-----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, VHcfttkWVUjDD0+1LY2Qn1rJ0AjwEZx/UbqOh5lvOC5r2XZjznmqBSwweqcrX+ZO dRjATqV1WsctNWEWft2HXg== 0000900092-96-000296.txt : 19961118 0000900092-96-000296.hdr.sgml : 19961118 ACCESSION NUMBER: 0000900092-96-000296 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96665693 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 QUARTERLY REPORT MERRILL LYNCH CAPITAL FUND, INC. FUND LOGO Semi-Annual Report September 30, 1996 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 Kurt Schansinger, Vice President and Portfolio Manager Gerald M. Richard, Treasurer Mark B. Goldfus, Secretary Custodian The Bank of New York 90 Washington Street New York, NY 10286 Transfer Agent Merrill Lynch 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 Capital Fund, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper. MERRILL LYNCH CAPITAL FUND, INC. PORTFOLIO SUMMARY Security Diversification As of September 30, 1996 A pie chart illustrating the following percentages: US Bonds 43.7% Non-US Bonds 3.4% US Stocks 37.5% Non-US Stocks 11.7% Cash & Cash Equivalents 3.7% Security Representation As a Percentage of Equities As of September 30, 1996 A pie chart illustrating the following percentages: Financial Services 24.8% Consumer Services 4.4% Transportation 1.1% Utilities 5.0% Capital Goods--Technology 8.7% Consumer Cyclicals 8.9% Energy 18.7% Basic Industries 8.5% Credit Cyclicals 0.9% Diversified 3.6% Capital Goods 4.2% Consumer Staples 11.2% Geographic Diversification Percent of As of September 30, 1996 Net Assets* United States 85.4% Argentina 4.2 United Kingdom 3.5 Switzerland 1.5 France 0.8 Brazil 0.7 Netherlands 0.6 Canada 0.6 Spain 0.5 Thailand 0.4 Finland 0.4 Australia 0.3 New Zealand 0.3 Peru 0.2 Singapore 0.2 Hong Kong 0.1 Ireland 0.1 Colombia 0.1 Mexico 0.1 [FN] *Includes investments in short-term securities. US Common Stock Investments S&P As of September 30, 1996 Fund 500* Average Capitalization (in billions) $12.1 $10.5 Price/Book Value 2.3 3.9 Price/Earnings Ratio** 14.5 18.1 Yield Based on Current Dividend 2.7% 2.1% [FN] *An unmanaged broad-based index comprised of common stocks. **Based on 1996 earnings estimates. Fixed-Income Investments Merrill Lynch As of September 30, 1996 Fund D0A0 Index* Duration 5.4 Years 5.0 Years Average Maturity 8.5 Years 12.8 Years Asset Breakdown: Corporates 48.8% 16.7% US Treasuries/Agencies 44.7% 54.6% Mortgage-Backed 1.5% 28.6% International Governments 4.9% -- [FN] *An unmanaged market-weighted corporate, Government and mortgage master bond index reflecting approximately 97% of total outstanding bonds. DEAR SHAREHOLDER A series of confusing, and often contradictory, economic statistics resulted in wide and frequent swings in investor perceptions about the level and direction of economic activity during the quarter ended September 30, 1996. June reports of strong 4.8% second calendar quarter gross domestic product growth, rising industrial production, personal income growth and consumer credit outstanding suggested accelerating economic activity and raised the specter of a Federal Reserve Board tightening. However, in July sluggish retail sales data and reported sequential declines in housing starts and auto sales, coupled with the smallest monthly gain in personal income of the year, suggested a moderat- ing economic outlook. In August, consumer confi- dence indicators rose to their highest level of the year, contrasting further weakness in auto sales and new construction. Recent September reports suggest additional slowing, with a reported decline in net new job formation and the steepest decline in factory orders in three years. Finally, the Federal Reserve Board left interest rates unchanged at its September meeting. This lack of a discernible and consistent trend in the economy and, in turn, the outlook for inflation and interest rates made for a very volatile investment environ- ment in the September quarter. The one constant during this period of unpredictable economic trends was the continued benign rate of inflation. The core rate of consumer price inflation, excluding the volatile food and energy components, ran at a 1% annual rate through August, the lowest level in two years. The core rate of producer price inflation climbed at an even more moderate 0.5% annual rate for the year-to-date period. This period of noninflationary economic growth pro- vided a generally favorable backdrop for the financial markets in the September quarter. The stock market, as measured by the unmanaged Standard & Poor's 500 Index (S&P 500), provided a +3.08% total return, adding to the strong gains realized in the first half of 1996. The bond market, as measured by the unmanaged Merrill Lynch Domestic Bond Master Index, returned +1.84% for the September quarter, with gains in July and September more than offsetting an August decline. Cash equivalents, as measured by 91-day Treasury bills, returned +1.38% for the three months ended September 30, 1996. We anticipate further and more consistent evidence of an economic slowdown to be forthcoming over the balance of the year. Consumer spending represents approximately two-thirds of the economy, and trends in consumer activity are consequently the primary driver of the overall rate of economic growth. Real consumer spending has been in decline since the early part of the year. Real retail sales grew at a 6.0% annual rate in the first quarter, followed by a more modest 1.0% increase in the second quarter, and expectations are for a decline in the September quarter. Auto sales dropped almost 6% in September, and sales incentives increased to sustain dealer show- room traffic. The housing market has been weakening since May, with existing home sales flat-to-down in four of the last five months. Finally, consumers' debt burden and the rate of personal bankruptcy filings continued to rise to record levels, suggesting further constraints on the consumers' ability to finance significant new purchases. While the indus- trial sector of the economy appears more robust, ongoing economic weakness among our major trad- ing partners, including a pronounced slowdown in the rapidly developing Asian economies, coupled with a strong US currency, suggest challenges to the maintenance of strong growth in this segment of the economy as well. Therefore, we expect economic growth to continue to decelerate through the balance of 1996 with continued low levels of inflation. Portfolio Matters It is interesting to provide some historical perspective on the stock market's extraordinary advance. Since the 1920s, equities have exhibited a consistent, long-term performance pattern. Examining returns by decade, equities, as measured by the S&P 500, have provided compound annual double-digit returns every 30 years. In the 1920s, 1950s and 1980s, the S&P 500 generated compound average annual total returns of +19.2%, +19.4% and +17.5%, respectively. For the 1930s, 1940s, 1960s and 1970s, compound average annual total returns were below 10% (and were actually 0% in the 1930s). So far in the 1990s, this pattern has been broken, with compound aver- age annual total returns in excess of 20% having been achieved through the end of the September quarter. If maintained, this would represent the first instance of two consecutive decades of double-digit average annual total returns since the 1920s. Corresponding to this unprecedented advance in stock prices has been a dramatic increase in the valuation levels of the stock market. Based on a variety of different historical valuation parameters dating to 1926, stocks are selling at record high levels relative to dividend yield and book value per share and at near-record highs relative to normalized, or mid-cycle, per-share earnings. To anticipate a further, sustained advance in equity prices from current levels, an investor today must either dismiss the relevance of 70 years of historical valuation data or expect rapid increases in the underlying levels of corporate earnings, dividends and book values. We are unwilling to predicate investment decisions on either of these two arguments, and consequently maintain our conservative asset mix, with 49.2% of Fund net assets invested in equities as of September 30, 1996, 47.1% in bonds and 3.7% in cash equivalents, comparable to the portfolio composition at the end of the June quarter. While we believe stocks are expensive, bonds appear attractively valued com- pared to both the stock market and the present rate of inflation. Current real interest rates, which adjust for inflation, have been exceeded only one time over the last 60 years, namely the early 1980s when the bank prime rate exceeded 20% and the economy suffered through a severe recession. With inflation seemingly well-contained, we believe bonds are very attractive today on this basis. Compared to the dividend yield on common stocks, bonds have been cheaper only one other time over the last 40 years, namely in the third quarter of 1987, just prior to the major stock market decline in October of that year. While this large bond weighting detracted from overall Fund returns this year, and indeed over the last few years, we believe these valuation argu- ments are compelling and that the current asset mix could contribute to above-average investment returns going forward. Within the equity component of the Fund, we con- tinue to seek high-quality companies whose stocks sell at reasonable prices. We look for companies which enjoy strong competitive positions in their markets, earn consistently high returns on capital, have solid balance sheets, generate cash in excess of their internal reinvestment requirements and are managed by individuals who are motivated to create value for shareholders. We look to invest in these companies at prices which do not adequately or accurately reflect what we believe to be their under- lying intrinsic values. On average, the stocks held in the Fund have earned comparable returns on share- holders' equity, offer faster earnings growth and have stronger balance sheets than the average com- pany as measured by the S&P 500. However, these same stocks sell at an average price/earnings ratio of 14.5 times estimated 1996 earnings per share compared to 18.1 times for the S&P 500, at an average price/book value per share ratio of 2.3 times