MERRILL
LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
Semi-Annual Report February 28, 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.
DEAR SHAREHOLDER
For the quarter ended February 28, 1994, Merrill Lynch
Fundamental Growth Fund, Inc.'s Class A and Class B Shares had
total returns of +1.88% and +1.80%, respectively, while the total
return for the unmanaged Standard & Poor's 500 Index (S&P 500)
was +1.81%. (Complete performance information, including average
annual total returns, can be found on page 4 of this report to
shareholders.)
<PAGE>
The net asset values of the Fund's Class A and Class B Shares
reached their peak valuations during January. There are a number
of reasons for the decline in share prices since then. First, the
Federal Reserve Board announced that it would increase the
Federal Funds rate by a quarter of one percent on February 4,
1994, which appears to have increased investors' concerns about
the rate of inflation and caused a significant rise in interest
rates. Another negative factor was the recent announcement of the
Federal Communications Commission's (FCC) intention to order a 7%
cutback in basic cable television rates, which ended the merger
plans between Bell Atlantic Corp. and Tele-Communications Inc.,
two of the Fund's holdings. The stock prices of both companies
declined significantly in the recent fiscal quarter. Finally, the
modest +0.2% rate of real growth in the fourth quarter of 1993
reported for the Mexican economy in conjunction with the rise in US
interest rates contributed to a correction in the Mexican stock
market. Consequently, there were declines in the stock prices of
our large-capitalization growth companies in Mexico that have
significant percentage weightings in the Fund. Also, the recent
armed uprising in the Mexican border state of Chiapas raised investor
concern about the stability of Mexico and contributed to the downside
volatility in the Mexican Bolsa.
Consequently, the decline in the common stock prices of many of
the Fund's holdings in financial services and telecommunication
companies, which started during the fiscal quarter ended November
30, 1993, continued in the most recent fiscal quarter. Some of
the companies among the top ten holdings of the Fund experienced
significant capital appreciation during the fiscal quarter and
were instrumental in producing the overall positive rate of
return. These companies were Grupo Televisa, S.A. de C.V.,
Caremark International, Inc., Intel Corp., and Vodafone Group
PLC.
The Environment
The significant upward revision of real growth for the US economy
in the fourth quarter of 1993, combined with the positive tone of
recent business conditions, seems to have focused US investors on
concerns about rising inflation and interest rates. Consumer
product price increases in recent months by domestic automobile
manufacturers and some food and tobacco companies have
contributed to the inflation psychology.
There are additional factors which may negatively affect the
strength of the US economy in the months ahead. While the Federal
tax increase on upper-income households, which was withheld
starting with January paychecks, has yet to slow the rate of
growth in consumer spending, these households will have to pay a
significant percentage of the accrued, but unpaid, tax liability
on 1993 income in April. It is too early to tell what effect this
tax increase will have on the overall rates of growth of
household spending and real economic activity. In addition,
mortgage interest rates have been rising and may reduce the level
of new home sales.
<PAGE>
On the industrial side, however, the demand for capital
investment goods in the United States appears to have good
momentum in a number of significant areas. Public and private
enterprises continue to invest heavily in advanced technology for
telecommunications equipment and related networking software, and
in personal computers and computer workstations. Cable television
companies and new competitors among the Bell telephone companies
have started digital, interactive communication systems in order
to deliver a new array of entertainment, information and
retailing services to consumers. Traditional personal telecommuni-
cations services are shifting from analog wireline and wireless
communication to higher capacity and better-quality wireless digital
communication services. In the transportation equipment area, both
commercial enterprises and consumers continue to sustain the recent
levels of demand for automobiles and trucks. A continuation of
relatively high real rates of growth in the developing economies
in Asia and Latin America is likely to keep US exports of computers,
software and telecommunications at relatively high levels. Also, trade
negotiations being conducted between the Clinton Administration
and the Japanese government may open up new export opportunities
for US-manufactured technology and telecommunications equipment.
As much as 15% of the Fund's net assets could benefit from
improved access to Japanese markets.
