-----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, EOR4YFxEIF5UZipSIC7IjcXozo9Ubbvi92yemoPms9K+DL13T5As4PCJgpqXMXC9 m3tk33gtQN9ukcoD2/i1hA== 0001005477-98-003324.txt : 19981120 0001005477-98-003324.hdr.sgml : 19981120 ACCESSION NUMBER: 0001005477-98-003324 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981119 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: SEC FILE NUMBER: 811-02405 FILM NUMBER: 98755368 BUSINESS ADDRESS: STREET 1: P O BOX 9011 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 SEMI-ANNUAL REPORT MERRILL LYNCH CAPITAL FUND, INC. [GRAPHIC OMITTED] STRATEGIC performance Semi-Annual Report September 30, 1998 MERRILL LYNCH CAPITAL FUND, INC. PORTFOLIO SUMMARY Security Diversification As a Percentage of Net Assets As of September 30, 1998 A pie chart illustrating the following percentages: US Bonds 30.6% Non-US Bonds 4.4% Cash & Cash Equivalents 3.7% US Stocks 52.2% Non-US Stocks 9.1% Sector Representation As a Percentage of Equities As of September 30, 1998 A pie chart illustrating the following percentages: Financial Services 21.0% Consumer Services 5.3% Utilities 2.7% Transportation 4.3% Capital Goods--Technology 9.5% Consumer Cyclicals 12.5% Energy 13.6% Basic Industries 4.5% Diversified 2.5% Credit Cyclicals 2.0% Consumer Staples 11.8% Capital Goods 10.3% Geographic Diversification Percent of As of September 30, 1998 Net Assets* - -------------------------------------------------------------------------------- United States 84.4% - -------------------------------------------------------------------------------- United Kingdom 3.6 - -------------------------------------------------------------------------------- Argentina 2.6 - -------------------------------------------------------------------------------- Switzerland 2.3 - -------------------------------------------------------------------------------- Bermuda 1.2 - -------------------------------------------------------------------------------- Mexico 1.1 - -------------------------------------------------------------------------------- France 1.1 - -------------------------------------------------------------------------------- Bahamas 0.9 - -------------------------------------------------------------------------------- Brazil 0.5 - -------------------------------------------------------------------------------- Netherlands 0.4 - -------------------------------------------------------------------------------- Turkey 0.4 - -------------------------------------------------------------------------------- Chile 0.4 - -------------------------------------------------------------------------------- Panama 0.3 - -------------------------------------------------------------------------------- India 0.3 - -------------------------------------------------------------------------------- Colombia 0.2 - -------------------------------------------------------------------------------- Hong Kong 0.1 - -------------------------------------------------------------------------------- South Korea 0.1 - -------------------------------------------------------------------------------- Guatemala 0.1 - -------------------------------------------------------------------------------- * Includes investments in short-term securities. US Common Stock Investments S&P As of September 30, 1998 Fund 500* - -------------------------------------------------------------------------------- Average Capitalization (in billions) $19.4 $16.1 - -------------------------------------------------------------------------------- Price/Book Value 2.5 5.6 - -------------------------------------------------------------------------------- Price/Earnings Ratio** 18.3 23.8 - -------------------------------------------------------------------------------- Yield Based on Current Dividend 2.1% 1.6% - -------------------------------------------------------------------------------- * An unmanaged broad-based index comprised of common stocks. ** Based on 1998 earnings estimates. Fixed-Income Investments Merrill Lynch As of September 30, 1998 Fund DOAO Index* - -------------------------------------------------------------------------------- Duration 5.4 Years 5.1 Years - -------------------------------------------------------------------------------- Average Maturity 8.9 Years 8.4 Years - -------------------------------------------------------------------------------- Asset Breakdown: - -------------------------------------------------------------------------------- Corporates 56.5% 20.6% - -------------------------------------------------------------------------------- US Treasuries/Agencies 35.2% 51.2% - -------------------------------------------------------------------------------- Mortgage-Backed 0.8% 28.2% - -------------------------------------------------------------------------------- International Governments 7.5% -- - -------------------------------------------------------------------------------- * An unmanaged market-weighted corporate, Government and mortgage master bond index reflecting approximately 97% of total outstanding US bonds. 1 Merrill Lynch Capital Fund, Inc. September 30, 1998 DEAR SHAREHOLDER During the quarter ended September 30, 1998, a series of adverse global business, economic and political developments necessitated a moderation of US corporate profits expectations and prompted a significant correction in US equity prices. Beginning in the month of July, a combination of slowing economic growth, weak corporate profits and renewed political turmoil drove stock prices lower. Revised second-quarter gross domestic product growth of 1.8% represented a marked slowdown from the 5.5% rate of growth in the first quarter of 1998. While the consumer sector of the economy remained robust, the industrial sector deteriorated, as evidenced by consecutive monthly declines in the index of leading economic indicators in the months of May and June, as well as nominal growth in June's rate of industrial production and the first negative Purchasing Manager's Survey in two years. During this period, the Asian economic crisis began to impair US economic activity. This was further manifest in the slow rate of US corporate profits growth in the second quarter of 1998 as operating income advanced at a mere 3% rate. Finally, concerns about a weakened or distracted US political leadership precipitated the second monthly decline in stock prices of 1998. An implosion in the Russian economy and financial markets exacerbated ongoing deterioration of emerging markets in Asia and Latin America in the month of August, which further restrained expectations for growth in US corporate profits. With equity prices and valuations still at or near record highs, the market offered precious little room for such disappointments. The moderation of earnings expectations resulted in a significant decline in stock prices, as the unmanaged Standard & Poor's 500 Index (S&P 500) declined 14.6% in August and almost 20% from its July peak. This significant decline in the broad market indexes masked even more serious declines within various segments of the