MERRILL LYNCH
DISCIPLINED
EQUITY FUND, INC.
FUND LOGO
Semi-Annual Report
November 30, 1999
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 11/30/99
Percent of
Ten Largest Industries Net Assets
Financial Services 18.8%
Technology 18.5
Consumer--Products 15.0
Capital Equipment 13.1
Healthcare 12.2
Consumer--Products & Services 9.3
Communications 5.2
Energy 2.2
Chemicals 1.2
Publishing 0.7
Percent of
Breakdown of Stocks by Country Net Assets
United States 95.5%
France 1.1
Percent of
Ten Largest Holdings Net Assets
Tyco International Ltd. 4.4%
Federal Home Loan Mortgage Association 4.2
Computer Sciences Corporation 3.9
ADC Telecommunications, Inc. 3.7
Symbol Technologies, Inc. 3.2
Lowe's Companies, Inc. 3.2
The Kroger Co. 3.1
Masco Corporation 3.1
Schering-Plough Corporation 3.0
Fiserv, Inc. 2.9
Merrill Lynch Disciplined Equity Fund, Inc., November 30, 1999
DEAR SHAREHOLDER
We are pleased to provide you with the first shareholder report for
Merrill Lynch Disciplined Equity Fund, Inc. The Fund seeks both
capital appreciation and current income by investing primarily in
income-producing common stocks with a focus on companies likely to
experience consistent earnings growth over time. In this and future
reports to shareholders, we will provide information on the Fund's
performance, discuss our investment strategies, and highlight some
of the Fund's holdings.
Merrill Lynch Disciplined Equity Fund, Inc. commenced operations on
June 25, 1999. Since inception through November 30, 1999, the Fund's
Class A, Class B, Class C and Class D Shares had total returns of
- -5.10%, -5.50%, -5.50% and -5.20%, respectively. These returns compare
to a 6.18% appreciation for the unmanaged Standard & Poor's (S&P) 500
Index and a 6.50% gain by the unmanaged Russell 1000 Index for the
same period. The total return of the Lipper Multi Cap Core Funds
average for the period June 30, 1999 through November 30, 1999 was
+2.57%. (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.)
Review of Objective and Process
The Fund's objective is growth of capital with moderate risk through
a focus on a diversified portfolio of companies that we believe can
deliver consistent earnings growth in most economic climates.
Investments are made in large-capitalization and mid-capitalization
equities with above-average consistent earnings growth combined with
reasonable valuations. Stocks with material valuation premiums to
the overall market (which we define as more than 25% over the
prevailing market average price/earnings multiple) are excluded. We
conduct company-specific fundamental research to isolate attributes
that support earnings stability and visibility. These attributes
include low cyclicality, excess cash flow and defensible business
niches. We believe that these qualities are prized by investors and
that over time companies that best manifest them have the greatest
chance of valuation expansion. We most heavily weight stocks with
what we view as the best combination of secular growth, valuation
and low economic and industry volatility. Emphasis is on stock
selection, and large sector bets are avoided. Our strategy is to
exploit temporary undervaluation in our larger cap stocks and take
advantage of a long-term seasoning process in our high-quality mid
cap stocks.
Investment Environment
The Fund's emphasis on stable growth companies, its stated valuation
discipline and its relatively large weight in mid-capitalization
stocks all hindered performance during the five-month period since
the Fund's inception. In general, the macro-economic environment for
equity investment was difficult during the period, largely as a
result of the Federal Reserve Board's policy of increasing short-
term interest rates, which occurred three times in the last five
months. Thus, the liquidity backdrop for the broader market was
unfavorable and the increased market breadth, which allowed many mid-
capitalization stocks to perform well earlier in the year,
dramatically reversed. As a result, positive returns during the
period were limited to a relatively small number of companies,
primarily large-capitalization companies. According to the Merrill
Lynch Performance Monitor, the relative performance of stocks within
the S&P 500 was very disparate, with stocks above $10 billion in
market capitalization performing relatively well and those below
doing much worse. Therefore, our partial emphasis on high-quality
mid cap stocks (half of the Fund's stocks have market
capitalizations below $7 billion) was a negative, and even modest
deterioration in fundamentals for any companies of this size was
punished severely by the market.