There is some evidence of renewed economic growth in Mexico after
a sharp slowdown in the fourth quarter of 1993. As the
governments of Canada, Mexico and the United States start to
implement the North American Free Trade Agreement, capital
investment in Mexico should rise in 1994. Pro-growth fiscal and
monetary policies in Mexico could lift real economic growth to
+4.0% from a subdued level of +0.4% in 1993.
Investment Strategy
The relatively persistent rise in interest rates during the most
recent fiscal quarter, combined with the policy action by the
Federal Reserve Board on February 4, 1994, have caused us to
reduce the Fund's investment exposure to the financial services
sector. We eliminated the Fund's investment in the Federal
National Mortgage Association, and reduced our position in
Countrywide Credit Industries, Inc. by one-half. Mortgage
refinance activity is still down by over 50% from the most
recent peak level in October 1993. We continue to believe that
the mortgage refinance business is a secular growth business,
albeit with wide swings in activity related to long-term interest
rate changes. Consumer unsecured installment and credit card debt
continues to be relatively high in cost and nondeductible on income
tax returns. The Fund's investment holdings in this area now consist
of Countrywide Credit Industries, Inc., Reliance Group Holdings, Inc.
and MGIC Investment Corp.
<PAGE>
Of the large multinational growth companies in the Fund, the best
investment returns during the fiscal quarter were turned in by
Intel Corp., Vodafone Group PLC, Duracell International Inc.,
Avon Products Inc., Colgate-Palmolive Co., Texas Instruments
Inc., and Mattel, Inc. These companies reflect the principal focus
of the Fund's investment strategy. The managements of these companies
have a global focus in their activities in research and product
development, in investing in manufacturing and in marketing.
The Fund continues to have a significant investment exposure in
large-capitalization growth companies in Mexico. During the
February quarter, these holdings experienced a significant price
decline and the Mexican stock market was down about 10% from its
recent high on February 8, 1994. This decline appears to
represent an overreaction to the report of slower-than-
anticipated real growth for the Mexican economy in the fourth
quarter of 1993 and the recent rise in United States interest
rates. Real economic growth in Mexico is already recovering in
combination with declining inflation and interest rates.
President Salinas of Mexico is dealing effectively with the
social unrest and the armed uprising in Chiapas. We believe that
Mexico represents one of the more attractive developing economies
with above-average growth prospects.
During the process of negotiation and the collapse of the
proposed merger deal between Bell Atlantic Corp. and Tele-
Communications Inc., the stock prices of both companies declined
substantially. The National Cable Television Association plans to
appeal FCC regulations to cut basic cable television rates by 7%,
which apparently caused the failure of the merger. Since the end
of the merger negotiations, the Chairman of Bell Atlantic Corp.
has stated that the company will continue with its plans to
invest over the next two years to bring advanced, interactive
telecommunications services to 1.25 million households in the
Bell Atlantic region. The Fund continues to have a meaningful
weighting in the areas of telecommunications, computer software,
broadcasting media and cable television. We think that selected
companies could experience a significant rise in earnings and
rates of return over the next few years as these new digital,
interactive telecommunication systems are deployed to bring
interactive entertainment, shopping services, financial, and
information services to consumers.
Portfolio Matters
At the end of the February quarter, the Fund's cash position was
4.3% of net assets. The substantial rise in interest rates during
the fiscal quarter caused us to reduce the Fund's holdings of
securities in the financial services sector.
<PAGE>
We increased the total number of companies in the portfolio from
59 to 60 during the period. We eliminated four holdings from the
Fund and added five new ones. As stated earlier, we sold the
Federal National Mortgage Association position at a profit in
order to reduce the financial services sector weighting while
interest rates are rising. We sold Sara Lee Corp. at a profit and
significantly reduced our investment in General Mills, Inc. at a
significant capital loss in order to reduce the food industry
weighting in the Fund. Private label brands continue to take
domestic market share from branded cereals. Consequently, the
outlook for either a near-term recovery in pricing power or
sustained unit volume growth for branded cereal companies does
not appear good. We eliminated Microsoft Corp. from the Fund at a
modest loss since we were concerned about the relatively high
valuation and the possibility of an erosion of gross margins and
rates of growth in earnings over the next few years. In addition,
we eliminated ALC Communications Corp. in response to MCI
Communications Corp.'s announcement of its MCI investment
program. This program will result in a 45% reduction in the
direct costs for MCI of long-distance calls in the major
metropolitan markets, which would be a significant strategic
threat to ALC Communications.
