-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KmsWo/MBTw8Gf7Wuir4reM6aq1xy26AqkYDdxXVW0K826j4XYIbGdpd7Hm+LpDpm RDf/CGIcgnapdq3hfby+MA== 0000900092-96-000120.txt : 19960523 0000900092-96-000120.hdr.sgml : 19960523 ACCESSION NUMBER: 0000900092-96-000120 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960522 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH CAPITAL FUND INC CENTRAL INDEX KEY: 0000110055 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 132757134 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-02405 FILM NUMBER: 96570790 BUSINESS ADDRESS: STREET 1: P O BOX 9066 CITY: PRINCETON STATE: NJ ZIP: 08543 BUSINESS PHONE: 6092823319 MAIL ADDRESS: STREET 1: P.O. BOX 9066 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 FORMER COMPANY: FORMER CONFORMED NAME: LIONEL D EDIE CAPITAL FUND INC DATE OF NAME CHANGE: 19760810 N-30D 1 ANNUAL REPORT MERRILL LYNCH CAPITAL FUND, INC. FUND LOGO Annual Report March 31, 1996 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 Capital Fund, Inc. Box 9011 Princeton, NJ 08543-9011 MERRILL LYNCH CAPITAL FUND, INC. PORTFOLIO SUMMARY Security Diversification As of March 31, 1996 A pie chart illustrating the following percentages: US Bonds 46.33% Non-US Bonds 2.85% US Stocks 35.50% Non-US Stocks 11.50% Cash & Cash Equivalents 3.82% Sector Representation As a Percentage of US Equities As of March 31, 1996 A pie chart illustrating the following percentages: Financial Services 26.07% Consumer Services 4.16% Utilities 6.14% Transportation 0.88% Capital Goods--Technology 7.44% Basic Industries 6.67% Diversified 3.29% Consumer Staples 12.22% Credit Cyclicals 0.22% Capital Goods 3.58% Energy 21.36% Consumer Cyclicals 7.97% Geographic Diversification Percent of As of March 31, 1996 Net Assets* United States 85.8% Argentina 4.8 United Kingdom 3.0 Switzerland 1.2 France 1.1 Netherlands 0.9 Canada 0.8 Spain 0.6 Brazil 0.4 Australia 0.3 Singapore 0.3 Thailand 0.2 Finland 0.2 Hong Kong 0.1 Ireland 0.1 Colombia 0.1 Peru 0.1 [FN] *Includes investments in short-term securities. US Common Stock Investments S&P As of March 31, 1996 Fund 500* Average Capitalization (in billions) $10.2 $ 9.6 Price/Book Value 2.2 4.1 Price/Earnings Ratio** 13.1 16.5 Yield Based on Current Dividend 2.8% 2.1% [FN] *An unmanaged broad-based index comprised of common stocks. **Based on 1996 earnings estimates. Fixed-Income Investments Merrill Lynch As of March 31, 1996 Fund DOAO Index* Duration 5.3 Years 5.1 Years Average Maturity 7.9 Years 12.7 Years Asset Breakdown: Corporates 48.2% 17.4% US Treasuries/Agencies 45.8% 55.1% Mortgage-Backed 2.3% 27.5% International Governments 3.7% -- [FN] *An unmanaged market-weighted corporate, Government and mortgage master bond index reflecting approximately 97% of total outstanding bonds. DEAR SHAREHOLDER A number of crosscurrents buffeted the US financial markets during the first quarter of 1996. Uncertain prospects for economic growth and, in turn, the outlook for inflation and interest rates resulted in divergent performance between the stock and bond markets and high levels of volatility within each market. Early in the year, the risk of an economic recession appeared quite high. Fourth quarter 1995 gross domestic product was reported to have grown at a sluggish 0.5%. Retail sales were weak as the increasingly debt-burdened consumer began to retrench and a number of prominent retail chains were forced into bankruptcy. Inventories of autos, housing and certain industrial commodities were historically high, while poor economic conditions among our major trading partners seemed likely to restrain export growth opportunities. The Federal Reserve Board, in reaction to these weak economic indicators and continued low levels of inflation, reduced short-term interest rates in January for the second time in six weeks. However, by March 31, 1996 quarter-end, an accumu- lating body of evidence suggested the economy was beginning to reaccelerate. Commodity prices, as measured by the Commodity Research Bureau Index, reached an eight-year high. Non-farm payroll employ- ment exploded in February, rising by some 705,000 jobs and reducing the unemployment rate to 5.5%. Retail sales trends improved, rising almost 5% in February. Finally, and in contrast to earlier expecta- tions, the Federal Reserve Board left short-term interest rates unchanged following its March meeting. We do not believe current conditions support a sustained increase in the rate of economic growth. Consumers, who represent two-thirds of overall eco- nomic activity, maintain debt and debt service burdens at or near historic highs and are unlikely to contribute significant incremental spending power to the economy. Indeed, recent evidence of rising delinquencies on credit card and other consumer installment debt suggest that consumers are already overextended and may begin to reduce spending in the period ahead. Corporate capital expenditures are projected to rise by a very modest 1.5% in 1996 after 1995's 8.1% rate of growth as industrial capacity expansion moderates and technology spending slows. The strengthening of the US dollar so far in 1996, combined with weak economic conditions in Europe and Japan, suggest limited export growth for US companies as well. Therefore, we do not anticipate an extended period of robust economic activity. Within this context, inflationary pressures are likely to remain well controlled. Portfolio Matters So far in 1996, the stock market has continued its extraordinary advance. The combination of strong corporate profit performance and unprecedented mutual fund cash inflows propelled the Standard & Poor's 500 Composite Index (S&P 500) to a +5.38% total return for the three months ended March 31, 1996. These results have extended the stock market's current record for the duration of an advance with- out a 10% correction to 65 months, by far the longest such bull market since 1960. The bond market, how- ever, retreated during the March quarter, with the unmanaged Merrill Lynch Domestic Bond Master Index recording a -1.76% total return. This weak- ness was prompted by perceptions of accelerating economic activity and concerns over the lack of progress in addressing the Federal budget deficit. Short-term investments returned +1.23% for the March quarter. While the stock market has risen over fivefold since 1982, it is worth noting that in the 14-year period from 1968 to 1982, the stock market was actually flat in price with all the return coming from dividend income. Indeed, in the post-war period from 1946 to 1995, the dividend yield has provided approximately 40% of the stock market's total return. Meanwhile, the S&P 500's current dividend yield of 2.13% is the lowest since 1955. We do not believe the current yield of the equity market provides adequate compen- sation for the risk of equity ownership and have further reduced Merrill Lynch Capital Fund, Inc.'s equity exposure. We continue to seek high-quality companies with strong competitive positions, sound financial characteristics and good managements whose stocks sell at reasonable prices. We are con- cerned about the likelihood of a continuation of the stock market's powerful advance in light of high historical valuation levels and uncertain corporate earnings prospects, however. Meanwhile, bond mar- ket yields are attractive relative to both the rate of inflation and stock dividend yields. We therefore maintain a balanced investment posture in Merrill Lynch Capital Fund, Inc., with 46.7% of the Fund's net assets in stocks, 48.9% in bonds and 4.4% in