MERRILL LYNCH
FUNDAMENTAL
GROWTH
FUND, INC.
FUND LOGO
Annual Report
August 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
Lawrence R. Fuller, Senior Vice President and
Portfolio Manager
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Barbara G. Fraser, Secretary
Custodian
The Chase Manhattan Bank
Global Securities Services
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
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
Fundamental
Growth Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
DEAR SHAREHOLDER
Fiscal Year in Review
For the year ended August 31, 1998, total returns for Merrill Lynch
Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and Class
D Shares were +6.37%, +5.21%, +5.19% and +6.08%, respectively. The
total return for the unmanaged Standard & Poor's 500 Index was
+8.09% for the same one-year period. The Fund substantially
outperformed the Lipper Analytical Services' Growth Funds Average
total return of -1.89% for the year ended August 31, 1998, primarily
because of the Fund's significant weighting in the retail sector. In
January 1998, we anticipated the potential for a rise in the rate of
growth of real consumer spending in 1998 as a result of the positive
effects of mortgage refinancing with declining consumer financing
rates, the reduction in Federal income tax rates for middle-income
and low-income households, and low levels of consumer price
inflation. This environment had relatively positive effects on the
rates of growth of most retailers during the first eight months of
1998.
Another important factor was the Fund's significant weighting in the
communications equipment industry during the fiscal year until April
1998. We correctly anticipated the acceleration of capital spending
on global wireless communications infrastructure, as well as an
increase in spending by public telephone companies and private
corporations on Internet access switches and communications devices.
Subsequently, we reduced the Fund's exposure to these cyclical
growth companies at near-peak levels of absolute stock prices and
valuations because of our concerns about the continuation of
declining economic activity in Asia. Finally, selected investments
in the computer software and pharmaceutical industries were
beneficial to the Fund's performance during the 12-month period.
Positive returns were posted by the Fund's investments in SAP AG
(Systeme, Anwendungen, Produkte in der Datenverarbeitung), Microsoft
Corporation, Pfizer, Inc., Bristol-Myers Squibb Co. and Merck & Co.,
Inc. Also, General Electric Company, the Fund's third-largest
holding (3.2% of net assets), appreciated by 14.3% during the year.
Our investment in SAP AG delivered the greatest return for the
fiscal year, appreciating 107%.
Positive returns during the August quarter were produced by holdings
in several industry categories. At August 31, 1998, the Fund's
largest industry sector was computer software, at 7.9% of net
assets. Microsoft Corporation, our largest holding in this industry
and the Fund's second-largest holding overall (3.5% of net assets),
produced solid returns during the quarter ended August 31, 1998.
Other strong contributors during the August quarter included Cisco
Systems, Inc., a leading communications equipment company, and Wal-
Mart Stores, Inc. in the retail stores sector, which is the Fund's
largest equity holding (4.1% of net assets). Staples, Inc., our
holding in the retail-specialty industry, was also a strong
performer during the August quarter. In the computer sector, COMPAQ
Computer Corporation posted positive returns, and Dell Computer
Corporation realized significant gains, largely because of an
increase in earnings that was above expectations and well above the
company's average rate of growth.
The Environment
During most of the quarter ended August 31, 1998, investor concern
focused on negative business and political developments in Russia,
Japan and the emerging economies of Asia and Latin America, with a
particular focus on Brazil. However, concerns about the possible
tightening of monetary policy by central banks in the United States,
the United Kingdom and Germany appear to be abating. The central
bank of Japan recently reduced its borrowing rate from 0.43% to
0.25%. Monetary policy experts appear to be focusing more on the
prevalence of lower commodity and manufactured goods prices rather
than on the rising prices of a few goods and services. Recent
business and economic reports on the US economy suggest a
continuation of above-average growth in real consumer spending and
corporate spending on technology equipment. US employment is
benefiting from a continued growth in demand for personnel in the
service industries, which dominate the domestic job market. The
decline in the interest rate on the 30-year US Treasury bond lowered
residential mortgage financing interest rates to record levels for
1998, and has started a new round of mortgage refinancing that
should provide a relatively long-lasting rise in household spending.
This is showing up in a sustained high level of spending on new home
construction and demand for consumer appliances.
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
The improving functionality of the lowest-price desktop personal
computers is being well-received by consumers, who continue to
purchase these products at a rapid pace. Motor vehicle purchases in
the United States also continue at a relatively accelerated rate.
There may be further household income tax relief as a result of the
political climate, the Federal budget surplus and increasing state
and local government budget surpluses. Price inflation remains
modest, and consumer financing rates are relatively low with ample
availability of funds. Our review of second-quarter corporate
profits appears to suggest a slow-growth outlook. We will continue
to seek the best investment opportunities by identifying companies
with above-average earnings growth.