We added Time Warner Inc. to the Fund because it is one of the
leading innovators in bringing enhanced cable service to one of
the largest domestic cable television networks. Cash flow and
earnings should rise rapidly over the next five years. In
addition, we added positions in Cabletron Systems, Inc., one of
the leading organizations in the area of computer networking, and
Novacare, Inc., the largest provider of contract medical rehabilitation
therapy and related services in the United States. We think that the
company should grow rapidly with rising profitability.
Another addition to the Fund was Ek Chor China Motorcycle Co.
Ltd. which, through joint-venture enterprises in China, designs,
manufactures and sells motorcycles and parts to Chinese
consumers. The company is likely to continue to experience very
high rates of growth in demand and earnings since the potential
market for motorized transportation is so large. Finally, we
added a position in Daimler-Benz AG, Germany's largest and once
one of the most consistently successful companies. We think that
the corporation could return to a relatively high rate
of growth in earnings and return on equity as the current
management continues to restructure the enterprise.
In Conclusion
We appreciate your continued investment in Merrill Lynch
Fundamental Growth Fund, Inc. We look forward to reporting
to you on our strategy and investment activities in our upcoming
quarterly report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Lawrence R. Fuller)
Lawrence R. Fuller
Vice President and Portfolio Manager
March 28, 1994
<PAGE>
PERFORMANCE DATA
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.
<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--2/28/94 10.51 10.28 -- -- -2.19
Cumulative total return as of 2/28/94: +2.80%**
<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>
<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--2/28/94 10.43 10.19 -- -- -2.30
Cumulative total return as of 2/28/94: +1.90%**
<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 reflect deduction of any sales charge; results would be lower
if sales charge was deducted.
</TABLE>
<PAGE>
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
2/28/94 11/30/93 2/28/93 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares $10.28 $10.09 $9.53 +7.87% +1.88%
ML Fundamental Growth Fund, Inc. Class B Shares 10.19 10.01 9.52 +7.04 +1.80
ML Fundamental Growth Fund, Inc. Class A Shares--Total Return +7.87 +1.88
ML Fundamental Growth Fund, Inc. Class B Shares--Total Return +7.04 +1.80
<FN>
*Investment results shown for the 3-month and 12-month periods are before the deduction of any sales charges.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/93 +5.95% -0.94%
Inception (12/24/92)
through 12/31/93 +5.10% -1.73
[FN]
*Maximum sales charge is 6.5%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/93 +5.14% +4.14%
Inception (12/24/92)
through 12/31/93 +4.30% +4.30%
[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>
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 $ 655,000 1.2%
Automotive & Truck 75,000 Consorcio G Grupo Dina, S.A. de C.V. (ADR) (a) 1,203,575 1,368,750 2.6