cash at March quarter-end. Within the Fund's equity component the average stock sells for 13.1 times estimated 1996 earnings per share compared to 16.5 times for the S&P 500. On average, the stocks in the Fund sell for 2.2 times current book value and provide a 2.8% dividend yield compared to the S&P 500, which sells for 4.1 times book value and yields 2.1%. We believe these attrac- tive valuation parameters for our equity holdings provide the prospect of upside potential while limit- ing downside risk. The Fund's fixed-income invest- ments provide, on average, a 6.8% yield to maturity and mature, on average, in 7.9 years. We believe the current asset allocation of the Fund is appropriate relative to our objective of seeking to enhance total investment return while limiting risk in the present economic and financial market environment. During the quarter ended March 31, 1996, the Fund initiated new investments in 22 stocks while eliminat- ing 12 stocks from the portfolio. In addition, the Fund increased its holdings in 67 companies while reduc- ing positions in an additional 81. Notable among the new holdings is Telecomunicacoes Brasileiras S.A.-- Telebras, the Brazilian national telephone company, which enjoys near-monopoly status in one of the developing world's least-penetrated telephone mar- kets. The extremely attractive valuation of the stock, combined with both an improving country outlook and company fundamentals such as double-digit unit volume growth, significant pricing power and substantial restructuring opportunities, make this a particularly timely investment opportunity. Kennametal, Inc. is another new addition to the Fund. This leading supplier of tools and tooling sys- tems for metal cutting and forming is reporting solid order trends supported by new business activities in the Pacific Rim, India and China. Revenues are projected to grow in excess of 10% in 1996 and, with opportunities for significant margin improvement, strong earnings per share growth is expected. The company generates consistently high returns on equity and is very well capitalized and attractively valued, in our opinion. The Fund increased its holdings in a number of stocks during the March quarter as stock prices weakened and/or new developments enhanced our conviction in the investment merits of a company. We continued to add to Glaxo Holdings PLC, the world's largest pharmaceutical company. Further stock price weak- ness afforded us the opportunity to add shares in this high-quality company at reasonable prices. Our invest- ment in Phillips Petroleum Company was increased based upon this company's above-average unit volume growth prospects, exciting exploration opportunities and attractive valuation. More First Colony Holding Corp. shares were also purchased. This well-run, well-capitalized life insurance and annuity company is attractively priced and is likely to readily with- stand rising competitive pressures in its business. The Fund sold its holding in Aetna Life & Casualty Co., the multi-line insurance company. We disagreed with the company's strategy of selling its property and casualty business at a low price in order to redeploy the proceeds to acquire a health main- tenance organization (HMO) company and expand its health insurance operations. While providing faster growth, publicly traded HMOs sell at high valu- ation levels, and we were concerned about Aetna management's ability to realize a compensatory return on this proposed investment. The Fund also eliminated its holding in British Steel PLC. Although statistically attractive, we were con- cerned that recent declines in European and Asian steel prices, coupled with the start-up of new steel- making capacity later this year, would depress the company's earnings. We did not believe the low valuation parameters of the stock would protect the value of our investment if this were to occur. Holdings of individual stocks may be reduced for a variety of reasons: price appreciation, deteriorating fundamental trends in the company's business, con- cerns over broader economic or interest rate trends and their effect on specific companies, and to provide assets to invest in more attractive opportunities. The Fund reduced its ownership of General Motors Corp. and Temple-Inland, Inc. based on concerns over the impact of a weakening economy on these companies' near-term fortunes. We continued to take profits in selected bank stocks, which have continued to per- form extremely well, such as Chemical Banking Corp. and NationsBank Corp. Business conditions are unlikely to improve much from current levels for these companies, and their valuations are no longer compelling. Warner-Lambert Co. was also reduced as further stock price appreciation, driven in part by takeover speculation, allowed us to continue to scale back this investment. We also sold some Wal-Mart Stores, Inc. shares during the March quarter after the company's disappointing fourth quarter earnings report compelled us to reassess the company's near- term growth prospects. Fiscal Year in Review Total returns of Merrill Lynch Capital Fund, Inc. for the 12 months ended March 31, 1996 were below the unmanaged S&P 500. While bonds performed reason- ably well over this period, their returns paled in comparison to equities so that the large concentration of bonds in the Fund served to dampen overall port- folio results. Within the equity component of the Fund, the large representation of financial companies positively contributed to performance as the bank, insurance and diversified financial sectors of the market performed well. The pharmaceutical group, of which the Fund had sizable holdings, was also a strong performer over the last year. The Fund was not exposed to many healthcare and consumer-related companies such as beverages, restaurants and tobacco, whose stocks outperformed the overall market average, since their stock valuations seemed to adequately reflect the fundamental attri- butes and growth prospects of these companies. The Fund was not a large investor in technology, a broad area of the market which performed well. The rapid pace of change and high risk of obsolescence for com- panies in this sector, combined with the often high valuations of their stocks, make this a difficult area in which to invest in the context of the Fund's con- servative investment philosophy. In Conclusion We appreciate your continued interest in Merrill Lynch Capital Fund, Inc. We continue to strive to provide our investors with attractive long-term, risk- adjusted investment returns, and we look forward to reviewing our progress with you in our next quarterly report to shareholders. Sincerely, (Arthur Zeikel) Arthur Zeikel President (Ernest S. Watts) Ernest S. Watts Vice President and Portfolio Manager May 1, 1996 Ernest S. Watts is on an indefinite leave of absence for personal family reasons from his responsibilities as Portfolio Manager of the Fund. The Fund's day-to-day management responsibilities will be assumed by Kurt Schansinger and Walter Cuje, Associate Portfolio Managers. Mr. Schansinger has been Associate Portfolio Manager of the Fund and Vice President of Merrill Lynch Asset Management, L.P. ("MLAM") since January 1995. From 1983 to 1995, he was Portfolio Manager at Oppenheimer Capital. Mr. Cuje has been Associate Portfolio Manager of the Fund since October 1993 and Vice President of MLAM since July 1991. From 1987 to 1993, he was Portfolio Manager in MLAM's Insurance Portfolio Group. 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 dis- tribution or account maintenance fees. Class A Shares are available only to eligible investors. * Class B Shares are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first year, decreasing 1% each year thereafter to 0% after the fourth year. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class D Shares after approximately 8 years. * 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. 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. Recent Performance Results