The acceleration in corporate earnings growth that has taken place
through much of this year has also had an impact on how our core
group of companies is perceived in the short term. When corporate
earnings are growing above 15%--20% on a year-to-year basis as they
are currently (in part because of easy comparisons against the Asian
collapse of 1997-1998), companies growing earnings at or below this
level do not, on a relative basis, stimulate the positive sentiment
needed to attract investor interest, regardless of the company's
record or continued good prospects. The Fund's core holdings tend to
be companies of this type, as opposed to more economically sensitive
companies whose profits are perceived to be accelerating now. In
fact, according to the Merrill Lynch Quantitative Strategy group,
the market's performance during 1999 has consistently been skewed
toward more cyclical companies as measured by S&P quality ratings.
This phenomenon has directed investors' attention toward
multinational industrials, technology and energy companies and away
from the Fund's core focus of consistent, more defensive investments
in the consumer, health care and financial areas. Investors have
also increasingly focused on revenue growth in addition to earnings
per share (EPS) growth when analyzing quarterly results. Several of
our companies have met EPS projections but have not met anticipated
sales growth, and their valuations have contracted as a result.
A further handicap has been the change in investor sentiment toward
companies that make acquisitions. A primary tenet of our investment
style is to focus on companies whose strength is in buying
competitors within their industries and achieving efficiencies that
can augment their more modest core earnings growth. The anticipated
change in accounting standards, which would limit the options for
how companies report the earnings of combined operations, has
depressed the valuations of our companies that employ this strategy,
despite their continuing record of meeting growth expectations.
The backdrop described above has inspired renewed focus on the large
cap technology companies, which have the highest growth rates in the
large cap segment of the market. Most of these are both large
components of the market benchmark indexes, and many are above the
Fund's ceiling on price/earnings valuations. Since we are precluded
from owning many of these stocks because of the Fund's discipline,
we were not able to capture one of the few offsets to a
predominately weak market. This is confirmed in a broader sense by
the fact that, within the S&P 500 Index, the top 20% of all stocks
ranked by price/earnings multiple had very positive relative
performance, while the bottom 80% had material underperformance
according to the Merrill Lynch Performance Monitor.
Sector Positioning
Our emphasis is on stock selection, not sector rotation. Therefore,
it is our general policy to maintain our sector weightings in a
range of 50%--150% of those of the major market indexes. At
inception, we had a close tracking to the Fund's benchmark, the
unmanaged Lipper Multi Capitalization Core Index, with modest
overweights in financials, health care, consumer staples and capital
goods and modest underweights in technology, consumer services,
basic materials and utilities. Our stock selection was a positive in
the capital goods area, neutral on balance in financials and health
care, and poor in consumer products. In technology, selection was
poor relative to the broad market, but more passable given our
valuation limitations. In consumer services, our stocks performed
well.
Going forward, we are confident that while our structure and
positioning was not optimal in the first months of the Fund's
history, succeeding periods should be a better environment for our
style. We believe the probability that cap size, valuation and
stable growth will all work against us simultaneously again is low.
The rising interest rates of the last nine months and harder
comparisons should begin to moderate the earnings acceleration we
have seen and allow our types of stocks to look more attractive on a
relative basis. When the Federal Reserve Board's tightening phase is
complete, the equity markets are likely to broaden out, and our mid
cap companies and our financial stocks can stop having their
valuations compressed.
In the meantime, we are finding many stocks that fit our criteria
for quality, especially in the mid cap area. Many companies are
being penalized greatly for short-term issues. We have core
Merrill Lynch Disciplined Equity Fund, Inc., November 30, 1999
positions in several stocks across diverse industry groups that
should be able to grow earnings 15%--20% per year and are trading at
one-half of the market's price/earnings ratio. We believe that
companies that dominate growing niches for necessary products and
services will not remain this undervalued for long.
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 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
January 10, 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.