com- pared to 3.9 times for the S&P 500 and provide an average 2.7% dividend yield compared to 2.1% for the S&P 500. This combination of superior companies selling at discount prices is an attractive formula for generating superior risk-adjusted equity returns over time. Within the bond component of the Fund, the average portfolio maturity of the Fund's holding at September 30, 1996 was 8.5 years, with a modified duration of 5.4 years. The average yield to maturity of our bond holdings was 6.99%, while quality ratings remain high at an average A1/A+ as measured by the major rating agencies. Examining the industry concentration of the Fund's equity holdings, we continue to maintain low weight- ings relative to the S&P 500 in the broad technology and consumer sectors, while energy and financial services represent relatively high weightings in the Fund's mix. We strive to identify attractive investment opportunities in technology in order to participate in its strong secular growth outlook, but we have been unable to uncover specific companies which meet our criteria. The consumer segment offers many superior companies with high market shares, premier returns and attractive financial characteristics, but the stocks tend to sell at very high valuation levels, limiting their investment appeal. Our large energy holding is not based on a top-down, commodity price forecast. We believe many companies in the energy arena offer attractive unit volume growth and additional restructuring opportunities while selling at reasonable prices with high current yields. Finan- cial companies, including banks, insurance and other diversified providers, offer an attractive combination of high returns on capital, excess capital generation and improving managements at reasonable prices. During the quarter ended September 30, 1996, we initiated new investments in eight stocks while elim- inating 18 from the portfolio. In addition, we increased the Fund's holdings in 43 companies while reducing positions in 31 others. Notable among the new invest- ments is Transamerica Corporation, the diversified financial services company. Transamerica has been substantially restructured over the past ten years and is now focused on three core business segments of finance, insurance and real estate services, where it maintains high market shares and which offer solid growth prospects and high returns. The company's financial characteristics are excellent with low levels of debt and excess capital generation. Senior manage- ment has a proven ability to effectively allocate capital in ways which further enhance returns and create value for shareholders, and their incentive compensation is largely tied to the achievement of these goals. We believe the recent share price weak- ness has created an attractive entry price and buying opportunity in this well above-average company. Masco Corporation, a building products and home improvement company, is another new addition to the Fund. Masco is unwinding a failed diversification effort to refocus on its core faucet and cabinet busi- nesses which are characterized by strong market positions, high levels of profitability and good growth. The recent sale of Masco's furniture business, coupled with other asset sale proceeds and free cash flow generation, will provide the company with sig- nificant financial resources to finance acquisitions, debt reductions and share repurchases. In addition, the company's chief executive officer restructured his compensation program to be based completely on stock price performance. Selling at attractive valua- tion levels and at the same price as in 1986, we believe this is an attractive entry point for a company with an excellent mix of business, powerful financial characteristics and a highly motivated management. We eliminated several electric utility company hold- ings from the Fund during the September quarter, including Central Hudson Gas & Electric Corp., Montana Power Co., NUI Corporation, Entergy Corp. and Aquarion Co. We believe deregulation will have a pronounced negative effect on the utility industry in general, and on these companies in particular, because of their low returns on capital, modest size and limited growth prospects. While these stocks are statistically cheap, the companies have no experience competing in a free market, and we believe their ability to create value for shareholders will be extremely limited over the next several years. We also sold two bank stocks which had performed extremely well, BankAmerica Corp. and Banco Bilbao Vizcaya, a Spanish banking institution. Both companies have prospered over the last five years, benefiting from strong loan demand, rapid earnings growth, consequent improvements in return on capi- tal and strengthening balance sheets. Shareholders in these companies have prospered as well, as these stocks have reached record high valuation levels which we believe now more accurately reflect their solid prospects and intrinsic values. We decided to realize the Fund's substantial gains in these two investments and redeploy the proceeds into more undervalued equities. In Conclusion We appreciate your ongoing interest in Merrill Lynch Capital Fund, Inc., and we look forward to assisting you with you financial needs in the months and years to come. Sincerely, (Arthur Zeikel) Arthur Zeikel President (Kurt Schansinger) Kurt Schansinger Vice President and Portfolio Manager November 1, 1996 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 contin- gent deferred sales charge of 4% if redeemed during the first year, decreasing 1% each year thereafter to 0% after the fourth year. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class D Shares after approximately 8 years. (There is no initial sales charge for automatic share conversions.) * 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% con- tingent 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 lev- els 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 9/30/96 6/30/96 9/30/95 % Change % Change ML Capital Fund, Inc. Class A Shares* $30.51 $31.40 $31.11 + 4.00%(1) -0.62%(2) ML Capital Fund, Inc. Class B Shares* 29.89 30.72 30.54 + 3.90(1) -0.45(2) ML Capital Fund, Inc. Class C Shares* 29.63 30.49 30.36 + 3.65(1) -0.55(2) ML Capital Fund, Inc. Class D Shares* 30.47 31.34 31.07 + 4.01(1) -0.56(2) Dow Jones Industrial Average** 5,882.17 5,654.63 4,789.08 +22.82 +4.02 Standard & Poor's 500 Index** 687.31 670.63 584.41 +17.61 +2.49 ML Capital Fund, Inc. Class A Shares--Total Return* +13.02(3) +2.91(4) ML Capital Fund, Inc. Class B Shares--Total Return* +11.88(5) +2.65(6) ML Capital Fund, Inc. Class C Shares--Total Return* +11.87(7) +2.64(8) ML Capital Fund, Inc. Class D Shares--Total Return* +12.77(9) +2.86(10) Dow Jones Industrial Average--Total Return** +25.68 +4.62 Standard & Poor's 500 Index--Total Return** +20.31 +3.08 *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 $1.786 per share capital gains distributions. (2)Percent change includes reinvestment of $0.675 per share capital gains distributions. (3)Percent change includes reinvestment of $2.620 per share ordinary income dividends and $1.786 per share capital gains distributions. (4)Percent change includes reinvestment of $1.077 per share ordinary income dividends and $0.675 per share capital gains distributions. (5)Percent change includes reinvestment of $2.291 per share ordinary income dividends and $1.786 per share capital gains distributions. (6)Percent change includes reinvestment of $0.926 per share ordinary income dividends and $0.675 per share capital gains distributions. (7)Percent change includes reinvestment of $2.346 per share ordinary income dividends and $1.786 per share capital gains distributions. (8)Percent change includes reinvestment of $0.947 per share ordinary income dividends and $0.675 per share capital gains distributions. (9)Percent change includes reinvestment of $2.547 per share ordinary income dividends and $1.786 per share capital gains distributions. (10)Percent change includes reinvestment of $1.043 per share ordinary income dividends and $0.675 per share capital gains distributions.
PERFORMANCE DATA (continued) 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 $15,464.24 on September 30, 1996. Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** Class A Shares* Year Ended 9/30/96 +13.02% + 7.08% Five Years Ended 9/30/96 +12.41 +11.20 Ten Years Ended 9/30/96 +12.97 +12.36 [FN] *Maximum sales charge is 5.25%. **Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** Class B Shares* Year Ended 9/30/96 +11.88% + 7.96% Five Years Ended 9/30/96 +11.28 +11.28 Inception (10/21/88) through 9/30/96 +11.84 +11.84 [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 9/30/96 +11.87% +10.89% Inception (10/21/94) through 9/30/96 +17.13 +17.13 [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 9/30/96 +12.77% + 6.85% Inception (10/21/94) through 9/30/96 +18.05 +14.82 [FN] *Maximum sales charge is 5.25%. **Assuming maximum sales charge. PERFORMANCE DATA (continued) Performance Summary--Class A Shares
Net Asset Value Capital Gains Period Covered Beginning Ending Distributed Dividends Paid* % Change** 11/8/73--12/31/73 $14.03 $13.87 -- -- - 1.11% 1974 13.87 10.78 -- $ 0.560 -18.62 1975 10.78 12.83 -- 0.510 +23.86 1976 12.83 14.10 -- 0.360 +12.75 1977 14.10 12.68 -- 0.370 - 7.37 1978 12.68 13.63 -- 0.500 +11.65 1979 13.63 16.54 -- 0.650 +26.73 1980 16.54 17.70 $ 1.250 1.150 +24.83 1981 17.70 16.62 1.990 1.150 +11.85 1982 16.62 17.85 0.830 0.930 +19.27 1983 17.85 20.63 0.600 0.690 +23.13 1984 20.63 19.33 1.990 0.670 + 7.98 1985 19.33 22.57 1.600 0.660 +29.88 1986 22.57 24.40 2.100 0.440 +19.89 1987 24.40 19.79 5.763 0.219 + 4.60 1988 19.79 21.39 1.008 0.742 +17.04 1989 21.39 24.43 0.723 1.099 +22.98 1990 24.43 23.01 0.390 1.295 + 1.08 1991 23.01 26.92 0.262 1.361 +24.69 1992 26.92 26.33 0.954 0.921 + 5.03 1993 26.33 27.97 0.699 1.201 +13.71 1994 27.97 25.70 1.245 1.247 + 0.91 1995 25.70 30.55 1.419 2.036 +32.87 1/1/96--9/30/96 30.55 30.51 0.675 1.077 + 5.77 ------- ------- Total $23.498 Total $19.838 Cumulative total return as of 9/30/96: +1,532.11%** *Figures may include short-term capital gains distributions. **Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date, and do not include sales charge; results would be lower if sales charge was included.
