authorized $ 60,646
Class B Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 538,412
Class C Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 109,573
Class D Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 98,295
Paid-in capital in excess of par 80,069,815
Accumulated realized capital loss on investments--net (2,257,351)
Unrealized appreciation on investments--net 6,124,787
------------
Net assets $ 84,744,177
============
Net Asset Class A--Based on net assets of $6,419,970 and 606,463
Value: shares outstanding $ 10.59
============
Class B--Based on net assets of $56,454,699 and 5,384,121
shares outstanding $ 10.49
============
Class C--Based on net assets of $11,488,281 and 1,095,731
shares outstanding $ 10.48
============
Class D--Based on net assets of $10,381,227 and 982,953
shares outstanding $ 10.56
============
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF OPERATIONS
For the Period June 25, 1999++ to May 31, 2000
<S> <S> <C> <C>
Investment Dividends (net of $5,715 foreign withholding tax) $ 585,678
Income: Interest and discount earned 262,691
------------
Total income 848,369
------------
Expenses: Investment advisory fees $ 545,462
Account maintenance and distribution fees--Class B 544,680
Offering costs 161,496
Registration fees 144,406
Account maintenance and distribution fees--Class C 122,386
Accounting services 67,984
Transfer agent fees--Class B 59,568
Directors' fees and expenses 52,344
Professional fees 42,773
Account maintenance fees--Class D 27,139
Custodian fees 21,904
Transfer agent fees--Class C 14,273
Transfer agent fees--Class D 9,681
Printing and shareholder reports 9,590
Transfer agent fees--Class A 5,639
Pricing fees 1,455
Other 7,971
------------
Total expenses 1,838,751
------------
Investment loss--net (990,382)
------------
Realized & Realized loss from investment income--net (2,257,351)
Unrealized Unrealized appreciation on investments--net 6,124,787
Gain (Loss) on ------------
Investments--Net: Net realized and unrealized gain on investments 3,867,436
------------
Net Increase in Net Assets Resulting from Operations $ 2,877,054
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Disciplined Equity Fund, Inc., May 31, 2000
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
June 25, 1999++
Increase (Decrease) in Net Assets: to May 31, 2000
<S> <S> <C>
Operations: Investment loss--net $ (990,382)
Realized loss on investments--net (2,257,351)
Unrealized appreciation on investments--net 6,124,787
------------
Net increase in net assets resulting from operations 2,877,054
------------
Capital Share Net increase in net assets derived from capital share transactions 81,767,123
------------
Transactions:
Net Assets: Total increase in net assets 84,644,177
Beginning of period 100,000
------------
End of period $ 84,744,177
============
++Commencement of operations.
See Notes to Financial Statements.
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from
information provided in the financial statements. For the Period
June 25, 1999++ to May 31, 2000
Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating ---------- ---------- ---------- ----------
Performance: Investment loss--net (.03) (.14) (.15) (.06)
Realized and unrealized gain on
investments--net .62 .63 .63 .62
---------- ---------- ---------- ----------
Total from investment operations .59 .49 .48 .56
---------- ---------- ---------- ----------
Net asset value, end of period $ 10.59 $ 10.49 $ 10.48 $ 10.56
========== ========== ========== ==========
Total Investment Based on net asset value per share 5.90%+++ 4.90%+++ 4.80%+++ 5.60%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.34%* 2.36%* 2.37%* 1.59%*
Net Assets: ========== ========== ========== ==========
Investment loss--net (.31%)* (1.36%)* (1.36%)* (.58%)*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 6,420 $ 56,455 $ 11,488 $ 10,381
Data: ========== ========== ========== ==========
Portfolio turnover 113.76% 113.76% 113.76% 113.76%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Disciplined Equity Fund, Inc., May 31, 2000
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Disciplined Equity 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 accordance with accounting
principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. Prior to
commencement of operations on June 25, 1999, the Fund had no
operations other than those relating to organizational matters and
the issue of 10,000 capital shares of the Fund to Merrill Lynch
Asset Management, L.P. ("MLAM") for $100,000 on June 17, 1999. The
Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. 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. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C 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. 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.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies 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 fluctuations 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.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts.
* 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 market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute 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 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). 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 (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost 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) Custodian bank--The Fund recorded an amount payable to the
custodian bank reflecting an overnight overdraft, which resulted
from a failed trade that settled the next day.