market, as the average New York Stock Exchange-listed stock declined over 30% from its 52-week high. A modest recovery ensued in September based on expectations for a more accommodative monetary policy and the potential for a coordinated global reduction in interest rates. With the US economy weakened from ongoing economic turmoil in emerging markets, investors anticipated Federal Reserve Board action to lower interest rates in order to alleviate these growing economic pressures. With the risk of deflation superceding that of inflation in many investors' minds, the lower interest rate structure was expected to facilitate more growth-oriented policies and precipitate a more stable economic environment. Such actions were indeed forthcoming as the Federal Reserve Board lowered the Federal Funds rate by 25 basis points (0.25%) in September. Equities began to weaken again toward month-end as this modest step was considered insufficient to reverse the deceleration in the US economy. However, the central bank unexpectedly cut the Federal Funds rate another quarter point in October, which investors viewed positively. For the September quarter, the US stock market, as measured by the S&P 500, had a -9.95% total return, its worst quarterly decline since the third quarter of 1990. The US bond market continued to be a significant beneficiary of these developments as investors' appetite for safety and security in this volatile environment, coupled with moderating economic growth and continued benign inflation, produced a strong advance in US Treasury security prices and sent long-term Government bond yields to record low levels. The benchmark unmanaged Merrill Lynch Domestic Bond Master Index generated a +4.22% total return for the September quarter, while cash equivalents earned a +1.42% total return. Portfolio Matters Total returns for Merrill Lynch Capital Fund, Inc.'s Class A, Class B, Class C and Class D Shares for the quarter ended September 30, 1998 were -11.41%, - -11.65%, -11.66% and -11.46%, respectively. (Fund results shown do not reflect sales charges and would be lower if sales charges were included.) For much of the year, our investment position reflected our view that equities were expensive and offered limited upside potential. Since we viewed bonds as attractively valued and expected them to provide competitive returns, we maintained a significant bond weighting within the Fund. Despite September's advance, we remain concerned about near-term prospects for the stock market. In our opinion, the powerful forces currently constraining economic and corporate profits growth are unlikely to abate in the near term, and stock prices have not yet fully adjusted to this slower-growth scenario. Therefore, we modestly reduced our equity allocation during the quarter ended September 30, 1998, with an asset allocation at quarter-end of 61.3% of net assets invested in equities, 35.0% in fixed-income securities 2 Merrill Lynch Capital Fund, Inc. September 30, 1998 and 3.8% in cash equivalents. This compares to 62.3% of the Fund's net assets invested in equities, 33.8% in fixed-income securities and 3.9% in cash equivalents at June 30, 1998. However, with bonds more fairly valued and stocks becoming significantly less expensive, our long-term strategy will be to pursue opportunities to increase the Fund's equity allocation in order to seek to take advantage of recent precipitous stock price declines. While our asset allocation posture helped mitigate the impact of declining stock prices during the September quarter, the Fund's relative performance was significantly impaired by adverse stock selection. The largest-capitalization stocks continued to significantly outperform smaller-capitalization equities as investors were willing to pay increasingly higher prices for liquidity. While the S&P 500 Index declined by approximately 10% during the September quarter, the unmanaged S&P Mid-Cap Index of medium-sized companies declined 15%, and the unmanaged Russell 2000 Index of smaller companies fell over 20% during the same period. Also, more than 56% of NYSE-listed stocks and more than 73% of NASDAQ stocks fell 30% or more from their 52-week highs during the September quarter. In addition, the value style of investing continued to underperform the growth style of investing, as the unmanaged Russell 1000 Value Index decreased more than 12% during the quarter while the Russell 1000 Growth Index declined by less than 9%. The Fund's value orientation and investments in many moderate-sized companies ultimately hindered performance. Although we have some holdings among the select group of large-capitalization, consumer-oriented stocks that continued to perform well, our holdings were nominal based on the very high valuation parameters these stocks command in the market. Furthermore, some traditionally defensive market segments, such as insurance, which represented the Fund's largest sector weighting, also performed poorly in this environment as a result of investors' concerns about asset quality and industry pricing trends. Finally, our exposure to the weak energy sector was a contributing factor to disappointing equity results during the quarter. However, we continue to believe our stock selection methodologies are sound and will provide superior risk-adjusted equity returns over the long term. During the quarter ended September 30, 1998, we added six new investments to the equity sector of the Fund, increased our position in 36 stocks, reduced our ownership in six stocks and eliminated eight holdings from the Fund. Notable among the new positions is Waste Management, Inc., the nation's largest environmental services company, which offers substantial opportunities for sustained earnings growth, rising profit margins and returns, significant free cash flow generation and an expanded valuation. This enterprise will command a 25% share of an increasingly consolidated market, and will be run by a management team that has provided superior results to shareholders over the past five years. With revenue growth of 3%-8%, significant cost efficiencies and more efficient capital allocation, the company has the potential to produce near-30% operating margins, a 14% or better return on capital and generate more than $2 billion in annual free cash flow. Insiders own or control approximately 15% of the outstanding shares and management has proven itself to be an excellent value creator. Selling at 15 times estimated 1998 earnings, we believe Waste Management offers attractive upside potential with limited downside risk. Another new position is LucasVarity PLC, an auto parts and aerospace company, whose stock declined by approximately 35% from its 1998 high, representing an attractive entry price in the shares of this highly shareholder-focused company. LucasVarity is reincorporating in the United States from the United Kingdom to facilitate a more active recapitalization and acquisition strategy. The company is debt free, generates ample free cash flow and possesses proven consolidation skills, but is constrained by