MERRILL LYNCH
PHOENIX
FUND, INC.
STRATEGIC
Performance
[GRAPHIC OMITTED]
Annual Report
July 31, 1998
<PAGE>
MERRILL LYNCH PHOENIX FUND, INC.
DEAR SHAREHOLDER
Mounting evidence of a slowing economy and the prospect of lower corporate
earnings growth led to greater volatility in the US financial markets during the
quarter ended July 31, 1998. At the same time, greater economic and political
uncertainties in Asia and Russia led investors to become concerned about the
outlook for economic activity worldwide. Although these developments were
negative for stock markets, they generally were beneficial to bond prices,
especially as inflationary trends remained subdued. As was widely anticipated,
the Federal Reserve Board did not move to tighten monetary policy.
In the United States, gross domestic product (GDP) rose at a rate of 1.4% for
the second calendar quarter, down from the 5.5% rate for the first three months
of the year. The economic slowdown in Asia negatively impacted US exports, and
the protracted strike at General Motors Corporation also was a negative factor
for economic activity. However, the US dollar remained strong, especially
relative to the Japanese yen. The weakness of the Japanese economy continues to
be a source of concern not only for Asia, but also for the rest of the world as
well.
In the months ahead, investors will continue to focus on the economic outlook in
Asia and its impact on worldwide economic activity and corporate earnings
results. If there were evidence of more buoyant yet moderate US economic growth
and a pick-up in corporate profits growth, we would expect stability to return
to the financial markets on a global basis. Absent these developments, market
volatility is likely to continue.
Portfolio Matters
As investor uncertainty increased during the July quarter, there was a flight to
the higher-quality, larger-capitalization stocks. However, for investors in
undervalued stocks--such as Merrill Lynch Phoenix Fund, Inc.--investment
opportunities are largely to be found in mid-capitalization to
small-capitalization issues. For example, many of the Fund's holdings have
market capitalizations of less than $5 billion, and stocks of this size
generally underperformed their large-capitalization counterparts. This difficult
investment environment was reflected in the Fund's performance during the
period. For the three months ended July 31, 1998, Merrill Lynch Phoenix Fund,
Inc.'s Class A, Class B, Class C and Class D Shares had total returns of -9.40%,
- -9.71%, -9.65% and -9.49%, respectively. (Fund results do not include sales
charges, and would be lower if sales charges were included. Complete performance
information can be found on pages 4-6 of this report to shareholders.)
During the July quarter, the Fund's best-performing holdings were those stocks
with the largest capitalizations. MediaOne Group Inc. continues on its recovery
path. It has successfully broken away from US West (which was a Fund holding),
monetized a number of non-core assets, announced a subsidized share repurchase
program, and rolled out new services such as telephony. Despite weakening demand
in Asia, Pharmacia & Upjohn, Inc., another larger-capitalization Fund holding,
has recovered its sales momentum through the introduction of new drugs in the
United States. We anticipate this positive trend continuing as the company
enters into licensing agreements for new formulations and develops new drugs.
Fund performance was negatively impacted by weakness in semiconductor-related
equities and the poor performance of stocks in the energy sector. Fund holdings
National Semiconductor Corporation, LTX Corp. and Integrated Device Technology,
Inc. all declined as the Asian financial crisis and slackening personal computer
(PC) demand dampened chip prices. Over the longer term, we believe that National
Semiconductor's and LTX Corp.'s emphasis on the growing "system on a chip"
market (that is, many functions on one chip) will positively impact their
earnings growth rates. Integrated Device Technology
1
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
shares are very inexpensive considering that this is one of the few companies
with the capacity to manufacture microprocessors. In the energy sector, shares
of Fund holdings EEX Corp. and KCS Energy, Inc. declined significantly as the
price of crude oil and natural gas fell with the slackening demand from Asian
countries. We believe that these exploration and development companies, which
have very active exploration programs, will profit once prices of energy
commodities improve. We utilized the share price weakness in all of these
industries to augment our holdings.
We also took advantage of share price weakness to purchase shares of two
companies issuing stock: Maxtor Corporation and Loews Cineplex Entertainment
Corporation. The difficult stock market environment forced these companies to
substantially reduce the per share prices that they sought for these stock
offerings. Maxtor Corporation--which had been a wholly owned subsidiary of the
troubled Korean conglomerate Hyundai Corporation--is a major factor in the disk
drive industry. This industry has recently come under pressure with slowing
demand for PCs. Even though Maxtor has one of the best products in the industry
from a technological standpoint, its shares trade at a discount to its
competitors. Given Maxtor's strong product offerings, we believe that the
company will do well once demand improves.
Loews Cineplex Entertainment Corporation, a leading movie theater operator, is
in the process of integrating the acquisition of Cineplex Odeon. We believe that
Loews' well-regarded management can focus on raising the profitability of
Cineplex theaters to its own high standard. This process should lead to an
improvement in Loews' stock price.
Weakness in the technology sector during the July quarter has been well
documented. We added several technology companies to the Fund as their share
prices weakened. AMP, Incorporated is a leading manufacturer of connectors used
in the consumer, PC and automotive industries. After years of underperformance,
management recently unveiled a restructuring plan that we believe will
eventually cut costs and raise profit margins. Subsequent to our purchase,
AlliedSignal Inc. made a tender offer for AMP.
LSI Logic Corporation, another new technology holding, is a designer and
manufacturer of custom semiconductors. The Asian economic slowdown has
negatively impacted demand and margins in the short term. We believe that the
company's leading market position in consumer products, such as video games and
digital video disk players, will help insulate earnings from the cyclical nature
of the PC business and provide the company with a foundation for future earnings
growth.
Micron Electronics, Inc. is a leading manufacturer of PCs and servers. New
management, formerly associated with Dell Computer, is in the process of
implementing a direct marketing model (that is, selling directly to users). On a
valuation basis, the stock was trading at three times cash flow per share and at
a substantial discount to industry leaders Dell and COMPAQ Computer Corporation
at the time of our purchase.