15,000 Daimler-Benz AG (ADR) (a) 729,492 714,375 1.3
20,000 Ek Chor China Motorcycle Co. Ltd. 734,300 597,500 1.1
----------- ----------- ------
2,667,367 2,680,625 5.0
Banking & Financial 15,000 State Street Boston Corp. 490,625 558,750 1.1
Beverages 5,000 The Coca-Cola Co. 208,425 213,125 0.4
30,000 Coca-Cola FEMSA, S.A. de C.V. (ADR) (a) 704,668 952,500 1.8
20,000 Panamerican Beverages, Inc. (Class A) 553,296 800,000 1.5
10,000 PepsiCo, Inc. 418,300 391,250 0.7
----------- ----------- ------
1,884,689 2,356,875 4.4
Broadcast--Cable 40,000 ++Tele-Communications Inc. (Class A) 995,000 945,000 1.8
15,000 Time Warner Inc. 641,706 571,875 1.1
----------- ----------- ------
1,636,706 1,516,875 2.9
Broadcast--Media 30,000 Grupo Televisa, S.A. de C.V., 'L' (GDS) (b) (c) 1,141,444 1,931,250 3.6
25,000 Infinity Broadcasting Corp. 714,375 800,000 1.5
30,000 Turner Broadcasting System, Inc. 787,265 682,500 1.3
----------- ----------- ------
2,643,084 3,413,750 6.4
Business Services 5,000 The Olsten Corp. 143,483 159,375 0.3
$ 500,000 The Olsten Corp., Convertible Bond, 4.875% due
5/15/2003 500,000 555,000 1.0
----------- ----------- ------
643,483 714,375 1.3
Chemical Producers 20,000 Duracell International Inc. 605,575 832,500 1.6
10,000 Great Lakes Chemical Corp. 732,730 782,500 1.5
----------- ----------- ------
1,338,305 1,615,000 3.1
Communications 5,000 Cabletron Systems, Inc. 612,028 625,000 1.2
10,000 cisco Systems, Inc. 493,125 737,500 1.4
----------- ----------- ------
1,105,153 1,362,500 2.6
Consumer Products 30,000 ++CUC International, Inc. 781,014 900,000 1.7
& Services
<PAGE>
Cosmetics 10,000 Avon Products Inc. 573,100 578,750 1.1
15,000 The Gillette Co. 890,475 926,250 1.8
15,000 International Flavors & Fragrances Inc. 521,225 556,875 1.1
----------- ----------- ------
1,984,800 2,061,875 4.0
Electronics 35,000 Intel Corp. 2,011,250 2,406,250 4.5
Entertainment 30,000 ++Electronic Arts Inc. 1,049,792 780,000 1.5
Finance 10,000 Countrywide Credit Industries, Inc. 264,350 250,000 0.5
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Shares Held Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Financial Services 40,000 MGIC Investment Corp. $ 1,337,450 $ 1,240,000 2.3%
30,000 The Travelers Corp. (d) 1,292,652 1,117,500 2.1
----------- ----------- ------
2,630,102 2,357,500 4.4
Food 5,000 General Mills, Inc. 340,300 278,750 0.5
5,000 Kellogg Co. 302,175 252,500 0.5
10,000 Wrigley (Wm.) Jr. Co. (Class B) 327,380 465,000 0.9
----------- ----------- ------
969,855 996,250 1.9
Health Care-- 20,000 IVAX Corp. 521,200 702,500 1.3
Pharmaceuticals 30,000 Teva Pharmaceutical Industries Ltd. (ADR) (a) 711,250 997,500 1.9
----------- ----------- ------
1,232,450 1,700,000 3.2
Health Services 100,000 Caremark International, Inc. 1,636,738 2,162,500 4.1
35,000 Novacare Inc. 531,221 630,000 1.2
----------- ----------- ------
2,167,959 2,792,500 5.3
Home Furnishings 20,000 Shaw Industries, Inc. 354,650 375,000 0.7
Household Products 5,000 Colgate-Palmolive Co. 274,675 325,625 0.6
10,000 Procter & Gamble Co. 569,475 573,750 1.1
----------- ----------- ------