the UK investment community from establishing a more efficient capital structure and participating in the ongoing consolidation of the auto parts industry. As part of its US-based strategy, LucasVarity plans to repurchase 20% of its outstanding shares over an 18-month period while retaining strong financial resources. The company intends to pursue acquisition opportunities to leverage its market leadership position in brake systems, electrical systems and fuel injection systems. The company has fully embraced the economic value-added approach to management, and employs a 20% pre-tax return hurdle for assessing capital commitments. If acquisitions are not forthcoming at compensatory returns, share repurchases will continue. With very attractive operating and financial characteristics, a highly disciplined senior management team and ample opportunities for internal and external growth, we believe LucasVarity represents 3 Merrill Lynch Capital Fund, Inc. September 30, 1998 very good value, selling at less than nine times estimated 1998 earnings and yielding almost 3%. We eliminated our positions in two insurance company investments, TIG Holdings, Inc. and Penncorp Financial Group, Inc. While we believed that each company possessed unique competitive advantages in niche insurance markets, the intense price competition characterizing current business conditions was ultimately overwhelming, resulting in deteriorating levels of profitability and poor stock price performance. We chose to concentrate our insurance holdings in those companies that possess strong market shares, proprietary distribution capabilities and/or the ability to generate excess capital. These are characteristics that should create value in this challenging pricing environment. Such companies include American International Group, Inc., The Allstate Corporation, Provident Companies, Inc. and EXEL Limited. Despite the stock market's recent volatility and our near-term concerns about stock market prospects, we continued to identify and invest in above-average companies whose stock sell at below-average valuation levels. We define an above-average company as one that maintains a strong competitive position, earns consistently high returns on capital, is financially sound, generates cash in excess of its internal reinvestment requirements and is managed by individuals motivated to create value for shareholders. We define a below-average price as one that does not adequately or accurately reflect what we believe to be the company's underlying intrinsic value. On average, the stocks held in the Fund generated comparable returns on shareholders' equity and have much stronger balance sheets and offer faster earnings growth than the average company, as measured by the S&P 500. However, these same stocks sell at an average price/earnings ratio of 18.3 times estimated 1998 earnings per share compared to 23.8 times for the S&P 500, at 2.5 times current book value per share compared to 5.6 times for the S&P 500, and provide a 2.1% dividend yield compared to a yield of 1.6% for the S&P 500. Within the fixed-income sector of the Fund, two important themes were in evidence during the September quarter. One was the dramatic decline of domestic interest rates on US Government bonds to historically low levels. The other was a rapid expansion of the premium or yield differential between US Treasury securities and other sectors of the bond market. Because of weakening economies and continued turmoil in Asia and Latin America during the quarter, high-yield and emerging-market securities were particularly hard hit. The Fund benefited from its relatively long duration of 5.4 years as well as a relatively high proportion of US Government bonds in its mix. However, this was offset by our exposure to foreign government bonds, such as those in Mexico and Argentina, which have fallen in price and now offer yields in excess of 10%. We took advantage of these dynamics by reducing our exposure to US Treasury securities from 40.3% of fixed-income assets at June 30, 1998 to 35.2% at September 30, 1998 and high-yield corporate bonds from 7.8% to 7.3%. The proceeds were reinvested in investment-grade corporate bonds, increasing the sector from 44.0% of the Fund's bond assets at June 30, 1998 to 49.2% at September 30, 1998. Proceeds were also redistributed into additional foreign government sector bonds, which now represent 7.5% of bond assets, up from 7.1% from the June quarter. As a result, the average quality of our bonds declined slightly from A1/A+ to A2/A. The average yield-to-maturity of our bonds declined only six basis points to 6.47%, while intermediate-term interest rates declined more than 100 basis points during the September quarter. In Conclusion We appreciate your continued interest and participation in Merrill Lynch Capital Fund, Inc., and we look forward to assisting you with your financial needs in the months and years to come. Sincerely, /s/ Arthur Zeikel Arthur Zeikel President /s/ Kurt Schansinger Kurt Schansinger Senior Vice President and Portfolio Manager November 5, 1998 4 Merrill Lynch Capital Fund, Inc. September 30, 1998 PERFORMANCE DATA About Fund Performance Investors are able to purchase shares of the Fund through the Merrill Lynch Select Pricing(SM) System, which offers four pricing alternatives: o Class A Shares incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution or account maintenance fees. Class A Shares are available only to eligible investors. o 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. (There is no initial sales charge for automatic share conversions.) o 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. o Class D Shares incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). None of the past results shown should be considered a representation of future performance. Figures shown in the "Recent Performance Results" and "Average Annual Total Return" tables assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. Recent Performance Results
Ten Years/ 12 Month 3 Month Since Inception Total Return Total Return Total Return ======================================================================================= ML Capital Fund, Inc. Class A Shares* -3.05% -11.41% +234.04% - --------------------------------------------------------------------------------------- ML Capital Fund, Inc. Class B Shares* -4.04 -11.65 +194.54 - --------------------------------------------------------------------------------------- ML Capital Fund, Inc. Class C Shares* -4.03 -11.66 + 64.71 - --------------------------------------------------------------------------------------- ML Capital Fund, Inc. Class D Shares* -3.28 -11.46 + 69.84 - --------------------------------------------------------------------------------------- Dow Jones Industrial Average** +0.41 -12.01 +394.85/+385.10/+120.11 - --------------------------------------------------------------------------------------- Standard & Poor's 500 Index** +9.05 - 9.95 +392.61/+371.71/+137.75 =======================================================================================