Investment Overview and Strategy
For the quarter ended August 31, 1998, total returns for Merrill
Lynch Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and
Class D Shares were -10.90%, -11.09%, -11.16% and -10.93%,
respectively. For the same three-month period, the Fund's total
returns outperformed both the S&P 500 Index total return of -11.93%
and the Lipper Analytical Services Growth Funds Average total return
of -15.31%. For the 1998 year-to-date period ended August 31, 1998,
Merrill Lynch Fundamental Growth Fund, Inc. had total returns for
Class A, Class B, Class C and Class D Shares of +1.63%, +0.98%,
+0.91% and +1.52%, respectively. For the same 1998 year-to-date
period, the S&P 500 Index had a total return of -0.38%, while the
year-to-date average return for the Lipper Growth Funds Group was -
5.87%.
During the quarter ended August 31, 1998, our investment strategy
was unchanged. We continued to believe that consumer spending would
lead real US economic and business activity. Consumption growth has
been a contributing factor to a substantial increase in imports of
manufactured goods from companies in the struggling economies of
Asia and Latin America and will likely continue. It is our opinion
that this increase in lower-priced manufactured imports will be more
important to US corporate enterprises than the loss of demand for US
corporate products in Russia, Japan and other Asian countries and
the major economies in Latin America. We believe the competitive
situation needs to be researched on a company-by-company basis in
order to determine the loss of revenues and profits from the inroads
made by less-expensive, foreign-produced manufactured goods, as well
as the loss of business from the collapse in consumer demand in
Japan and emerging economies.
During the August quarter, we added several new investments in the
US retail industry. Abercrombie & Fitch Co., a rapidly growing and
well-managed specialty retailer, was added to the Fund because we
believed it possesses a relatively attractive valuation relative to
the company's potential growth prospects. Ascend Communications,
Inc. was added to the Fund's communications equipment sector because
of potential earnings growth from the consummation of an important
strategic acquisition. Also, the company is a leader in the rapid-
growth segment of the network communications equipment market.
Safeway Inc. was added to the Fund's food merchandising holdings
because we believed that the company offers an attractive valuation
from ongoing internal restructuring and changes in the management of
the stores.
Several other companies were added to the Fund's portfolio for their
attractive valuations, including Network Appliance, Inc., America
Online Inc., Cable & Wireless PLC and GTE Corporation. Network
Appliance, Inc. designs, manufactures and installs advanced database
file servers for primary usage in Internet sites. America Online
Inc., the leading consumer access provider to the Internet,
continues to show rapid growth of new subscribers, revenues and fees
from advertising and commercial access partnerships. We believe
Cable & Wireless will experience improved rates of growth and
profitability in wireless communication operations as well as more
profitable operations in Hong Kong and China. GTE Corporation offers
potential for above-average growth in earnings from a unique and
broad-based local access franchise and rapid growth in value-added
commercial communication services, including Internet access and
communications.
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
In Conclusion
We continue to have a positive outlook for US stocks over the next
fiscal year. In particular, we believe that our focus on high-
quality, large-capitalization companies with above-average earnings
growth prospects is likely to provide strong investment returns. It
is our opinion that relatively slow real global economic growth,
coupled with low inflation and low interest rates, will provide an
attractive environment for large global companies with unique and/or
value-added products and services.
We thank you for your investment in Merrill Lynch Fundamental Growth
Fund, Inc., and we look forward to reviewing our outlook and
strategy and outlook in our upcoming quarterly report to
shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Lawrence R. Fuller)
Lawrence R. Fuller
Senior Vice President and
Portfolio Manager
October 6, 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:
* 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, as detailed in the Fund's prospectus. If you were a Class
A shareholder prior to October 21, 1994, your Class A Shares were
redesignated to Class D Shares on October 21, 1994. However, in the
case of certain eligible investors, the shares were simultaneously
exchanged for Class A Shares.
* 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 8 years. (There is no initial sales charge for
automatic share conversions.) If you were a Class B shareholder
prior to October 21, 1994, your Class B Shares were redesignated to
Class C Shares on October 21, 1994.
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "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.
Merrill Lynch Fundamental Growth Fund, Inc.
August 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 and Class B Shares compared to growth of an
investment in the S&P 500 Total Return Index. Beginning and
ending values are:
10/21/94** 8/98
ML Fundamental Growth Fund, Inc.++--
Class A Shares* $ 9,475 $20,135
ML Fundamental Growth Fund, Inc.++--
Class B Shares* $10,000 $20,326
S&P 500 Total Return Index++++ $10,000 $22,343
A line graph depicting the growth of an investment in the Fund's
Class A Shares and Class B Shares compared to growth of an
investment in the S&P 500 Total Return Index. Beginning and
ending values are:
12/24/92** 8/98
ML Fundamental Growth Fund, Inc.++--
Class C Shares* $10,000 $20,108
ML Fundamental Growth Fund, Inc.++--
Class D Shares* $ 9,475 $19,924
S&P 500 Total Return Index++++ $10,000 $24,841
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++ML Fundamental Growth Fund, Inc. invests primarily in equity
securities with a particular emphasis on companies that have
exhibited above-average growth rates in earnings.