844,150 899,375 1.7
Information Processing 10,000 First Financial Management Corp. 469,338 588,750 1.1
<PAGE>
Insurance 7,000 American International Group, Inc. 589,750 614,250 1.2
5,000 General Reinsurance Corp. 615,525 528,125 1.0
150,000 Reliance Group Holdings, Inc. 1,096,250 918,750 1.7
10,000 UNUM Corp. 510,692 537,500 1.0
----------- ----------- ------
2,812,217 2,598,625 4.9
Leisure 30,000 PolyGram N.V. (ADR) (a) 799,150 1,211,250 2.3
Medical--Technology 20,000 Haemonetics Corp. 549,480 445,000 0.8
Oil Services 10,000 Schlumberger Ltd. 649,350 568,750 1.1
Pollution Control 20,000 WMX Technologies Inc. 623,700 492,500 0.9
Publishing 20,000 Scholastic Corp. 909,841 790,000 1.5
Restaurant 10,000 McDonald's Corp. 581,850 606,250 1.1
Retail--Specialty 10,000 The Pep Boys--Manny, Moe & Jack 249,350 285,000 0.5
20,000 Staples Inc. 487,275 615,000 1.2
----------- ----------- ------
736,625 900,000 1.7
Retail Stores 600,000 ++Cifra, S.A. de C.V., 'C' (b) 1,161,042 1,587,461 3.0
Semiconductors 5,000 Texas Instruments Inc. 380,925 403,750 0.8
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Industries Shares Held Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Software--Computer 35,000 Computer Associates International, Inc. $ 1,278,296 $ 1,286,250 2.4%
30,000 Oracle Systems Corp. 877,292 990,000 1.9
----------- ----------- ------
2,155,588 2,276,250 4.3
Telecommunications 30,000 Bell Atlantic Corp. 1,866,779 1,642,500 3.1
40,000 MCI Communications Corp. 1,097,143 1,090,000 2.1
40,000 QUALCOMM Inc. 1,100,000 880,000 1.7
15,000 Vodafone Group PLC (ADR) (a) 1,186,525 1,355,625 2.6
----------- ----------- ------
5,250,447 4,968,125 9.5
Toys 25,000 Mattel, Inc. 538,283 653,125 1.2
Total Stocks & Bonds 45,015,070 48,482,336 91.6
<PAGE>
<CAPTION>
Face
Amount Short-Term Securities
<S> <C> <S> <C> <C> <C>
Commercial $1,283,000 General Electric Co., 3.40% due 3/01/1994 1,283,000 1,283,000 2.4
Paper* 1,000,000 UBS Finance, Inc., 3.30% due 3/01/1994 1,000,000 1,000,000 1.9
Total Short-Term Securities 2,283,000 2,283,000 4.3
Total Investments $47,298,070 50,765,336 95.9
===========
Other Assets Less Liabilities 2,166,071 4.1
----------- ------
Net Assets $52,931,407 100.0%
=========== ======
<FN>
++Non-income producing security.
*Commercial Paper is 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 Receipts (ADR).
(b)Foreign Stock--Mexico.
(c)Global Depositary Shares (GDS).
(d)Formerly Primerica Corp.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
For the Quarter Ended February 28, 1994
Ten Largest Percent of
Equity Holdings Net Assets
Intel Corp. 4.5%
Caremark International, Inc. 4.1
Grupo Televisa, S.A. de C.V., 'L' (GDS) 3.6
Bell Atlantic Corp. 3.1
Cifra, S.A. de C.V., 'C' 3.0
Consorcio G Grupo Dina, S.A. de C.V.
(ADR) 2.6
Vodafone Group PLC (ADR) 2.6
Computer Associates International, Inc. 2.4
MGIC Investment Corp. 2.3
PolyGram N.V. (ADR) 2.3
<PAGE>
Additions
Cabletron Systems, Inc.
Daimler-Benz AG (ADR)
Ek Chor China Motorcycle Co. Ltd.
Novacare Inc.
Time Warner Inc.
Deletions
ALC Communications Corp.
Federal National Mortgage Association
Microsoft Corp.
Sara Lee Corp.