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included. Total investment returns are based on changes in net asset values for the periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. The Fund's ten-year/inception periods are: Class A Shares, for the ten years ended 9/30/98; Class B Shares, from 10/21/88 to 9/30/98; and Class C & Class D Shares, from 10/21/94 to 9/30/98. ** An unmanaged broad-based index comprised of common stocks. Total investment returns for unmanaged indexes are based on estimates. Ten years/since inception total returns are: for the ten years ended 9/30/98; from 10/21/88 to 9/30/98; and from 10/21/94 to 9/30/98, respectively. 5 Merrill Lynch Capital Fund, Inc. September 30, 1998 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 $19,120.27 on September 30, 1998. Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** ================================================================================ Class A Shares* ================================================================================ Year Ended 9/30/98 - 3.05% - 8.14% - -------------------------------------------------------------------------------- Five Years Ended 9/30/98 +12.36 +11.15 - -------------------------------------------------------------------------------- Ten Years Ended 9/30/98 +12.82 +12.21 - -------------------------------------------------------------------------------- * Maximum sales charge is 5.25%. ** Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** ================================================================================ Class B Shares* ================================================================================ Year Ended 9/30/98 - 4.04% - 7.59% - -------------------------------------------------------------------------------- Five Years Ended 9/30/98 +11.22 +11.22 - -------------------------------------------------------------------------------- Inception (10/21/88) through 9/30/98 +11.48 +11.48 - -------------------------------------------------------------------------------- * 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 9/30/98 - 4.03% - 4.92% - -------------------------------------------------------------------------------- Inception (10/21/94) through 9/30/98 +13.49 +13.49 - -------------------------------------------------------------------------------- * 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 9/30/98 - 3.28% - 8.36% - -------------------------------------------------------------------------------- Inception (10/21/94) through 9/30/98 +14.38 +12.83 - -------------------------------------------------------------------------------- * Maximum sales charge is 5.25%. ** Assuming maximum sales charge. 6 Merrill Lynch Capital Fund, Inc. September 30, 1998 SCHEDULE OF INVESTMENTS
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets ==================================================================================================================================== Aerospace 2,500,000 Boeing Co. (The) $ 122,280,349 $ 85,781,250 0.8% 1,500,000 Lockheed Martin Corporation 136,266,348 151,218,750 1.5 -------------- --------------- ----- 258,546,697 237,000,000 2.3 ==================================================================================================================================== Apparel 3,000,000 ++Fruit of the Loom, Inc. (Class A) 86,426,095 45,187,500 0.4 ==================================================================================================================================== Automobile Parts 2,600,000 Federal-Mogul Corp. 119,255,101 121,550,000 1.2 ==================================================================================================================================== Automotive 393,500 LucasVarity PLC (ADR)* 12,725,700 12,296,875 0.1 ==================================================================================================================================== Banking 2,100,000 Chase Manhattan Corporation (The) 87,690,574 90,825,000 0.9 ==================================================================================================================================== Building Materials 2,300,000 ++American Standard Companies, Inc. 106,290,321 60,662,500 0.6 5,100,000 Masco Corporation 83,288,716 125,587,500 1.2 -------------- --------------- ----- 189,579,037 186,250,000 1.8 ==================================================================================================================================== Capital Goods 2,000,000 United Dominion Industries, Ltd. 50,002,195 36,250,000 0.3 ==================================================================================================================================== Chemicals 2,100,000 du Pont (E.I.) de Nemours & Co. 108,372,212 117,862,500 1.1 2,200,000 Imperial Chemical Industries PLC (ADR)* 111,272,802 69,850,000 0.7 -------------- --------------- ----- 219,645,014 187,712,500 1.8 ==================================================================================================================================== Computer Software 1,900,000 Computer Associates International, Inc. 58,102,793 70,300,000 0.7 ==================================================================================================================================== Diversified 2,700,000 Corning, Inc. 103,956,918 79,481,250 0.8 Companies 2,000,000 GenCorp, Inc. 58,220,920 38,500,000 0.4 2,100,000 Rockwell International Corp. 116,109,160 75,862,500 0.7 1,796,000 Tenneco, Inc. 77,862,249 59,043,500 0.6 12,500,000 Tomkins PLC 56,833,792 58,574,100 0.5 2,000,000 United Technologies Corporation 63,643,951 152,875,000 1.5 1,750,000 Varian Associates, Inc. (a) 93,141,060 61,687,500 0.6 -------------- --------------- ----- 569,768,050 526,023,850 5.1 ==================================================================================================================================== Drug Stores 4,300,000 Rite Aid Corp. 68,282,570 152,650,000 1.5 ==================================================================================================================================== Electrical Equipment 1,500,000 General Electric Co. 38,165,328 119,343,750 1.1 750,000 Philips Electronics N.V. (NY Registered Shares) 50,507,781 40,031,250 0.4 -------------- --------------- ----- 88,673,109 159,375,000 1.5 ==================================================================================================================================== Electronic 1,500,000 Avnet, Inc. 83,947,762 55,218,750 0.5 Components ==================================================================================================================================== Financial Services 2,000,000 Federal National Mortgage Association 52,392,099 128,500,000 1.2 1,000,000 Transamerica Corporation 76,009,264 106,000,000 1.0 -------------- --------------- ----- 128,401,363 234,500,000 2.2 ==================================================================================================================================== Food & Beverage 3,230,800 Diageo PLC (ADR)* 145,087,956 117,116,500 1.1 2,000,000 McCormick & Company, Inc. 66,067,228 58,125,000 0.6 -------------- --------------- ----- 211,155,184 175,241,500 1.7 ==================================================================================================================================== Foods/Food 75,000 Nestle S.A. (Registered Shares) 78,575,411 149,252,114 1.4 Processing ==================================================================================================================================== Footwear 2,000,000 Nike, Inc. (Class B) 92,141,145 73,625,000 0.7 8,000,000 Yue Yuen Industrial (Holdings Limited) 10,727,086 14,145,586 0.1 -------------- --------------- ----- 102,868,231 87,770,586 0.8 ==================================================================================================================================== Hospital 4,300,000 ++Tenet Healthcare Corp. 74,755,706 123,625,000 1.2 Management ====================================================================================================================================