Performance Summary--Class B Shares
Net Asset Value Capital Gains Period Covered Beginning Ending Distributed Dividends Paid* % Change** 10/21/88--12/31/88 $22.64 $21.38 $0.773 $0.537 + 0.25% 1989 21.38 24.29 0.723 0.961 +21.70 1990 24.29 22.85 0.390 1.077 + 0.10 1991 22.85 26.66 0.262 1.147 +23.39 1992 26.66 26.03 0.954 0.684 + 3.99 1993 26.03 27.61 0.699 0.930 +12.54 1994 27.61 25.34 1.245 0.974 - 0.10 1995 25.34 30.04 1.419 1.748 +31.52 1/1/96--9/30/96 30.04 29.89 0.675 0.926 + 4.97 ------ ------ Total $7.140 Total $8.984 Cumulative total return as of 9/30/96: +143.21%** *Figures may include short-term capital gains distributions. **Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date, and do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
PERFORMANCE DATA (concluded) Performance Summary--Class C Shares
Net Asset Value Capital Gains Period Covered Beginning Ending Distributed Dividends Paid* % Change** 10/21/94--12/31/94 $26.81 $25.24 $0.617 $0.543 - 1.47% 1995 25.24 29.81 1.419 1.832 +31.48 1/1/96--9/30/96 29.81 29.63 0.675 0.947 + 4.98 ------ ------ Total $2.711 Total $3.322 Cumulative total return as of 9/30/96: +36.00%** *Figures may include short-term capital gains distributions. **Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date, and do not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
Performance Summary--Class D Shares
Net Asset Value Capital Gains Period Covered Beginning Ending Distributed Dividends Paid* % Change** 10/21/94--12/31/94 $27.27 $25.70 $0.617 $0.572 - 1.33% 1995 25.70 30.53 1.419 1.978 +32.55 1/1/96--9/30/96 30.53 30.47 0.675 1.043 + 5.59 ------ ------ Total $2.711 Total $3.593 Cumulative total return as of 9/30/96: +38.09%** *Figures may include short-term capital gains distributions. **Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date, and do not include sales charge; results would be lower if sales charge was included.
SCHEDULE OF INVESTMENTS
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Aerospace 120,000 Goodrich (B.F.) Co. $ 3,765,576 $ 5,415,000 0.1% 800,000 Lockheed Martin Corp. 53,962,430 72,100,000 0.8 850,000 Rockwell International Corporation 30,626,530 47,918,750 0.5 -------------- -------------- ------ 88,354,536 125,433,750 1.4 Airlines 66,200 KLM Royal Dutch Airlines N.V. (NY Registered Shares) 2,273,023 1,746,025 0.0 Automobile 1,500,000 Echlin Inc. 48,219,012 47,062,500 0.5 Equipment Automotive 1,000,000 General Motors Corp. 47,253,858 48,000,000 0.5 Banking 700,000 Bancorp Hawaii, Inc. 20,457,127 27,300,000 0.3 700,000 Bangkok Bank Public Company Ltd. 7,163,083 9,145,286 0.1 700,000 The Chase Manhattan Corp. (c) 39,486,471 56,087,500 0.6 175,000 NationsBank Corp. 9,330,593 15,203,125 0.2 2,075,000 SouthTrust Corp. 38,757,956 63,287,500 0.7 1,750,000 Thai Military Bank Public Company, Ltd. 7,010,952 6,232,292 0.1 800,000 Union Planters Corp. 14,078,719 28,400,000 0.3 -------------- -------------- ------ 136,284,901 205,655,703 2.3 Building Materials 950,700 Masco Corporation 28,058,411 28,521,000 0.3 325,000 Medusa Corp. 8,495,910 9,993,750 0.1 -------------- -------------- ------ 36,554,321 38,514,750 0.4 Capital Goods 1,000,000 Cincinnati Milacron, Inc. 24,399,349 18,875,000 0.2 442,000 GATX Corp. 17,933,469 20,663,500 0.2 300,000 Giddings & Lewis, Inc. 4,968,678 3,487,500 0.0 450,000 Kennametal, Inc. 14,643,434 15,468,750 0.2 275,000 United Dominion Industries, Ltd. 6,613,724 5,500,000 0.1 -------------- -------------- ------ 68,558,654 63,994,750 0.7 Chemicals 350,000 Dexter Corporation 9,042,303 10,456,250 0.1 782,500 du Pont (E.I.) de Nemours & Co. 55,592,299 69,055,625 0.8 1,139,600 Engelhard Corp. 20,169,915 26,210,800 0.3 1,861,000 Imperial Chemical Industries PLC (ADR)* 91,838,138 98,167,750 1.1 -------------- -------------- ------ 176,642,655 203,890,425 2.3 Computer Software 1,025,000 ++Creative Technology, Ltd. 12,833,743 5,893,750 0.1 Diversified 4,100,000 Hanson PLC (ADR)* 65,181,095 50,737,500 0.6 Companies 10,000,000 Hillsdown Holdings PLC 23,692,604 28,091,750 0.3 1,150,000 Tenneco, Inc. 52,172,394 57,643,750 0.6 6,000,000 Tomkins PLC 24,678,005 26,010,300 0.3 1,000,000 United Technologies Corp. 59,058,703 120,125,000 1.3 1,000,000 ++Worldtex Inc. (b) 4,947,151 7,500,000 0.1 -------------- -------------- ------ 229,729,952 290,108,300 3.2 Drug Stores 1,500,000 Rite Aid Corp. 43,488,550 54,375,000 0.6 Electrical 650,000 Belden Inc. 18,307,478 18,850,000 0.2 Equipment 550,000 Cooper Industries, Inc. 21,429,936 23,787,500 0.3 820,000 General Electric Co. 41,535,004 74,620,000 0.8 800,000 Philips Electronics N.V. (NY Registered Shares) (d) 20,679,242 28,700,000 0.3 -------------- -------------- ------ 101,951,660 145,957,500 1.6
SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Electronic 41,200 Avnet, Inc. $ 1,975,472 $ 1,998,200 0.0% Components Financial Services 2,000,000 Federal National Mortgage Association 52,392,099 69,750,000 0.8 9,970,000 ++Ruam Pattana II Fund (Foreign) 6,316,792 5,590,764 0.1 7,530,000 Ruam Pattana II Fund (Local) 4,895,274 4,222,513 0.0 608,100 Transamerica Corporation 42,320,421 42,490,988 0.5 -------------- -------------- ------ 105,924,586 122,054,265 1.4 Food Distribution 15,000,000 Dairy Farm International Holdings Ltd. (Ordinary) 16,436,481 9,150,000 0.1 Foods/Food 2,000,000 Archer-Daniels-Midland Co. 34,105,377 38,500,000 0.4 Processing 300,000 Dean Foods Co. 7,492,201 8,475,000 0.1 99,000 Nestle S.A. 103,564,527 110,403,638 1.2 183,700 Thai Theparos Food Product Public Company Limited (Foreign) 831,998 708,429 0.0 -------------- -------------- ------ 145,994,103 158,087,067 1.7 Footware 30,000,000 Yue Yuen Industrial (Holdings Limited) 7,853,985 8,147,114 0.1 Forest Products 975,000 Weyerhaeuser Co. 44,548,916 44,971,875 0.5 Hospital 2,100,000 Columbia/HCA Healthcare Corp. 100,922,252 119,437,500 1.3 Management 3,200,000 ++Tenet Healthcare Corp. 43,928,657 71,200,000 0.8 -------------- -------------- ------ 144,850,909 190,637,500 2.1 Insurance 2,300,000 Allstate Corporation 69,292,895 113,275,000 1.2 247,500 American General Corporation 8,963,415 9,343,125 0.1 850,000 American International Group, Inc. 57,419,473 85,637,500 0.9 297,100 Ayudhya Insurance Company, Ltd. (Foreign) 2,207,170 2,221,352 0.0 702,900 Ayudhya Insurance Company, Ltd. (Local) 5,251,496 5,255,430 0.1 1,984,000 EXEL Ltd. 42,546,437 68,944,000 0.7 2,500,000 Fremont General Corp. (b) 38,202,313 73,750,000 0.8 700,000 Horace Mann Educators Corp. 18,997,417 23,012,500 0.2 2,154,000 Lowndes Lambert Group Holdings PLC 5,366,108 3,809,241 0.0 1,300,000 Penncorp Financial Group, Inc. 39,143,295 41,925,000 0.5 950,000 Provident Life & Accident Insurance Co. 31,752,658 35,625,000 0.4 1,400,000 Sphere Drake Holdings Ltd. 18,102,202 12,600,000 0.1 395,000 St. Paul Companies, Inc. 20,169,892 21,922,500 0.2 400,000 TIG Holdings, Inc. 9,313,651 12,000,000 0.1 2,400,000 Travelers Inc. 41,045,348 117,900,000 1.3 -------------- -------------- ------ 407,773,770 627,220,648 6.6 Iron & Steel 1,600,000 Birmingham Steel Corp. (b) 28,005,214 25,400,000 0.3 854,000 Cleveland-Cliffs, Inc. (b) 28,920,123 34,160,000 0.4 -------------- -------------- ------ 56,925,337 59,560,000 0.7 Leisure/Hotels 1,500,000 Carnival Corp. (Class A) 36,873,424 46,500,000 0.5 500,000 ++Harrah's Entertainment, Inc. 9,803,309 9,312,500 0.1 3,800,000 Mandarin Oriental International Ltd. 3,828,224 5,624,000 0.1 -------------- -------------- ------ 50,504,957 61,436,500 0.7 Medical Services 400,050 Bumrungrad Hospital Public Company, Ltd. (Foreign) 344,997 314,851 0.0
SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Metals & Basic 21,700 Cameco Corp. $ 651,441 $ 1,068,271 0.0% Materials 1,200,000 Industrias Penoles S.A. 5,465,971 5,077,473 0.1 701,000 ++Minsura Sociedad Limitada S.A. (T Shares) 5,179,884 6,540,243 0.1 -------------- -------------- ------ 11,297,296 12,685,987 0.2 Natural Gas 1,100,000 Coastal Corp. 31,533,060 45,375,000 0.5 Suppliers 355,000 El Paso Natural Gas Co. 10,188,728 15,620,000 0.2 424,000 MetroGas S.A. (ADR)* 4,792,336 4,187,000 0.0 3,000,000 TransCanada Pipelines Ltd. 43,755,473 48,375,000 0.5 3,700,000 Williams Companies, Inc. 99,361,340 188,700,000 2.1 -------------- -------------- ------ 189,630,937 302,257,000 3.3 Oil--Integrated 300,000 Mobil Corporation 33,186,002 34,725,000 0.4 2,000,000 Phillips Petroleum Company 68,634,181 85,500,000 0.9 37,000 Repsol, S.A. (ADR)* 1,287,719 1,225,625 0.0 1,240,000 Repsol, S.A. (Ordinary) 37,646,000 40,769,770 0.4 65,000 Texaco Inc. 4,350,775 5,980,000 0.1 1,900,000 TOTAL S.A. (ADR)* 58,079,799 74,337,500 0.8 9,408,700 YPF S.A. (ADR)* 186,735,423 215,224,012 2.3 -------------- -------------- ------ 389,919,899 457,761,907 4.9 Oil--Refining & 200,000 Ultramar Corp. 5,172,303 6,050,000 0.1 Marketing Oil--Service 2,483,500 Dresser Industries, Inc. 64,045,014 73,884,125 0.8 Paper 200,000 Jefferson Smurfit Group PLC (ADR)* 6,207,462 5,350,000 0.1 790,000 Temple-Inland, Inc. 36,163,014 41,672,500 0.5 -------------- -------------- ------ 42,370,476 47,022,500 0.6 Pharmaceuticals 502,000 Block Drug, Inc. (Class A) 15,212,377 22,401,750 0.2 3,650,000 Glaxo Wellcome PLC (ADR)* (a) 94,777,915 113,606,250 1.2 400,000 Merck & Co., Inc. 19,645,017 28,150,000 0.3 1,150,000 Pfizer, Inc. 57,515,259 90,993,750 1.0 22,260 Sandoz AG 25,973,217 26,741,832 0.3 -------------- -------------- ------ 213,123,785 281,893,582 3.0 Photography 250,000 Eastman Kodak Co. 14,627,440 19,625,000 0.2 Plastic Recycling 946,000 Wellman Inc. 20,386,872 16,555,000 0.2 Railroads 420,000 Canadian National Railway Co. 6,732,746 8,610,000 0.1 950,700 Kansas City Southern Industries, Inc. 38,905,271 40,642,425 0.4 -------------- -------------- ------ 45,638,017 49,252,425 0.5 Real Estate 195,000 National Health Investors, Inc. 6,202,950 6,508,125 0.1 Investment Trusts 1,850,000 RFS Hotel Investors, Inc. (b) 27,921,299 28,906,250 0.3 406,000 South West Properties Trust 5,523,927 5,633,250 0.1 1,350,000 Walden Residential Properties, Inc. (b) 24,943,513 28,518,750 0.3 -------------- -------------- ------ 64,591,689 69,566,375 0.8 Retail Trade 800,000 Melville Corporation 31,758,177 35,300,000 0.4 2,400,000 Wal-Mart Stores, Inc. 58,675,739 63,300,000 0.7 -------------- -------------- ------ 90,433,916 98,600,000 1.1 Services 3,100,000 PHH Corp. (b) 58,499,537 92,225,000 1.0
SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets Telecommuni- 1,300,000 Frontier Corporation $ 38,405,012 $ 34,612,500 0.4% cations 1,900,000 GTE Corp. 61,457,068 73,150,000 0.8 800,000 Nokia Corp. (ADR)* 28,161,352 35,400,000 0.4 850,000 Telecomunicacoes Brasileiras S.A.-- Telebras (ADR)* 46,585,931 66,725,000 0.7 500,000 Telefonica del Peru S.A. (ADR)* 10,250,000 11,437,500 0.1 -------------- -------------- ------ 184,859,363 221,325,000 2.4 Tires & Rubber 3,000,000 The Goodyear Tire & Rubber Co. 119,321,790 138,375,000 1.5 Utilities--Electric, 74,800 Energen Corp. 1,719,912 1,795,200 0.0 Gas & Water 1,050,000 Illinova Corp. 22,555,391 27,825,000 0.3 75,000 Northwest Natural Gas Co. 1,625,113 1,725,000 0.0 800,000 Pinnacle West Capital Corp. 16,525,455 23,700,000 0.3 160,000 Public Service Company of North Carolina 2,555,808 2,940,000 0.0 200,000 Texas Utilities Co. 8,053,148 7,925,000 0.1 1,400,000 Unicom Corp. 32,447,717 35,175,000 0.4 240,000 Washington Water Power Co. 4,030,780 4,530,000 0.0 -------------- -------------- ------ 89,513,324 105,615,200 1.1 Total Common Stocks 3,578,710,036 4,506,904,574 49.2 Face Amount Corporate Bonds Aerospace US$ 15,000,000 Lockheed Martin Corp., 6.85% due 5/15/2001 14,987,850 14,985,600 0.2 Automobile Parts 20,000,000 Eaton Corp., 6.50% due 6/01/2025 19,929,200 19,100,600 0.2 Automotive Hertz Corp.: 25,000,000 6.70% due 6/15/2002 24,815,300 24,557,750 0.3 13,000,000 6% due 1/15/2003 12,891,670 12,290,980 0.1 -------------- -------------- ------ 37,706,970 36,848,730 0.4 Banking 20,000,000 Banco Rio de la Plata, 8.75% due 12/15/2003 20,060,800 18,550,000 0.2 25,000,000 Bank of Boston Corp., 6.625% due 12/01/2005 23,519,000 23,652,500 0.3 BankAmerica Corp.: 15,000,000 6.875% due 6/01/2003 14,149,050 14,768,250 0.2 30,000,000 6.75% due 9/15/2005 29,591,750 28,899,300 0.3 Bankers Trust Company: 10,000,000 7.50% due 1/15/2002 9,688,700 10,144,600 0.1 40,000,000 7.125% due 3/15/2006 39,299,350 39,113,600 0.4 The Chase Manhattan Corp.: 20,000,000 6.50% due 8/01/2005 19,403,800 18,864,000 0.2 10,000,000 6.25% due 1/15/2006 9,137,000 9,264,600 0.1 15,000,000 First Chicago Corp., 6.875% due 6/15/2003 13,963,300 14,779,500 0.2 6,000,000 First Hawaiian, Inc., 6.25% due 8/15/2000 5,841,600 5,845,380 0.1 First Security Corp.: 5,000,000 5.71% due 2/09/1999 5,000,000 4,904,600 0.0 20,000,000 7% due 7/15/2005 19,803,850 19,403,860 0.2 30,000,000 First Union Corp., 6.55% due 10/15/2035 29,953,350 28,634,100 0.3 20,000,000 Firstbank Puerto Rico, 7.625% due 12/20/2005 19,451,445 19,507,200 0.2 10,000,000 Great Western Financial Corp., 6.375% due 7/01/2000 9,998,800 9,843,600 0.1 Household Bank: 10,000,000 6.87% due 5/15/2001 9,868,800 9,990,900 0.1 20,000,000 6.875% due 3/17/2003 19,886,200 19,758,800 0.2 10,300,000 6.50% due 7/15/2003 10,202,253 9,915,810 0.1
SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Banking NationsBank Corp.: (concluded) US$ 10,500,000 5.70% due 9/11/2000 $ 9,545,865 $ 10,087,350 0.1% 40,000,000 5.60% due 2/07/2001 40,000,000 38,080,000 0.4 10,000,000 6.20% due 8/15/2003 9,670,360 9,520,000 0.1 25,000,000 6.50% due 8/15/2003 22,104,200 24,033,250 0.3 25,500,000 PNC Funding Corp., 6.125% due 9/01/2003 24,922,025 23,983,515 0.3 Provident Bank: 10,000,000 6.125% due 12/15/2000 10,071,000 9,713,200 0.1 15,000,000 6.375% due 1/15/2004 14,709,250 14,180,250 0.2 Union Planters Corp.: 20,000,000 6.25% due 11/01/2003 18,756,100 18,872,400 0.2 7,500,000 6.75% due 11/01/2005 7,205,925 7,131,375 0.1 20,000,000 Wachovia Corp., 6.605% due 10/01/2025 20,012,500 19,305,000 0.2 -------------- -------------- ------ 485,816,273 480,746,940 5.3 Broadcasting & 30,000,000 News America Holdings, Inc., 7.50% due Publishing 3/01/2000 29,179,330 30,477,600 0.3 Capital Goods 5,000,000 Giddings & Lewis, Inc., 7.50% due 10/01/2005 5,000,000 4,855,750 0.1 Chemicals 21,000,000 Lyondell Petrochemical Company, 6.50% due 2/15/2006 19,940,920 19,529,160 0.2 25,000,000 Union Carbide Corp., 6.79% due 6/01/2025 25,000,000 24,164,750 0.3 -------------- -------------- ------ 44,940,920 43,693,910 0.5 Diversified 20,000,000 Grace (W.R.) & Co., 7.40% due 2/01/2000 19,663,100 20,316,400 0.2 Companies Tenneco, Inc.: 15,000,000 7.875% due 10/01/2002 14,619,180 15,545,400 0.2 10,000,000 6.50% due 12/15/2005 10,050,000 9,356,100 0.1 -------------- -------------- ------ 44,332,280 45,217,900 0.5 Electronics 16,000,000 Litton Industries, Inc., 6.98% due 3/15/2006 16,000,000 15,643,296 0.2 Philips Electronics N.V.: 10,000,000 6.75% due 8/15/2003 9,866,300 9,650,000 0.1 15,000,000 7.125% due 5/15/2025 14,954,200 14,693,100 0.2 -------------- -------------- ------ 40,820,500 39,986,396 0.5 Finance Chrysler Finance Corp.: 10,000,000 5.70% due 1/19/1999 10,011,600 9,819,300 0.1 30,000,000 6.20% due 12/06/2000 30,000,000 29,196,900 0.3 35,000,000 Ford Motor Credit Co., 5.75% due 1/25/2001 34,744,400 33,479,600 0.4 General Motors Acceptance Corp.: 25,000,000 5.625% due 2/01/1999 23,855,545 24,496,750 0.3 50,000,000 6.375% due 4/04/2000 49,887,500 49,377,000 0.5 50,000,000 5.625% due 2/15/2001 49,623,200 47,555,000 0.5 30,000,000 6.75% due 6/10/2002 29,520,300 29,534,700 0.3 10,000,000 Greyhound Financial Corp., 6.75% due 3/25/1999 9,694,200 10,019,900 0.1 15,000,000 Household Finance Corp., 7.05% due 6/06/2001 15,013,950 15,031,200 0.2 International Lease Finance Corp.: 22,500,000 6.05% due 4/30/1999 22,368,375 22,235,400 0.2 20,000,000 5.62% due 2/01/2000 19,876,200 19,347,400 0.2 10,000,000 Margaretten Financial Corp., 6.75% due 6/15/2000 9,621,060 9,936,100 0.1 Sears, Roebuck Acceptance Corp.: 20,000,000 6.50% due 6/15/2000 20,025,000 19,813,800 0.2 25,000,000 5.71% due 2/06/2001 25,000,000 23,933,750 0.3 50,000,000 5.63% due 2/07/2001 49,996,500 47,719,000 0.5 15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 14,391,750 0.2 -------------- -------------- ------ 414,233,630 405,887,550 4.4
SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Financial GATX Corp.: Leasing US$ 7,000,000 6.66% due 3/15/2001 $ 6,997,900 $ 6,915,370 0.1% 12,000,000 6.27% due 12/05/2001 11,823,270 11,589,240 0.1 25,000,000 6.69% due 11/30/2005 24,984,750 23,884,000 0.3 XTRA Corp.: 20,000,000 6.79% due 8/01/2001 19,945,800 19,824,000 0.2 20,000,000 6.68% due 11/30/2001 20,000,000 19,694,400 0.2 -------------- -------------- ------ 83,751,720 81,907,010 0.9 Financial 10,000,000 American Express Credit Corp., 6.125% Services due 11/15/2001 9,963,300 9,683,400 0.1 Finova Capital Corp.: 25,000,000 6.45% due 6/01/2000 24,766,550 24,676,000 0.3 15,000,000 5.98% due 2/27/2001 14,968,950 14,444,550 0.1 10,000,000 6.56% due 11/15/2002 10,000,000 9,726,100 0.1 McDonnell Douglas Finance Corp.: 5,000,000 5.48% due 2/08/1999 4,997,600 4,854,200 0.0 10,000,000 6.77% due 9/11/2002 9,983,500 9,720,100 0.1 10,000,000 6.90% due 10/01/2002 9,981,400 9,942,000 0.1 20,000,000 6.965% due 9/12/2005 20,049,200 19,380,400 0.2 35,000,000 Morgan Stanley Group, Inc., 5.75% due 2/15/2001 34,968,150 33,486,250 0.4 16,000,000 Salomon Inc., 7% due 5/15/1999 15,965,140 16,036,640 0.2 Smith Barney Shearson Holdings, Inc.: 40,000,000 5.875% due 2/01/2001 39,179,400 38,504,000 0.4 15,000,000 6.50% due 10/15/2002 14,690,800 14,536,200 0.2 -------------- -------------- ------ 209,513,990 204,989,840 2.2 Food & Tobacco Nabisco Inc.: 21,000,000 6.70% due 6/15/2002 20,830,000 20,513,640 0.2 20,000,000 6.85% due 6/15/2005 20,000,000 19,158,600 0.2 -------------- -------------- ------ 40,830,000 39,672,240 0.4 Foreign NZ$ 42,000,000 New Zealand Government Bond, 8% Government due 2/15/2001 27,158,207 29,245,332 0.3 Obligations US$ 5,000,000++++Province of Buenos Aires, 11.50% due 10/19/1998 5,000,000 5,187,500 0.1 Republic of Argentina: 61,000,000 9.25% due 2/23/2001 60,223,900 59,932,500 0.7 55,000,000 8.375% due 12/20/2003 40,435,000 49,293,750 0.5 73,500,000 6.625% due 3/31/2005 49,217,438 61,556,250 0.7 4,500,000 Republic of Colombia, 7.25% due 2/23/2004 4,145,000 4,173,750 0.0 -------------- -------------- ------ 186,179,545 209,389,082 2.3 Forest Products 20,400,000 Champion International Corp., 6.40% due 2/15/2026 20,238,456 19,062,780 0.2 Hospital Columbia/HCA Healthcare Corp.: 20,000,000 6.125% due 12/15/2000 18,456,800 19,375,000 0.2 5,000,000 6.91% due 6/15/2005 4,979,850 4,891,850 0.0 17,500,000 6.63% due 7/15/2045 17,149,625 17,358,075 0.2 15,000,000 Tenet Healthcare Corp., 8.625% due 12/01/2003 15,217,630 15,618,750 0.2 -------------- -------------- ------ 55,803,905 57,243,675 0.6
SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Industrial US$ 9,775,000 Crane Co., 7.25% due 6/15/1999 $ 9,619,840 $ 9,811,852 0.1% 12,750,000 Diamond Shamrock, Inc., 7.65% due 7/01/2026 12,741,188 12,970,447 0.1 7,800,000 Interface, Inc., 9.50% due 11/15/2005 7,552,000 7,741,500 0.1 50,000,000 Williams Holdings of Delaware, Inc., 6.25% due 2/01/2006 49,739,500 46,058,000 0.5 -------------- -------------- ------ 79,652,528 76,581,799 0.8 Insurance 15,125,000 Integon Corp., 8% due 8/15/1999 15,225,519 15,107,909 0.2 10,000,000 NAC Re Corp., 8% due 6/15/1999 10,189,300 10,280,000 0.1 20,000,000 Travelers Inc., 6.875% due 6/01/2025 20,037,200 19,665,600 0.2 -------------- -------------- ------ 45,452,019 45,053,509 0.5 Machinery 20,000,000 Black & Decker Corp., 6.625% due 11/15/2000 19,217,900 19,780,600 0.2 20,000,000 FMC Corp., 6.375% due 9/01/2003 18,940,800 19,005,800 0.2 22,500,000 Harris Corp., 6.375% due 8/15/2002 22,461,850 21,708,000 0.3 -------------- -------------- ------ 60,620,550 60,494,400 0.7 Manufactured 3,000,000 Oakwood Homes Corp., 9.125% due 6/01/2007 3,000,000 3,003,750 0.0 Housing Natural Gas 30,000,000 Coastal Corp., 8.125% due 9/15/2002 30,417,815 31,250,100 0.3 Suppliers 15,000,000 ENSERCH Corporation, 7.125% due 6/15/2005 15,095,150 14,656,800 0.2 -------------- -------------- ------ 45,512,965 45,906,900 0.5 Oil--Integrated Occidental Petroleum Corp.: 14,475,000 5.90% due 11/09/1998 14,325,908 14,271,916 0.1 18,375,000 6.24% due 11/24/2000 18,135,306 17,925,180 0.2 Oryx Energy Co.: 5,500,000 8% due 10/15/2003 5,380,610 5,482,785 0.1 15,000,000 8.375% due 7/15/2004 15,024,550 15,066,540 0.2 Union Texas Petroleum Holdings, Inc.: 10,000,000 6.70% due 11/18/2002 10,000,000 9,725,800 0.1 20,000,000 6.81% due 12/05/2007 20,000,000 19,018,800 0.2 Unocal Corporation: 10,000,000 6.11% due 2/17/2004 10,000,000 9,329,200 0.1 40,000,000 6.23% due 2/15/2005 40,000,000 37,136,400 0.4 30,000,000 YPF S.A., 8% due 2/15/2004 26,252,500 28,125,000 0.3 -------------- -------------- ------ 159,118,874 156,081,621 1.7 Oil--Related Tosco Corporation: 20,000,000 7% due 7/15/2000 19,894,250 19,833,000 0.2 20,000,000 7.625% due 5/15/2006 19,978,400 19,957,000 0.2 -------------- -------------- ------ 39,872,650 39,790,000 0.4 Real Estate 2,000,000 Franchise Finance Corp. of America, Investment 7% due 11/30/2000 1,965,740 1,948,000 0.0 Trusts 5,000,000 Meditrust, 7.82% due 9/10/2026 5,060,400 5,078,950 0.1 -------------- -------------- ------ 7,026,140 7,026,950 0.1 Services 20,000,000 ADT Operations, 8.25% due 8/01/2000 20,158,313 20,525,000 0.2 Steel 20,000,000 USX Corp., 6.375% due 7/15/1998 19,894,000 19,828,600 0.2 Telecommuni- 10,000,000 Pacific Telecom, Inc., 6.625% due 10/20/2005 10,000,000 9,501,200 0.1 cations
SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets Transportation US$ 11,000,000 Burlington Northern Santa Fe, 7.29% due 6/01/2036 $ 10,874,710 $ 11,019,800 0.1% 10,000,000 General American Transportation Corp., 6.44% due 11/13/2001 10,000,000 9,735,100 0.1 -------------- -------------- ------ 20,874,710 20,754,900 0.2 Travel & Lodging Royal Caribbean Cruises Ltd.: 10,000,000 7.125% due 9/18/2002 9,900,050 9,883,500 0.1 8,000,000 7.25% due 8/15/2006 7,866,915 7,836,640 0.1 -------------- -------------- ------ 17,766,965 17,720,140 0.2 Utilities-- 30,000,000 Enron Corp., 6.75% due 7/01/2005 28,878,400 28,933,200 0.3 Electric, 5,000,000 Long Island Lighting Co., 7.625% due 4/15/1998 4,986,210 5,007,650 0.1 Gas & Water 20,000,000 PECO Energy Co., 5.625% due 11/01/2001 18,908,800 18,834,400 0.2 United Illuminating Co.: 5,000,000 7.375% due 1/15/1998 5,003,125 5,032,050 0.1 5,000,000 6.20% due 1/15/1999 4,693,050 4,891,000 0.0 -------------- -------------- ------ 62,469,585 62,698,300 0.7 Total Corporate Bonds 2,324,683,868 2,319,032,672 25.3 Collateralized Mortgage Obligations Federal Home Loan Mortgage Corp.: 20,000,000 5.80% due 4/15/2006 18,615,625 19,512,400 0.2 5,000,000 7% due 8/15/2008 4,762,500 4,821,850 0.1 13,000,000 6% due 2/15/2011 12,020,938 11,683,750 0.1 Federal National Mortgage Association: 13,400,000 7% due 7/25/2006 13,236,688 13,039,808 0.1 12,000,000 6.50% due 1/25/2008 11,608,125 11,478,720 0.1 5,010,000 6.50% due 4/25/2008 4,653,038 4,678,870 0.1 Total Collateralized Mortgage Obligations 64,896,914 65,215,398 0.7 US Government Obligations US Treasury Notes: 95,000,000 5.75% due 10/31/2000 96,074,219 92,714,300 1.0 580,000,000 5.75% due 8/15/2003 563,347,188 553,267,800 6.0 650,000,000 5.875% due 2/15/2004 644,252,344 621,868,000 6.8 25,000,000 6.50% due 5/15/2005 24,800,781 24,711,000 0.3 30,000,000 6.50% due 8/15/2005 29,900,594 29,615,700 0.3 495,000,000 5.875% due 11/15/2005 492,156,119 467,621,550 5.1 30,000,000 7.25% due 5/15/2016 30,001,562 30,651,600 0.4 125,000,000 6.25% due 8/15/2023 112,284,375 112,948,750 1.2 Total US Government Obligations 1,992,817,182 1,933,398,700 21.1
SCHEDULE OF INVESTMENTS (concluded)
Face Value Percent of Amount Short-Term Investments Cost (Note 1a) Net Assets Commercial US$ 26,000,000 Alpine Securitization Co., 5.40% due 11/07/1996 $ 25,855,700 $ 25,855,700 0.3% Paper** 40,600,000 CSW Credit, Inc., 5.31% due 10/10/1996 40,546,104 40,546,104 0.4 29,500,000 Caterpillar, Inc., 5.33% due 10/16/1996 29,434,485 29,434,485 0.3 40,000,000 Corporate Receivables Corp., 5.30% due 10/07/1996 39,964,667 39,964,667 0.4 41,766,000 General Electric Capital Corp., 5.80% due 10/01/1996 41,766,000 41,766,000 0.5 45,000,000 Goldman Sachs Group L.P., 5.30% due 10/04/1996 44,980,125 44,980,125 0.5 25,013,000 International Securitization Corp., 5.51% due 10/25/1996 24,921,119 24,921,119 0.3 20,000,000 Monsanto Company, 5.30% due 10/03/1996 19,994,111 19,994,111 0.2 25,000,000 National Fleet Funding Corp., 5.32% due 10/01/1996 25,000,000 25,000,000 0.3 -------------- -------------- ------ 292,462,311 292,462,311 3.2 Commercial Czk 100,000,000 International Bank for Reconstruction & Paper-- Development, 11.50% due 10/09/1997 3,715,590 3,715,314 0.0 Foreign** Total Short-Term Investments 296,177,901 296,177,625 3.2 Total Investments $8,257,285,901 9,120,728,969 99.5% ============== Other Assets Less Liabilities 49,458,692 0.5 -------------- ------ Net Assets $9,170,187,661 100.0% ============== ====== *American Depositary Receipts (ADR). **Commercial Paper and Commercial Paper--Foreign are traded on a discount basis; the interest rate shown is the discount rate 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 approximately $5,188,000, representing 0.06% of net assets. Acquisition Value Issue Date Cost (Note 1a) Province of Buenos Aires, 11.50% due 10/19/1998 10/19/1995 $5,000,000 $5,187,500 Total $5,000,000 $5,187,500 ========== ========== (a)Formerly Glaxo Holdings PLC (ADR). (b)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 Companies Worldtex Inc. (240,000) $ (1,017,395) +++ Insurance Fremont General Corp. 342,000 8,261,827 $ 750,225 Iron & Steel Birmingham Steel Corp. 1,108,000 17,678,280 178,180 Iron & Steel Cleveland-Cliffs, Inc. -- -- 555,100 Real Estate RFS Hotel Investment Investors, Inc. 96,000 1,450,250 1,257,260 Trusts Real Estate Walden Residential Investment Properties, Inc. 80,000 1,645,737 1,218,300 Trusts Services PHH Corp. 1,430,000 (4,038,216) 1,175,800 +++Non-income producing security. (c)Formerly Chemical Banking Corp. (d)Shares of Philips Electronics N.V. (ADR) were converted into shares of Philips Electronics N.V. (NY Registered Shares). See Notes to Financial Statements.