Price weakness in the high-yield bond sector afforded two new positions for the
Fund, AmeriTruck Distribution Corp. and Sunbeam Corporation. AmeriTruck is a
trucking company specializing in transportation of frozen and refrigerated
goods. As with Trism Inc., our other trucking investment, AmeriTruck has
driver-retention issues in this virtually full-employment economy. We also
purchased the convertible subordinated debentures of Sunbeam following
management turmoil and disclosures of accounting irregularities. We believe that
the franchise values of the company's Sunbeam and Coleman brands will ultimately
be re-established and offer significant upside potential. Other developments in
the high-yield sector during the quarter were the emergence of Fund holdings
U.S. Leather Inc. and Town & Country Corporation from bankruptcy. As a result,
these bond investments were converted to equity positions.
Fiscal Year in Review
Total returns for Merrill Lynch Phoenix Fund, Inc.'s Class A, Class B, Class C
and Class D Shares for the fiscal year ended July 31, 1998 were +10.98%, +9.84%,
+9.90% and +10.70%, respectively.
While the Fund performed relatively well during the first and third quarters of
the fiscal year, performance on the whole did trail that of the S&P 500
Composite Index for the 12-month period as investors continued to favor a small
number of large-capitalization blue chip stocks. Divergence in performance was
particularly wide after the Asian financial crisis began in the fall of 1997 and
during the last quarter of the Fund's fiscal year, when it became apparent that
the crisis was going to last longer than originally hoped. Historically, as
2
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
uncertainty enters investors' minds, a flight to quality ensues which makes it
difficult for equities of operationally troubled issuers to perform well.
We were fortunate to have a large number of takeovers in the portfolio over the
course of the fiscal year, which positively contributed to Fund performance.
Humana, Inc., DSC Communications Corp., Amdahl Corp., Digital Equipment Corp.,
CompuServe Corp., Computervision Corp. and Tele-Communications, Inc. were all
acquired by other organizations. Additionally AMP, Incorporated, a recent
addition to the Fund's portfolio, is currently the subject of a tender offer. It
appears that the market values of many troubled companies in takeover situations
currently exceed their public valuations.
In last year's annual report to shareholders, we stated that larger-
capitalization issues would be an area of investment focus for the Fund. While
smaller-capitalization to mid-capitalization shares have served the Fund well
over the years, the stock market was sending a clear signal that the liquidity
of larger-capitalization companies was worth a premium to the valuations
afforded smaller companies. This decision positively impacted Fund performance
as our investments in AT&T Corp., Viacom, Inc., and Digital Equipment Corp. all
appreciated significantly. We continued this process during the past fiscal year
by adding Pharmacia & Upjohn, Inc., Columbia/HCA Healthcare Corp. and AMP,
Incorporated. At the end of the Fund's fiscal year, the valuation gap between
large-capitalization and mid-capitalization to small-capitalization issues was
the widest it has been for some time. Accordingly, we anticipate increasing
investments in mid-cap and small-cap stocks as long as this valuation disparity
continues.
On the negative side, performance was generally hurt by new additions to the
Fund. As we have stated in the past, value investing often involves establishing
positions early in the recovery process, since a company's restructuring efforts
sometimes take longer than expected. As a result, stocks that represent good
value at a particular price often decline further as the company struggles
through the turnaround. Our purchases of shares of The Seagram Co., Ltd.,
Columbia/HCA Healthcare Corp., Union Pacific Corporation and LSI Logic
Corporation were initiated at prices above their current trading levels. We
anticipate adding to our holdings in these companies should their prices weaken
further. While this process hurts Fund performance in the short term, we believe
these investments will eventually become the engines that drive longer-term
performance to higher levels.
In summary, the fiscal year was another challenging period for contrarian equity
investors such as Merrill Lynch Phoenix Fund, Inc., since earnings momentum
continued to be the dominant investment criterion for investors. We were
fortunate to have a large number of takeovers during the year that positively
contributed to Fund performance. We utilized the uncertainty of the Asian crisis
to upgrade the quality of the companies in our portfolio as we await the return
of more certain economic times.
In Conclusion
We thank you for your investment in Merrill Lynch Phoenix Fund, Inc., and we
look forward to serving your financial needs throughout the Fund's new fiscal
year and beyond.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Robert J. Martorelli
Robert J. Martorelli
Senior Vice President and Portfolio Manager
September 9, 1998
3
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
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:
o 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.
o 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.)
o 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.
o 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
"Average Annual 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.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 6/30/98 +28.79% +22.03%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +15.33 +14.09
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 +14.43 +13.82
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 6/30/98 +27.54% +23.54%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +14.16 +14.16
- --------------------------------------------------------------------------------
Inception (10/21/88)
through 6/30/98 +13.40 +13.40
- --------------------------------------------------------------------------------
* 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*
================================================================================
Year Ended 6/30/98 +27.47% +26.47%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/98 +16.31 +16.31
- --------------------------------------------------------------------------------
* 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*
================================================================================
Year Ended 6/30/98 +28.51% +21.76%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 6/30/98 +17.24 +15.54
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
4
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the S&P 500 Index. Beginning and ending
values are:
7/88 7/98
ML Phoenix Fund, Inc.+--
Class A Shares* $ 9,475 $33,793
S&P 500 Index++ $10,000 $54,510
A line graph depicting the growth of an investment in the Fund's Class B Shares
compared to growth of an investment in the S&P 500 Index. Beginning and ending
values are:
10/21/88** 7/98
ML Phoenix Fund, Inc.+--
Class B Shares* $10,000 $31,438
S&P 500 Index++ $10,000 $51,823
A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class D Shares compared to growth of an investment in the S&P 500 Index.
Beginning and ending values are:
10/21/94** 7/98
ML Phoenix Fund, Inc.+--
Class C Shares* $10,000 $16,239
ML Phoenix Fund, Inc.+--
Class D Shares* $ 9,475 $15,850
S&P 500 Index++ $10,000 $26,119
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ ML Phoenix Fund, Inc. in a diversified portfolio of equity and
fixed-income securities, including municipal securities, of issues in weak
financial condition or experiencing poor operating results that management
of the Fund believes are undervalued relative to management's assessment
of the current or prospective condition of such issuers.