7 Merrill Lynch Capital Fund, Inc. September 30, 1998 SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets ==================================================================================================================================== Hotels & Casinos 2,500,000 ++Sun International Hotels Ltd. (a) $ 99,267,368 $ 94,843,750 0.9% ==================================================================================================================================== Information Systems 2,750,000 Reynolds & Reynolds Company (Class A) 55,569,130 48,984,375 0.5 ==================================================================================================================================== Insurance 3,600,000 Allstate Corporation (The) 57,144,863 150,075,000 1.4 1,500,000 American International Group, Inc. 46,545,446 115,500,000 1.1 1,800,000 Berkley (W.R.) Corporation (a) 62,155,679 53,775,000 0.5 2,000,000 EXEL Limited (Class A) 48,930,546 126,000,000 1.2 2,100,000 Fremont General Corp. (a) 37,724,811 100,800,000 1.0 2,366,100 Horace Mann Educators Corp. (a) 39,300,095 70,983,000 0.7 1,450,000 ITT Industries Inc. 48,310,473 49,118,750 0.5 4,200,000 Provident Companies, Inc. 86,546,428 141,750,000 1.4 4,700,000 ++Travelers Group, Inc. 47,951,392 176,250,000 1.7 -------------- --------------- ----- 474,609,733 984,251,750 9.5 ==================================================================================================================================== Leisure/Hotels 4,500,000 Carnival Corp. (Class A) 61,184,278 143,156,250 1.4 3,500,000 ++Harrah's Entertainment, Inc. 63,703,248 46,593,750 0.4 -------------- --------------- ----- 124,887,526 189,750,000 1.8 ==================================================================================================================================== Machinery & 1,000,000 ++SPX Corp. (a) 58,441,924 41,312,500 0.4 Machine Tools ==================================================================================================================================== Natural Gas 3,750,000 Coastal Corporation (The) 81,382,658 126,562,500 1.2 2,600,000 El Paso Energy Corporation 57,509,409 84,337,500 0.8 8,000,000 Williams Companies, Inc. 71,579,900 230,000,000 2.2 -------------- --------------- ----- 210,471,967 440,900,000 4.2 ==================================================================================================================================== Oil--Integrated 1,750,000 TOTAL S.A. (ADR)* 73,032,394 109,921,875 1.1 3,168,700 Unocal Corporation 118,671,046 114,865,375 1.1 5,000,000 YPF S.A. (ADR)* 95,920,616 130,000,000 1.2 -------------- --------------- ----- 287,624,056 354,787,250 3.4 ==================================================================================================================================== Oil--Service 2,500,000 Halliburton Co. 69,699,584 71,406,250 0.7 ==================================================================================================================================== Paper & Forest 2,100,000 Kimberly-Clark Corp. 105,243,201 85,050,000 0.8 Products 800,000 Temple-Inland, Inc. 36,743,614 38,300,000 0.4 1,500,000 Weyerhaeuser Co. 68,318,476 63,281,250 0.6 -------------- --------------- ----- 210,305,291 186,631,250 1.8 ==================================================================================================================================== Pharmaceuticals 1,750,000 Glaxo Wellcome PLC (ADR)* 47,298,375 99,968,750 1.0 60,000 Novartis AG (Registered Shares) 78,569,582 96,206,373 0.9 -------------- --------------- ----- 125,867,957 196,175,123 1.9 ==================================================================================================================================== Railroads 5,000,000 Kansas City Southern Industries, Inc. 83,444,911 175,000,000 1.7 2,300,000 Union Pacific Corporation 135,110,114 98,037,500 0.9 -------------- --------------- ----- 218,555,025 273,037,500 2.6 ==================================================================================================================================== Real Estate 1,000,000 CarrAmerica Realty Corp. 26,832,805 22,812,500 0.2 Investment Trusts 2,700,000 Patriot American Hospitality, Inc. 71,717,053 34,425,000 0.4 1,000,000 Walden Residential Properties, Inc. (a) 20,679,751 23,000,000 0.2 -------------- --------------- ----- 119,229,609 80,237,500 0.8 ==================================================================================================================================== Restaurants 2,000,000 McDonald's Corporation 98,086,085 119,375,000 1.1 ==================================================================================================================================== Retail--Stores 850,000 Sears, Roebuck and Co. 38,406,410 37,559,375 0.4 ====================================================================================================================================
8 Merrill Lynch Capital Fund, Inc. September 30, 1998 SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of Industries Held Common Stocks Cost (Note 1a) Net Assets ==================================================================================================================================== Retail Trade 1,500,000 Wal-Mart Stores, Inc. $ 37,077,170 $ 81,937,500 0.8% ==================================================================================================================================== Semiconductors 2,400,000 Motorola, Inc. 129,670,703 102,450,000 1.0 ==================================================================================================================================== Telecommunications 2,707,100 Frontier Corporation 77,508,146 74,106,863 0.7 700,000 ++Telecomunicacoes Brasileiras S.A.