++++This unmanaged broad-based Index is comprised of common stocks.
Past performance is not predictive of future performance.
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/98 +32.09% +25.15%
Inception (10/21/94)
through 6/30/98 +28.59 +26.72
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/98 +30.70% +26.70%
Inception (10/21/94)
through 6/30/98 +27.28 +27.14
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 6/30/98 +30.72% +29.72%
Five Years Ended 6/30/98 +20.68 +20.68
Inception (12/24/92)
through 6/30/98 +17.19 +17.19
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 6/30/98 +31.70% +24.79%
Five Years Ended 6/30/98 +21.62 +20.31
Inception (12/24/92)
through 6/30/98 +18.10 +16.95
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Fundamental Growth Fund, Inc. Class A Shares* +6.37% -10.90% +112.50%
ML Fundamental Growth Fund, Inc. Class B Shares* +5.21 -11.09 +104.26
ML Fundamental Growth Fund, Inc. Class C Shares* +5.19 -11.16 +101.08
ML Fundamental Growth Fund, Inc. Class D Shares* +6.08 -10.93 +110.27
Standard & Poor's 500 Index** +8.09 -11.93 +123.43/+148.40
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. The
Fund's inception periods are Class A & Class B Shares, from 10/21/94
to 8/31/98 and Class C & Class D Shares, from 12/24/92 to 8/31/98.
**An unmanaged broad-based Index comprised of common stocks. Since
inception total returns are from 10/21/94 to 8/31/98 and from
12/24/92 to 8/31/98, respectively.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Advertising 145,596 Interpublic Group of Companies, Inc. $ 6,405,679 $ 8,298,972 0.7%
Banking & Financial 333,658 Banc One Corporation 15,921,915 12,679,004 1.1
90,750 BankAmerica Corporation 6,793,727 5,813,672 0.5
82,725 Citicorp 12,538,555 8,944,641 0.8
303,325 Mellon Bank Corporation 18,166,682 15,772,900 1.4
255,000 NationsBank Corporation 19,686,900 14,535,000 1.3
188,062 State Street Corporation 9,604,604 9,790,978 0.9
-------------- -------------- ------
82,712,383 67,536,195 6.0
Beverages 381,000 Coca-Cola Company (The) 30,048,481 24,812,625 2.3
72,798 Seagram Company Ltd. (The) 3,053,720 2,247,638 0.2
-------------- -------------- ------
33,102,201 27,060,263 2.5
Broadcasting-- 242,660 Chancellor Media Corp. (Class A) 11,531,919 8,659,929 0.8
Radio & Television 291,192 Clear Channel Communications, Inc. 13,489,040 13,103,640 1.2
-------------- -------------- ------
25,020,959 21,763,569 2.0
Chemicals 181,995 duPont (E.I.) de Nemours & Company 14,129,817 10,498,837 1.0
Communications 120,000 ++Ascend Communications, Inc. 5,678,871 4,215,000 0.4
Equipment 400,389 ++Cisco Systems, Inc. 26,698,568 32,781,849 3.0
100,300 ++FORE Systems, Inc. 2,419,105 1,730,175 0.2
30,000 Lucent Technologies, Inc. 2,653,851 2,126,250 0.2
242,660 ++Newbridge Networks Corporation 9,364,675 4,504,376 0.4
78,865 Northern Telecom Ltd. 3,998,913 3,765,804 0.3
30,300 Telefonaktiebolaget LM Ericsson (ADR)(a) 820,244 649,556 0.1
-------------- -------------- ------
51,634,227 49,773,010 4.6
Computers 1,088,204 COMPAQ Computer Corporation 27,201,602 30,401,699 2.8
181,995 Dell Computer Corporation 14,281,204 18,188,125 1.7
121,330 Hewlett-Packard Company 8,021,348 5,892,088 0.5
30,000 ++Network Appliance, Inc. 1,358,466 1,250,625 0.1
-------------- -------------- ------
50,862,620 55,732,537 5.1
Cosmetics 300,016 Gillette Company (The) 13,207,953 12,338,158 1.1
24,266 ++International Flavors & Fragrances, Inc. 1,157,165 940,307 0.1
-------------- -------------- ------
14,365,118 13,278,465 1.2
Electrical Equipment 36,399 Emerson Electric Co. 1,616,259 2,074,743 0.2
436,788 General Electric Company 29,318,730 34,943,040 3.2
12,133 Honeywell, Inc. 925,783 758,312 0.1
-------------- -------------- ------
31,860,772 37,776,095 3.5
Electronics 333,658 Intel Corporation 25,792,497 23,752,279 2.2
121,330 STMicroelectronics (NY Registered Shares) 8,508,566 6,331,909 0.6
380,535 Texas Instruments Inc. 21,951,729 18,146,763 1.6
-------------- -------------- ------
56,252,792 48,230,951 4.4
Energy 30,000 El Paso Energy Corporation 1,076,486 744,375 0.1
30,000 Enron Corp. 1,446,269 1,269,375 0.1
-------------- -------------- ------
2,522,755 2,013,750 0.2