++ This unmanaged broad-based Index is comprised of common stocks.
Past performance is not predictive of future performance.
5
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
PERFORMANCE DATA (concluded)
Recent Performance Results
<TABLE>
<CAPTION>
Ten Years/
12 Month 3 Month Since Inception
Total Return Total Return Total Return
=============================================================================================================
<S> <C> <C> <C>
ML Phoenix Fund, Inc. Class A Shares* +10.98% -9.40% +256.67%
- -------------------------------------------------------------------------------------------------------------
ML Phoenix Fund, Inc. Class B Shares* + 9.84 -9.71 +214.38
- -------------------------------------------------------------------------------------------------------------
ML Phoenix Fund, Inc. Class C Shares* + 9.90 -9.65 + 62.39
- -------------------------------------------------------------------------------------------------------------
ML Phoenix Fund, Inc. Class D Shares* +10.70 -9.49 + 67.28
- -------------------------------------------------------------------------------------------------------------
Dow Jones Industrial Average** + 9.89 -1.58 +458.55/+447.82/+148.57
- -------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index** +19.28 +1.18 +445.10/+418.24/+161.20
=============================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results 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/inception dates are:
Class A Shares, ten years ended 7/31/98; Class B Shares, 10/21/88; and
Class C and Class D Shares, 10/21/94.
** An unmanaged broad-based index comprised of common stocks. Ten years/since
inception total returns are: for the ten years ended 7/31/98; from
10/21/88 to 7/31/98; and from 10/21/94 to 7/31/98, respectively.
6
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Amount/ Value Percent of
Industry Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Discount to Assets
- ----------------------------------------------------------------------------------------------------------------------
Cable 500,000 +TCI Ventures Group (Series A) $ 3,310,425 $ 9,843,750 1.5%
- ----------------------------------------------------------------------------------------------------------------------
Leisure & Entertainment 500,000 Seagram Co., Ltd. (The) 17,224,320 18,375,000 2.7
400,000 +Viacom, Inc. (Class B) (Non-Voting) 11,328,769 27,400,000 4.1
- ----------------------------------------------------------------------------------------------------------------------
Printing & Publishing 1,420,300 +Scitex Corp. Ltd. 14,825,223 16,599,756 2.5
- ----------------------------------------------------------------------------------------------------------------------
Total Discount to Assets 46,688,737 72,218,506 10.8
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Earning Turnarounds
- ----------------------------------------------------------------------------------------------------------------------
Computer Peripherals 900,000 +Maxtor Corporation 6,300,000 6,300,000 0.9
- ----------------------------------------------------------------------------------------------------------------------
Computer Software 1,400,000 +Mentor Graphics Corporation 14,049,847 13,475,000 2.0
- ----------------------------------------------------------------------------------------------------------------------
Consumer Products 37,051 +TCC Holdings (a)(f) 2,323,750 527,977 0.1
2,700,000 +Topps Co., Inc. (The) (g) 14,976,635 7,762,500 1.2
- ----------------------------------------------------------------------------------------------------------------------
Energy Related 1,700,000 +EEX Corp. 13,895,504 11,900,000 1.8
1,200,000 KCS Energy, Inc. 17,128,838 8,325,000 1.2
- ----------------------------------------------------------------------------------------------------------------------
Gold 1,000,000 Placer Dome Inc. 14,980,789 10,375,000 1.6
- ----------------------------------------------------------------------------------------------------------------------
Health Care 1,300,000 +NeoRx Corp. (g) 7,991,431 5,200,000 0.8
- ----------------------------------------------------------------------------------------------------------------------
Industrial Services 1,407,670 +Anacomp, Inc. (g) 9,137,200 26,041,895 3.9
- ----------------------------------------------------------------------------------------------------------------------
Leisure & Entertainment 900,000 +CST Entertainment Imaging, Inc. (f) 675,000 9,000 0.0
- ----------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 400,000 Pharmacia & Upjohn, Inc. 14,035,530 18,950,000 2.8
- ----------------------------------------------------------------------------------------------------------------------
Semiconductor 2,500,000 +Integrated Device Technology, Inc. 20,687,555 13,281,250 2.0
500,000 +LSI Logic Corporation 10,308,032 10,343,750 1.5
2,600,000 +LTX Corp. (g) 15,356,759 9,912,500 1.5
950,000 +National Semiconductor Corporation 15,452,167 11,696,875 1.7
- ----------------------------------------------------------------------------------------------------------------------
Steel 790,700 Birmingham Steel Corp. 12,203,104 8,252,931 1.2
- ----------------------------------------------------------------------------------------------------------------------
Transportation 230,000 +Mesa Air Group, Inc. 1,409,275 1,782,500 0.3
625,000 Union Pacific Corporation 32,245,609 26,250,000 3.9
- ----------------------------------------------------------------------------------------------------------------------
Total Earning Turnarounds 223,157,025 190,386,178 28.4
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Financial Restructuring
- ----------------------------------------------------------------------------------------------------------------------
Consumer Products 656,383 +U.S. Leather Inc. (h) 5,679,677 2,625,532 0.4
- ----------------------------------------------------------------------------------------------------------------------
Energy Related 1,938,475 +Gulfport Energy Corporation (b)(g) 16,017,828 2,180,786 0.3
1,938,475 +Gulfport Energy Corporation--Litigation
Trust Certificates (b) 370,839 0 0.0
- ----------------------------------------------------------------------------------------------------------------------
Financial Services 3,000,000 +Mego Mortgage Corporation (g) 4,500,000 4,125,000 0.6
- ----------------------------------------------------------------------------------------------------------------------
Health Care $16,500,000 +Unison Healthcare Corp., 12.25% due
11/01/2006 (i) 9,962,500 6,600,000 1.0
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Amount/ Value Percent of
Industry Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Financial Restructuring (concluded)
- ----------------------------------------------------------------------------------------------------------------------
Home Builders 520,000 +New Millenium Homes, LLC (f) $ 1,934,501 $ 2,340,000 0.4%
$10,250,000 New Millenium Homes, LLC,
Senior Notes, 12% due 9/03/2004 9,128,158 10,045,000 1.5
- ----------------------------------------------------------------------------------------------------------------------