-- Telebras (ADR)* 76,408,230 49,306,250 0.5 -------------- --------------- ----- 153,916,376 123,413,113 1.2 ==================================================================================================================================== Tires & Rubber 2,500,000 Goodyear Tire & Rubber Company (The) 100,281,864 128,437,500 1.2 ==================================================================================================================================== Waste Management 2,500,000 Waste Management, Inc. 129,827,858 120,156,250 1.2 ==================================================================================================================================== Wireless 2,400,000 ++Nextel Communications, Inc. 55,877,780 48,450,000 0.5 Communication-- Domestic Paging & Cellular ==================================================================================================================================== Total Common Stocks 5,286,074,008 6,375,124,661 61.3 ==================================================================================================================================== Face Amount Corporate Bonds ==================================================================================================================================== Aerospace Boeing Company (The): $ 12,500,000 6.44% due 12/20/2004 12,560,000 13,172,250 0.1 10,000,000 Series X, 6.18% due 3/15/2005 10,000,000 10,103,080 0.1 -------------- --------------- ----- 22,560,000 23,275,330 0.2 ==================================================================================================================================== Automotive Hertz Corp.: 10,000,000 7% due 5/01/2002 10,305,500 10,489,800 0.1 25,000,000 6.70% due 6/15/2002 24,815,300 25,952,500 0.3 13,000,000 6% due 1/15/2003 12,891,670 13,197,730 0.1 20,000,000 Hyundai Motor Co., Ltd., 7.60% due 7/15/2007+++ 19,916,100 12,200,000 0.1 -------------- --------------- ----- 67,928,570 61,840,030 0.6 ==================================================================================================================================== Banking 30,000,000 Banco Nacional de Commercio Exterior SNC, Global Bonds, 7.25% due 2/02/2004 28,187,700 24,000,000 0.2 13,600,000 Banco Rio de la Plata, 8.75% due 12/15/2003 13,751,700 11,900,000 0.1 29,000,000 Bank of Boston Corp., 6.625% due 12/01/2005 27,575,520 29,900,450 0.3 BankAmerica Corp.: 15,000,000 6.875% due 6/01/2003 14,149,050 15,912,600 0.2 30,000,000 6.75% due 9/15/2005 29,591,750 31,848,000 0.3 Chase Manhattan Corporation (The): 15,000,000 6.50% due 8/01/2005 14,552,850 15,482,850 0.2 15,000,000 6.25% due 1/15/2006 13,892,250 15,247,050 0.1 20,000,000 First Security Corp., 7% due 7/15/2005 19,803,850 21,411,700 0.2 30,000,000 First Union Corp., 6.55% due 10/15/2035 29,953,350 31,519,500 0.3 22,750,000 Firstbank Puerto Rico, 7.625% due 12/20/2005 22,140,802 24,119,618 0.2 10,000,000 Great Western Financial Corp., 6.375% due 7/01/2000 9,998,800 10,152,600 0.1 Household Bank: 10,000,000 6.87% due 5/15/2001 9,868,800 10,338,040 0.1 20,000,000 6.875% due 3/17/2003 19,886,200 20,961,240 0.2 10,300,000 6.50% due 7/15/2003 10,202,253 10,771,637 0.1 40,000,000 NationsBank Corp., 5.60% due 2/07/2001 40,000,000 40,454,400 0.4 25,500,000 PNC Funding Corp., 6.125% due 9/01/2003 24,922,025 26,288,970 0.2 20,000,000 People's Bank--Bridgeport, 7.20% due 12/01/2006 19,956,700 19,856,800 0.2 26,000,000 Provident Bank, 6.375% due 1/15/2004 25,287,430 26,855,660 0.3
9 Merrill Lynch Capital Fund, Inc. September 30, 1998 SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets ==================================================================================================================================== Banking Union Planters Corp.: (concluded) $ 20,000,000 6.25% due 11/01/2003 $ 18,756,100 $ 20,795,000 0.2% 12,500,000 6.75% due 11/01/2005 12,001,875 12,912,750 0.1 -------------- --------------- ----- 404,479,005 420,728,865 4.0 ==================================================================================================================================== Beverages 22,000,000 Coca-Cola Femsa, S.A., 8.95% due 11/01/2006 21,984,595 19,602,616 0.2 10,000,000 Panamerican Beverages, Inc., 7.25% due 7/01/2009 10,037,500 9,175,000 0.1 -------------- --------------- ----- 32,022,095 28,777,616 0.3 ==================================================================================================================================== Broadcasting 20,000,000 British Sky Broadcasting Group PLC, 7.30% due 10/15/2006 20,037,440 20,657,600 0.2 ==================================================================================================================================== Building Materials 10,000,000 Armstrong World, 6.50% due 8/15/2005 9,980,400 10,451,700 0.1 ==================================================================================================================================== Chemicals 12,000,000 Airgas, Inc., 7.14% due 3/08/2004 12,007,480 12,733,104 0.1 37,000,000 Lyondell Petrochemical Company, 6.50% due 2/15/2006 35,447,016 33,733,640 0.3 40,000,000 Union Carbide Corp., 6.79% due 6/01/2025 40,292,500 41,814,800 0.4 -------------- --------------- ----- 87,746,996 88,281,544 0.8 ==================================================================================================================================== Consumer Services Loewen Group, Inc.+++: 16,000,000 6.70% due 10/01/1999 15,970,340 15,432,400 0.1 20,000,000 8.25% due 10/15/2003 20,208,132 19,600,160 0.2 -------------- --------------- ----- 36,178,472 35,032,560 0.3 ==================================================================================================================================== Electronics Tandy Corp.: 20,000,000 6.125% due 1/15/2003 19,971,600 20,855,600 0.2 15,000,000 6.95% due 9/01/2007 14,944,120 15,962,250 0.2 -------------- --------------- ----- 34,915,720 36,817,850 0.4 ==================================================================================================================================== Finance General Motors Acceptance Corp.: 30,000,000 6.375% due 4/04/2000 29,932,500 30,403,260 0.3 55,000,000 5.625% due 2/15/2001 54,450,000 55,578,050 0.5 30,000,000 6.75% due 6/10/2002 29,520,300 31,603,200 0.3 15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 15,231,150 0.2 -------------- --------------- ----- 128,898,600 132,815,660 1.3 ==================================================================================================================================== Financial Leasing GATX Corp.: 25,000,000 6.875% due 11/01/2004 24,938,000 26,451,500 0.2 25,000,000 6.69% due 11/30/2005 24,984,750 26,708,000 0.3 20,000,000 XTRA Corp., 6.68% due 11/30/2001 20,000,000 20,939,960 0.2 -------------- --------------- ----- 69,922,750 74,099,460 0.7 ==================================================================================================================================== Financial Other 14,000,000 Case Credit Corp., 5.95% due 8/01/2000 13,988,380 14,151,788 0.1 ==================================================================================================================================== Financial Services Finova Capital Corp.: 25,000,000 6.45% due 6/01/2000 24,766,550 25,371,250 0.2 15,000,000 5.98% due 2/27/2001 14,968,950 15,157,110 0.2 10,000,000 6.56% due 11/15/2002 10,000,000 10,411,400 0.1 20,000,000 McDonnell Douglas Finance Corp., 6.965% due 9/12/2005 20,049,200 21,955,380 0.2 35,000,000 Morgan Stanley Group, Inc., 5.75% due 2/15/2001 34,968,150 35,365,435 0.3 13,000,000 Norwest Financial, Inc., 6.625% due 7/15/2004 13,000,000 13,830,960 0.1 Salomon, Inc.: 10,000,000 6.75% due 2/15/2003 9,804,000 10,418,340 0.1 5,000,000 6.875% due 12/15/2003 4,968,500 5,255,985 0.1