Entertainment 121,330 ++Viacom, Inc. (Class A) 5,950,516 5,975,503 0.5
750,000 Walt Disney Company (The) 24,752,062 20,578,125 1.9
-------------- -------------- ------
30,702,578 26,553,628 2.4
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Financial Services 67,283 American Express Company $ 6,728,783 $ 5,248,074 0.5%
165,450 Federal National Mortgage Association 9,485,025 9,399,628 0.9
181,995 Franklin Resources, Inc. 9,685,981 5,869,339 0.5
218,394 Morgan Stanley, Dean Witter, Discover & Co. 14,669,924 12,680,502 1.2
193,025 Travelers Group, Inc. 10,808,904 8,565,484 0.8
-------------- -------------- ------
51,378,617 41,763,027 3.9
Food 36,399 ConAgra, Inc. 833,704 900,875 0.1
60,665 Wrigley (Wm.) Jr. Company (Class B) 4,533,973 4,701,538 0.4
-------------- -------------- ------
5,367,677 5,602,413 0.5
Food Merchandising 48,000 Albertson's, Inc. 1,895,172 2,427,000 0.2
100,000 ++Meyer (Fred), Inc. 2,405,021 3,931,250 0.4
77,210 Safeway Inc. 3,514,894 3,040,144 0.3
-------------- -------------- ------
7,815,087 9,398,394 0.9
Home Furnishings 355,000 Ethan Allen Interiors, Inc. 18,274,523 11,537,500 1.0
Hotel 145,596 Marriott International, Inc. (Class A) 4,604,375 4,085,788 0.4
Household Products 42,466 Colgate-Palmolive Company 3,658,569 3,062,860 0.3
97,064 Kimberly-Clark Corporation 4,857,102 3,700,565 0.3
327,591 Procter & Gamble Company (The) 24,841,110 25,060,712 2.3
274,000 Unilever N.V. (NY Registered Shares) 19,707,062 17,364,750 1.6
-------------- -------------- ------
53,063,843 49,188,887 4.5
Information 72,798 America Online Inc. 6,808,005 5,964,886 0.5
Processing 436,788 First Data Corporation 15,634,701 9,036,052 0.8
-------------- -------------- ------
22,442,706 15,000,938 1.3
Insurance 12,133 Aetna, Inc. 976,876 730,255 0.1
234,999 American International Group, Inc. 17,950,281 18,168,360 1.7
-------------- -------------- ------
18,927,157 18,898,615 1.8
Leisure 253,690 Polygram N.V. (NY Registered Shares) 13,176,731 13,699,260 1.2
Medical Technology 176,663 ++Boston Scientific Corporation 10,925,740 12,233,913 1.1
20,000 Guidant Corporation 1,502,734 1,235,000 0.1
24,266 Johnson & Johnson 1,280,674 1,674,354 0.1
-------------- -------------- ------
13,709,148 15,143,267 1.3
Oil Services 163,796 Baker Hughes, Inc. 6,454,745 2,989,277 0.3
43,000 Diamond Offshore Drilling, Inc. 1,967,521 897,625 0.1
30,000 Schlumberger Ltd. 2,064,088 1,314,375 0.1
-------------- -------------- ------
10,486,354 5,201,277 0.5
Pharmaceuticals 36,399 ++Amgen, Inc. 2,051,765 2,220,339 0.2
242,660 Bristol-Myers Squibb Co. 23,991,077 23,750,347 2.2
188,613 Merck & Co., Inc. 22,279,387 21,867,320 2.0
365,458 Pfizer, Inc. 31,572,933 33,987,594 3.1
-------------- -------------- ------
79,895,162 81,825,600 7.5
Photography 13,000 Eastman Kodak Company 906,493 1,015,625 0.1
Pollution Control 15,950 ++Waste Management, Inc. 658,449 703,794 0.1
Publishing 165,450 Gannett Co., Inc. 11,654,521 9,761,550 0.9
Restaurant 100,000 McDonald's Corporation 6,091,574 5,606,250 0.5
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Retail--Specialty 75,000 ++Abercrombie & Fitch Co. (Class A) $ 3,623,250 $ 3,225,000 0.3%
526,771 CVS Corporation 18,929,150 19,161,295 1.7
226,261 Gap, Inc. (The) 10,766,312 11,553,452 1.0
924,747 Staples, Inc. 20,129,851 25,083,762 2.3
400,000 Walgreen Co. 13,741,491 15,400,000 1.4
-------------- -------------- ------
67,190,054 74,423,509 6.7
Retail Stores 280,860 ++Federated Department Stores, Inc. 14,162,552 12,234,964 1.1
766,950 Wal-Mart Stores, Inc. 35,745,039 45,058,313 4.1
-------------- -------------- ------
49,907,591 57,293,277 5.2
Semiconductors 388,256 ++Applied Materials, Inc. 13,859,530 9,536,538 0.9
Software--Computer 75,000 ++Baan Company N.V. (US Registered Shares) 3,198,679 2,137,500 0.2
397,080 Microsoft Corporation 35,910,886 38,094,862 3.5
551,500 ++PeopleSoft, Inc. 24,912,072 15,510,938 1.4
727,980 SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung)(ADR)(a) 17,910,883 30,484,163 2.8
-------------- -------------- ------
81,932,520 86,227,463 7.9
Telecommunications 388,256 AT&T Corp. 25,007,570 19,461,332 1.8
154,420 Cable & Wireless PLC (ADR)(a) 6,210,420 4,381,667 0.4