Telecommunications $12,500,000 American Telecasting Inc., Senior
Discount Notes, 42.054% due
8/15/2005 (i) 2,642,597 2,750,000 0.4
$13,000,000 CS Wireless Systems Inc., Senior
Discount Notes, 29.319% due 3/01/2006 (i) 3,633,944 3,250,000 0.5
- ----------------------------------------------------------------------------------------------------------------------
Total Financial Restructuring 53,870,044 33,916,318 5.1
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
High Yield
- ----------------------------------------------------------------------------------------------------------------------
Consumer Products $29,475,000 Sunbeam Corporation, Senior Subordinated
Debentures, 7.618% due 3/25/2018 (f)(i) 6,796,946 6,447,656 1.0
- ----------------------------------------------------------------------------------------------------------------------
Home Builders $20,000,000 +Baldwin Homes, Series B, 10.375%
due 8/01/2003 8,311,750 8,000,000 1.2
- ----------------------------------------------------------------------------------------------------------------------
Printing & $ 6,255,400 San Jacinto Holdings, Inc., Senior
Publishing Subordinated Notes, 12% due 12/31/2002 4,048,512 4,879,212 0.7
- ----------------------------------------------------------------------------------------------------------------------
Steel 19,500 Geneva Steel Company, Series B,
Preferred, 14% 2,647,000 1,599,000 0.2
- ----------------------------------------------------------------------------------------------------------------------
Supermarkets $25,000,000 +Grand Union Co., Senior Notes, 12% due
9/01/2004 12,463,406 14,625,000 2.2
- ----------------------------------------------------------------------------------------------------------------------
Telecommunications $ 4,000,000 CAI Wireless Systems, Inc., Senior
Notes, 12.25% due 9/15/2002 1,100,000 960,000 0.1
$30,500,000 +MobileMedia Corp., Senior Subordinated
Notes, 9.375% 6,202,312 13,877,500 2.1
- ----------------------------------------------------------------------------------------------------------------------
Transportation $ 9,100,000 AmeriTruck Distribution Corp., Senior
Subordinated Notes, 12.25% due
11/15/2005 5,098,000 5,733,000 0.8
$ 9,500,000 Trism Inc., Senior Subordinated Notes,
10.75% due 12/15/2000 8,076,250 8,431,250 1.3
- ----------------------------------------------------------------------------------------------------------------------
Total High Yield 54,744,176 64,552,618 9.6
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Operational Restructuring
- ----------------------------------------------------------------------------------------------------------------------
Beverages 1,500,000 Coca-Cola Amatil, Limited 5,769,232 5,972,880 0.9
1,500,000 +Coca-Cola Beverages PLC 3,715,385 4,534,290 0.7
- ----------------------------------------------------------------------------------------------------------------------
Cable 500,000 +MediaOne Group Inc. (c) 8,665,452 24,156,250 3.6
- ----------------------------------------------------------------------------------------------------------------------
Chemicals 271,300 IMC Global, Inc. 9,359,371 6,935,106 1.0
- ----------------------------------------------------------------------------------------------------------------------
Computer Services 895,900 +Micron Electronics, Inc. 11,448,737 12,318,625 1.8
- ----------------------------------------------------------------------------------------------------------------------
Computer Software 3,300,000 +Inprise Corporation (d)(g) 37,428,962 20,315,625 3.0
4,500,000 +Novell Inc. 41,271,080 50,906,250 7.6
- ----------------------------------------------------------------------------------------------------------------------
Electronics 250,000 AMP, Incorporated 7,352,500 7,343,750 1.1
- ----------------------------------------------------------------------------------------------------------------------
Engineering 600,000 +EMCOR Group, Inc. 3,963,265 11,812,500 1.8
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Value Percent of
Industry Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Operational Restructuring (concluded)
- ----------------------------------------------------------------------------------------------------------------------
Environmental 5,300,000 +Philip Services Corporation $ 37,397,416 $ 13,581,250 2.0%
4,000,000 +Safety-Kleen Corp. (e) 15,227,484 15,750,000 2.4
- ----------------------------------------------------------------------------------------------------------------------
Financial Services 320,000 H & R Block, Inc. 11,988,687 13,600,000 2.0
- ----------------------------------------------------------------------------------------------------------------------
Health Care 700,000 Columbia/HCA Healthcare Corp. 20,777,858 19,950,000 3.0
1,077,400 +Pharmaceutical Product Development, Inc. 14,209,538 25,049,550 3.7
- ----------------------------------------------------------------------------------------------------------------------
Leisure & Entertainment 450,000 +Loews Cineplex Entertainment Corporation 4,950,000 4,809,375 0.7
- ----------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 2,200,000 +IVAX Corp. 19,686,434 19,662,500 2.9
- ----------------------------------------------------------------------------------------------------------------------
Steel 1,298,500 +WHX Corp. (g) 11,160,678 14,526,969 2.2
- ----------------------------------------------------------------------------------------------------------------------
Total Operational Restructuring 264,372,079 271,224,920 40.4
- ----------------------------------------------------------------------------------------------------------------------
Total Investments 642,832,061 632,298,540 94.3
- ----------------------------------------------------------------------------------------------------------------------
Face Amount Short-Term Investments
- ----------------------------------------------------------------------------------------------------------------------
Commercial Paper* $10,000,000 Bell Atlantic Financial Services Inc.,
5.53% due 8/07/1998 9,990,783 9,990,783 1.5
8,302,000 General Motors Acceptance Corp., 5.69%
due 8/03/1998 8,299,376 8,299,376 1.2
7,000,000 International Securitization Corporation,
5.54% due 8/27/1998 6,971,992 6,971,992 1.1
14,911,000 Park Avenue Receivables Corp., 5.55%
due 8/17/1998 14,874,220 14,874,220 2.2
10,000,000 Three Rivers Funding Corp., 5.54% due
8/24/1998 9,964,606 9,964,606 1.5
- ----------------------------------------------------------------------------------------------------------------------
Total Short-Term Investments 50,100,977 50,100,977 7.5
- ----------------------------------------------------------------------------------------------------------------------
Total Investments $692,933,038 682,399,517 101.8
============
Liabilities in Excess of Other Assets (11,991,390) (1.8)
------------ ------
Net Assets $670,408,127 100.0%
============ ======
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper is traded on a discount basis; the interest rates shown
reflect the discount rates paid at the time of purchase by the Fund.
