MERRILL
LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
Annual Report August 31, 1994
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.
Merrill Lynch
Fundamental Growth Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
<PAGE>
DEAR SHAREHOLDER
Fiscal Year in Review
For the fiscal year ended August 31, 1994, Merrill Lynch Fundamental
Growth Fund, Inc.'s Class A and Class B Shares provided total
returns of +1.82% and +1.01%, respectively, compared to a total
return of +5.49% for the unmanaged Standard & Poor's 500 Index (S&P
500). (Complete performance information, including average annual
total returns, can be found on pages 4 and 5 of this report to share-
holders.)
The major changes in the Fund's portfolio strategy during the fiscal
year occurred in the third and fourth fiscal quarters ended May 31,
1994 and August 31, 1994, respectively. During the May quarter, we
substantially increased the Fund's cash reserve position of short-
term securities in anticipation of further declines in the equity
markets, which subsequently took place. The S&P 500 declined 8.9%
from its peak in late January 1994 to its recent low in early April
1994. A larger decline of 13.7% was experienced by the unmanaged
NASDAQ Composite Index from its peak on March 18, 1994 to its low in
late June 1994. The Fund's cash reserve position of short-term
securities at the end of the third fiscal quarter was 46.9% of net
assets.
During the August quarter, the Fund's cash reserves were almost
entirely reinvested, with cash reserves at 19.7% of net assets at
August 31, 1994. The reason for our reinvestment program was that
reported economic and business statistics were beginning to show
signs of an overall deceleration in the growth rate of real domestic
products. A slowdown in the rate of real economic growth could
reduce inflationary expectations and slow materially the rate of the
rises in both short-term and long-term interest rates. The
reinvestment program, and the subsequent upside rally in the equity
markets during the second half of August, were material factors in
the positive total returns in the fourth fiscal quarter. The total
returns in the fourth fiscal quarter for Class A and Class B Shares
were +5.21% and +4.95%, respectively, compared to a total return of
+4.96% for the unmanaged S&P 500.
During the May quarter, the valuation ratios for many of the growth
companies in the Fund declined substantially, primarily as a result
of the rapid and significant rise in both short-term and long-term
interest rates subsequent to the Federal Reserve Board initiating on
February 4, 1994 a series of increases in the Federal Funds rate.
The total returns of the Fund's Class A and Class B Shares for the
third fiscal quarter were -6.71% and -6.87%, respectively. Thus the
modest positive total returns for the fiscal year were primarily the
result of the recovery in the last fiscal quarter.
<PAGE>
The Environment
Investors appear to remain concerned about the prospect of an
uncontrolled rise in overall prices and wages in the future. These
fears have been reinforced by the substantial increases over the
last year in the prices of certain basic materials and agricultural
commodities, as well as certain industrial materials and chemicals.
Manufacturers of steel, chemicals, paper, motor vehicles and tobacco
products have raised prices to reflect both shortages of productive
capacity as well as higher raw material prices. The key issue from
our perspective is whether the slowdown in the rate of growth of
consumer spending is sufficient to stabilize or reduce the overall
rate of inflation and significantly reduce the rate of increase in
interest rates. The stock prices and valuation ratios of many growth
companies have recovered since early July 1994. Long-term US
Treasury interest rates have been in a relatively narrow trading
range over this recent period. The decrease in the growth rate of
consumer spending since the first calendar quarter of 1994 appears
to be the result of the substantial increase in residential mortgage
interest rates during 1994 and the more recent increases in motor
vehicle financing rates. The increase in household income tax rates
on upper-income families has contributed to the slowdown in
spending. A continuation of a moderate rate of growth of household
spending on new homes, appliances, furniture and motor vehicles
could reduce investor fears of rising inflation and rapidly rising
interest rates. This scenario could prove to be a favorable
environment for large to mid-size capitalization growth companies.
Investment Strategy
The stock prices of each of the companies among our top ten holdings
in the quarter ended August 31, 1994 either increased or remained
unchanged as compared to the May quarter. Our investment focus is on
high-quality large and mid-size capitalization growth companies. The
list of the Fund's top ten holdings (which can be found on page 5 of
this report to shareholders) reflects the diverse industries
represented in the portfolio.