<TABLE>
Recent
Performance
Results*
<CAPTION>
Since Inception
As of November 30, 1999 Total Return
<S> <C>
ML Disciplined Equity Fund, Inc. Class A Shares -5.10%
ML Disciplined Equity Fund, Inc. Class B Shares -5.50
ML Disciplined Equity Fund, Inc. Class C Shares -5.50
ML Disciplined Equity Fund, Inc. Class D Shares -5.20
<FN>
*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>
Aggregate
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (6/25/99) through 9/30/99 -9.50% -14.25%
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (6/25/99) through 9/30/99 -9.70% -13.31%
[FN]
*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 9/30/99 -9.70% -10.60%
[FN]
*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 9/30/99 -9.50% -14.25%
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Disciplined Equity Fund, Inc., November 30, 1999
<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>
France Energy 15,500 Total Fina SA (ADR)(a) $ 1,024,938 1.1%
Total Common Stocks in France 1,024,938 1.1
United States Capital Equipment 78,900 ++American Power Conversion Corporation 1,873,875 2.0
23,700 Danaher Corporation 1,164,262 1.2
25,000 Pall Corporation 585,937 0.6
28,000 Pentair, Inc. 1,039,500 1.1
64,100 Symbol Technologies, Inc. 3,056,769 3.2
17,000 Teleflex Incorporated 581,188 0.6
106,500 Tyco International Ltd. 4,266,656 4.4
------------ ------
12,568,187 13.1
Chemicals 32,400 Ecolab Inc. 1,121,850 1.2
Communications 7,000 ALLTEL Corporation 605,500 0.6
26,000 CenturyTel, Inc. 1,196,000 1.3
23,200 ++MCI WorldCom Inc. 1,918,350 2.0
23,500 SBC Communications Inc. 1,220,531 1.3
------------ ------
4,940,381 5.2
Consumer--Products 23,200 Anheuser-Busch Companies, Inc. 1,735,650 1.8
48,900 CVS Corporation 1,940,719 2.0
38,400 Cardinal Health, Inc. 2,008,800 2.1
29,100 The Dial Corporation 816,619 0.9
140,000 ++The Kroger Co. 2,983,750 3.1
116,300 Masco Corporation 2,936,575 3.1
13,000 The Procter & Gamble Company 1,404,000 1.5
23,000 Universal Foods Corporation 488,750 0.5
------------ ------
14,314,863 15.0
Consumer--Products & 19,400 The Interpublic Group of Companies, Inc. 911,800 1.0
Services 45,000 ++Jones Apparel Group, Inc. 1,200,937 1.2
61,100 Lowe's Companies, Inc. 3,043,544 3.2
51,200 Meredith Corporation 1,936,000 2.0
35,000 Young & Rubicam Inc. 1,826,563 1.9
------------ ------
8,918,844 9.3
Energy 40,000 Tosco Corporation 1,082,500 1.1
Financial Services 11,300 AFLAC Incorporated 540,987 0.6
12,125 American International Group, Inc. 1,251,906 1.3
14,000 ++The BISYS Group, Inc. 808,500 0.8
40,300 The Bank of New York Company, Inc. 1,606,962 1.7
42,000 Charter One Financial, Inc. 910,875 1.0
80,600 Federal Home Loan Mortgage Association 3,979,625 4.2
25,000 Federal National Mortgage Association 1,665,625 1.7
20,000 MBNA Corporation 505,000 0.5
53,800 Mellon Financial Corporation 1,960,337 2.0
49,700 Nationwide Financial Services, Inc. (Class A) 1,786,094 1.9
35,800 Protective Life Corporation 1,145,600 1.2
22,500 Providian Financial Corporation 1,780,313 1.9
------------ ------
17,941,824 18.8
Healthcare 20,800 American Home Products Corporation 1,081,600 1.1
53,300 Biomet, Inc. 1,685,612 1.8
42,000 ++Forest Laboratories, Inc. 2,149,875 2.2
56,700 Schering-Plough Corporation 2,898,788 3.0
86,000 ++Sybron International Corporation 2,112,375 2.2
47,500 ++Watson Pharmaceuticals, Inc. 1,766,406 1.9
------------ ------
11,694,656 12.2
Home Furnishings 25,000 Shaw Industries, Inc. 392,188 0.4
Publishing 18,000 ++Valassis Communications, Inc. 708,750 0.7
Technology 66,500 ++ADC Telecommunications, Inc. 3,545,281 3.7
20,000 ++Affiliated Computer Services, Inc. (Class A) 748,750 0.8
53,000 ++Ceridian Corporation 1,146,125 1.2
57,700 ++Computer Sciences Corporation 3,764,925 3.9
33,900 ++Compuware Corporation 1,146,244 1.2
77,800 ++Fiserv, Inc. 2,761,900 2.9
10,000 Intel Corporation 766,250 0.8
13,500 International Business Machines Corporation 1,391,344 1.5
63,800 ++Sungard Data Systems Inc. 1,419,550 1.5
20,500 ++Waters Corporation 1,004,500 1.0
------------ ------
17,694,869 18.5
Total Common Stocks in the United States 91,378,912 95.5
Total Investments in Common Stocks
(Cost--$94,033,625) 92,403,850 96.6
Face
Amount Short-Term Securities
Commercial US$ 3,674,000 General Motors Acceptance Corp., 5.75%
Paper* due 12/01/1999 3,674,000 3.8
Total Investments in Short-Term Securities
(Cost--$3,674,000) 3,674,000 3.8
Total Investments (Cost--$97,707,625) 96,077,850 100.4
Liabilities in Excess of Other Assets (367,125) (0.4)
------------ ------
Net Assets $ 95,710,725 100.0%
============ ======
<FN>
(a)American Depositary Receipts (ADR).