+ Non-income producing security.
(a) On June 2, 1998, received in exchange for Town and Country Corp., 13%
Senior Subordinated Notes due 5/31/1998.
(b) Name changed from WRT Energy Corp. to Gulfport Energy Corporation.
(c) On June 15, 1998, name changed from U S West Media Group to MediaOne Group
Inc.
(d) On June 8, 1998, name changed from Borland International, Inc. to Inprise
Corporation.
(e) On July 1, 1998, name changed from Laidlaw Environmental Services Inc. to
Safety-Kleen Corp.
(f) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(g) 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
- --------------------------------------------------------------------------------
Computer Inprise
Software Corporation 3,300,000 $37,428,962 +
Consumer Topps Co., Inc. (The) 200,000 541,250 +
Products
Energy Related Gulfport Energy
Corporation 1 -- +
Financial Mego Mortgage
Services Corporation 3,000,000 4,500,000 +
Health Care NeoRx Corp. -- -- +
Industrial Anacomp, Inc. -- -- +
Services
Semiconductor LTX Corp. 1,942,300 11,409,310 +
Steel WHX Corp. (300,000) (3,466,753) +
- --------------------------------------------------------------------------------
+ Non-income producing security.
(h) On July 21, 1998, received in exchange for U.S. Leather Inc., 10.25%
Senior Notes due 7/31/2003.
(i) Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
See Notes to Financial Statements.
9
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of July 31, 1998
===========================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified
cost--$692,933,038) (Note 1a) ........................ $682,399,517
Cash ................................................. 113
Foreign cash (Note 1c) ............................... 265
Receivables:
Securities sold .................................... $ 2,202,672
Interest ........................................... 823,303
Capital shares sold ................................ 338,720
Dividends .......................................... 246,150 3,610,845
-------------
Prepaid registration fees and other assets (Note 1f)
31,773
------------
Total assets ......................................... 686,042,513
------------
- -----------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ............................... 12,742,895
Capital shares redeemed ............................ 1,203,937
Investment adviser (Note 2) ........................ 599,141
Distributor (Note 2) ............................... 291,595 14,837,568
-------------
Accrued expenses and other liabilities
796,818
------------
Total liabilities .................................... 15,634,386
------------
- -----------------------------------------------------------------------------------------------------------
Net Assets: Net assets ........................................... $670,408,127
============
- -----------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 50,000,000 shares authorized ......................... $ 2,098,581
Class B Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized ........................ 2,215,417
Class C Shares of Common Stock, $0.10 par value,
50,000,000 shares authorized ......................... 88,219
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized ........................ 666,856
Paid-in capital in excess of par ..................... 584,479,396
Undistributed investment income--net ................. 2,209,139
Undistributed realized capital gains on investments
and foreign currency transactions--net ............... 89,184,115
Unrealized depreciation on investments and foreign
currency transactions--net ........................... (10,533,596)
------------
Net assets ........................................... $670,408,127
============
- -----------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $283,005,115 and
20,985,805 shares outstanding ........................ $ 13.49
============
Class B--Based on net assets of $286,396,286 and
22,154,170 shares outstanding ........................ $ 12.93
============
Class C--Based on net assets of $11,315,816 and
882,195 shares outstanding ........................... $ 12.83
============
Class D--Based on net assets of $89,690,910 and
6,668,556 shares outstanding ......................... $ 13.45
============
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended July 31, 1998
===========================================================================================================
<S> <C> <C> <C>
Investment Interest and discount earned ......................... $ 9,347,884
Income Dividends (net of $127,457 foreign withholding tax) .. 5,801,927
(Notes 1d & 1e): ------------
Total income ......................................... 15,149,811
------------
- -----------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) .................... $ 7,181,685
Account maintenance and distribution fees--Class B
(Note 2) ........................................... 3,221,900
Transfer agent fees--Class B (Note 2) ................ 661,615
Transfer agent fees--Class A (Note 2) ................ 556,243
Account maintenance fees--Class D (Note 2) ........... 228,418
Transfer agent fees--Class D (Note 2) ................ 167,600
Accounting services (Note 2) ......................... 134,288
Account maintenance and distribution fees--Class C
(Note 2) ........................................... 131,376
Printing and shareholder reports ..................... 107,401
Professional fees .................................... 78,968
Directors' fees and expenses ......................... 74,917
Registration fees (Note 1f) .......................... 65,277
Custodian fees ....................................... 47,780
Transfer agent fees--Class C (Note 2) ................ 28,579
Pricing fees ......................................... 1,319
Other ................................................ 17,699
------------
Total expenses ....................................... 12,705,065
------------
Investment income--net ............................... 2,444,746
------------
- -----------------------------------------------------------------------------------------------------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net ................................... 135,576,129
(Loss) on Foreign currency transactions--net ................. (28,013) 135,548,116
Investments & Change in unrealized appreciation/depreciation on:
Foreign Currency Investments--net ................................... (64,284,216)
Transactions-- Foreign currency transactions--net ................. 8 (64,284,208)
Net (Notes ------------ ------------
1b, 1c, 1e & 3): Net realized and unrealized gain on investments and
foreign currency transactions ...................... 71,263,908
------------
Net Increase in Net Assets Resulting from
Operations ......................................... $ 73,708,654
============
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
=============================================================================================================
For the Year Ended
July 31,
--------------------------------
Increase (Decrease) in Net Assets: 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment income--net ............................. $ 2,444,746 $ 1,568,152
Realized gain on investments and foreign currency
transactions--net .................................. 135,548,116 117,006,161
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net (64,284,208) 65,493,785
------------ ------------
Net increase in net assets resulting from operations 73,708,654 184,068,098
------------ ------------
- -------------------------------------------------------------------------------------------------------------
Dividends & Investment income--net:
Distributions to Class A .......................................... (2,071,936) (1,322,009)
Shareholders Class B .......................................... (331,618) --
(Note 1g): Class C .......................................... (14,683) --
Class D .......................................... (488,410) (167,328)
Realized gain on investments--net:
Class A .......................................... (63,710,745) (32,459,002)
Class B .......................................... (70,993,494) (43,674,101)
Class C .......................................... (2,997,794) (1,814,737)
Class D .......................................... (18,334,157) (5,849,564)
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders ................ (158,942,837) (85,286,741)
- -------------------------------------------------------------------------------------------------------------