At the end of the August quarter, the Fund's largest industry
weighting was telecommunications at 8.4% of net assets. We continue
to focus on what we perceive to be opportunities for business growth
and above-average rates of return for companies in the
telecommunications, computer software, information processing,
retailing, entertainment, and broadcast media industries. Innovative
technologies and lower costs are creating new products for
commercial and consumer markets. More than 25% of the Fund's net
assets is invested in companies in these sectors. The Fund's
exposure to growth companies in Mexico remains moderate at 4.7% of
net assets as of August 31, 1994, compared to 2.7% at the end of the
May quarter.
<PAGE>
We reinvested the Fund's cash reserves primarily in the stock of the
companies in the portfolio which had been reduced by sales during
the May quarter and early in the August quarter.
Portfolio Matters
At the close of the August quarter, the portfolio held the common
stock or convertible debt securities, or both, of 64 companies, as
compared to 58 companies at the end of the May quarter. The net
change is a result of the introduction of nine companies to the Fund
and the elimination of holdings in three companies.
We eliminated Caremark International, Inc. from the Fund at a profit
because of the formal indictment by a US Attorney in the Minnesota
district office of Caremark International executives on charges of
illegal kickbacks to a medical doctor. A capital loss was taken on
the elimination of a modest investment position in IVAX Corporation
as a result of our concerns over continued reductions in earnings
estimates for the company resulting from new generic competition for
one of IVAX Corporation's newest and most promising drugs. We also
eliminated our position in Lotus Development Corporation, which we
sold at a capital gain, after it had been held by the portfolio for
a short time during the August quarter. The investment was initiated
because of the growth potential from a new licensing agreement with
AT&T Corporation. The investment was sold because of a subsequent
substantial reduction in the near-term estimates for earnings from
the licensing agreement.
Growth companies added to the portfolio included Albertson's, Inc.,
Carnival Corporation, Dollar General Corporation, Fingerhut
Companies, Inc., General Motors Corp., Informix Corp., Marriott
International, Inc., and Pfizer Inc.
<PAGE>
Albertson's, Inc. is one of the largest and best-managed regional
retail food chains in the United States. We expect management's
aggressive capital investment program over the next three years--
five years to produce significant returns on invested capital and
rates of growth in earnings. Carnival Corporation is the industry
leader in current cruise ship capacity and planned additions to
capacity over the next three years--five years. We anticipate a
continuation of above-average returns on equity and rates of growth
in earnings. Dollar General Corporation is a regional growth
retailer with a focus on selling at bargain prices in convenient
locations to the budget-conscious consumer. The company merchandises
irregular and close-out merchandise from branded quality
manufacturers. Fingerhut Companies, Inc. is a multi-media direct
marketing company selling a broad range of products and services
directly to consumers by catalogs, television and other media. We
expect returns on invested capital and the growth of earnings to
increase over the next three years--five years as new products in
the consumer credit and financial services area as well as a joint
venture with Montgomery Ward gain momentum. We added General Motors
Corp. (Class E) (Electronic Data Systems) to the Fund because we
believe the company's new business backlog for the management of
third party data processing and communications systems will result
in a rising return on invested capital and in an increasing growth
rate for earnings. We added Informix Corp. because of the earnings
growth potential from a new line of computer software products in
the relational database area. Marriott International, Inc. is one of
the leading lodging and food service companies. Marriott's excellent
management is likely to produce above-average returns on invested
capital and equity as the company focuses on management contracts
and franchising. In addition, the retirement community business is a
major focus for business growth. We added Pfizer Inc. to the
healthcare sector of the Fund because it is our opinion the
company's management has one of the most rational approaches to
generating future growth in earnings in the evolving healthcare
environment.
In Conclusion
We appreciate your continued investment in Merrill Lynch Fundamental
Growth Fund, Inc. We seek to provide long-term capital gains through
the appreciation of investments in large to mid-size capitalization
growth companies. We believe that the need to raise cash reserves,
as we did during the May quarter and early in the August quarter,
will not occur frequently. Our primary focus is long-run investment
returns in a high-quality portfolio of growth companies. We look
forward to reporting to you on our strategy and investment
activities in our upcoming quarterly report.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Lawrence R. Fuller)
Lawrence R. Fuller
Vice President and Portfolio Manager
September 23, 1994
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Melvin R. Seiden, Director
Steven B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Lawrence R. Fuller, Vice President and
Portfolio Manager
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
The Chase Manhattan Bank, N.A.