240,000 GTE Corporation 12,035,994 12,000,000 1.1
479,805 Sprint Corporation 31,676,974 32,176,923 2.9
380,535 ++WorldCom, Inc. 18,039,681 15,554,368 1.4
-------------- -------------- ------
92,970,639 83,574,290 7.6
Toys 303,325 Mattel, Inc. 11,546,515 9,820,147 0.9
Travel & Lodging 419,140 Carnival Corporation (Class A) 12,427,222 12,102,667 1.1
Total Stocks 1,047,858,389 989,926,348 90.3
Face
Amount Short-Term Securities
Commercial $10,000,000 Countrywide Home Loans Inc., 5.54%
Paper* due 9/24/1998 9,964,606 9,964,606 0.9
10,000,000 Delaware Funding Corp., 5.52% due
9/03/1998 9,996,933 9,996,933 0.9
36,682,000 General Motors Acceptance Corp.,
5.81% due 9/01/1998 36,682,000 36,682,000 3.3
10,000,000 International Securitization Corp.,
5.55% due 9/17/1998 9,975,333 9,975,333 0.9
10,000,000 Park Avenue Receivables Corp., 5.54%
due 9/03/1998 9,996,922 9,996,922 0.9
10,000,000 Variable Funding Capital Corp., 5.53%
due 9/02/1998 9,998,464 9,998,464 0.9
-------------- -------------- ------
86,614,258 86,614,258 7.8
US Government 25,000,000 Federal Home Loan Mortgage Corporation, 24,935,542 24,935,542 2.3
Agency Obligations* 5.46% due 9/18/1998
Total Short-Term Securities 111,549,800 111,549,800 10.1
Total Investments $1,159,408,189 1,101,476,148 100.4
==============
Liabilities in Excess of Other Assets (4,103,815) (0.4)
-------------- ------
Net Assets $1,097,372,333 100.0%
============== ======
<FN>
(a)American Depositary Receipt (ADR).
++Non-income producing security.
See Notes to Financial Statements.
*Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis; the interest rates shown reflect the
discount rates paid at the time of purchase by the Fund.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,159,408,189) (Note 1a) $1,101,476,148
Receivables:
Capital shares sold $ 8,414,256
Dividends 426,003
Securities sold 205,793 9,046,052
--------------
Prepaid registration fees and other assets (Note 1f) 105,373
--------------
Total assets 1,110,627,573
--------------
Liabilities: Payables:
Capital shares redeemed 7,889,023
Securities purchased 3,363,070
Distributor (Note 2) 763,673
Investment adviser (Note 2) 673,377 12,689,143
--------------
Accrued expenses and other liabilities 566,097
--------------
Total liabilities 13,255,240
--------------
Net Assets: Net assets $1,097,372,333
==============
Net Assets Class A Shares of capital stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 1,032,264
Class B Shares of capital stock, $0.10 par value, 100,000,000
shares authorized 4,170,506
Class C Shares of capital stock, $0.10 par value, 100,000,000
shares authorized 845,381
Class D Shares of capital stock, $0.10 par value, 100,000,000
shares authorized 983,405
Paid-in capital in excess of par 1,098,603,906
Undistributed realized capital gains on investments--net 49,668,912
Unrealized depreciation on investments--net (57,932,041)
--------------
Net assets $1,097,372,333
==============
Net Asset Value: Class A--Based on net assets of $167,132,452 and 10,322,643 shares
outstanding $ 16.19
==============
Class B--Based on net assets of $641,688,226 and 41,705,055 shares
outstanding $ 15.39
==============
Class C--Based on net assets of $130,652,405 and 8,453,814 shares
outstanding $ 15.45
==============
Class D--Based on net assets of $157,899,250 and 9,834,050 shares
outstanding $ 16.06
==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 1998
<S> <S> <C> <C>
Investment Income Dividends (net of $73,209 foreign withholding tax) $ 5,254,362
(Notes 1d & 1e): Interest and discount earned 3,846,805
--------------
Total income 9,101,167
--------------
Expenses: Investment advisory fees (Note 2) $ 4,761,601
Account maintenance and distribution fees--Class B (Note 2) 4,193,008
Account maintenance and distribution fees--Class C (Note 2) 1,069,996
Transfer agent fees--Class B (Note 2) 544,501
Registration fees (Note 1f) 379,896
Account maintenance fees--Class D (Note 2) 252,459
Transfer agent fees--Class C (Note 2) 141,901
Printing and shareholder reports 131,985
Transfer agent fees--Class A (Note 2) 116,674
Transfer agent fees--Class D (Note 2) 110,960
Accounting services (Note 2) 78,323