Capital Share Net increase (decrease) in net assets derived from
Transactions capital share transactions ....................... 16,827,602 (85,819,453)
(Note 4): ------------ ------------
- -------------------------------------------------------------------------------------------------------------
Net Assets: Total increase (decrease) in net assets ............ (68,406,581) 12,961,904
Beginning of year .................................. 738,814,708 725,852,804
------------ ------------
End of year* ....................................... $670,408,127 $738,814,708
============ ============
- -------------------------------------------------------------------------------------------------------------
*Undistributed investment income--net (Note 1h) ..... $ 2,209,139 $ 1,664,384
============ ============
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Class A
The following per share data and ratios have been derived -----------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
-----------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995+ 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........ $ 15.32 $ 13.37 $ 13.44 $ 13.31 $ 13.75
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................... .12 .10 .13 .17 .03
Realized and unrealized gain on investments
and foreign currency transactions--net .... 1.33 3.46 .51 1.47 1.18
-------- -------- -------- -------- --------
Total from investment operations .......... 1.45 3.56 .64 1.64 1.21
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net .................. (.11) (.06) (.13) (.11) --
Realized gain on investments--net ....... (3.17) (1.55) (.58) (1.40) (1.65)
-------- -------- -------- -------- --------
Total dividends and distributions ......... (3.28) (1.61) (.71) (1.51) (1.65)
-------- -------- -------- -------- --------
Net asset value, end of year .............. $ 13.49 $ 15.32 $ 13.37 $ 13.44 $ 13.31
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........ 10.98% 29.78% 4.78% 13.91% 9.36%
Return:* ======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses .................................. 1.24% 1.26% 1.24% 1.31% 1.22%
Average ======== ======== ======== ======== ========
Net Assets: Investment income--net .................... .83% .77% .92% 1.40% .48%
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .... $283,005 $301,936 $279,351 $286,258 $255,856
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................ 81.20% 81.46% 87.66% 70.36% 63.95%
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
See Notes to Financial Statements.
13
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (continued)
====================================================================================================================================
Class B+
The following per share data and ratios have been derived -----------------------------------------------------------------
from information provided in the financial statements. For the Year Ended July 31,
-----------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........ $ 14.82 $ 12.99 $ 13.12 $ 13.02 $ 13.46
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net ............. (.03) (.03) (.01) .04 (.07)
Realized and unrealized gain on investments
and foreign currency transactions--net .... 1.28 3.35 .50 1.45 1.11
-------- -------- -------- -------- --------
Total from investment operations .......... 1.25 3.32 .49 1.49 1.04
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net .................. (.01) -- (.04) (.02) --
Realized gain on investments--net ....... (3.13) (1.49) (.58) (1.37) (1.48)
-------- -------- -------- -------- --------
Total dividends and distributions ......... (3.14) (1.49) (.62) (1.39) (1.48)
-------- -------- -------- -------- --------
Net asset value, end of year .............. $ 12.93 $ 14.82 $ 12.99 $ 13.12 $ 13.02
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........ 9.84% 28.48% 3.67% 12.83% 8.21%
Return:* ======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses .................................. 2.26% 2.29% 2.26% 2.34% 2.24%
Average Net ======== ======== ======== ======== ========
Assets: Investment income (loss)--net ............. (.18%) (.26%) (.11%) .37% (.51%)
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .... $286,396 $337,022 $381,808 $414,886 $362,129
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................ 81.20% 81.46% 87.66% 70.36% 63.95%
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (continued)
=====================================================================================================================
Class C++
--------------------------------------------------
For the
Period
The following per share data and ratios have been derived Oct 21,
from information provided in the financial statements. For the Year Ended July 31, 1994+ to
--------------------------------------- July 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ...... $ 14.72 $ 12.92 $ 13.07 $ 12.31
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net ............. (.03) (.04) (.02) .03
Realized and unrealized gain on investments
and foreign currency transactions--net .... 1.29 3.33 .51 1.21
-------- -------- -------- --------
Total from investment operations .......... 1.26 3.29 .49 1.24
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net .................. (.02) -- (.06) (.05)
Realized gain on investments--net ....... (3.13) (1.49) (.58) (.43)
-------- -------- -------- --------
Total dividends and distributions ......... (3.15) (1.49) (.64) (.48)
-------- -------- -------- --------
Net asset value, end of period ............ $ 12.83 $ 14.72 $ 12.92 $ 13.07
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........ 9.90% 28.39% 3.69% 10.99%+++
Return:** ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Expenses .................................. 2.27% 2.30% 2.27% 2.39%*
Average Net ======== ======== ======== ========
Assets: Investment income (loss)--net ............. (.19%) (.27%) (.12%) .34%*
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) .. $ 11,316 $ 14,448 $ 15,821 $ 11,775
Data: ======== ======== ======== ========
Portfolio turnover ........................ 81.20% 81.46% 87.66% 70.36%
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
15
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights (concluded)
====================================================================================================================
Class D++
-------------------------------------------------
For the
Period
The following per share data and ratios have been derived Oct 21,
from information provided in the financial statements. For the Year Ended July 31, 1994+ to
--------------------------------------- July 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ...... $ 15.29 $ 13.35 $ 13.43 $ 12.57
Operating ------- ------- ------- -------
Performance: Investment income--net .08 .07 .09 .11
Realized and unrealized gain on investments
and foreign currency transactions--net .... 1.33 3.45 .51 1.25
------- ------- ------- -------
Total from investment operations .......... 1.41 3.52 .60 1.36
------- ------- ------- -------
Less dividends and distributions:
Investment income--net .................. (.09) (.04) (.10) (.07)
Realized gain on investments--net ....... (3.16) (1.54) (.58) (.43)
------- ------- ------- -------
Total dividends and distributions ......... (3.25) (1.58) (.68) (.50)
------- ------- ------- -------
Net asset value, end of period ............ $ 13.45 $ 15.29 $ 13.35 $ 13.43
======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........ 10.70% 29.44% 4.50% 11.72%+++
Return:** ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
Ratios to Expenses .................................. 1.51% 1.52% 1.48% 1.60%*
Average Net ======= ======= ======= =======
Assets: Investment income--net .................... .59% .54% .67% 1.11%*
======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) .. $89,691 $85,409 $48,873 $36,388
Data: ======= ======= ======= =======
Portfolio turnover ........................ 81.20% 81.46% 87.66% 70.36%
======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
16
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Phoenix Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
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 which 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
which 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
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last asked price.