Global Securities Services
Chase MetroTech Center
Brooklyn, New York 11245
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
PERFORMANCE DATA
<PAGE>
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
Class A and Class B Shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Total Return Based on a $10,000 Investment
GRAPHIC MATERIAL APPEARS HERE. SEE APPENDIX,
GRAPHIC AND IMAGE MATERIAL: Item 1.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/94 -0.43% -6.90%
Inception (12/24/92)
through 6/30/94 -4.20 -8.36
[FN]
*Maximum sales charge is 6.5%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/94 -1.17% -2.16%
Inception (12/24/92)
through 6/30/94 -4.95 -4.95
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after one year.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
8/31/94 5/31/94 8/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares* $10.09 $9.59 $9.91 +1.82% +5.21%
ML Fundamental Growth Fund, Inc. Class B Shares* 9.96 9.49 9.86 +1.01 +4.95
Standard & Poor's 500 Index** +2.57 +4.16
ML Fundamental Growth Fund, Inc. Class A Shares--Total Return* +1.82 +5.21
ML Fundamental Growth Fund, Inc. Class B Shares--Total Return* +1.01 +4.95
Standard & Poor's 500 Index--Total Return** +5.49 +4.96
<FN>
*Investment results shown do not reflect any sales charges; results
shown would be lower if a sales charge was included.
**An unmanaged broad-based Index comprised of common stocks. Total
investment returns for unmanaged indexes are based on estimates.
</TABLE>
PERFORMANCE DATA (concluded)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
12/24/92--12/31/92 $10.00 $ 9.92 -- -- -0.80%
1993 9.92 10.51 -- -- +5.95
1/1/94--8/31/94 10.51 10.09 -- -- -4.00
Cumulative total return as of 8/31/94: +0.90%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<PAGE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
12/24/92--12/31/92 $10.00 $ 9.92 -- -- -0.80%
1993 9.92 10.43 -- -- +5.14
1/1/94--8/31/94 10.43 9.96 -- -- -4.51
Cumulative total return as of 8/31/94: -0.40%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
PORTFOLIO INFORMATION (unaudited)
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
Intel Corp. 3.5%
Bell Atlantic Corp. 2.9
Pfizer Inc. 2.4
PolyGram N.V. (ADR) 2.4
cisco Systems, Inc. 2.2
MGIC Investment Corp. 2.2
First Financial Management Corp. 2.2
MCI Communications Corp. 2.2
Informix Corp. 2.1
The Coca-Cola Co. 2.1
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Telecommunications 8.4%
Retail Specialty 4.7
Insurance 4.4
Beverages 4.3
Financial Services 4.2
Software--Computer 4.0
Broadcast--Media 4.0
Information Processing 3.8
Electronics 3.5
Broadcast--Cable 3.3
<PAGE>
Portfolio Changes for the Quarter Ended
August 31, 1994
Additions
Albertson's, Inc.
Carnival Corporation (Class A)
Dollar General Corporation
Fingerhut Companies, Inc.
General Motors Corp. (Class E)
Informix Corp.
*Lotus Development Corporation
Marriott International, Inc.
The Pep Boys--Manny, Moe & Jack, Convertible Bond,
4% due 9/01/1999
Pfizer Inc.
Deletions
Caremark International, Inc.