Professional fees 71,181
Custodian fees 43,183
Directors' fees and expenses 40,260
Amortization of organization expenses (Note 1f) 5,077
Other 16,291
--------------
Total expenses 11,957,296
--------------
Investment loss--net (2,856,129)
--------------
Realized & Unreal- Realized gain from investments--net 53,073,187
ized Gain (Loss) Change in unrealized appreciation on investments--net (107,454,701)
on Investments-- ---------------
Net (Notes 1b, 1c, Net Decrease in Net Assets Resulting from Operations $ (57,237,643)
1e & 3): ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment loss--net $ (2,856,129) $ (986,327)
Realized gain on investments--net 53,073,187 63,286,586
Change in unrealized appreciation on investments--net (107,454,701) 31,560,205
-------------- --------------
Net increase (decrease) in net assets resulting from
operations (57,237,643) 93,860,464
-------------- --------------
Distributions to Realized gain on investments--net:
Shareholders Class A (8,425,794) (4,708,644)
(Note 1g): Class B (34,969,855) (11,489,976)
Class C (10,532,443) (4,699,934)
Class D (8,909,959) (2,535,797)
-------------- --------------
Net decrease in net assets resulting from distributions
to shareholders (62,838,051) (23,434,351)
-------------- --------------
Capital Share Net increase in net assets derived from capital
Transactions share transactions 810,929,738 95,459,275
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 690,854,044 165,885,388
Beginning of year 406,518,289 240,632,901
-------------- --------------
End of year $1,097,372,333 $ 406,518,289
============== ==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A++++
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 1994++ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 17.37 $ 13.60 $ 11.66 $ 9.99
Operating -------- -------- -------- --------
Performance: Investment income--net .07 .07 .07 --+++++
Realized and unrealized gain on investments--net 1.09 4.95 2.13 1.98
-------- -------- -------- --------
Total from investment operations 1.16 5.02 2.20 1.98
-------- -------- -------- --------
Less distributions from realized gain on
investments--net (2.34) (1.25) (.26) (.31)
-------- -------- -------- --------
Net asset value, end of period $ 16.19 $ 17.37 $ 13.60 $ 11.66
======== ======== ======== ========
Total Investment Based on net asset value per share 6.37% 39.24% 19.02% 20.55%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses .87% .99% 1.12% 1.46%*
Net Assets: ======== ======== ======== ========
Investment income--net .37% .47% .51% .02%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $167,133 $ 62,049 $ 47,048 $ 21,288
Data: ======== ======== ======== ========
Portfolio turnover 40.27% 94.38% 82.10% 80.41%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
+++++Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class B++++
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 1994++ to
August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 16.69 $ 13.14 $ 11.40 $ 9.85
Operating -------- -------- -------- --------
Performance: Investment loss--net (.11) (.09) (.07) (.09)
Realized and unrealized gain on
investments--net 1.05 4.79 2.07 1.95
-------- -------- -------- --------
Total from investment operations .94 4.70 2.00 1.86
-------- -------- -------- --------
Less distributions from realized gain on
investments--net (2.24) (1.15) (.26) (.31)
-------- -------- -------- --------
Net asset value, end of period $ 15.39 $ 16.69 $ 13.14 $ 11.40
======== ======== ======== ========
Total Investment Based on net asset value per share 5.21% 37.95% 17.68% 19.60%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.88% 2.02% 2.16% 2.48%*
Net Assets: ======== ======== ======== ========
Investment loss--net (.64%) (.59%) (.54%) (.95%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $641,688 $216,636 $116,641 $ 63,748
Data: ======== ======== ======== ========
Portfolio turnover 40.27% 94.38% 82.10% 80.41%
======== ======== ======== ========
<FN>
*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.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived Class C++
from information provided in the financial statements.