Short-term securities are valued at amortized cost, which approximates market
value. Other investments 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) 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.
o Options--The Fund is authorized to write covered call 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 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 US 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 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).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where
17
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
NOTES TO FINANCIAL STATEMENTS (continued)
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) 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 $1,006,656 have been reclassified between undistributed
net realized capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM 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 "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc.
FAM 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
based upon the average daily value of the Fund's net assets at the following
rates: 1.00% of average daily net assets not exceeding $500 million; 0.95% of
average daily net assets in excess of $500 million but not exceeding $1 billion;
and 0.90% of average daily net assets in excess of $1 billion.
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 .................................... 0.25% 0.75%
Class C .................................... 0.25% 0.75%
Class D .................................... 0.25% --
- --------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("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 year ended July 31, 1998, MLFD 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:
- --------------------------------------------------------------------------------
MLFD MLPF&S
- --------------------------------------------------------------------------------
Class A .................................... $2,034 $23,855
Class D .................................... $1,809 $26,750
- --------------------------------------------------------------------------------
For the year ended July 31, 1998, MLPF&S received contingent deferred sales
charges of $336,501 and $2,715 relating to transactions in Class B and Class C
Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $34,961 relating to transactions subject to front-end sales charge
waivers in Class A Shares.
In addition, MLPF&S received $16,710 in commissions on the execution of
portfolio security transactions for the Fund for the year ended July 31, 1998.
During the year ended July 31, 1998, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $279 for security price quotations to
compute the net asset value of the Fund.
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 FAM at cost.
18
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 1998 were $538,292,057 and $650,239,359, respectively.
Net realized gains (losses) for the year ended July 31, 1998 and net unrealized
losses as of July 31, 1998 were as follows:
- -------------------------------------------------------------------------------
Realized
Gains Unrealized
(Losses) Losses
- -------------------------------------------------------------------------------
Long-term investments ..... $ 135,576,139 $(10,533,521)
Short-term investments .... (10) --
Foreign currency
transactions .............. (28,013) (75)
------------- ------------
Total ..................... $ 135,548,116 $(10,533,596)
============= ============
- -------------------------------------------------------------------------------
As of July 31, 1998, net unrealized depreciation for Federal income tax purposes
aggregated $10,630,037, of which $111,896,411 related to appreciated securities
and $122,526,448 related to depreciated securities. At July 31, 1998, the
aggregate cost of investments for Federal income tax purposes was $693,029,554.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share transactions
was $16,827,602 and $(85,819,453) for the years ended July 31, 1998 and July 31,
1997, respectively.