IVAX Corporation
*Lotus Development Corporation
[FN]
*Added and deleted in the same quarter.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Advertising 20,000 Interpublic Group of Companies, Inc. $ 697,450 $ 690,000 1.2%
Automotive & Truck 75,000 Consorcio G Grupo Dina, S.A. de C.V. (ADR) (a) 1,203,575 1,068,750 1.9
2,000 Daimler-Benz AG (ADR) (a) 96,537 106,000 0.2
20,000 Ek Chor China Motorcycle Co. Ltd. 734,300 482,500 0.9
----------- ----------- ------
2,034,412 1,657,250 3.0
Banking & Financial 20,000 State Street Boston Corp. 761,250 797,500 1.4
Beverages 25,000 The Coca-Cola Co. 1,080,300 1,150,000 2.1
2,000 Coca-Cola FEMSA, S.A. de C.V. (ADR)(a) 58,807 69,750 0.1
15,000 Panamerican Beverages, Inc. (Class A) 490,176 493,125 0.9
20,000 PepsiCo, Inc. 728,900 662,500 1.2
----------- ----------- ------
2,358,183 2,375,375 4.3
<PAGE>
Broadcast--Cable 40,000 ++Tele-Communications Inc. (Class A) 995,000 900,000 1.6
25,000 Time Warner Inc. 1,008,556 953,125 1.7
----------- ----------- ------
2,003,556 1,853,125 3.3
Broadcast--Media 15,000 Grupo Televisa, S.A. de C.V., 'L' (GDS) (b)(c) 782,653 879,375 1.6
25,000 ++Infinity Broadcasting Corp. 750,433 787,500 1.4
30,000 Turner Broadcasting System, Inc. 787,265 543,750 1.0
----------- ----------- ------
2,320,351 2,210,625 4.0
Business Services 5,000 The Olsten Corp. 143,483 180,000 0.3
$500,000 The Olsten Corp., Convertible Bond, 4.875%
due 5/15/2003 500,000 575,000 1.0
----------- ----------- ------
643,483 755,000 1.3
Chemical Producers 20,000 Duracell International Inc. 841,970 920,000 1.7
10,000 Great Lakes Chemical Corp. 732,730 602,500 1.1
----------- ----------- ------
1,574,700 1,522,500 2.8
Communications 5,000 Cabletron Systems, Inc. 612,028 529,375 1.0
50,000 cisco Systems, Inc. 1,071,979 1,237,500 2.2
----------- ----------- ------
1,684,007 1,766,875 3.2
Consumer Products & 30,000 ++CUC International, Inc. 781,014 1,027,500 1.8
Services
Cosmetics 10,000 The Gillette Co. 694,975 723,750 1.3
15,000 International Flavors & Fragrances Inc. 603,292 658,125 1.2
----------- ----------- ------
1,298,267 1,381,875 2.5
Electronics 30,000 Intel Corp. 1,830,400 1,965,000 3.5
Entertainment 40,000 ++Electronic Arts Inc. 1,237,292 710,000 1.3
Finance 5,000 Countrywide Credit Industries, Inc. 88,117 74,375 0.1
<PAGE>
Financial Services 40,000 MGIC Investment Corp. 1,337,450 1,230,000 2.2
30,000 The Travelers Corp. 1,292,652 1,110,000 2.0
----------- ----------- ------
2,630,102 2,340,000 4.2
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Food 5,000 General Mills, Inc. $ 340,300 $ 270,000 0.5%
5,000 Kellogg Co. 302,175 283,125 0.5
15,000 Wrigley (Wm.) Jr. Co. (Class B) 628,098 613,125 1.1
----------- ----------- ------
1,270,573 1,166,250 2.1
Food Merchandising 35,000 Albertson's, Inc. 944,433 1,010,625 1.8
Health Care-- 30,000 Teva Pharmaceutical Industries Ltd. (ADR)(a) 802,769 862,500 1.6
Pharmaceuticals
Health Services 50,000 ++Novacare Inc. 771,887 781,250 1.4
Home Furnishings 50,000 Shaw Industries, Inc. 857,375 868,750 1.6
Hotel 20,000 Marriott International, Inc. 597,884 590,000 1.1
Household Products 5,000 Colgate-Palmolive Co. 274,675 286,250 0.5
5,000 Procter & Gamble Co. 292,300 304,375 0.6
----------- ----------- ------