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 16.72 $ 13.14 $ 11.40 $ 9.96 $ 9.86
Operating -------- -------- -------- -------- --------
Performance: Investment loss--net (.11) (.09) (.07) (.09) (.05)
Realized and unrealized gain on
investments--net 1.05 4.79 2.07 1.84 .15
-------- -------- -------- -------- --------
Total from investment operations .94 4.70 2.00 1.75 .10
-------- -------- -------- -------- --------
Less distributions from realized gain
on investments--net (2.21) (1.12) (.26) (.31) --
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.45 $ 16.72 $ 13.14 $ 11.40 $ 9.96
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 5.19% 37.90% 17.68% 18.28% 1.01%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 1.89% 2.02% 2.15% 2.44% 2.35%
Net Assets: ======== ======== ======== ======== ========
Investment loss--net (.63%) (.58%) (.57%) (.88%) (.52%)
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $130,652 $ 74,732 $ 54,052 $ 44,220 $ 47,263
Data: ======== ======== ======== ======== ========
Portfolio turnover 40.27% 94.38% 82.10% 80.41% 112.68%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
The following per share data and ratios have been derived Class D++
from information provided in the financial statements.
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 17.27 $ 13.54 $ 11.64 $ 10.09 $ 9.91
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net .02 .03 .03 (.01) .03
Realized and unrealized gain on
investments--net 1.09 4.93 2.13 1.87 .15
-------- -------- -------- -------- --------
Total from investment operations 1.11 4.96 2.16 1.86 .18
-------- -------- -------- -------- --------
Less distributions from realized gain
on investments--net (2.32) (1.23) (.26) (.31) --
-------- -------- -------- -------- --------
Net asset value, end of year $ 16.06 $ 17.27 $ 13.54 $ 11.64 $ 10.09
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.08% 38.90% 18.70% 19.15% 1.82%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 1.11% 1.24% 1.37% 1.65% 1.58%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net .12% .17% .24% (.10%) .31%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $157,899 $ 53,101 $ 22,892 $ 13,231 $ 8,623
Data: ======== ======== ======== ======== ========
Portfolio turnover 40.27% 94.38% 82.10% 80.41% 112.68%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
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
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. Options purchased 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 bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily 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.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(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.
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
NOTES TO FINANCIAL STATEMENTS (continued)
(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 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.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a period not exceeding five years. 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
$2,856,129 have been reclassified between undistributed net realized
capital gains and accumulated net investment loss. 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
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of
Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. 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.
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
Maintenance Distribution
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 August 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 $ 1,019 $ 13,768
Class D $ 43,898 $ 616,164
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
For the year ended August 31, 1998, MLPF&S received contingent
deferred sales charges of $618,910 and $22,172 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $55,594 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
August 31, 1998.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, FDS, PSI, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1998 were $950,842,517 and
$268,219,090, respectively.
Net realized gains (losses) for the year ended August 31, 1998 and
net unrealized losses as of August 31, 1998 were as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $ 53,078,239 $ (57,932,041)
Short-term investments (5,052) --
------------ -------------
Total $ 53,073,187 $ (57,932,041)
============ =============
As of August 31, 1998, net unrealized depreciation for Federal
income tax purposes aggregated $58,359,632, of which $61,272,500
related to appreciated securities and $119,632,132 related to
depreciated securities. At August 31, 1998, the aggregate cost of
investments for Federal income tax purposes was $1,159,835,780.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
were $810,929,738 and $95,459,275 for the years ended August 31,
1998 and August 31, 1997, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 10,150,522 $184,644,940
Shares issued to shareholders
in reinvestment of
distributions 492,245 8,166,345
------------ ------------
Total issued 10,642,767 192,811,285
Shares redeemed (3,891,720) (70,428,026)
------------ ------------
Net increase 6,751,047 $122,383,259
============ ============
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 5,300,860 $ 80,749,430
Shares issued to shareholders
in reinvestment of
distributions 318,999 4,411,762
------------ ------------
Total issued 5,619,859 85,161,192
Shares redeemed (5,508,434) (81,532,077)
------------ ------------
Net increase 111,425 $ 3,629,115