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of February 28, 1994
<S> <S>
Assets: Investments, at value (identified cost--$47,298,070) (Note 1a) $50,765,336
Cash 3,161
Receivables:
Securities sold $1,886,315
Capital shares sold 730,925
Dividends 36,279
Interest 7,137 2,660,656
----------
Deferred organization expenses (Note 1g) 88,195
Prepaid registration fees and other assets (Note 1g) 37,794
-----------
Total assets 53,555,142
-----------
Liabilities: Payables:
Capital shares redeemed 408,395
Distributor (Note 2) 36,419
Investment adviser (Note 2) 26,425 471,239
----------
Accrued expenses and other liabilities 152,496
-----------
Total liabilities 623,735
-----------
Net Assets: Net assets $52,931,407
===========
<PAGE>
Net Assets Class A Shares of capital stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 72,134
Class B Shares of capital stock, $0.10 par value, 100,000,000 shares
authorized 446,845
Paid-in capital in excess of par 51,041,606
Accumulated investment loss--net (532,042)
Accumulated realized capital losses on investments and foreign currency
transactions--net (1,564,402)
Unrealized appreciation on investments and foreign currency transactions--net 3,467,266
------------
Net assets $ 52,931,407
============
Net Asset Class A--Based on net assets of $7,414,140 and 721,336 shares of capital
Value: stock outstanding $ 10.28
============
Class B--Based on net assets of $45,517,267 and 4,468,451 shares of capital
stock outstanding $ 10.19
============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations For the Six
Months Ended
February 28, 1994
<S> <S> <C>
Investment Dividends (net of $1,981 foreign withholding tax) $ 269,546
Income Interest and discount earned 60,056
(Notes 1e -----------
& 1f): Total income 329,602
-----------
Expenses: Distribution fees--Class B (Note 2) 229,814
Investment advisory fees (Note 2) 172,258
Registration fees (Note 1g) 43,701
Transfer agent fees--Class B (Note 2) 33,888
Professional fees 28,596
Printing and shareholder reports 24,978
Accounting services (Note 2) 22,157
Directors' fees and expenses 20,093
Amortization of organization expenses (Note 1g) 11,467
Custodian fees 8,850
Account maintenance fees--Class A (Note 2) 8,799
Transfer agent fees--Class A (Note 2) 4,764
Other 5,907
-----------
Total expenses 615,272
-----------
Investment loss--net (285,670)
-----------
<PAGE>
Realized & Realized loss on investments and foreign currency transactions--net (1,425,526)
Unrealized Gain Change in unrealized appreciation on investments and foreign currency transactions--net 3,483,255
(Loss) on -----------
Investments & Net Increase in Net Assets Resulting from Operations $ 1,772,059
Foreign ===========
Currency
Transactions--
Net
(Notes 1b,
1f & 3):
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the For the
Six Months Period
Ended Dec. 24, 1992++
Feb. 28, to Aug. 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment loss--net $ (285,670) $ (246,372)
Realized loss on investments and foreign currency transactions--net (1,425,526) (138,876)
Change in unrealized appreciation on investments and foreign
currency transactions--net 3,483,255 (15,989)
------------- -------------
Net increase (decrease) in net assets resulting from operations 1,772,059 (401,237)
------------- -------------
Capital Share Net increase (decrease) in net assets derived from capital share
Transactions transactions (1,506,281) 52,966,866
(Note 4): ------------- -------------
Net Assets: Total increase in net assets 265,778 52,565,629
Beginning of period 52,665,629 100,000
------------- -------------
End of period* $ 52,931,407 $ 52,665,629
============= =============
<FN>
*Accumulated investment loss--net $ (532,042) $ (246,372)
============= =============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
Class A Class B
For the For the
For the Period For the Period
Six Months Dec. 24, Six Months Dec. 24,
The following per share data and ratios have been derived from Ended 1992++ Ended 1992++
information provided in the financial statements. Feb. 28, to Aug. 31, Feb. 28, to Aug. 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 loss--net (.02) -- (.06) (.05)
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net (1) .39 (.09) .39 (.09)
--------- ---------- --------- ----------
Total from investment operations .37 (.09) .33 (.14)
--------- ---------- --------- ----------
Net asset value, end of period $ 10.28 $ 9.91 $ 10.19 $ 9.86
========= ========== ========= ==========
Total Based on net asset value per share 3.73%+++ (0.90%)+++ 3.35%+++ (1.40%)+++
Investment ========= ========== ========= ==========
Return:*
Ratios to Expenses, excluding account maintenance and
Average Net distribution fees 1.41% 1.78% 1.42% 1.79%
Assets:** ========= ========== ========= ==========
Expenses 1.66% 2.03% 2.42% 2.79%
========= ========== ========= ==========
Investment loss--net (0.42)% (.04)% (1.18)% (.83)%
========= ========== ========= ==========
Supplemental Net assets, end of period (in thousands) $ 7,414 $ 6,930 $ 45,517 $ 45,736
Data: ========= ========== ========= ==========
Portfolio turnover 42.36% 64.09% 42.36% 64.09%
========= ========== ========= ==========
<FN>
*Total investment returns exclude the effects of sales loads.