566,975 590,625 1.1
Information 20,000 First Financial Management Corp. 1,197,306 1,215,000 2.2
Processing 25,000 General Motors Corp. (Class E) 896,850 909,375 1.6
----------- ----------- ------
2,094,156 2,124,375 3.8
<PAGE>
Insurance 10,000 American International Group, Inc. 923,854 940,000 1.7
5,000 General Reinsurance Corp. 615,525 558,125 1.0
150,000 Reliance Group Holdings, Inc. 1,096,250 918,750 1.7
----------- ----------- ------
2,635,629 2,416,875 4.4
Leisure 30,000 PolyGram N.V. (ADR) (a) 1,140,508 1,350,000 2.4
Medical--Technology 20,000 ++Haemonetics Corp. 549,480 375,000 0.7
Oil Services 10,000 Schlumberger Ltd. 649,350 570,000 1.0
Pharmaceuticals 20,000 Pfizer Inc. 1,323,288 1,365,000 2.4
Pollution Control 20,000 WMX Technologies Inc. 623,700 600,000 1.1
Publishing 10,000 ++Scholastic Corp. 455,625 450,000 0.8
Restaurant 30,000 McDonald's Corp. 823,375 847,500 1.5
Retail Specialty 30,000 Fingerhut Companies, Inc. 847,727 858,750 1.5
15,000 The Pep Boys--Manny, Moe & Jack 484,983 523,125 0.9
$350,000 The Pep Boys--Manny, Moe & Jack,
Convertible Bond, 4% due 9/01/1999 350,000 365,750 0.7
30,000 Staples Inc. 816,004 915,000 1.6
----------- ----------- ------
2,498,714 2,662,625 4.7
Retail Stores 50,000 Cifra, S.A. de C.V., 'C' (b) 98,537 134,712 0.2
25,000 Dollar General Corporation 571,100 631,250 1.1
----------- ----------- ------
669,637 765,962 1.3
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Semiconductors 1,000 Texas Instruments Inc. $ 76,185 $ 77,875 0.1%
<PAGE>
Software--Computer 25,000 Computer Associates International, Inc. 1,002,321 1,003,125 1.8
50,000 ++Informix Corp. 1,068,856 1,181,250 2.1
1,000 Oracle Systems Corporation 28,875 42,625 0.1
----------- ----------- ------
2,100,052 2,227,000 4.0
Telecommunications 30,000 Bell Atlantic Corp. 1,866,779 1,642,500 2.9
50,000 MCI Communications Corp. 1,330,893 1,212,500 2.2
40,000 ++QUALCOMM Inc. 1,100,000 900,000 1.6
30,000 Vodafone Group PLC (ADR) (a) 894,312 960,000 1.7
----------- ----------- ------
5,191,984 4,715,000 8.4
Toys 30,000 Mattel, Inc. 761,826 862,500 1.6
Travel & Lodging 15,000 Carnival Corporation (Class A) 704,866 665,625 1.2
Total Stocks & Bonds 50,052,855 49,072,337 88.0
<CAPTION>
Face Amount Short-Term Securities
<S> <C> <S> <C> <C> <C>
US Government $ 2,000,000 Federal Home Loan Bank, 4.64% due 9/29/1994 1,992,782 1,992,782 3.5
& Agency 6,000,000 Federal National Mortgage Association,
Obligations* 4.48% due 9/19/1994 5,986,560 5,986,560 10.7
----------- ----------- ------
7,979,342 7,979,342 14.2
Commercial 2,131,000 General Electric Capital Corp., 4.75%
Paper* due 9/01/1994 2,131,000 2,131,000 3.8
1,000,000 Student Loan Marketing Association,
4.60% due 9/23/1994 997,189 997,189 1.7
----------- ----------- ------
3,128,189 3,128,189 5.5
Total Short-Term Securities 11,107,531 11,107,531 19.7
Total Investments $61,160,386 60,179,868 107.7
===========
Liabilities in Excess of Other Assets (4,293,715) (7.7)
----------- ------
Net Assets $55,886,153 100.0%
=========== ======
<PAGE>
<FN>
*Commercial Paper and certain US Government & Agency Obligations are
traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
(a)American Depositary Receipt (ADR).
(b)Foreign Stock--Mexico.
(c)Global Depositary Share (GDS).