============ ============
Class B Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 33,050,643 $574,031,375
Shares issued to shareholders
in reinvestment of
distributions 2,042,041 32,448,035
------------ ------------
Total issued 35,092,684 606,479,410
Automatic conversion
of shares (100,555) (1,730,013)
Shares redeemed (6,270,855) (107,964,345)
------------ ------------
Net increase 28,721,274 $496,785,052
============ ============
Class B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 8,146,257 $124,318,206
Shares issued to shareholders
in reinvestment of
distributions 782,595 10,471,125
------------ ------------
Total issued 8,928,852 134,789,331
Automatic conversion
of shares (23,111) (352,449)
Shares redeemed (4,796,356) (69,880,135)
------------ ------------
Net increase 4,109,385 $ 64,556,747
============ ============
Class C Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 5,075,475 $ 88,126,487
Shares issued to shareholders
in reinvestment of
distributions 592,391 9,454,545
------------ ------------
Total issued 5,667,866 97,581,032
Shares redeemed (1,683,540) (28,971,978)
------------ ------------
Net increase 3,984,326 $ 68,609,054
============ ============
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 1,343,912 $20,658,965
Shares issued to shareholders
in reinvestment of
distributions 310,633 4,165,597
------------ ------------
Total issued 1,654,545 24,824,562
Shares redeemed (1,297,675) (19,022,602)
------------ ------------
Net increase 356,870 $ 5,801,960
============ ============
Class D Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 8,037,460 $146,003,016
Automatic conversion of shares 96,623 1,730,013
Shares issued to shareholders
in reinvestment of
distributions 485,816 8,011,110
------------ ------------
Total issued 8,619,899 155,744,139
Shares redeemed (1,860,036) (32,591,766)
------------ ------------
Net increase 6,759,863 $123,152,373
============ ============
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 2,051,457 $ 31,598,761
Automatic conversion of shares 22,419 352,449
Shares issued to shareholders in
reinvestment of distributions 164,753 2,268,645
------------ ------------
Total issued 2,238,629 34,219,855
Shares redeemed (855,358) (12,748,402)
------------ ------------
Net increase 1,383,271 $ 21,471,453
============ ============
5. Reorganization Plan:
On July 8, 1998, the Fund's Board of Directors approved a plan of
reorganization whereby the Fund would acquire substantially all of
the assets and liabilities of Merrill Lynch Fund For Tomorrow, Inc.
in exchange for newly issued shares of the Fund. The plan of
reorganization is subject to Merrill Lynch Fund For Tomorrow, Inc.
shareholder approval. Merrill Lynch Fund For Tomorrow, Inc. is a
registered, diversified, open-end management investment company.
Both entities have a similar investment objective and are managed by
MLAM.
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
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, 1998, and the related
statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then
ended and financial highlights for each of the years indicated
therein. 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
and financial highlights. Our procedures included confirmation of
securities owned as of August 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, 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. as
of August 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the
indicated periods in conformity with generally accepted accounting
principles.
(ERNST & YOUNG)
Princeton, New Jersey
October 5, 1998
</AUDIT-REPORT>
Merrill Lynch Fundamental Growth Fund, Inc.
August 31, 1998
IMPORTANT TAX INFORMATION (unaudited)
<TABLE>
The following information summarizes all per share distributions
paid by Merrill Lynch Fundamental Growth Fund, Inc. during its
taxable year ended August 31, 1998:
<CAPTION>
Record Payable Qualifying Federal Non-Qualifying Total Long-Term
Date Date Ordinary Income Obligation Interest Ordinary Income Ordinary Income Capital Gains
<S> <C> <C> <C> <C> <C> <C>
Class A Shares
12/05/97 12/15/97 $.119225 $.001906 $.980082 $1.101213 $1.242418*
Class B Shares
12/05/97 12/15/97 $.108092 $.001728 $.888563 $ .998383 $1.242418*
Class C Shares
12/05/97 12/15/97 $.104552 $.001672 $.859457 $ .965681 $1.242418*
Class D Shares
12/05/97 12/15/97 $.116681 $.001866 $.959164 $1.077711 $1.242418*
<FN>
*Of this long-term capital gain distribution, 37.06% is subject to
the 28% tax rate and 62.94% is subject to the 20% tax rate.
The qualifying ordinary income qualifies for the dividends received
deductions for corporations.
Please retain this information for your records.
</TABLE>
PORTFOLIO INFORMATION (unaudited)
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
Wal-Mart Stores, Inc. 4.1%
Microsoft Corporation 3.5
General Electric Company 3.2
Pfizer, Inc. 3.1
Cisco Systems, Inc. 3.0
Sprint Corporation 2.9
SAP AG (Systeme, Anwendungen, Produkte
in der Datenverarbeitung)(ADR) 2.8
COMPAQ Computer Corporation 2.8
Staples, Inc. 2.3
Procter & Gamble Company (The) 2.3
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Software--Computer 7.9%
Telecommunications 7.6
Pharmaceuticals 7.5
Retail--Specialty 6.7
Banking & Financial 6.0
Retail Stores 5.2
Computers 5.1
Communications Equipment 4.6
Household Products 4.5
Electronics 4.4
Equity Portfolio Changes for the
Quarter Ended August 31, 1998
Additions
Abercrombie & Fitch Co. (Class A)
America Online Inc.
Ascend Communications, Inc.
Cable & Wireless PLC (ADR)
GTE Corporation
NationsBank Corporation
Network Appliance, Inc.
Safeway Inc.