10 Merrill Lynch Capital Fund, Inc. September 30, 1998 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) $ 25,000,000 6.625% due 7/01/2002 $ 24,994,000 $ 25,899,500 0.3% 20,000,000 7% due 3/15/2004 19,951,800 21,167,280 0.2 -------------- --------------- ----- 177,471,150 184,832,640 1.8 ==================================================================================================================================== Food & Tobacco Nabisco, Inc.: 21,500,000 6.125% due 2/01/2033 21,405,450 21,595,890 0.2 20,000,000 6.375% due 2/01/2035 19,939,200 20,357,800 0.2 -------------- --------------- ----- 41,344,650 41,953,690 0.4 ==================================================================================================================================== Foreign Government 10,000,000 Province of Mendoza, 10% due 9/04/2007+++ 9,931,700 6,550,000 0.1 Obligations Republic of Argentina: 59,500,000 8.75% due 7/10/2002+++ 55,708,750 41,352,500 0.4 18,815,500 Floating Rate Brady Bonds, Series L, 6.187% due 3/31/2005+ 14,891,800 14,864,245 0.2 20,000,000 Global Bonds, 8.375% due 12/20/2003 19,773,750 17,850,000 0.2 15,000,000 Global Bonds, 11.375% due 1/30/2017 14,198,750 13,762,500 0.1 35,000,000 Republic of Colombia, Global Bonds, 7.625% due 2/15/2007 32,457,325 24,412,500 0.2 15,000,000 Republic of Guatemala, 8.50% due 8/03/2007+++ 15,082,250 12,750,000 0.1 39,500,000 Republic of Panama, 8.25% due 4/22/2008 39,272,995 33,575,000 0.3 Republic of Turkey+++: 15,000,000 9.875% due 2/23/2005 14,853,700 12,000,000 0.1 40,000,000 10% due 9/19/2007 39,980,625 32,800,000 0.3 75,000,000 United Mexican States, Global Bonds, 8.625% due 3/12/2008 72,597,500 63,937,500 0.6 -------------- --------------- ----- 328,749,145 273,854,245 2.6 ==================================================================================================================================== Hospital Medpartners, Inc.: Management 29,125,000 6.875% due 9/01/2000 28,915,910 24,631,595 0.2 5,500,000 7.375% due 10/01/2006 4,886,570 4,543,770 0.1 -------------- --------------- ----- 33,802,480 29,175,365 0.3 ==================================================================================================================================== Industrial 20,000,000 Browning-Ferris Industries, Inc., 6.375% due 1/15/2008 19,627,200 20,574,400 0.2 Interface, Inc.: 7,800,000 9.50% due 11/15/2005 7,552,000 8,034,000 0.1 8,000,000 7.30% due 4/01/2008 7,999,520 7,999,784 0.1 20,000,000 Reliance Industries Ltd., 8.25% due 1/15/2027+++ 19,526,999 16,250,000 0.1 25,000,000 Triton Energy Ltd., 8.75% due 4/15/2002 25,363,000 23,917,350 0.2 15,000,000 United Refining Co., 10.75% due 6/15/2007 15,000,000 12,000,000 0.1 Williams Holdings of Delaware, Inc.: 20,000,000 6.625% due 11/15/2004 19,908,000 20,912,200 0.2 50,000,000 6.25% due 2/01/2006 49,739,500 50,976,500 0.5 -------------- --------------- ----- 164,716,219 160,664,234 1.5 ==================================================================================================================================== Information Systems Reynolds & Reynolds Company: 10,000,000 5.875% due 3/20/2000 9,992,900 10,105,000 0.1 37,500,000 6.12% due 3/02/2001 37,500,000 37,875,000 0.4 -------------- --------------- ----- 47,492,900 47,980,000 0.5 ====================================================================================================================================
11 Merrill Lynch Capital Fund, Inc. September 30, 1998 SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets ==================================================================================================================================== Machinery $ 20,000,000 FMC Corp., 6.75% due 5/05/2005 $ 19,890,200 $ 21,087,800 0.2% 22,500,000 Harris Corp., 6.375% due 8/15/2002 22,461,850 23,349,375 0.2 -------------- --------------- ----- 42,352,050 44,437,175 0.4 ==================================================================================================================================== Media/Publishing 15,000,000 News American, Inc., 6.75% due 1/09/2038 15,000,000 15,512,700 0.2 ==================================================================================================================================== Natural Gas-- 15,000,000 Enron Corp., 6.40% due 7/15/2006 14,976,600 15,352,950 0.2 Pipelines ==================================================================================================================================== Natural Gas Coastal Corporation (The): Suppliers 10,000,000 6.50% due 6/02/2008 9,938,550 10,243,700 0.1 27,500,000 6.70% due 2/15/2027 27,225,400 28,840,570 0.3 -------------- --------------- ----- 37,163,950 39,084,270 0.4 ==================================================================================================================================== Oil--Integrated 10,000,000 Compania Naviera Perez Compac S.A.C.F.I.M.F.A., 9% due 1/30/2004+++ 10,125,000 9,125,000 0.1 10,000,000 Giant Industries, Inc., 9% due 9/01/2007+++ 10,000,000 9,400,000 0.1 Occidental Petroleum Corp.: 18,375,000 6.24% due 11/24/2000 18,135,306 18,667,530 0.2 20,000,000 6.50% due 4/01/2005 19,805,815 20,369,800 0.2 20,500,000 Perez Companc S.A., 8.125% due 7/15/2007+++ 20,201,470 16,605,000 0.1 Union Texas Petroleum Holdings, Inc.: 23,250,000 6.70% due 11/18/2002 23,190,070 24,530,075 0.2 20,000,000 6.81% due 12/05/2007 20,000,000 21,769,800 0.2 10,000,000 Unocal Corporation, 6.11% due 2/17/2004 10,000,000 10,345,800 0.1 20,000,000 YPF, 8% due 2/15/2004 18,334,375 18,150,000 0.2 -------------- --------------- ----- 149,792,036 148,963,005 1.4 ==================================================================================================================================== Oil Field 20,000,000 R & B Falcon Corp., 6.75% due 4/15/2005 19,663,800 20,638,020 0.2 Equipment ==================================================================================================================================== Paper & Forest Boise Cascade Corporation: Products 10,000,000 7.35% due 10/11/2004 10,316,700 10,374,200 0.1 20,000,000 7.66% due 5/27/2005 20,000,000 20,944,800 0.2 25,000,000 Champion International Corp., 6.65% due 12/15/2037 25,000,000 25,463,000 0.3 -------------- --------------- ----- 55,316,700 56,782,000 0.6 ==================================================================================================================================== Real Estate 10,000,000 Franchise Finance Corp. of America, 6.95% Investment Trusts due 8/29/2007 10,000,000 10,113,690 0.1 ==================================================================================================================================== Telecommunications 10,000,000 Pacific Telecom, Inc., 6.625% due 10/20/2005 