++Non-income producing securities.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1994
<CAPTION>
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$61,160,386) (Note 1a) $60,179,868
Receivables:
Capital shares sold $ 313,452
Dividends 23,440
Interest 8,181 345,073
-----------
Deferred organization expenses (Note 1g) 66,001
Prepaid registration fees and other assets (Note 1g) 72,859
-----------
Total assets 60,663,801
-----------
Liabilities: Payables:
Securities purchased 2,488,603
Capital shares redeemed 295,746
Distributor (Note 2) 44,565
Investment adviser (Note 2) 32,894 2,861,808
-----------
Accrued expenses and other liabilities 1,915,840
-----------
Total liabilities 4,777,648
-----------
Net Assets: Net assets $55,886,153
===========
<PAGE>
Net Assets Class A Shares of capital stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 85,483
Class B Shares of capital stock, $0.10 par value,
100,000,000 shares authorized 474,608
Paid-in capital in excess of par 54,631,837
Undistributed realized capital gains--net 1,674,743
Unrealized depreciation on investments--net (980,518)
-----------
Net assets $55,886,153
===========
Net Asset Value: Class A--Based on net assets of $8,622,893 and 854,827
shares of capital stock outstanding $ 10.09
===========
Class B--Based on net assets of $47,263,260 and 4,746,084
shares of capital stock outstanding $ 9.96
===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 1994
<S> <S> <C>
Investment Interest and discount earned $ 515,106
Income Dividends (net of $6,362 foreign withholding tax) 470,085
(Note 1e & 1f): -----------
Total income 985,191
-----------
Expenses: Distribution fees--Class B (Note 2) 459,174
Investment advisory fees (Note 2) 347,874
Professional fees 75,779
Transfer agent fees--Class B (Note 2) 67,238
Printing and shareholder reports 60,251
Registration fees (Note 1g) 55,301
Directors' fees and expenses 36,246
Accounting services (Note 2) 21,149
Amortization of organization expenses (Note 1g) 20,308
Account maintenance fees--Class A (Note 2) 19,004
Custodian fees 14,691
Transfer agent fees--Class A (Note 2) 10,041
Other 13,059
-----------
Total expenses 1,200,115
-----------
Investment loss--net (214,924)
-----------
<PAGE>
Realized & Realized gain on investments--net 2,028,567
Unrealized Gain Change in unrealized depreciation on investments--net (964,529)
(Loss) on -----------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 849,114
(Notes 1f & 3): ===========
</TABLE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the For the Period
Year Ended Dec. 24, 1992++
August 31, to August 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment loss--net $ (214,924) $ (246,722)
Realized gain (loss) on investments--net 2,028,567 (138,526)
Unrealized depreciation on investments--net (964,529) (15,989)
----------- -----------
Net increase (decrease) in net assets resulting from
operations 849,114 (401,237)
----------- -----------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 2,371,410 52,966,866
(Note 4): ----------- -----------
Net Assets: Total increase in net assets 3,220,524 52,565,629
Beginning of period 52,665,629 100,000
----------- -----------
End of period $55,886,153 $52,665,629
=========== ===========
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<PAGE>
<TABLE>
Financial Highlights
<CAPTION>
Class A Class B
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Dec. 24, Year Dec. 24,
from information provided in the financial statements. Ended 1992++ to Ended 1992++ to
August 31, August 31, August 31, August 31,
Increase (Decrease) in Net Asset Value: 1994 1993++++ 1994++++ 1993++++
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.91 $ 10.00 $ 9.86 $ 10.00
Operating --------- --------- --------- ---------
Performance: Investment income (loss)--net .03 -- (.05) (.05)
Realized and unrealized gain (loss) on investments--net .15 (.09) .15 (.09)
--------- --------- --------- ---------
Total from investment operations .18 (.09) .10 (.14)
--------- --------- --------- ---------
Net asset value, end of period $ 10.09 $ 9.91 $ 9.96 $ 9.86
========= ========= ========= =========
Total Investment Based on net asset value per share 1.82% (0.90%)+++ 1.01% (1.40%)+++
Return:** ========= ========= ========= =========
Ratios to Average Expenses, excluding account maintenance and
Net Assets: distribution fees 1.33% 1.78%* 1.35% 1.79%*
========= ========= ========= =========
Expenses 1.58% 2.03%* 2.35% 2.79%*
========= ========= ========= =========
Investment income (loss)--net .31% (.04%)* (.52%) (.83%)*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 8,623 $ 6,930 $ 47,263 $ 45,736
Data: ========= ========= ========= =========
Portfolio turnover 112.68% 64.09% 112.68% 64.09%
========= ========= ========= =========
<FN>
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The Fund offers
both Class A and Class B Shares. Class A Shares are sold with a
front-end sales charge. Class B Shares may be subject to a
contingent deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class A Shares bear the
expense of the ongoing account maintenance fee and have exclusive