(i) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$990,382 have been reclassified between paid-in captial in excess of
par and accumulated net investment loss. These classifications have
no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with
MLAM. The general partner of MLAM 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
Merrill Lynch Funds Distributor ("MLFD" or the "Distributor"), a
division of Princeton Funds Distributor, Inc. ("PFD"), which is a
wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM 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. As
compensation for its services to the Fund, MLAM receives monthly
compensation at the annual rate of .65% of the average daily net
assets of the Fund.
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 Distribution
Maintenance Fee Fee
Class B .25% .75%
Class C .25% .75%
Class D .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 and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the period June 25, 1999 to May 31, 2000, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 290 $ 2,750
Class D $3,904 $576,699
Merrill Lynch Disciplined Equity Fund, Inc., May 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
For the period June 25, 1999 to May 31, 2000, MLPF&S received
contingent deferred sales charges of $204,912 and $28,509 relating
to transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$545 relating to transactions subject to front-end sales charge
waivers in Class D Shares.
In addition, MLPF&S received $50,206 in commissions on the execution
of portfolio security transactions for the Fund for the period June
25, 1999 to May 31, 2000.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PFD, FDS, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period June 25, 1999 to May 31, 2000 were $175,784,138 and
$96,798,185, respectively.
Net realized losses for the period June 25, 1999 to May 31, 2000 and
net unrealized gains as of May 31, 2000 were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (2,257,269) $ 6,124,787
Short-term investments (82) --
------------ ------------
Total $ (2,257,351) $ 6,124,787
============ ============
As of May 31, 2000, net unrealized appreciation for Federal income
tax purposes aggregated $5,921,614, of which $10,512,623 related to
appreciated securities and $4,591,009 related to depreciated
securities. At May 31, 2000, the aggregate cost of investments for
Federal income tax purposes was $79,307,856.
4. Capital Share Transactions:
The net increase in net assets derived from capital share trans-
actions was $81,767,123 for the period June 25, 1999 to May 31,
2000.
Transactions in shares for each class were as follows:
Class A Shares for the Period Dollar
June 25, 1999++ to May 31, 2000 Shares Amount
Shares sold 1,078,139 $ 10,772,455
Shares redeemed (474,176) (4,505,916)
------------ ------------
Net increase 603,963 $ 6,266,539
============ ============
++Prior to June 25, 1999 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class B Shares for the Period Dollar
June 25, 1999++ to May 31, 2000 Shares Amount
Shares sold 7,163,503 $ 71,279,772
Shares redeemed (1,772,672) (16,826,050)
Automatic conversion of shares (9,210) (86,434)
------------ ------------
Net increase 5,381,621 $ 54,367,288
============ ============
++Prior to June 25, 1999 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class C Shares for the Period Dollar
June 25, 1999++ to May 31, 2000 Shares Amount
Shares sold 1,760,505 $ 17,487,162
Shares redeemed (667,274) (6,283,807)
------------ ------------
Net increase 1,093,231 $ 11,203,355
============ ============
++Prior to June 25, 1999 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class D Shares for the Period Dollar
June 25, 1999++ to May 31, 2000 Shares Amount
Shares sold 1,589,682 $ 15,787,096
Automatic conversion of shares 9,172 86,434
------------ ------------
Total issued 1,598,854 15,873,530
Shares redeemed (618,401) (5,943,589)
------------ ------------
Net increase 980,453 $ 9,929,941
============ ============
++Prior to June 25, 1999 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
5. Capital Loss Carryforward:
At May 31, 2000, the Fund had a net capital loss carryforward of
approximately $2,054,000, all of which expires in 2008. This amount
will be available to offset like amounts of any future taxable
gains.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Merrill Lynch Disciplined Equity Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Disciplined Equity Fund, Inc. as of May 31, 2000, the related
statements of operations and changes in net assets and the financial
highlights for the period June 25, 1999 (commencement of operations)
to May 31, 2000. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at May 31, 2000 by correspondence
with the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Disciplined Equity Fund, Inc. as of May 31, 2000, the
results of its operations, the changes in its net assets, and the
financial highlights for the period June 25, 1999 (commencement of
operations) to May 31, 2000 in accordance with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
June 27, 2000
</AUDIT-REPORT>
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
M. Colyer Crum, Director
Laurie Simon Hodrick, Director
Jack B. Sunderland, Director
J. Thomas Touchton, Director
Fred G. Weiss, Director
Arthur Zeikel, Director
George H. Burwell, Senior Vice President and
Portfolio Manager
Robert C. Doll, Jr., Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President and Treasurer
Phillip Gillespie, Secretary
Custodian
The Chase Manhattan Bank
Global Securities Services
4 Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