++Non-income producing security.
*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.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Disciplined Equity Fund, Inc., November 30, 1999
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of November 30, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$97,707,625) $ 96,077,850
Cash 200
Receivables:
Securities sold $ 1,257,518
Capital shares sold 227,224
Dividends 38,909 1,523,651
------------
Prepaid expenses 366,495
------------
Total assets 97,968,196
------------
Liabilities: Payables:
Securities purchased 1,514,117
Capital shares redeemed 231,757
Distributor 70,001
Investment adviser 6,923 1,822,798
------------
Accrued expenses and other liabilities 434,673
------------
Total liabilities 2,257,471
------------
Net Assets: Net assets $ 95,710,725
============
Net Assets Class A Shares of Common Stock, $.10 par value,
Consist of: 100,000,000 shares authorized $ 75,404
Class B Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 651,245
Class C Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 155,172
Class D Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 130,512
Paid-in capital in excess of par 100,222,760
Accumulated investment loss--net (391,000)
Accumulated realized capital loss on investments--net (3,503,593)
Unrealized depreciation on investments--net (1,629,775)
------------
Net assets $ 95,710,725
============
Net Asset Class A--Based on net assets of $7,155,642 and 754,043
Value: shares outstanding $ 9.49
============
Class B--Based on net assets of $61,524,912 and 6,512,447
shares outstanding $ 9.45
============
Class C--Based on net assets of $14,658,963 and 1,551,717
shares outstanding $ 9.45
============
Class D--Based on net assets of $12,371,208 and
1,305,123 shares outstanding $ 9.48
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period June 25, 1999++ to November 30, 1999
<S> <S> <C> <C>
Investment Dividends (net of $5,715 foreign withholding tax) $ 336,263
Income: Interest and discount earned 154,334
-----------
Total income 490,597
-----------
Expenses: Investment advisory fees $ 264,998
Account maintenance and distribution fees--Class B 259,202
Offering costs 78,983
Registration fees 69,152
Account maintenance and distribution fees--Class C 60,919
Transfer agent fees--Class B 29,516
Accounting services 26,927
Directors' fees and expenses 24,062
Professional fees 20,970
Account maintenance fees--Class D 13,470
Printing and shareholder reports 8,808
Transfer agent fees--Class C 7,305
Transfer agent fees--Class D 5,087
Custodian fees 3,477
Transfer agent fees--Class A 3,184
Pricing fees 2,671
Other 2,866
-----------
Total expenses 881,597
-----------
Investment loss--net (391,000)
-----------
Realized & Realized loss from investment income--net (3,503,593)
Unrealized Loss on Unrealized depreciation on investments--net (1,629,775)
Investments--Net: -----------
Net realized and unrealized loss on investments (5,133,368)
-----------
Net Decrease in Net Assets Resulting from Operations $(5,524,368)
===========
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Disciplined Equity Fund, Inc., November 30, 1999
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
June 25, 1999++ to
Increase (Decrease) in Net Assets: November 30, 1999
<S> <S> <C>
Operations: Investment loss--net $ (391,000)
Realized loss on investments--net (3,503,593)
Unrealized depreciation on investments--net (1,629,775)
------------
Net decrease in net assets resulting from operations (5,524,368)
------------
Capital Share Net increase in net assets derived from capital share transactions 101,135,093
Transactions: ------------
Net Assets: Total increase in net assets 95,610,725
Beginning of period 100,000
------------
End of period $ 95,710,725
============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived from
information provided in the financial statements. For the Period
June 25, 1999++ to November 30, 1999
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 --++++ (.05) (.05) (.02)
Realized and unrealized loss on
investments and foreign currency
transactions--net (.51) (.50) (.50) (.50)
---------- ---------- ---------- ----------
Total from investment operations (.51) (.55) (.55) (.52)
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.49 $ 9.45 $ 9.45 $ 9.48
========== ========== ========== ==========