voting rights with respect to such maintenance fee expenditures, and
Class B Shares bear certain expenses related to the distribution of
such shares and have exclusive voting rights with respect to matters
relating to such distribution expenditures. On September 27, 1994,
shareholders approved the implementation of the Merrill Lynch Select
Pricing SM System, which will offer two new classes of shares, Class
C and Class D. 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
principal market 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. 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
Directors as the primary market. Securities traded in the over-the-
counter market are valued at the last available bid prices obtained
from one or more dealers in the over-the-counter market prior to the
time of valuation. Portfolio 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. Short-term
securities are valued at amortized cost, which approximates market
value. Options purchased by the Fund are valued at their last bid
price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the average of the
last bid price as obtained from two or more dealers unless a
quotation from only one dealer is available, in which case only that
dealer's price will be used. Options written by the Fund are valued
at the last asked price in the case of exchange-traded options, or
in the case of options traded in the over-the-counter market, the
average of the last asked price as obtained from one or more
dealers. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good
faith by or under the direction of the Fund's Directors.
<PAGE>
(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 or payables expressed in
foreign currencies into US dollars. Realized and unrealized gains or
losses from investments include the effects of foreign exchange
rates on investments.
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. Premium or discount is
amortized over the life of the contracts.
(c) Options--When the Fund sells 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 sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted
from) the basis 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 paid or received
(or gain or loss to the extent the cost of the closing transaction
is less than or greater than the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value
of the contract. Such receipts or payments are known as variation
margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.
<PAGE>
(f) 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 date, except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Fund is informed of 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.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend date.
(i) Reclassifications--Accumulated investment loss--net, in the
amount of $461,646, has been reclassified to undistributed realized
capital gains--net and paid-in capital in excess of par, as
appropriate.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective January 1,
1994, the investment advisory business of MLAM was reorganized from
a corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of MLAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of MLAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and Merrill
Lynch Investment Management, Inc. ("MLIM"), which is also an
indirect wholly-owned subsidiary of ML & Co. The Fund has also
entered into a Distribution Agreement and a Distribution Plan with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of MLIM.
For such services, the Fund pays a monthly fee at the annual rate of
0.65% of the average daily value of the Fund's net assets. The
Investment Advisory Agreement obligates MLAM to reimburse the Fund
to the extent the Fund's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and extraordinary
items) exceed 2.5% of the Fund's first $30 million of average daily
net assets, 2.0% of the Fund's next $70 million of average daily net
assets, and 1.5% of the remaining daily net assets. No fee payment
will be made to MLAM during any fiscal year which will cause
expenses to exceed the most restrictive expense limitation at the
time of such payment.
<PAGE>
Pursuant to a distribution plan (the "Distribution Plan") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor an ongoing account
maintenance fee at an annual rate of 0.25% of the average daily net
assets of the Class A Shares and distribution and account
maintenance fees, which are accrued daily and paid monthly at the
annual rates of 0.75% and 0.25%, respectively, of the average daily
net assets of the Class B Shares of the Fund. Pursuant to a sub-
agreement with the Distributor, Merrill Lynch, Pierce, Fenner, and
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
shareholders. The ongoing distribution fee compensates the
Distributor and MLPF&S for providing shareholder and distribution
services and bearing certain distribution-related expenses of the
Fund. For the year ended August 31, 1994, MLFD earned $19,004 and
$459,174 for Class A and Class B Shares, respectively, under the
Distribution Plans, all of which was paid to MLPF&S pursuant to the
agreement.