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of September 30, 1996 Assets: Investments, at value (identified cost--$8,257,285,901) (Note 1a) $9,120,728,969 Cash 3,870,210 Receivables: Interest $ 64,498,579 Securities sold 47,742,833 Dividends 11,893,841 Capital shares sold 10,482,084 134,617,337 -------------- Prepaid registration fees and other assets (Note 1f) 178,665 -------------- Total assets 9,259,395,181 -------------- Liabilities: Payables: Securities purchased 44,667,776 Capital shares redeemed 34,437,816 Distributor (Note 2) 4,606,095 Investment adviser (Note 2) 3,114,156 86,825,843 -------------- Accrued expenses and other liabilities 2,381,677 -------------- Total liabilities 89,207,520 -------------- Net Assets: Net assets $9,170,187,661 ============== Net Assets Class A Shares of Common Stock, $0.10 par value, 400,000,000 shares Consist of: authorized $ 10,627,234 Class B Shares of Common Stock, $0.10 par value, 400,000,000 shares authorized 16,775,171 Class C Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized 1,041,282 Class D Shares of Common Stock, $0.10 par value, 200,000,000 shares authorized 1,985,662 Paid-in capital in excess of par 8,013,649,856 Undistributed investment income--net 83,363,504 Undistributed realized capital gains on investments and foreign currency transactions--net 179,279,481 Unrealized appreciation on investments and foreign currency transactions--net 863,465,471 -------------- Net assets $9,170,187,661 ============== Net Asset Value: Class A--Based on net assets of $3,242,809,794 and 106,272,336 shares outstanding $ 30.51 ============== Class B--Based on net assets of $5,013,839,239 and 167,751,713 shares outstanding $ 29.89 ============== Class C--Based on net assets of $308,563,298 and 10,412,821 shares outstanding $ 29.63 ============== Class D--Based on net assets of $604,975,330 and 19,856,624 shares outstanding $ 30.47 ============== See Notes to Financial Statements.
FINANCIAL INFORMATION (continued)
Statement of Operations for the Six Months Ended September 30, 1996 Investment Interest and discount earned $ 156,608,542 Income Dividends (net of $2,473,310 foreign withholding tax) 63,505,294 (Notes 1d & 1e): Other 184,305 -------------- Total income 220,298,141 -------------- Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 25,312,006 Investment advisory fees (Note 2) 18,493,708 Transfer agent fees--Class B (Note 2) 3,595,011 Transfer agent fees--Class A (Note 2) 1,962,248 Account maintenance and distribution fees--Class C (Note 2) 1,461,119 Account maintenance fees--Class D (Note 2) 726,275 Custodian fees 387,389 Transfer agent fees--Class D (Note 2) 353,195 Printing and shareholder reports 349,566 Registration fees (Note 1f) 327,824 Transfer agent fees--Class C (Note 2) 223,006 Professional fees 61,855 Directors' fees and expenses 20,426 Pricing fees 5,628 Other 58,929 -------------- Total expenses 53,338,185 -------------- Investment income--net 166,959,956 -------------- Realized & Realized gain (loss) from: Unrealized Gain Investments--net 183,510,654 (Loss) on Foreign currency transactions--net (64,818) 183,445,836 Investments & -------------- Foreign Currency Change in unrealized appreciation/depreciation on: Transactions--Net Investments--net 29,264,115 (Notes 1b, 1c, Foreign currency transactions--net 28,656 29,292,771 1e & 3): -------------- -------------- Net realized and unrealized gain on investments and foreign currency transactions 212,738,607 -------------- Net Increase in Net Assets Resulting from Operations $ 379,698,563 ============== See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the For the Six Months Year Ended Ended September 30, March 31, Increase (Decrease) in Net Assets: 1996 1996 Operations: Investment income--net $ 166,959,956 $ 271,962,871 Realized gain on investments and foreign currency transactions--net 183,445,836 843,050,533 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net 29,292,771 481,215,982 -------------- -------------- Net increase in net assets resulting from operations 379,698,563 1,596,229,386 -------------- -------------- Dividends & Investment income--net: Distributions to Class A (63,102,692) (107,615,888) Shareholders Class B (76,610,755) (124,808,348) (Note 1g): Class C (4,719,836) (4,109,418) Class D (11,025,808) (12,210,426) Realized gain on investments--net: Class A (115,848,116) (215,994,688) Class B (186,338,551) (336,099,182) Class C (10,985,541) (11,431,655) Class D (21,409,667) (27,764,995) -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders (490,040,966) (840,034,600) -------------- -------------- Capital Share Net increase in net assets derived from capital share transactions 248,537,770 1,885,677,575 Transactions -------------- -------------- (Note 4): Net Assets: Total increase in net assets 138,195,367 2,641,872,361 Beginning of period 9,031,992,294 6,390,119,933 -------------- -------------- End of period* $9,170,187,661 $9,031,992,294 ============== ============== *Undistributed investment income--net $ 83,363,504 $ 71,862,639 ============== ============== See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Financial Highlights
Class A For the Six The following per share data and ratios have been derived Months from information provided in the financial statements. Ended Sept. 30, For the Year Ended March 31, Increase (Decrease) in Net Asset Value: 1996++++ 1996 1995 1994 1993 Per Share Net asset value, beginning of period $ 30.90 $ 27.74 $ 27.46 $ 27.89 $ 26.90 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net .66 1.21 1.01 .97 .87 Realized and unrealized gain on investments and foreign currency transactions--net .70 5.41 1.77 .50 1.99 ---------- ---------- ---------- ---------- ---------- Total from investment operations 1.36 6.62 2.78 1.47 2.86 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.62) (1.16) (.94) (.95) (.87) Realized gain on investments--net (1.13) (2.30) (1.56) (.95) (1.00) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (1.75) (3.46) (2.50) (1.90) (1.87) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 30.51 $ 30.90 $ 27.74 $ 27.46 $ 27.89 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 4.57%+++ 24.50% 10.95% 5.39% 11.33% Return:** ========== ========== ========== ========== ========== Ratios to Expenses .55%* .56% .57% .53% .55% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net 4.26%* 4.09% 3.81% 3.52% 3.56% ========== ========== ========== ========== ========== Supplemental Net assets, end of period (in thousands) $3,242,810 $3,225,758 $2,507,767 $2,237,492 $2,056,023 Data: ========== ========== ========== ========== ========== Portfolio turnover 22% 84% 89% 86% 55% ========== ========== ========== ========== ========== Average commission rate paid++ $ .0488 $ .0382 -- -- -- ========== ========== ========== ========== ========== *Annualized. **Total investment returns exclude the effects of sales loads. ++For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange rate on the date of the transaction. Such conversions may materially affect the rate shown. ++++Based on average shares outstanding during the period. +++Aggregate total investment return. See Notes to Financial Statements.
FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class B For the Six The following per share data and ratios have been derived Months from information provided in the financial statements. Ended Sept. 30, For the Year Ended March 31, Increase (Decrease) in Net Asset Value: 1996++++ 1996 1995 1994 1993 Per Share Net asset value, beginning of period $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net .48 .90 .74 .70 .65 Realized and unrealized gain on investments and foreign currency transactions--net .71 5.29 1.72 .48 1.89 ---------- ---------- ---------- ---------- ---------- Total from investment operations 1.19 6.19 2.46 1.18 2.54 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.47) (.87) (.66) (.68) (.63) Realized gain on investments--net (1.13) (2.30) (1.56) (.95) (1.00) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (1.60) (3.17) (2.22) (1.63) (1.63) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 29.89 $ 30.30 $ 27.28 $ 27.04 $ 27.49 ========== ========== ========== ========== ========== Total Investment Based on net asset value per share 4.07%+++ 23.22% 9.81% 4.36% 10.16% Return:** ========== ========== ========== ========== ========== Ratios to Expenses 1.57%* 1.58% 1.59% 1.55% 1.56% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net 3.19%* 3.07% 2.79% 2.50% 2.53% ========== ========== ========== ========== ========== Supplemental Net assets, end of period (in thousands) $5,013,839 $5,025,504 $3,664,250 $3,079,332 $2,694,774 Data: ========== ========== ========== ========== ========== Portfolio turnover 22% 84% 89% 86% 55% ========== ========== ========== ========== ========== Average commission rate paid++ $ .0488 $ .0382 -- -- -- ========== ========== ========== ========== ========== *Annualized. **Total investment returns exclude the effects of sales loads. ++For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange rate on the date of the transaction. Such conversions may materially affect the rate shown. ++++Based on average shares outstanding during the period. +++Aggregate total investment return. See Notes to Financial Statements.
FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
Class C Class D For the For the For the For the Six For the Period Six For the Period The following per share data and ratios have been derived Months Year Oct. 21, Months Year Oct. 21, from information provided in the financial statements. Ended Ended 1994++++ Ended Ended 1994++++ to Sept. 30, March 31, March 31, Sept. 30, March 31, March 31, Increase (Decrease) in Net Asset Value: 1996++++++ 1996 1995 1996++++++ 1996 1995 Per Share Net asset value, beginning of period $ 30.08 $ 27.17 $ 26.81 $ 30.86 $ 27.72 $ 27.27 Operating -------- -------- -------- -------- -------- -------- Performance: Investment income--net .53 .92 .49 .65 1.16 .48 Realized and unrealized gain on investments and foreign currency transactions--net .64 5.24 1.03 .67 5.38 1.15 -------- -------- -------- -------- -------- -------- Total from investment operations 1.17 6.16 1.52 1.32 6.54 1.63 -------- -------- -------- -------- -------- -------- Less dividends and distributions: Investment income--net (.49) (.95) (.43) (.58) (1.10) (.45) Realized gain on investments--net (1.13) (2.30) (.73) (1.13) (2.30) (.73) -------- -------- -------- -------- -------- -------- Total dividends and distributions (1.62) (3.25) (1.16) (1.71) (3.40) (1.18) -------- -------- -------- -------- -------- -------- Net asset value, end of period $ 29.63 $ 30.08 $ 27.17 $ 30.47 $ 30.86 $ 27.72 ======== ======== ======== ======== ======== ======== Total Investment Based on net asset value per share 4.04%+++ 23.25% 6.07%+++ 4.46%+++ 24.21% 6.42%+++ Return:** ======== ======== ======== ======== ======== ======== Ratios to Average Expenses 1.58%* 1.59% 1.64%* .80%* .81% .87%* Net Assets: ======== ======== ======== ======== ======== ======== Investment income--net 3.49%* 3.08% 3.22%* 4.20%* 3.84% 3.94%* ======== ======== ======== ======== ======== ======== Supplemental Net assets, end of period $308,563 $259,131 $ 46,902 $604,976 $521,599 $171,201 Data: (in thousands) ======== ======== ======== ======== ======== ======== Portfolio turnover 22% 84% 89% 22% 84% 89% ======== ======== ======== ======== ======== ======== Average commission rate paid++ $ .0488 $ .0382 -- $ .0488 $ .0382 -- ======== ======== ======== ======== ======== ======== *Annualized. **Total investment returns exclude the effect of sales loads. ++For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign currencies, which have been converted into US dollars using the prevailing exchange rate on the date of the transaction. Such conversions may materially affect the rate shown. ++++Commencement of Operations. ++++++Based on average shares outstanding during 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. These unaudited financial statements reflect all adjust- ments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal recurring nature. 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, liqui- dation and other rights and the same terms and con- ditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account main- tenance 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 mainte- nance 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 en- gage 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 enter into closing purchase transactions with respect to such options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written 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. 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. 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 mainten- ance 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 six months ended September 30, 1996, MLFD earned underwriting 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 $24,270 $ 339,314 Class D $87,123 $1,243,243 For the six months ended September 30, 1996, MLPF&S received contingent deferred sales charges of $2,865,924 and $96,196 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $986 relating to transactions subject to front-end sales charge waivers in Class D Shares. In addition, MLPF&S received $267,420 in commissions on the execution of portfolio security transactions for the six months ended September 30, 1996. Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. During the six months ended September 30, 1996, Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, received $3,374 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. NOTES TO FINANCIAL STATEMENTS (concluded) 3. Investments: Purchases and sales of investments, excluding short- term securities, for the six months ended September 30, 1996 were $1,935,137,537 and $1,959,261,113, respectively. Net realized and unrealized gains (losses) as of September 30, 1996 were as follows: Realized Unrealized Gains (Losses) Gains Long-term investments $183,356,236 $863,443,068 Short-term investments 32,250 -- Paydowns 122,168 -- Foreign currency transactions (64,818) 22,403 ------------ ------------ Total $183,445,836 $863,465,471 ============ ============ As of September 30, 1996, net unrealized appreciation for Federal income tax purposes aggregated $863,443,068, of which $1,030,343,688 related to appreciated securi- ties and $166,900,620 related to depreciated securities. At September 30, 1996, the aggregate cost of invest- ments for Federal income tax purposes was $8,257,285,901. 4. Capital Share Transactions: Net increase in net assets derived from capital share transactions was $248,537,770 and $1,885,677,575 for the six months ended September 30, 1996 and for the year ended March 31, 1996, respectively. Transactions in capital shares for each class were as follows: Class A Shares for the Six Dollar Months Ended September 30, 1996 Shares Amount Shares sold 10,486,452 $ 315,584,268 Shares issued to shareholders in reinvestment of dividends & distributions 3,379,846 100,246,233 ------------ -------------- Total issued 13,866,298 415,830,501 Shares redeemed (11,995,248) (363,983,852) ------------ -------------- Net increase 1,871,050 $ 51,846,649 ============ ============== 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 B Shares for the Six Dollar Months Ended September 30, 1996 Shares Amount Shares sold 18,526,947 $ 549,832,492 Shares issued to shareholders in reinvestment of dividends & distributions 4,658,122 135,644,515 ------------ -------------- Total issued 23,185,069 685,477,007 Shares redeemed (21,035,387) (624,804,183) Automatic conversion of shares (238,386) (7,007,350) ------------ -------------- Net increase 1,911,296 $ 53,665,474 ============ ============== 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 C Shares for the Six Dollar Months Ended September 30, 1996 Shares Amount Shares sold 2,992,059 $ 88,491,974 Shares issued to shareholders in reinvestment of dividends & distributions 282,706 8,164,542 ------------ -------------- Total issued 3,274,765 96,656,516 Shares redeemed (1,476,796) (43,475,691) ------------ -------------- Net increase 1,797,969 $ 53,180,825 ============ ============== 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 D Shares for the Six Dollar Months Ended September 30, 1996 Shares Amount Shares sold 5,077,167 $ 154,561,942 Automatic conversion of shares 233,976 7,007,350 Shares issued to shareholders in reinvestment of dividends & distributions 584,357 17,314,493 ------------ -------------- Total issued 5,895,500 178,883,785 Shares redeemed (2,942,590) (89,038,963) ------------ -------------- Net increase 2,952,910 $ 89,844,822 ============ ============== 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 2,406,945 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 ============ ============== 5. Commitments: At September 30, 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 $3,759,000 and $296,000, respectively. PORTFOLIO INFORMATION As of September 30, 1996 Ten Largest Common Percent of Stock Holdings Net Assets YPF S.A. (ADR) 2.3% Williams Companies, Inc. 2.1 The Goodyear Tire & Rubber Co. 1.5 United Technologies Corp. 1.3 Columbia/HCA Healthcare Corp. 1.3 Travelers Inc. 1.3 Glaxo Wellcome PLC (ADR) 1.2 Allstate Corporation 1.2 Nestle S.A. 1.2 Imperial Chemical Industries PLC (ADR) 1.1 Ten Largest Percent of Industries Net Assets* Banking 7.6% Insurance 7.1 Oil--Integrated 6.6 Finance 4.4 Natural Gas Suppliers 3.8 Diversified Companies 3.7 Financial Services 3.6 Pharmaceuticals 3.0 Chemicals 2.8 Telecommunications 2.5 [FN] *Based on total holdings in common stocks and bonds. Common Stock Portfolio Changes For the Quarter Ended September 30, 1996 Additions Avnet, Inc. Belden Inc. Harrah's Entertainment, Inc. Kansas City Southern Industries, Inc. Masco Corporation Sandoz AG Telefonica del Peru S.A. (ADR) Transamerica Corporation Deletions Aquarion Co. Armor All Products Corp. BELCO Oil & Gas Corporation Banco Bilboa Vizcaya (ADR) BankAmerica Corp. Central Hudson Gas & Electric Corp. Danaher Corporation Entergy Corp. First Colony Holding Corp. Integon Corp. KLM Royal Dutch Airlines N.V. Montana Power Co. NUI Corporation Oriole Homes Corp. Rollins, Inc. USLIFE Corporation United Water Resources, Inc. Warner-Lambert Co. -----END PRIVACY-ENHANCED MESSAGE-----