Total Investment Based on net asset value per share (5.10%)+++ (5.50%)+++ (5.50%)+++ (5.20%)+++
Ratios to Average ========== ========== ========== ==========
Net Assets: Expenses 1.32%* 2.34%* 2.35%* 1.57%*
========== ========== ========== ==========
Investment loss--net (.11%)* (1.14%)* (1.17%)* (.37%)*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 7,156 $ 61,525 $ 14,659 $ 12,371
Data: ========== ========== ========== ==========
Portfolio turnover 36.32% 36.32% 36.32% 36.32%
========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Amount is less than $.01 per share.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Disciplined Equity Fund, Inc., November 30, 1999
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 generally
accepted accounting principles, 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. 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 strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
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.
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 November 30, 1999, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of the Fund's Class D Shares as follows:
MLFD MLPF&S
Class D $2,836 $564,761
For the period June 25, 1999 to November 30, 1999, MLPF&S received
contingent deferred sales charges of $32,422 and $5,528 relating to
transactions in Class B and Class C Shares, respectively.
Merrill Lynch Disciplined Equity Fund, Inc., November 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
In addition, MLPF&S received $32,812 in commissions on the execution
of portfolio security transactions for the Fund for the period June
25, 1999 to November 30, 1999.
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 November 30, 1999 were $128,959,425
and $31,422,289, respectively.
Net realized losses for the period June 25, 1999 to November 30,
1999 and net unrealized losses as of November 30, 1999 were
as follows:
Realized Unrealized
Losses Losses
Long-term investments $ (3,503,511) $ (1,629,775)
Short-term investments (82) --
------------ ------------
Total $ (3,503,593) $ (1,629,775)
============ ============
As of November 30, 1999, net unrealized depreciation for Federal
income tax purposes aggregated $1,629,775, of which $4,569,040
related to appreciated securities and $6,198,815 related to
depreciated securities. At November 30, 1999, the aggregate cost of
investments for Federal income tax purposes was $97,707,625.
4. Capital Share Transactions:
The net increase in net assets derived from capital share
transactions was $101,135,093 for the period June 25, 1999 to
November 30, 1999.
Transactions in shares for each class were as follows:
Class A Shares for the Period Dollar
June 25, 1999++ to November 30, 1999 Shares Amount
Shares sold 943,362 $ 9,418,745
Shares redeemed (191,819) (1,810,439)
---------- -------------
Net increase 751,543 $ 7,608,306
========== =============
[FN]
++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 November 30, 1999 Shares Amount
Shares sold 6,891,388 $ 68,621,718
Shares redeemed (377,596) (3,582,641)
Automatic conversion of shares (3,845) (35,055)
---------- -------------
Net increase 6,509,947 $ 65,004,022
========== =============
[FN]
++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 November 30, 1999 Shares Amount
Shares sold 1,666,095 $ 16,567,358
Shares redeemed (116,878) (1,094,389)
---------- -------------
Net increase 1,549,217 $ 15,472,969
========== =============
[FN]
++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 November 30, 1999 Shares Amount
Shares sold 1,466,954 $ 14,573,512
Automatic conversion of shares 3,836 35,055
---------- -------------
Total issued 1,470,790 14,608,567
Shares redeemed (168,167) (1,558,771)
---------- -------------
Net increase 1,302,623 $ 13,049,796
========== =============
[FN]
++Prior to June 25, 1999 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
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, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President and Treasurer
Phillip Gillespie, Secretary
Donald Cecil and Edward H. Meyer, Directors of Merrill Lynch
Disciplined Equity Fund, Inc. have recently retired. The Fund's
Board of Directors wishes Mr. Cecil and Mr. Meyer well in their
retirements.
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