**Annualized.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
(1)Foreign currency transaction amounts have been reclassified to conform to 1994 presentation.
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 fees 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. 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. 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. Other investments, including futures contracts and related options,
are stated at market value. 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)
receivables 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 net assets 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--Certain 1993 amounts have been reclassified
to conform to the 1994 presentation.
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., an indirect
wholly-owned subsidiary of Merrill Lynch and Co. The limited part-
ners 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 Distribu-
tor, 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 average daily net assets in excess
thereof. 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>
The Fund has adopted separate Plans of Distribution (the "Distribution
Plans") for Class A and Class B Shares in accordance with Rule 12b-1
under the Investment Company Act of 1940, pursuant to which MLFD receives
from the Fund at the end of each month (a) an account maintenance fee,
at an annual rate of 0.25% of the average daily net assets of the Fund
attributable to Class A Shares in order to compensate the Distributor
and Merrill Lynch (pursuant to a sub-agreement) in connection with account
maintenance activities, and (b) ongoing distribution and account maintenance
fees at the annual rates of 0.75% and 0.25%, respectively, of the average
daily net assets of the Fund attributable to Class B Shares, in order to
compensate the Distributor for the services it provides and the expenses
borne by the Distributor under the Distribution Agreement. As authorized
by the Distribution Plans, the Distributor has entered into an agreement
with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") which provides
for the compensation of MLPF&S in connection with account maintenance
activities for Class A and Class B Shares and for providing distri-
bution-related services to the Fund for Class B Shares. For the six months
ended February 28, 1994, MLFD earned $8,799 and $229,814 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 six months ended February 28, 1994, MLFD earned underwriting
discounts of $2,639, and MLPF&S earned dealer concessions of $44,656
on sales of the Fund's Class A Shares of capital stock.
MLPF&S received contingent deferred sales charges of $16,416
relating to transactions in Class B Shares of capital stock and
$6,930 in commissions on the execution of portfolio security
transactions for the Fund during the period.
NOTES TO FINANCIAL STATEMENTS (concluded)
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, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended February 28, 1994 were $21,154,662 and $24,896,492,
respectively.
Net realized and unrealized gains (losses) as of February 28,
1994 were as follows:
Realized Unrealized
Losses Gains
Long-term investments $(1,425,526) $ 3,467,266
----------- -----------
Total $(1,425,526) $ 3,467,266
=========== ===========
<PAGE>
As of February 28, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $3,467,266, of which $5,733,691
related to appreciated securities and $2,266,425 related to
depreciated securities. The aggregate cost of investments at
February 28, 1994 for Federal income tax purposes was $47,298,070.
4. Shares of Capital Stock:
Net increase (decrease) in net assets derived from capital stock
transactions was ($1,506,281) for the six months ended February 28,
1994 and $52,966,866 for the period ended August 31, 1993.
Transactions in shares of capital stock for Class A and Class B
Shares were as follows:
Class A Shares for the Six Months Dollar
Ended February 28, 1994 Shares Amount
Shares sold 161,246 $ 1,671,581
Shares redeemed (139,283) (1,427,262)
---------- ------------
Net increase 21,963 $ 244,319
========== ============
Class A Shares for the Period Dollar
December 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 Six Months Dollar
Ended February 28, 1994 Shares Amount
Shares sold 540,502 $ 5,554,184
Shares redeemed (711,998) (7,304,784)
---------- ------------
Net decrease (171,496) $ (1,750,600)
========== ============
Class B Shares for the Period Dollar
December 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.
<PAGE>
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen 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