12 Month 3 Month 3/31/96 12/31/95 3/31/95 % Change % Change ML Capital Fund, Inc. Class A Shares* $30.90 $30.55 $27.74 +16.71%(1) +1.15% ML Capital Fund, Inc. Class B Shares* 30.30 30.04 27.28 +16.46(1) +0.87 ML Capital Fund, Inc. Class C Shares* 30.08 29.81 27.17 +16.12(1) +0.91 ML Capital Fund, Inc. Class D Shares* 30.86 30.53 27.72 +16.65(1) +1.08 Dow Jones Industrial Average** 5,587.14 5,117.12 4,157.69 +34.38 +9.19 Standard & Poor's 500 Index** 645.50 615.93 500.71 +28.92 +4.80 ML Capital Fund, Inc. Class A Shares--Total Return* +24.50(2) +1.15 ML Capital Fund, Inc. Class B Shares--Total Return* +23.22(3) +0.87 ML Capital Fund, Inc. Class C Shares--Total Return* +23.25(4) +0.91 ML Capital Fund, Inc. Class D Shares--Total Return* +24.21(5) +1.08 Dow Jones Industrial Average--Total Return** +37.68 +9.79 Standard & Poor's 500 Index--Total Return** +32.09 +5.38 *Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included. **An unmanaged broad-based index comprised of common stocks. Total investment returns for unmanaged indexes are based on estimates. (1)Percent change includes reinvestment of $1.419 per share capital gains distributions. (2)Percent change includes reinvestment of $2.036 per share ordinary income dividends and $1.419 per share capital gains distributions. (3)Percent change includes reinvestment of $1.748 per share ordinary income dividends and $1.419 per share capital gains distributions. (4)Percent change includes reinvestment of $1.832 per share ordinary income dividends and $1.419 per share capital gains distributions. (5)Percent change includes reinvestment of $1.978 per share ordinary income dividends and $1.419 per share capital gains distributions.
PERFORMANCE DATA (continued) Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Shares compared to an investment in the Standard & Poor's 500. Beginning and ending values are: 3/86 3/96 ML Capital Fund, Inc.++-- Class A Shares* $ 9,475 $30,087 S&P 500 Index++++ $10,000 $36,926 10/21/88** 3/96 ML Capital Fund, Inc.++-- Class B Shares* $10,000 $23,370 S&P 500 Index++++ $10,000 $28,524 10/21/94** 3/96 ML Capital Fund, Inc.++-- Class C Shares* $10,000 $13,073 ML Capital Fund, Inc.++-- Class D Shares* $ 9,475 $12,525 S&P 500 Index++++ $10,000 $14,398 [FN] *Assuming maximum sales charge, transaction costs and other operating expenses including advisory fees. **Commencement of Operations. ++Merrill Lynch Capital Fund, Inc. through a fully managed investment policy utilizes equity, debt and convertible securities. ++++This unmanaged broad-based Index is comprised of common stocks. Past performance is not precidtive of future performance. Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** Class A Shares* Year Ended 3/31/96 +24.50% +17.97% Five Years Ended 3/31/96 +12.86 +11.65 Ten Years Ended 3/31/96 +12.25 +11.64 [FN] *Maximum sales charge is 5.25%. **Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** Class B Shares* Year Ended 3/31/96 +23.22% +19.22% Five Years Ended 3/31/96 +11.71 +11.71 Inception (10/21/88) through 3/31/96 +12.07 +12.07 [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 3/31/96 +23.25% +22.25% Inception (10/21/94) through 3/31/96 +20.39 +20.39 [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 3/31/96 +24.21% +17.69% Inception (10/21/94) through 3/31/96 +21.32 +16.88 [FN] *Maximum sales charge is 5.25%. **Assuming maximum sales charge. PERFORMANCE DATA (concluded) Results of a $1,000 Investment Since Inception--Class A Shares (5.25% sales charge--$947.50 net amount invested; assuming reinvestment of all dividends and capital gains distributions) A mountain chart depicting the growth of an investment in the Fund's Class A Shares from $947.50 on November 8, 1973 to $14,788.30 on March 31, 1996. PORTFOLIO INFORMATION As of March 31, 1996 Ten Largest Common Percent of Stock Holdings Net Assets YPF S.A. (Sponsored) (ADR) 2.5% Williams Companies, Inc. 2.1 The Goodyear Tire & Rubber Co. 1.6 Pfizer, Inc. 1.5 United Technologies Corp. 1.2 Nestle S.A. 1.2 Columbia/HCA Healthcare Corp. 1.2 TOTAL S.A. (ADR) 1.2 Phillips Petroleum Company 1.1 Travelers Inc. 1.1 Ten Largest Percent of Industries Net Assets* Banking 7.8% Oil--Integrated 7.5 Insurance 6.9 Finance 5.8 Natural Gas Suppliers 4.2 Diversified Companies 3.5 Pharmaceuticals 3.5 Utilities--Electric, Gas & Water 3.0 Financial Services 2.7 Telecommunications 2.1 [FN] *Based on total holdings in common stocks and bonds. SCHEDULE OF INVESTMENTS
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Aerospace 178,000 Goodrich (B.F.) Co. $ 9,078,923 $ 14,151,000 0.2% 514,000 Lockheed Martin Corp. (a) 31,379,559 38,999,750 0.4 1,010,000 Rockwell International Corporation 35,951,594 59,463,750 0.7 -------------- -------------- ------ 76,410,076 112,614,500 1.3 Airlines 455,000 KLM Royal Dutch Airlines N.V. 15,454,833 15,847,417 0.2 408,000 KLM Royal Dutch Airlines N.V. (NY Shares) (ADR)* 12,936,844 14,178,000 0.1 -------------- -------------- ------ 28,391,677 30,025,417 0.3 Automobile 944,000 Echlin Inc. 28,954,480 34,220,000 0.4 Equipment Automotive 1,000,000 General Motors Corp. 47,198,920 53,250,000 0.6 Banking 237,000 Banco Bilboa Vizcaya (ADR)* 5,835,430 8,798,625 0.1 1,593,000 Bancorp Hawaii, Inc. 46,046,216 55,954,125 0.6 600,000 Bangkok Bank Company Ltd. 5,935,084 8,085,612 0.1 360,000 BankAmerica Corp. 20,136,956 27,900,000 0.3 360,000 Chemical Banking Corp. 12,987,657 25,380,000 0.3 950,000 NationsBank Corp. 45,495,094 76,118,750 0.8 2,740,000 SouthTrust Corp. 47,579,304 75,692,500 0.8 1,220,000 Union Planters Corp. 17,085,667 36,905,000 0.4 -------------- -------------- ------ 201,101,408 314,834,612 3.4 Beverages 1,600,000 Cadbury Schweppes PLC 11,499,142 12,210,400 0.1 Building Materials 241,000 Medusa Corp. 6,023,782 7,380,625 0.1 Capital Goods 442,000 GATX Corp. 17,933,469 20,332,000 0.2 458,000 Giddings & Lewis, Inc. 7,717,565 8,702,000 0.1 284,000 Kennametal, Inc. 8,803,338 10,259,500 0.1 235,000 United Dominion Industries, Ltd. 5,650,699 5,698,750 0.1 -------------- -------------- ------ 40,105,071 44,992,250 0.5 Chemicals 197,000 Dexter Corporation 4,882,022 5,220,500 0.1 400,000 du Pont (E.I.) de Nemours & Co. 24,194,771 33,200,000 0.3 792,000 Engelhard Corp. 13,001,621 18,513,000 0.2 1,240,000 Imperial Chemical Industries PLC (ADR)* 60,045,532 70,680,000 0.8 -------------- -------------- ------ 102,123,946 127,613,500 1.4 Computer Software 1,025,000 ++Creative Technology, Ltd. 12,833,743 6,150,000 0.1 Diversified 3,500,000 Hanson PLC (Sponsored) (ADR)* 56,409,536 52,500,000 0.6 Companies 10,599,000 Hillsdown Holdings PLC 25,028,158 29,927,919 0.3 743,000 Tenneco, Inc. 30,564,622 41,515,125 0.5 3,900,000 Tomkins PLC 16,271,315 15,060,002 0.1 1,000,000 United Technologies Corp. 59,058,703 112,250,000 1.2 1,240,000 ++Worldtex Inc. (c) 5,964,546 6,045,000 0.1 -------------- -------------- ------ 193,296,880 257,298,046 2.8 Drug Stores 770,000 Rite Aid Corp. 22,045,542 23,773,750 0.3
SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Electrical 266,000 Cooper Industries, Inc. $ 9,655,449 $ 10,374,000 0.1% Equipment 820,000 General Electric Co. 41,535,004 63,857,500 0.7 868,000 Philips Electronics N.V. (ADR)* 21,479,447 31,573,500 0.4 -------------- -------------- ------ 72,669,900 105,805,000 1.2 Financial Services 1,460,000 Federal National Mortgage Association 35,463,490 46,537,500 0.5 4,770,000 Ruam Pattana II Fund (Foreign) 2,849,866 3,072,235 0.0 9,730,000 ++Ruam Pattana II Fund (Local) 6,628,068 6,266,845 0.1 -------------- -------------- ------ 44,941,424 55,876,580 0.6 Food Distribution 13,870,000 Dairy Farm International Holdings Ltd. (Ordinary) 15,534,045 13,107,150 0.1 Foods/Food 1,361,600 Archer-Daniels-Midland Co. 23,758,364 25,019,400 0.3 Processing 14,600 Cultor OY 573,921 662,518 0.0 321,000 Dean Foods Co. 8,659,673 8,025,000 0.1 99,000 Nestle S.A. 103,564,527 111,767,477 1.2 200,000 Thai Theparos Food Product Public Company Limited (Foreign) 880,000 871,978 0.0 359,400 Thai Theparos Food Product Public Company Limited (Local) 1,589,259 1,566,944 0.0 -------------- -------------- ------ 139,025,744 147,913,317 1.6 Footware 28,618,000 Yue Yuen Industrial (Holdings Limited) 7,454,895 6,956,535 0.1 Forest Products 612,000 Weyerhaeuser Co. 27,846,461 28,228,500 0.3 Home Builders 260,000 ++Oriole Homes Corp. (c) 2,394,771 1,950,000 0.0 Hospital 1,900,000 Columbia/HCA Healthcare Corp. 90,574,852 109,725,000 1.2 Management 2,810,000 ++Tenet Healthcare Corp. (b) 36,022,061 59,010,000 0.7 -------------- -------------- ------ 126,596,913 168,735,000 1.9 Household Products 170,000 Armor All Products Corp. 3,045,566 2,677,500 0.0 Insurance 1,800,000 Allstate Corporation 49,201,588 75,825,000 0.8 416,000 American General Corporation 14,956,200 14,352,000 0.2 773,000 American International Group, Inc. 50,408,890 72,372,125 0.8 176,000 American National Insurance Co. 10,182,521 11,880,000 0.1 36,700 Ayudhya Insurance Company, Ltd. (Foreign) 241,496 232,739 0.0 61,200 Ayudhya Insurance Company, Ltd. (Local) 403,981 388,109 0.0 1,080,000 EXEL Ltd. (ADR)* 45,501,718 74,520,000 0.8 600,000 First Colony Holding Corp. 14,962,987 14,325,000 0.2 2,158,000 Fremont General Corp. (c) 29,940,486 50,982,750 0.6 457,000 Horace Mann Educators Corp. 11,386,151 13,938,500 0.1 123,000 Integon Corp. 2,126,783 2,506,125 0.0 2,154,000 Lowndes Lambert Group Holdings PLC 5,366,108 4,799,969 0.1 200,000 Penncorp Financial Group, Inc. 6,372,501 6,300,000 0.1 290,000 Provident Life & Accident Insurance Co. 7,317,251 8,808,750 0.1 1,605,000 Safeco Corp. 42,977,252 53,767,500 0.6 1,170,000 Sphere Drake Holdings Ltd. 15,809,901 11,846,250 0.1 361,000 St. Paul Companies, Inc. 18,451,602 20,035,500 0.2 465,000 TIG Holdings, Inc. 10,689,988 15,112,500 0.2 1,450,000 Travelers Inc. 32,039,038 95,700,000 1.1 275,000 USLIFE Corporation 7,161,900 8,078,125 0.1 -------------- -------------- ------ 375,498,342 555,770,942 6.2
SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Iron & Steel 492,000 Birmingham Steel Corp. $ 10,326,934 $ 7,257,000 0.1% 854,000 Cleveland-Cliffs, Inc. (c) 28,920,123 37,789,500 0.4 -------------- -------------- ------ 39,247,057 45,046,500 0.5 Leisure/Hotels 1,092,000 Carnival Corp. (Class A) 25,400,446 30,030,000 0.3 3,400,000 Mandarin Oriental International Ltd. 3,324,644 4,284,000 0.1 -------------- -------------- ------ 28,725,090 34,314,000 0.4 Manufactured 277,000 Fleetwood Enterprises, Inc. 6,068,949 6,855,750 0.1 Housing Medical Services 442,000 Bumrungrad Hospital Public Company, Ltd. (Foreign) 556,290 499,287 0.0 232,300 Bumrungrad Hospital Public Company, Ltd. (Local) 289,002 262,408 0.0 -------------- -------------- ------ 845,292 761,695 0.0 Metals & Basic 215,000 Cameco Corp. 4,880,067 11,361,468 0.1 Materials 571,000 Minsura Sociedad Limitada S.A. (T Shares) 4,121,560 4,566,057 0.1 -------------- -------------- ------ 9,001,627 15,927,525 0.2 Natural Gas 1,400,000 Coastal Corp. 39,876,060 55,300,000 0.6 Suppliers 320,000 El Paso Natural Gas Co. 8,804,854 11,840,000 0.1 659,000 MetroGas S.A. (ADR)* 7,847,336 6,260,500 0.1 3,684,000 TransCanada Pipelines, Ltd. (ADR)* 54,273,082 51,115,500 0.6 3,760,000 Williams Companies, Inc. 101,147,048 189,410,000 2.1 -------------- -------------- ------ 211,948,380 313,926,000 3.5 Oil & Gas 40,000 ++BELCO Oil & Gas Corporation 882,400 910,000 0.0 Exploration Oil--Integrated 167,000 Mobil Corporation 18,409,272 19,351,125 0.2 2,558,000 Phillips Petroleum Company 88,340,747 101,041,000 1.1 37,000 Repsol, S.A. (ADR)* 1,287,719 1,382,875 0.0 1,240,000 Repsol, S.A. (Ordinary) 37,646,000 46,784,908 0.5 448,000 Texaco Inc. 29,612,871 38,528,000 0.4 3,000,000 TOTAL S.A. (ADR)* 86,214,090 102,000,000 1.2 11,313,000 YPF S.A. (Sponsored) (ADR)* 234,428,432 227,674,125 2.5 -------------- -------------- ------ 495,939,131 536,762,033 5.9 Oil--Refining & 290,000 Ultramar Corp. 7,506,452 8,373,750 0.1 Marketing Oil Service 1,265,000 Dresser Industries, Inc. 28,464,979 38,582,500 0.4 Paper 200,000 ++Jefferson Smurfit Group PLC (ADR)* 6,207,462 5,325,000 0.1 790,000 Temple-Inland, Inc. 36,163,014 37,031,250 0.4 -------------- -------------- ------ 42,370,476 42,356,250 0.5 Pharmaceuticals 503,000 Block Drug, Inc. (Class A) 15,230,004 20,371,500 0.2 3,480,000 Glaxo Holdings PLC (ADR)* 90,665,465 87,435,000 1.0 650,000 Mallinckrodt Group Inc. 20,266,093 24,456,250 0.3 393,000 Merck & Co., Inc. 18,821,304 24,464,250 0.3 2,110,000 Pfizer, Inc. 98,215,361 141,370,000 1.5 200,000 Warner-Lambert Co. 16,152,383 20,650,000 0.2 -------------- -------------- ------ 259,350,610 318,747,000 3.5
SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Photography 290,000 Eastman Kodak Co. $ 16,924,155 $ 20,590,000 0.2% Plastic Recycling 946,000 Wellman Inc. 20,386,872 22,231,000 0.3 Railroads 420,000 Canadian National Railway Co. 6,732,746 7,245,000 0.1 Real Estate 195,000 National Health Investors, Inc. 6,202,950 6,337,500 0.1 Investment Trusts 1,754,000 RFS Hotel Investors, Inc. (c) 26,471,049 29,598,750 0.3 406,000 South West Properties Trust 5,524,272 5,430,250 0.1 1,270,000 Walden Residential Properties, Inc. (c) 23,297,776 27,781,250 0.3 -------------- -------------- ------ 61,496,047 69,147,750 0.8 Retail Trade 1,904,000 Wal-Mart Stores, Inc. 45,929,299 44,030,000 0.5 Savings & Loan 475,000 Ahmanson (H.F.) & Co. 11,043,343 11,518,750 0.1 Associations Services 1,670,000 PHH Corp. (c) 62,537,753 92,893,750 1.0 265,000 Rollins, Inc. 6,535,562 6,194,375 0.1 -------------- -------------- ------ 69,073,315 99,088,125 1.1 Telecommuni- 130,000 Frontier Corporation 3,759,365 4,095,000 0.0 cations 1,818,000 GTE Corp. 58,038,914 79,764,750 0.9 410,000 ++Nokia Corp. (ADR)* (c) 14,103,994 14,042,500 0.2 970,000 ++Telecomunicacoes Brasileiras S.A.-- Telebras (ADR)* 53,263,047 48,257,500 0.5 -------------- -------------- ------ 129,165,320 146,159,750 1.6 Tires & Rubber 2,900,000 The Goodyear Tire & Rubber Co. 114,315,790 147,900,000 1.6 Utilities--Electric, 101,000 Aquarion Co. 2,306,022 2,575,500 0.0 Gas & Water 115,000 Central Hudson Gas & Electric Corp. 3,045,568 3,478,750 0.1 136,000 Energen Corp. 3,115,698 2,975,000 0.0 640,000 Entergy Corp. 15,520,093 17,920,000 0.2 1,050,000 Illinova Corp. 22,555,391 29,531,250 0.3 156,000 Montana Power Co. 3,575,431 3,373,500 0.1 118,000 Northwest Natural Gas Co. 3,862,348 3,746,500 0.1 23,000 NUI Corporation 419,780 428,375 0.0 1,900,000 Pinnacle West Capital Corp. 37,516,110 54,862,500 0.6 160,000 Public Service Company of North Carolina 2,555,808 2,560,000 0.0 288,000 Texas Utilities Co. 11,556,428 11,916,000 0.1 1,400,000 Unicom Corp. 32,447,717 37,800,000 0.4 170,000 United Water Resources, Inc. 2,203,889 2,231,250 0.0 240,000 Washington Water Power Co. 4,030,780 4,590,000 0.1 -------------- -------------- ------ 144,711,063 177,988,625 2.0 Total Common Stocks 3,335,121,121 4,219,845,627 46.7 Face Amount Corporate Bonds Automobile Parts $ 20,000,000 Eaton Corp., 6.50% due 6/01/2025 19,929,200 19,545,000 0.2 Automotive Hertz Corp.: 15,000,000 6.70% due 6/15/2002 14,982,500 14,916,900 0.2 13,000,000 6% due 1/15/2003 12,891,670 12,371,840 0.1 -------------- -------------- ------ 27,874,170 27,288,740 0.3
SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Banking $ 20,000,000 Banco Rio de la Plata, 8.75% due 12/15/2003 $ 20,060,800 $ 17,200,000 0.2% 25,000,000 Bank of Boston Corp., 6.625% due 12/01/2005 23,519,000 24,203,250 0.3 BankAmerica Corp.: 15,000,000 6.875% due 6/01/2003 14,149,050 14,988,300 0.2 30,000,000 6.75% due 9/15/2005 29,591,750 29,579,100 0.3 10,000,000 Bankers Trust Company, 7.50% due 1/15/2002 9,688,700 10,181,500 0.1 30,000,000 The Chase Manhattan Corp., 6.50% due 8/01/2005 29,105,700 28,953,000 0.3 11,400,000 Chemical Bank, 7% due 6/01/2005 11,191,266 11,370,702 0.1 15,000,000 First Chicago Corp., 6.875% due 6/15/2003 13,963,300 14,939,250 0.2 6,000,000 First Hawaiian, Inc., 6.25% due 8/15/2000 5,841,600 5,895,240 0.1 First Security Corp.: 5,000,000 5.71% due 2/09/1999 5,000,000 4,908,000 0.1 10,000,000 7% due 7/15/2005 9,978,700 9,910,710 0.1 30,000,000 First Union Corp., 6.55% due 10/15/2035 29,953,350 29,326,800 0.3 Great Western Financial Corp.: 13,000,000 6.125% due 6/15/1998 12,244,010 12,985,960 0.1 10,000,000 6.375% due 7/01/2000 9,998,800 9,896,400 0.1 NationsBank Corp.: 10,500,000 5.70% due 9/11/2000 9,545,865 10,163,160 0.1 40,000,000 5.60% due 2/07/2001 40,000,000 38,395,600 0.4 10,000,000 6.20% due 8/15/2003 9,670,360 9,623,100 0.1 25,000,000 6.50% due 8/15/2003 22,104,200 24,336,250 0.3 25,000,000 PNC Funding Corp., 6.125% due 9/01/2003 24,451,000 23,757,000 0.3 Provident Bank: 10,000,000 6.125% due 12/15/2000 10,071,000 9,755,200 0.1 15,000,000 6.375% due 1/15/2004 14,709,250 14,326,650 0.2 20,000,000 Union Planters Corp., 6.25% due 11/01/2003 18,756,100 19,055,600 0.2 20,000,000 Wachovia Corp., 6.605% due 10/01/2025 20,012,500 19,601,600 0.2 -------------- -------------- ------ 393,606,301 393,352,372 4.4 Broadcasting & 30,000,000 News America Holdings, Inc., 7.50% due Publishing 3/01/2000 29,179,330 30,810,600 0.3 Capital Goods 5,000,000 Giddings & Lewis, Inc., 7.50% due 10/01/2005 5,000,000 4,971,800 0.1 Chemicals 16,000,000 Lyondell Petrochemical Company, 6.50% due 2/15/2006 15,228,970 15,234,240 0.2 25,000,000 Union Carbide Corp., 6.79% due 6/01/2025 25,000,000 24,566,000 0.3 -------------- -------------- ------ 40,228,970 39,800,240 0.5 Diversified Grace (W.R.) & Co.: Companies 10,000,000 6.85% due 6/23/1997 9,903,700 10,107,800 0.1 20,000,000 7.40% due 2/01/2000 19,663,100 20,363,400 0.2 Tenneco, Inc.: 15,000,000 7.875% due 10/01/2002 14,619,180 15,683,700 0.2 20,000,000 6.50% due 12/15/2005 19,991,900 19,053,400 0.2 -------------- -------------- ------ 64,177,880 65,208,300 0.7 Electronics 16,000,000 Litton Industries, Inc., 6.98% due 3/15/2006 16,000,000 15,987,808 0.2 Philips Electronics N.V.: 10,000,000 6.75% due 8/15/2003 9,866,300 9,866,300 0.1 10,000,000 7.125% due 5/15/2025 9,972,650 10,107,900 0.1 -------------- -------------- ------ 35,838,950 35,962,008 0.4
SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Finance $ 5,000,000 Caterpillar Financial Services Corp., 5.35% due 11/10/1998 $ 4,924,800 $ 4,896,050 0.1% Chrysler Finance Corp.: 13,000,000 6.50% due 6/15/1998 12,752,820 13,054,990 0.2 12,000,000 5.375% due 10/15/1998 11,439,770 11,752,200 0.1 10,000,000 5.70% due 1/19/1999 10,011,600 9,840,300 0.1 30,000,000 6.20% due 12/06/2000 30,000,000 29,489,400 0.3 Ford Motor Credit Co.: 10,000,000 5.625% due 12/15/1998 9,703,400 9,835,800 0.1 30,000,000 5.75% due 1/25/2001 29,937,200 28,939,800 0.3 40,000,000 ++++GTE Finance Corp., 5.81% due 12/15/1997 40,000,000 39,592,000 0.5 8,000,000 General Electric Capital Corp., 5.13% due 4/01/2004 8,000,000 8,550,936 0.1 General Motors Acceptance Corp.: 25,000,000 5.875% due 1/12/1999 25,044,500 24,728,250 0.3 48,500,000 5.625% due 2/01/1999 47,273,190 47,629,910 0.5 50,000,000 5.625% due 2/15/2001 49,623,200 47,935,000 0.5 30,000,000 6.75% due 6/10/2002 29,520,300 29,826,600 0.3 10,000,000 Greyhound Financial Corp., 6.75% due 3/25/1999 9,694,200 10,014,600 0.1 Household Finance Corp.: 15,000,000 7.125% due 4/30/1999 14,356,800 15,259,350 0.2 10,000,000 7.45% due 4/01/2000 9,958,700 10,296,400 0.1 10,300,000 6.50% due 7/15/2003 10,202,253 10,011,497 0.1 International Lease Finance Corp.: 10,000,000 5.98% due 11/16/1998 9,990,200 9,919,900 0.1 22,500,000 6.05% due 4/30/1999 22,368,375 22,269,375 0.3 20,000,000 5.62% due 2/01/2000 19,876,200 19,368,200 0.2 10,000,000 Margaretten Financial Corp., 6.75% due 6/15/2000 9,621,060 10,037,700 0.1 Sears, Roebuck Acceptance Corp.: 20,000,000 6.50% due 6/15/2000 20,025,000 19,910,200 0.2 25,000,000 5.71% due 2/06/2001 25,000,000 24,017,500 0.3 50,000,000 5.63% due 2/07/2001 49,996,500 48,038,000 0.5 15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 14,520,000 0.2 -------------- -------------- ------ 524,315,868 519,733,958 5.8 Financial Leasing GATX Corp.: 12,000,000 6.27% due 12/05/2001 11,823,270 11,700,840 0.1 25,000,000 6.69% due 11/30/2005 24,984,750 24,304,250 0.3 XTRA Corp.: 20,000,000 6.79% due 8/01/2001 19,945,800 20,072,400 0.2 20,000,000 6.68% due 11/30/2001 20,000,000 19,918,000 0.2 -------------- -------------- ------ 76,753,820 75,995,490 0.8 Financial Services 10,000,000 American Express Credit Corp., 6.125% due 11/15/2001 9,963,300 9,807,700 0.1 Finova Capital Corp.: 25,000,000 6.45% due 6/01/2000 24,766,550 24,888,750 0.3 15,000,000 5.98% due 2/27/2001 14,968,950 14,590,800 0.2 10,000,000 6.56% due 11/15/2002 10,000,000 9,756,300 0.1 McDonnell Douglas Finance Corp.: 5,000,000 5.48% due 2/08/1999 4,997,600 4,854,250 0.1 10,000,000 6.375% due 7/15/1999 9,864,100 9,935,400 0.1 10,000,000 6.77% due 9/11/2002 9,983,500 10,035,400 0.1 20,000,000 6.965% due 9/12/2005 20,049,200 19,773,400 0.2 Morgan Stanley Group, Inc.: 15,000,000 5.625% due 3/01/1999 14,969,100 14,702,025 0.2 35,000,000 5.75% due 2/15/2001 34,968,150 33,716,550 0.4
SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Financial Services Smith Barney Shearson Holdings, Inc.: (concluded) $ 10,000,000 6% due 3/15/1997 $ 9,902,000 $ 10,010,100 0.1% 20,000,000 5.875% due 2/01/2001 19,936,800 19,359,000 0.2 -------------- -------------- ------ 184,369,250 181,429,675 2.1 Food & Tobacco Nabisco Inc.: 21,000,000 6.70% due 6/15/2002 20,830,000 20,686,260 0.2 20,000,000 6.85% due 6/15/2005 20,000,000 19,419,200 0.2 40,830,000 40,105,460 0.4 Foreign 20,000,000 ++++Province of Buenos Aires, 11.50% due 10/19/1998 20,000,000 20,340,000 0.2 Government Republic of Argentina: Obligations 45,000,000 9.25% due 2/23/2001 44,801,400 41,287,500 0.5 55,000,000 8.375% due 12/20/2003 40,435,000 46,200,000 0.5 74,250,000 6.812% due 3/31/2005 49,722,750 53,367,188 0.6 4,500,000 Republic of Colombia, 7.25% due 2/23/2004 4,145,000 4,140,000 0.1 -------------- -------------- ------ 159,104,150 165,334,688 1.9 Forest Products 20,000,000 Champion International Corp., 6.40% due 2/15/2026 19,863,440 18,894,860 0.2 Hospital Columbia/HCA Healthcare Corp.: 20,000,000 6.125% due 12/15/2000 18,456,800 19,558,800 0.2 20,000,000 6.91% due 6/15/2005 19,919,400 19,934,800 0.2 17,500,000 6.63% due 7/15/2045 17,149,625 17,064,425 0.2 5,000,000 Tenet Healthcare Corp., 9.625% due 9/01/2002 5,000,000 5,362,500 0.1 -------------- -------------- ------ 60,525,825 61,920,525 0.7 Industrial 9,775,000 Crane Co., 7.25% due 6/15/1999 9,619,840 9,888,879 0.1 50,000,000 Williams Holdings of Delaware, Inc., 6.25% due 2/01/2006 49,739,500 47,143,500 0.5 -------------- -------------- ------ 59,359,340 57,032,379 0.6 Insurance 15,125,000 Integon Corp., 8% due 8/15/1999 15,225,519 15,230,724 0.2 10,000,000 NAC Re Corp., 8% due 6/15/1999 10,189,300 10,309,500 0.1 Travelers Inc.: 20,000,000 6.125% due 6/15/2000 18,772,550 19,499,600 0.2 20,000,000 6.875% due 6/01/2025 20,037,200 20,143,800 0.2 -------------- -------------- ------ 64,224,569 65,183,624 0.7 Machinery 15,000,000 Black & Decker Corp., 6.625% due 11/15/2000 14,248,100 14,950,650 0.2 20,000,000 FMC Corp., 6.375% due 9/01/2003 18,940,800 19,080,800 0.2 Harris Corp.: 22,500,000 6.375% due 8/15/2002 22,461,850 21,891,600 0.2 10,000,000 10.375% due 12/01/2018 10,541,400 11,030,900 0.1 10,000,000 TRINOVA Corp., 7.95% due 5/01/1997 9,975,000 10,166,600 0.1 -------------- -------------- ------ 76,167,150 77,120,550 0.8 Manufactured 3,000,000 Oakwood Homes Corp., 9.125% due 6/01/2007 3,000,000 3,015,000 0.0 Housing Natural Gas Coastal Corp.: Suppliers 13,000,000 8.75% due 5/15/1999 13,055,960 13,702,000 0.2 30,000,000 8.125% due 9/15/2002 29,984,410 31,678,800 0.3 15,000,000 ENSERCH Corporation, 7.125% due 6/15/2005 15,095,150 15,006,300 0.2 -------------- -------------- ------ 58,135,520 60,387,100 0.7
SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Oil--Integrated Occidental Petroleum Corp.: $ 12,000,000 5.85% due 11/09/1998 $ 11,150,172 $ 11,848,080 0.1% 14,475,000 5.90% due 11/09/1998 14,325,907 14,308,827 0.2 18,375,000 6.24% due 11/24/2000 18,135,306 18,103,234 0.2 Union Texas Petroleum Holdings, Inc.: 10,000,000 6.70% due 11/18/2002 10,000,000 9,764,500 0.1 20,000,000 6.81% due 12/05/2007 20,000,000 19,417,200 0.2 Unocal Corporation: 10,000,000 6.11% due 2/17/2004 10,000,000 9,427,100 0.1 40,000,000 6.23% due 2/15/2005 40,000,000 37,810,800 0.4 25,000,000 YPF S.A., 8% due 2/15/2004 21,533,750 22,187,500 0.3 -------------- -------------- ------ 145,145,135 142,867,241 1.6 Oil--Related 20,000,000 Tosco Corporation, 7% due 7/15/2000 19,894,250 19,600,000 0.2 Railroads 3,000,000 Burlington Northern, Inc., 7.40% due 5/15/1999 2,993,580 3,065,220 0.0 Services 19,375,000 ADT Operations, 8.25% due 8/01/2000 19,511,125 19,907,813 0.2 Steel 20,000,000 USX Corp., 6.375% due 7/15/1998 19,894,000 19,877,000 0.2 Telecommuni- 25,000,000 AT&T Capital Corp., 6.07% due 10/24/1997 25,000,000 25,030,000 0.3 cations 10,000,000 Bell Atlantic Financial Services, Inc., 5.47% due 4/27/1998 10,031,400 9,882,900 0.1 10,000,000 Pacific Telecom, Inc., 6.625% due 10/20/2005 10,000,000 9,647,400 0.1 -------------- -------------- ------ 45,031,400 44,560,300 0.5 Transportation 10,000,000 General American Transportation Corp., 6.44% due 11/13/2001 10,000,000 9,801,700 0.1 Utilities--Electric, 10,000,000 Commonwealth Edison Co., 6% due 3/15/1998 10,157,200 9,929,400 0.1 Gas & Water 25,000,000 Enron Corp., 6.75% due 7/01/2005 24,050,050 24,321,250 0.3 5,000,000 Long Island Lighting Co., 7.625% due 4/15/1998 4,986,210 5,029,100 0.0 PECO Energy Co.: 5,000,000 7.50% due 1/15/1999 5,043,600 5,131,700 0.1 20,000,000 5.625% due 11/01/2001 18,908,800 18,830,600 0.2 Texas Utilities Co.: 5,000,000 7.125% due 6/01/1997 4,987,500 5,060,700 0.1 9,500,000 5.75% due 7/01/1998 9,297,135 9,394,075 0.1 United Illuminating Co.: 5,000,000 7.375% due 1/15/1998 5,003,125 5,044,450 0.1 5,000,000 6.20% due 1/15/1999 4,693,050 4,894,950 0.0 87,126,670 87,636,225 1.0 -------------- -------------- ------ Total Corporate Bonds 2,292,079,893 2,290,407,868 25.4 Collateralized Mortgage Obligations Federal Home Loan Mortgage Corp.: 20,000,000 5.80% due 4/15/2006 18,615,625 19,518,600 0.2 14,902,246 6% due 4/15/2006 14,558,214 14,836,974 0.2 13,000,000 6% due 2/15/2011 12,020,937 11,765,000 0.1 Federal National Mortgage Association: 20,000,000 5.10% due 3/25/2002 19,256,250 19,756,200 0.2 12,000,000 6.50% due 1/25/2008 11,608,125 11,553,720 0.1 10,000,000 5% due 4/25/2014 9,756,250 9,853,100 0.1 13,093,229 Prudential Home Mortgage Security Co., 5.25% due 12/25/2000 12,532,675 12,790,383 0.2 Total Collateralized Mortgage Obligations 98,348,076 100,073,977 1.1
SCHEDULE OF INVESTMENTS (concluded)
Face Value Percent of Amount US Government Obligations Cost (Note 1a) Net Assets US Treasury Notes: $110,000,000 5.75% due 10/31/2000 $ 111,273,437 $ 108,401,700 1.2% 130,000,000 6.375% due 8/15/2002 123,911,719 130,751,400 1.4 525,000,000 5.75% due 8/15/2003 512,372,188 507,034,500 5.6 605,000,000 5.875% due 2/15/2004 600,813,281 586,850,000 6.5 345,000,000 5.875% due 11/15/2005 348,964,844 332,493,750 3.7 376,000,000 5.625% due 2/15/2006 375,408,750 356,613,440 4.0 Total US Government Obligations 2,072,744,219 2,022,144,790 22.4 Short-Term Investments Commercial 49,000,000 American Telephone & Telegraph Co., 5.32% Paper** due 4/23/1996 48,826,213 48,826,213 0.5 34,862,000 Associates Corp. of North America, 5.48% due 4/01/1996 34,851,386 34,851,386 0.4 42,000,000 Daimler-Benz AG, 5.14% due 4/03/1996 41,976,013 41,976,013 0.5 50,000,000 Goldman Sachs Group L.P., 5.35% due 4/25/1996 49,806,806 49,806,806 0.6 40,000,000 National Fleet Funding Corp., 5.25% due 5/01/1996 39,813,333 39,813,333 0.4 8,000,000 Schering-Plough Corp., 5.12% due 4/04/1996 7,994,311 7,994,311 0.1 -------------- -------------- ------ 223,268,062 223,268,062 2.5 US Government Federal National Mortgage Association: & Agency 40,000,000 5.17% due 4/16/1996 39,902,344 39,902,344 0.5 Obligations** 40,000,000 5.17% due 4/19/1996 39,885,111 39,885,111 0.4 40,000,000 5.17% due 4/26/1996 39,844,900 39,844,900 0.4 -------------- -------------- ------ 119,632,355 119,632,355 1.3 Total Short-Term Investments 342,900,417 342,900,417 3.8 Total Investments $8,141,193,726 8,975,372,679 99.4 ============== Other Assets Less Liabilities 56,619,615 0.6 -------------- ------ Net Assets $9,031,992,294 100.0% ============== ====== *American Depositary Receipts (ADR). **Commercial Paper and US Government & Agency Obligations are traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. ++Non-income producing security. ++++Restricted security as to resale. The value of the Fund's investments in restricted securities was $59,932,000, representing 0.7% of net assets. Acquisition Value Issue Dates Cost (Note 1a) GTE Finance Corp., 5.81% due 12/15/1997 5/25/1993 $40,000,000 $39,592,000 Province of Buenos Aires, 11.50% due 10/19/1998 10/04/1995 20,000,000 20,340,000 Total $60,000,000 $59,932,000 =========== =========== (a)Formerly Lockheed Corp. (b)Formerly National Medical Enterprises, Inc. (c)Investments in companies 5% or more of whose outstanding securities are held by the Fund (such companies are defined as "Affiliated Companies" in section 2(a)(3) of the Investment Company Act of 1940) are as follows: Net Share Net Dividend Industry Affiliate Activity Cost Income Diversified Worldtex Inc. 250,000 $ 1,155,793 +++ Companies Home Builders Oriole Homes Corp. (10,000) (104,975) +++ Insurance Fremont General Corp. 708,000 (787,434) $1,234,300 Iron & Steel Cleveland--Cliffs, Inc. (205,000) (7,544,226) 1,120,393 Real Estate RFS Hotel Investment Investors, Inc. 654,000 9,351,838 1,869,130 Trusts Real Estate Walden Residential Investment Properties, Inc. 475,000 7,954,221 2,081,130 Trusts Services PHH Corp. -- -- 2,237,800 Telecommuni- cations Nokia Corp. (ADR) 410,000 14,103,994 +++ +++Non-income producing security. See Notes to Financial Statements.