For the year ended August 31, 1994, MLFD earned underwriting
discounts of $4,130, and MLPF&S earned dealer concessions of $65,203
on sales of the Fund's Class A Shares of capital stock.
MLPF&S received contingent deferred sales charges of $23,762
relating to transactions in Class B Shares of capital stock and
$11,240 in commissions on the execution of portfolio security
transactions for the Fund during the period.
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 MLIM, MLPF&S, FDS, PSI, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1994 were $47,385,980 and $49,544,286,
respectively.
<PAGE>
Net realized and unrealized gains (losses) as of August 31, 1994
were as follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $2,030,235 $ (980,518)
Short-term investments (1,668) --
---------- -----------
Total $2,028,567 $ (980,518)
========== ===========
As of August 31, 1994, net unrealized depreciation for Federal
income tax purposes aggregated $980,518, of which $2,130,097 related
to appreciated securities and $3,110,615 related to depreciated
securities. The aggregate cost of investments at August 31, 1994 for
Federal income tax purposes was $61,160,386.
4. Shares of Capital Stock:
Net increase in net assets derived from capital stock transactions
was $2,371,410 and $52,966,866 for the years ended August 31, 1994
and August 31, 1993, respectively.
Transactions in shares of capital stock for Class A and Class B
Shares were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 556,921 $ 5,502,292
Shares redeemed (401,467) (3,995,468)
---------- -----------
Net increase 155,454 $ 1,506,824
========== ===========
<PAGE>
Class A Shares for the Period Dollar
Dec. 24, 1992++ to August 31, 1993 Shares Amount
Shares sold 867,186 $ 8,576,762
Shares redeemed (172,813) (1,650,457)
---------- -----------
Net increase 694,373 $ 6,926,305
========== ===========
[FN]
++Prior to December 24, 1992 (commencement of operations), the Fund
issued 5,000 shares to MLAM for $50,000.
Class B Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 2,123,924 $20,737,115
Shares redeemed (2,017,787) (19,872,529)
---------- -----------
Net increase 106,137 $ 864,586
========== ===========
Class B Shares for the Period Dollar
Dec. 24, 1992++ to August 31,1993 Shares Amount
Shares sold 5,434,015 $53,568,283
Shares redeemed (799,068) (7,527,722)
---------- -----------
Net increase 4,634,947 $46,040,561
========== ===========
[FN]
++Prior to December 24, 1992 (commencement of operations), the Fund
issued 5,000 shares to MLAM for $50,000.
</AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
<PAGE>
To the Shareholders and Board of Directors,
Merrill Lynch Fundamental Growth Fund, Inc.:
We have audited the accompanying statement of assets and liabilities
of Merrill Lynch Fundamental Growth Fund, Inc., including the
schedule of investments, as of August 31, 1994, and the related
statement of operations for the year then ended and the statement of
changes in net assets and financial highlights for the year then
ended and for the period from December 24, 1992 (commencement of
operations) to August 31, 1993. These financial statements and
financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and 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 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 August
31, 1994 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Merrill Lynch Fundamental Growth Fund, Inc. at
August 31, 1994, and the results of its operations for the year then
ended, and the changes in its net assets and the financial
highlights for the year then ended and for the period from December
24, 1992 to August 31, 1993 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
New York, New York
September 23, 1994
</AUDIT-REPORT>
APPENDIX: GRAPHIC AND IMAGE MATERIAL.
<PAGE>
Item 1:
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's
Class A and Class B Shares compared to the growth of an investment in
the S&P 500 Total Return Index. Beginning and ending values are:
12/24/92** 8/94
ML Fundamental Growth Fund Inc.++--
Class A Shares* $ 9,350 $ 9,434
ML Fundamental Growth Fund, Inc.++--
Class B Shares* $10,000 $ 9,960
S&P 500 Total Return Index++++ $10,000 $11,335
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses including advisory fees.
**Commencement of Operations.
++Merrill Lynch Fundamental Growth Fund, Inc. invests primarily
in equity securities with particular emphasis on companies
that have exhibited above-average growth rates in earnings.
++++This unmanaged broad-based index is comprised of common
stocks.