Transactions in capital shares for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................... 3,072,942 $ 42,892,690
Shares issued to shareholders
in reinvestment of
dividends and distributions .... 4,281,696 56,397,472
---------- ------------
Total issued ................... 7,354,638 99,290,162
Shares redeemed ................ (6,083,241) (83,944,710)
---------- ------------
Net increase ................... 1,271,397 $ 15,345,452
========== ============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................... 3,245,516 $ 43,038,169
Shares issued to shareholders
in reinvestment of
dividends and distributions .... 2,408,271 29,567,961
---------- ------------
Total issued ................... 5,653,787 72,606,130
Shares redeemed ................ (6,835,778) (90,944,050)
---------- ------------
Net decrease ................... (1,181,991) $(18,337,920)
========== ============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ................... 3,021,386 $ 41,058,916
Shares issued to shareholders
in reinvestment of
dividends and distributions ... 5,085,899 64,767,544
---------- -------------
Total issued .................. 8,107,285 105,826,460
Shares redeemed ............... (7,674,858) (103,277,768)
Automatic conversion
of shares ..................... (1,026,345) (13,724,180)
---------- -------------
Net decrease .................. (593,918) $ (11,175,488)
========== =============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................. 3,717,624 $ 47,733,794
Shares issued to shareholders
in reinvestment of
distributions ................ 3,291,225 39,178,069
----------- -------------
Total issued ................. 7,008,849 86,911,863
Automatic conversion
of shares .................... (2,540,026) (32,669,108)
Shares redeemed .............. (11,110,883) (143,277,186)
----------- -------------
Net decrease ................. (6,642,060) $ (89,034,431)
=========== =============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ...................... 446,268 $ 5,967,922
Shares issued to shareholders
in reinvestment of
dividends and distributions ...... 210,620 2,664,763
-------- ------------
Total issued ..................... 656,888 8,632,685
Shares redeemed .................. (755,911) (10,121,962)
-------- ------------
Net decrease ..................... (99,023) $ (1,489,277)
======== ============
- -------------------------------------------------------------------------------
19
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
- -------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ..................... 240,282 $ 3,051,157
Shares issued to shareholders
in reinvestment of
distributions ................... 136,318 1,613,090
-------- -----------
Total issued .................... 376,600 4,664,247
Shares redeemed ................. (619,861) (7,937,076)
-------- -----------
Net decrease .................... (243,261) $(3,272,829)
======== ===========
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended July 31, 1998 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................... 1,131,275 $ 15,753,197
Automatic conversion
of shares ...................... 990,830 13,724,180
Shares issued to shareholders
in reinvestment of
dividends and distributions .... 1,281,377 16,844,867
---------- ------------
Total issued ................... 3,403,482 46,322,244
Shares redeemed ................ (2,321,058) (32,175,329)
---------- ------------
Net increase ................... 1,082,424 $ 14,146,915
========== ============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .................... 1,043,610 $ 13,805,556
Automatic conversion
of shares ...................... 2,467,989 32,669,108
Shares issued to shareholders
in reinvestment of
dividends and distributions .... 454,079 5,575,759
---------- ------------
Total issued ................... 3,965,678 52,050,423
Shares redeemed ................ (2,040,372) (27,224,696)
---------- ------------
Net increase ................... 1,925,306 $ 24,825,727
========== ============
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Merrill Lynch Phoenix Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Phoenix Fund, Inc. as of July 31,
1998, the related statements of operations for the year then ended and changes
in net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 July 31,
1998 by correspondence with the custodian and brokers. 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 audits provide 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
Phoenix Fund, Inc. as of July 31, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 16, 1998
20
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by Merrill
Lynch Phoenix Fund, Inc. during its fiscal year ended July 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Qualifying Non-Qualifying Total Long-Term
Record Payable Ordinary Ordinary Ordinary Capital
Date Date Income Income Income Gains
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares: 09/03/97 09/11/97 $0.024207 $1.254438 $1.278645 $1.157826*
12/10/97 12/18/97 $0.016754 $0.514029 $0.530783 $0.309446**
- -----------------------------------------------------------------------------------------------------
Class B Shares: 09/03/97 09/11/97 $0.022475 $1.164651 $1.187126 $1.157826*
12/10/97 12/18/97 $0.015622 $0.479294 $0.494916 $0.309446**
- -----------------------------------------------------------------------------------------------------
Class C Shares: 09/03/97 09/11/97 $0.022487 $1.165280 $1.187767 $1.157826*
12/10/97 12/18/97 $0.015599 $0.478594 $0.494193 $0.309446**
- -----------------------------------------------------------------------------------------------------
Class D Shares: 09/03/97 09/11/97 $0.023854 $1.236137 $1.259991 $1.157826*
12/10/97 12/18/97 $0.016482 $0.505698 $0.522180 $0.309446**
- -----------------------------------------------------------------------------------------------------
</TABLE>
* Of this long-term capital gain distribution, 47.48% is subject to the 28%
tax rate and 52.52% is subject to the 20% tax rate.
** Of this long-term capital gain distribution, 48.17% is subject to the 28%
tax rate and 51.83% is subject to the 20% tax rate.
The domestic qualifying ordinary income qualifies for the dividends
received deduction for corporations.
Please retain this information for your records.
21
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
PORTFOLIO INFORMATION (unaudited)
As of July 31, 1998
Percent of
Asset Mix Net Assets
Stocks .............................................. 81.5%
Bonds ............................................... 12.8
Cash & Cash Equivalents ............................. 5.7
Percent of
Ten Largest Holdings Net Assets
Novell Inc. ......................................... 7.6%
Viacom, Inc. (Class B) (Non-Voting) ................. 4.1
Union Pacific Corporation ........................... 3.9
Anacomp, Inc. ....................................... 3.9
Pharmaceutical Product
Development, Inc. ................................. 3.7
MediaOne Group Inc. ................................. 3.6
Inprise Corporation ................................. 3.0
Columbia/HCA Healthcare Corp. ....................... 3.0
IVAX Corp. .......................................... 2.9
Pharmacia & Upjohn, Inc. ............................ 2.8
Percent of
Five Largest Industries Net Assets
Computer Software ................................... 12.6%
Health Care ......................................... 8.5
Leisure & Entertainment ............................. 7.5
Semiconductor ....................................... 6.7
Transportation ...................................... 6.3
Equity Investment Portfolio Changes
For the Quarter Ended July 31, 1998
Additions
AMP, Incorporated
Coca-Cola Amatil, Limited
Coca-Cola Beverages PLC
Loews Cineplex Entertainment Corporation
LSI Logic Corporation
Maxtor Corporation
Mego Mortgage Corporation
Micron Electronics, Inc.
TCC Holdings
U.S. Leather Inc.
*US West Inc.
Deletions
ANTEC Corporation
AT&T Corp.
CML Group, Inc.
Humana, Inc.
Parametric Technology Corp.
Reuters Group PLC (ADR)
Stone Container Corp.
*US West Inc.
WorldCom, Inc.
Zale Corp. Litigation Limited Partnership Units
*Added and deleted in the same quarter.
22
<PAGE>
Merrill Lynch Phoenix Fund, Inc. July 31, 1998
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Robert J. Martorelli, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Robert Harris, Secretary
Custodian
The Chase Manhattan Bank, N.A.
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
23
<PAGE>
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 Phoenix Fund, Inc. is not related to Phoenix Home Life Mutual Life
Insurance Company or any of its subsidiaries or affiliates, including The
Phoenix Series Fund.
Merrill Lynch
Phoenix Fund, Inc.
Box 9011
Princeton, NJ
08543 #10263--7/98
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