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of March 31, 1996 Assets: Investments, at value (identified cost--$8,141,193,726) (Note 1a) $8,975,372,679 Cash 3,012,797 Foreign cash (Note 1c) 3,462,743 Receivables: Interest $ 57,826,401 Capital shares sold 28,875,344 Dividends 10,741,685 Securities sold 9,152,874 106,596,304 -------------- Prepaid registration fees and other assets (Note 1f) 135,000 -------------- Total assets 9,088,579,523 -------------- Liabilities: Payables: Capital shares redeemed 24,214,226 Securities purchased 21,961,605 Distributor (Note 2) 4,246,383 Investment adviser (Note 2) 2,864,387 53,286,601 -------------- Accrued expenses and other liabilities 3,300,628 -------------- Total liabilities 56,587,229 -------------- Net Assets: Net assets $9,031,992,294 ============== Net Assets Class A Shares of Common Stock, $0.10 par value, 300,000,000 shares Consist of: authorized $ 10,440,129 Class B Shares of Common Stock, $0.10 par value, 300,000,000 shares authorized 16,584,042 Class C Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized 861,485 Class D Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized 1,690,371 Paid-in capital in excess of par 7,765,965,408 Undistributed investment income--net 71,862,639 Undistributed realized capital gains on investments and foreign currency transactions--net 330,415,520 Unrealized appreciation on investments and foreign currency transactions--net 834,172,700 -------------- Net assets $9,031,992,294 ============== Net Asset Value: Class A--Based on net assets of $3,225,757,636 and 104,401,286 shares outstanding $ 30.90 ============== Class B--Based on net assets of $5,025,504,320 and 165,840,417 shares outstanding $ 30.30 ============== Class C--Based on net assets of $259,131,009 and 8,614,852 shares outstanding $ 30.08 ============== Class D--Based on net assets of $521,599,329 and 16,903,714 shares outstanding $ 30.86 ============== See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Statement of Operations for the Year Ended March 31, 1996 Investment Interest and discount earned $ 245,286,391 Income Dividends (net of $2,678,657 foreign withholding tax) 117,437,311 (Notes 1d & 1e): Other 118,038 -------------- Total income 362,841,740 Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 43,935,168 Investment advisory fees (Note 2) 31,428,894 Transfer agent fees--Class B (Note 2) 6,544,983 Transfer agent fees--Class A (Note 2) 3,690,869 Account maintenance and distribution fees--Class C (Note 2) 1,382,636 Account maintenance fees--Class D (Note 2) 875,288 Printing and shareholder reports 782,018 Registration fees (Note 1f) 707,903 Custodian fees 578,365 Transfer agent fees--Class D (Note 2) 452,520 Transfer agent fees--Class C (Note 2) 223,212 Professional fees 108,486 Directors' fees and expenses 41,285 Pricing fees 10,005 Other 117,237 -------------- Total expenses 90,878,869 -------------- Investment income--net 271,962,871 -------------- Realized & Realized gain (loss) from: Unrealized Gain Investments--net 843,469,459 (Loss) on Foreign currency transactions--net (418,926) 843,050,533 Investments & -------------- Foreign Currency Change in unrealized appreciation/depreciation on: Transactions--Net Investments--net 481,220,303 (Notes 1b, 1c, Foreign currency transactions--net (4,321) 481,215,982 1e & 3): -------------- -------------- Net realized and unrealized gain on investments and foreign currency transactions 1,324,266,515 -------------- Net Increase in Net Assets Resulting from Operations $1,596,229,386 ============== See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the Year Ended March 31, Increase (Decrease) in Net Assets: 1996 1995 Operations: Investment income--net $ 271,962,871 $ 184,513,108 Realized gain on investments and foreign currency transactions--net 843,050,533 229,679,961 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net 481,215,982 156,181,613 -------------- -------------- Net increase in net assets resulting from operations 1,596,229,386 570,374,682 -------------- -------------- Dividends & Investment income--net: Distributions to Class A (107,615,888) (79,657,527) Shareholders Class B (124,808,348) (80,336,105) (Note 1g): Class C (4,109,418) (186,349) Class D (12,210,426) (1,531,830) Realized gain on investments--net: Class A (215,994,688) (132,046,243) Class B (336,099,182) (188,065,461) Class C (11,431,655) (321,434) Class D (27,764,995) (2,472,719) -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders (840,034,600) (484,617,668) -------------- -------------- Capital Share Net increase in net assets derived from capital share transactions 1,885,677,575 987,538,601 Transactions -------------- -------------- (Note 4): Net Assets: Total increase in net assets 2,641,872,361 1,073,295,615 Beginning of year 6,390,119,933 5,316,824,318 -------------- -------------- End of year* $9,031,992,294 $6,390,119,933 ============== ============== *Undistributed investment income--net (Note 1h) $ 71,862,639 $ 61,422,496 ============== ============== See Notes to Financial Statements. FINANCIAL INFORMATION (continued)
Financial Highlights
The following per share data and ratiois have been derived Class A from informatioon provided in the financial statements. For the Year Ended March 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 Per Share Net asset value, beginning of year $ 27.74 $ 27.46 $ 27.89 $ 26.90 $ 25.38 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net 1.21 1.01 .97 .87 1.02 Realized and unrealized gain on investments and foreign currency transactions--net 5.41 1.77 .50 1.99 2.12 ---------- ---------- ---------- ---------- ---------- Total from investment operations 6.62 2.78 1.47 2.86 3.14 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (1.16) (.94) (.95) (.87) (1.02) Realized gain on investments--net (2.30) (1.56) (.95) (1.00) (.60) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (3.46) (2.50) (1.90) (1.87) (1.62) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 30.90 $ 27.74 $ 27.46 $ 27.89 $ 26.90 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 24.50% 10.95% 5.39% 11.33% 12.96% Return:* ========== ========== ========== ========== ========== Ratios to Expenses .56% .57% .53% .55% .56% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net 4.09% 3.81% 3.52% 3.56% 4.21% ========== ========== ========== ========== ========== Supplemental Net assets, end of year (in thousands) $3,225,758 $2,507,767 $2,237,492 $2,056,023 $1,533,530 Data: ========== ========== ========== ========== ========== Portfolio turnover 84% 89% 86% 55% 59% ========== ========== ========== ========== ========== Average commission rate paid $ .0382 -- ++ -- ++ -- ++ -- ++ ========== ========== ========== ========== ========== The following per share data and ratiois have been derived Class B from informatioon provided in the financial statements. For the Year Ended March 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992 Per Share Net asset value, beginning of year $ 27.28 $ 27.04 $ 27.49 $ 26.58 $ 25.14 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net .90 .74 .70 .65 .80 Realized and unrealized gain on investments and foreign currency transactions--net 5.29 1.72 .48 1.89 2.05 ---------- ---------- ---------- ---------- ---------- Total from investment operations 6.19 2.46 1.18 2.54 2.85 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.87) (.66) (.68) (.63) (.81) Realized gain on investments--net (2.30) (1.56) (.95) (1.00) (.60) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (3.17) (2.22) (1.63) (1.63) (1.41) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 23.22% 9.81% 4.36% 10.16% 11.81% Return:* ========== ========== ========== ========== ========== Ratios to Expenses 1.58% 1.59% 1.55% 1.56% 1.58% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net 3.07% 2.79% 2.50% 2.53% 3.14% ========== ========== ========== ========== ========== Supplemental Net assets, end of year (in thousands) $5,025,504 $3,664,250 $3,079,332 $2,694,774 $1,582,065 Data: ========== ========== ========== ========== ========== Portfolio turnover 84% 89% 86% 55% 59% ========== ========== ========== ========== ========== Average commission rate paid $ .0382 -- ++ -- ++ -- ++ -- ++ ========== ========== ========== ========== ========== *Total investment returns exclude the effects of sales loads. ++Data not required for the period. See Notes to Financial Statements.
FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
Class C Class D For the For the For the Period For the Period The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21, from information provided in the financial statements. Ended 1994++ to Ended 1994++ to March 31, March 31, March 31, March 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 27.17 $ 26.81 $ 27.72 $ 27.27 Operating ---------- ---------- ---------- ---------- Performance: Investment income--net .92 .49 1.16 .48 Realized and unrealized gain on investments and foreign currency transactions--net 5.24 1.03 5.38 1.15 ---------- ---------- ---------- ---------- Total from investment operations 6.16 1.52 6.54 1.63 ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.95) (.43) (1.10) (.45) Realized gain on investments--net (2.30) (.73) (2.30) (.73) ---------- ---------- ---------- ---------- Total dividends and distributions (3.25) (1.16) (3.40) (1.18) ---------- ---------- ---------- ---------- Net asset value, end of period $ 30.08 $ 27.17 $ 30.86 $ 27.72 ========== ========== ========== ========== Total Investment Based on net asset value per share 23.25% 6.07%+++ 24.21% 6.42%+++ Return:** ========== ========== ========== ========== Ratios to Average Expenses 1.59% 1.64%* .81% .87%* Net Assets: ========== ========== ========== ========== Investment income--net 3.08% 3.22%* 3.84% 3.94%* ========== ========== ========== ========== Supplemental Net assets, end of period (in thousands) $ 259,131 $ 46,902 $ 521,599 $ 171,201 Data: ========== ========== ========== ========== Portfolio turnover 84% 89% 84% 89% ========== ========== ========== ========== Average commission rate paid $ .0382 -- ++++$ .0382 -- ++++ ========== ========== ========== ========== *Annualized. **Total investment returns exclude the effect of sales loads. ++Commencement of Operations. ++++Data not required for the period. +++Aggregate total investment return. See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Capital Fund, Inc. (the "Fund") is regis- tered 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 con- tingent 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 ex- clusive 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 representa- tive 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. Securities and assets for which market quotations are not available are valued at 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. * Options--The Fund is authorized to write covered call options and purchase put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing trans- action), 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 pro- ducing investments. (c) Foreign currency transactions--Transactions denomi- nated 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 unreal- ized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax pro- vision 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 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 recog- nized on the accrual basis. Realized gains and losses on security transactions are determined on the identified cost basis. (f) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and distributions--Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. (h) Reclassification--Generally accepted accounting principles require that certain components of net assets be reclassified to reflect permanent differences between financial reporting and tax purposes. Accordingly, current year's permanent book/tax differences of $12,778,648 have been reclassified from undistributed net investment income to accumulated net realized capital losses. These reclassifications have no effect on net assets or net asset value 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 sub- sidiary 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, Inc. ("MLFD" or "Distributor"), 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, facili- ties, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee based upon the average daily value of the Fund's net assets at the following annual rates: 0.50% of the Fund's average daily net assets not exceeding $250 million; 0.45% of average daily net assets in excess of $250 million but not exceeding $300 million; 0.425% of average daily net assets in excess of $300 million but not exceeding $400 million; and 0.40% of average daily net assets in excess of $400 million. 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 such expenses to exceed the most restrictive expense limitation at the time of such payment. Pursuant to the distribution plans (the "Distribution Plans") adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Distribution Maintenance Fee Fee Class B 0.25% 0.75% Class C 0.25% 0.75% Class D 0.25% -- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account main- tenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Dis- tributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Dis- tributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended March 31, 1996, MLFD earned under- writing discounts and 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 $ 81,332 $1,167,475 Class D $247,249 $3,538,854 For the year ended March 31, 1996, MLPF&S received contingent deferred sales charges of $4,025,586 and $75,917 relating to transactions in Class B and Class C Shares, respectively. In addition, MLPF&S received $525,422 in commissions on the execution of portfolio security transactions for the year ended March 31, 1996. NOTES TO FINANCIAL STATEMENTS (concluded) Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. During the year ended March 31, 1996, Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, received $7,714 for security price quotations to compute the net asset value of the Fund. Certain officers and/or directors of the Fund are officers and/or directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short- term securities, for the year ended March 31, 1996 were $7,446,853,963 and $6,285,139,919, respectively. Net realized and unrealized gains (losses) as of March 31, 1996 were as follows: Realized Unrealized Gains Gains (Losses) (Losses) Long-term investments $843,151,299 $834,178,953 Short-term investments (22,268) -- Paydowns 340,428 -- Foreign currency transactions (418,926) (6,253) ------------ ------------ Total $843,050,533 $834,172,700 ============ ============ As of March 31, 1996, net unrealized appreciation for Federal income tax purposes aggregated $830,016,332, of which $982,470,622 related to appreciated securities and $152,454,290 related to depreciated securities. At March 31, 1996, the aggregate cost of investments for Federal income tax purposes was $8,145,356,347. 4. Capital Share Transactions: Net increase in net assets derived from capital share transactions was $1,885,677,575 and $987,538,601 for the years ended March 31, 1996 and March 31, 1995, respectively. Transactions in capital shares for each class were as follows: Class A Shares for the Year Dollar Ended March 31, 1996 Shares Amount Shares sold 19,027,848 $ 584,244,547 Shares issued to shareholders in reinvestment of dividends & distributions 9,847,092 289,450,802 -------------- -------------- Total issued 28,874,940 873,695,349 Shares redeemed (14,880,078) (451,792,754) -------------- -------------- Net increase 13,994,862 $ 421,902,595 ============== ============== Class A Shares for the Year Dollar Ended March 31, 1995 Shares Amount Shares sold 17,286,503 $ 471,481,609 Shares issued to shareholders in reinvestment of dividends & distributions 7,424,496 192,734,824 -------------- -------------- Total issued 24,710,999 664,216,433 Shares redeemed (15,776,697) (427,291,645) -------------- -------------- Net increase 8,934,302 $ 236,924,788 ============== ============== Class B Shares for the Year Dollar Ended March 31, 1996 Shares Amount Shares sold 45,146,025 $1,369,296,478 Shares issued to shareholders in reinvestment of dividends & distributions 13,896,514 386,369,306 -------------- -------------- Total issued 59,042,539 1,755,665,784 Shares redeemed (25,082,439) (748,567,202) Automatic conversion of shares (2,447,861) (71,651,206) -------------- -------------- Net increase 31,512,239 $ 935,447,376 ============== ============== Class B Shares for the Year Dollar Ended March 31, 1995 Shares Amount Shares sold 35,795,347 $ 958,699,323 Shares issued to shareholders in reinvestment of dividends & distributions 9,333,565 239,011,925 -------------- -------------- Total issued 45,128,912 1,197,711,248 Shares redeemed (20,872,708) (557,090,978) Automatic conversion of shares (3,804,492) (100,075,150) -------------- -------------- Net increase 20,451,712 $ 540,545,120 ============== ============== Class C Shares for the Year Dollar Ended March 31, 1996 Shares Amount Shares sold 7,451,321 $ 221,649,300 Shares issued to shareholders in reinvestment of dividends & distributions 474,830 13,924,668 -------------- -------------- Total issued 7,926,151 235,573,968 Shares redeemed (1,037,499) (31,045,232) -------------- -------------- Net increase 6,888,652 $ 204,528,736 ============== ============== Class C Shares for the Period Dollar Oct. 21, 1994++ to Mar. 31, 1995 Shares Amount Shares sold 1,868,357 $ 49,114,822 Shares issued to shareholders in reinvestment of dividends & distributions 18,191 452,606 -------------- -------------- Total issued 1,886,548 49,567,428 Shares redeemed (160,348) (4,186,298) -------------- -------------- Net increase 1,726,200 $ 45,381,130 ============== ============== [FN] ++Commencement of Operations. Class D Shares for the Year Dollar Ended March 31, 1996 Shares Amount Shares sold 10,198,663 $ 303,203,877 Automatic conversion of shares 2,406,94 71,651,206 Shares issued to shareholders in reinvestment of dividends & distributions 1,173,178 35,170,384 -------------- -------------- Total issued 13,778,786 410,025,467 Shares redeemed (3,050,741) (86,226,599) -------------- -------------- Net increase 10,728,045 $ 323,798,868 ============== ============== Class D Shares for the Period Dollar Oct. 21, 1994++ to Mar. 31, 1995 Shares Amount Shares sold 2,621,771 $ 69,784,869 Automatic conversion of shares 3,740,107 100,075,150 Shares issued to shareholders in reinvestment of dividends & distributions 140,100 3,548,731 -------------- -------------- Total issued 6,501,978 173,408,750 Shares redeemed (326,309) (8,721,187) -------------- -------------- Net increase 6,175,669 $ 164,687,563 ============== ============== [FN] ++Commencement of Operations. 5. Commitments: At March 31, 1996, the Fund had entered into forward exchange contracts under which it had agreed to buy and sell various foreign currencies with a value of $317,838 and 696,025, respectively. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch Capital Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of invest- ments, of Merrill Lynch Capital Fund, Inc. as of March 31, 1996, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at March 31, 1996 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Merrill Lynch Capital Fund, Inc. as of March 31, 1996, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey May 1, 1996 IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by Merrill Lynch Capital Fund, Inc. during its fiscal year ended March 31, 1996: Record Payable Qualifying Domestic Interest from Domestic Non-Qualifying Total Long-Term Date Date Ordinary Income* Federal Obligations Ordinary Income Ordinary Income Capital Gains Class A Shares: 6/22/95 6/30/95 $0.155544 $0.061657 $0.276204 $0.493405 $0.308408 12/11/95 12/19/95 $0.215393 $0.204604 $1.122461 $1.542458 $1.111073 Class B Shares: 6/22/95 6/30/95 $0.120721 $0.047853 $0.214369 $0.382943 $0.308408 12/11/95 12/19/95 $0.190678 $0.181128 $0.993666 $1.365472 $1.111073 Class C Shares: 6/22/95 6/30/95 $0.136410 $0.054072 $0.242228 $0.432710 $0.308408 12/11/95 12/19/95 $0.195349 $0.185565 $1.018011 $1.398925 $1.111073 Class D Shares: 6/22/95 6/30/95 $0.149446 $0.059239 $0.265375 $0.474060 $0.308408 12/11/95 12/19/95 $0.209950 $0.199435 $1.094101 $1.503486 $1.111073 The qualifying domestic ordinary income qualifies for the dividends-received deduction for corporations. The law varies in each state as to whether and what percentage of dividend income attributable to Federal obligations is exempt from state income tax. We recommend that you consult your tax adviser to determine if any portion of the dividends you received are exempt from state income tax. Listed at right are the percentages of total assets of the Fund invested in Federal obligations for each quarter ended during the fiscal year. Please retain this information for your records. Percentage of For the Quarter Ended Federal Obligations* June 30, 1995 19.43% September 30, 1995 17.34% December 31, 1995 20.31% March 31, 1996 22.18% *For purposes of this calculation, Federal Obligations include US Treasury Notes, US Treasury Bills and US Treasury Bonds. Also included are obligations issued by the following agencies: Banks for Cooperatives, Federal Intermediate Credit Banks, Federal Land Banks, Federal Home Loan Banks and the Student Loan Marketing Association. Repurchase Agreements are not included in this calculation. PORTFOLIO CHANGES Common Stock Portfolio Changes For the Quarter Ended March 31, 1996 Additions Ayudhya Insurance Company, Ltd. (Foreign) Ayudhya Insurance Company, Ltd. (Local) BELCO Oil & Gas Corporation Bumrungrad Hospital Public Company, Ltd. (Foreign) Bumrungrad Hospital Public Company, Ltd. (Local) *Engineering Animation, Inc. *Ford Motor Company Frontier Corporation KLM Royal Dutch Airlines N.V. KLM Royal Dutch Airlines N.V. (NY Shares) (ADR) Kennametal, Inc. Mobil Corporation NUI Corporation Penncorp Financial Group, Inc. Repsol, S.A. (ADR) *Telefonos de Mexico S.A. (Class L) (ADR) Telecomunicacoes Brasileiras S.A.--Telebras (ADR) Thai Theparos Food Product Public Company Limited (Foreign) Thai Theparos Food Product Public Company Limited (Local) Tomkins PLC United Dominion Industries, Ltd. United Water Resources, Inc. Deletions Aetna Life & Casualty Co. American Water Works Co., Inc. British Steel PLC (ADR) *Engineering Animation, Inc. English China Clays PLC (Ordinary) Federal Paper Board Co., Inc. *Ford Motor Company Kerr-McGee Corp. MCN Corp. Newmont Mining Corp. PT Telekomunikasi Indonesia (ADR) *Telefonos de Mexico S.A. (Class L) (ADR) *Added and deleted in the same quarter. OFFICERS AND DIRECTORS Arthur Zeikel, President and Director Donald Cecil, Director M. Colyer Crum, Director Edward H. Meyer, Director Jack B. Sunderland, Director J. Thomas Touchton, Director Terry K. Glenn, Executive Vice President Norman R. Harvey, Senior Vice President Donald C. Burke, Vice President Ernest S. Watts, Vice President and Portfolio Manager Gerald M. Richard, Treasurer Mark B. Goldfus, Secretary Custodian The Bank of New York 90 Washington Street New York, New York 10286 Transfer Agent Merrill Lynch Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, Florida 32246-6484 (800) 637-3863
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