10,000,000 10,713,710 0.1 10,000,000 WorldCom Inc., 6.40% due 8/15/2005 10,013,350 10,552,200 0.1 -------------- --------------- ----- 20,013,350 21,265,910 0.2 ==================================================================================================================================== Tires & Rubber 40,000,000 Goodyear Tire & Rubber Company (The), 6.625% due 12/01/2006 39,840,000 42,074,400 0.4 ==================================================================================================================================== Transportation 12,500,000 Northwest Airlines, Inc., 7.625% due 3/15/2005 12,471,225 11,888,750 0.1 20,000,000 Ryder Systems, Inc., 6.50% due 5/15/2005 19,960,600 21,034,420 0.2 17,000,000 Transportacion Maritima Mexicana, S.A. de C.V., 10% due 11/15/2006 17,152,730 13,175,000 0.1 15,000,000 Union Pacific Corp., 6.625% due 2/01/2008 14,776,750 15,521,550 0.2 -------------- --------------- ----- 64,361,305 61,619,720 0.6 ====================================================================================================================================
12 Merrill Lynch Capital Fund, Inc. September 30, 1998 SCHEDULE OF INVESTMENTS (continued)
Face Value Percent of Industries Amount Corporate Bonds Cost (Note 1a) Net Assets ==================================================================================================================================== Travel & Lodging Royal Caribbean Cruises Ltd.: $ 10,000,000 7.125% due 9/18/2002 $ 9,900,050 $ 10,379,100 0.1% 13,500,000 7.25% due 8/15/2006 13,513,945 14,144,490 0.1 -------------- --------------- ----- 23,413,995 24,523,590 0.2 ==================================================================================================================================== Trucking 9,000,000 Ryder System Inc., 6.30% due 7/21/2003 9,000,000 9,289,404 0.1 ==================================================================================================================================== Utilities-- 28,250,000 Connecticut Light & Power Co., 7.75% Electric, Gas, due 6/01/2002+++ 28,173,725 29,707,418 0.3 & Water 33,000,000 Empresa Nacional de Electricidad S.A. (Endesa), 7.325% due 2/01/2037 33,065,750 27,839,064 0.2 30,000,000 Enron Corp., 6.75% due 7/01/2005 29,387,285 31,198,800 0.3 20,000,000 Niagara Mohawk Power Corp., 5.875% due 9/01/2002 19,504,200 19,651,800 0.2 24,750,000 Tata Electric Co., 8.50% due 8/19/2017+++ 23,737,525 17,448,750 0.2 -------------- --------------- ----- 133,868,485 125,845,832 1.2 ==================================================================================================================================== Yankee Corporates 15,000,000 Enersis S.A., 6.60% due 12/01/2026 14,350,102 13,345,950 0.1 ==================================================================================================================================== Total Corporate Bonds 2,371,347,345 2,334,238,793 22.4 ==================================================================================================================================== Collateralized Mortgage Obligations ==================================================================================================================================== Federal Home Loan Mortgage Corp.: 9,241,900 6.50% due 5/15/2008 8,831,790 9,290,974 0.1 5,000,000 7% due 8/15/2008 4,762,500 5,142,150 0.1 13,000,000 6% due 2/15/2011 12,020,938 13,210,223 0.1 ==================================================================================================================================== Total Collateralized Mortgage Obligations 25,615,228 27,643,347 0.3 ==================================================================================================================================== US Government Obligations ==================================================================================================================================== US Treasury Bonds: 190,000,000 6.25% due 8/15/2023 175,748,828 217,460,700 2.1 20,000,000 6% due 2/15/2026 20,228,125 22,375,000 0.2 US Treasury Notes: 65,000,000 5.875% due 7/31/1999 65,207,617 65,618,800 0.6 575,000,000 5.875% due 11/15/2005 558,272,731 626,658,000 6.0 325,000,000 5.625% due 2/15/2006 324,570,703 350,441,000 3.4 ==================================================================================================================================== Total US Government Obligations 1,144,028,004 1,282,553,500 12.3 ==================================================================================================================================== Short-Term Investments ==================================================================================================================================== Commercial Paper** 25,000,000 Citicorp, 5.50% due 10/15/1998 24,946,528 24,946,528 0.2 84,326,000 General Motors Acceptance Corp., 5.88% due 10/01/1998 84,326,000 84,326,000 0.8 40,000,000 Goldman Sachs Group, L.P., 5.51% due 10/14/1998 39,920,411 39,920,411 0.4 Lexington Parker Capital Co. LLC: 30,000,000 5.54% due 10/06/1998 29,976,917 29,976,917 0.3 25,000,000 5.54% due 10/08/1998 24,973,069 24,973,069 0.2 50,000,000 Morgan Stanley Group, Inc., 5.53% due 10/20/1998 49,854,069 49,854,069 0.5 38,565,000 Repeat Offering Securitisation Entity (ROSE) Inc., 5.55% due 10/05/1998 38,541,218 38,541,218 0.4 30,000,000 Riverwoods Funding Corp., 5.52% due 10/05/1998 29,981,600 29,981,600 0.3
13 Merrill Lynch Capital Fund, Inc. September 30, 1998 SCHEDULE OF INVESTMENTS (concluded)
Face Value Percent of Amount Short-Term Investments Cost (Note 1a) Net Assets ==================================================================================================================================== Commercial Paper** Variable Funding Capital Corp.: (concluded) $ 31,000,000 5.54% due 10/09/1998 $ 30,961,836 $ 30,961,836 0.3% 40,000,000 5.54% due 10/23/1998 39,864,578 39,864,578 0.4 ==================================================================================================================================== Total Short-Term Investments 393,346,226 393,346,226 3.8 ==================================================================================================================================== Total Investments $9,220,410,811 10,412,906,527 100.1 ============== Liabilities in Excess of Other Assets (12,237,677) (0.1) --------------- ------ Net Assets $10,400,668,850 100.0% =============== ====== ====================================================================================================================================
* American Depositary Receipts (ADR). ** Commercial Paper is traded on a discount basis. The interest rates shown reflect the rates in effect on September 30, 1998. + Brady Bonds are securities which have been issued to refinance commercial bank loans and other debt. The risk associated with these instruments is the amount of any uncollateralized principal or interest payments since there is a high default rate of commercial bank loans by countries issuing these securities. ++ Non-income producing security. +++ The security may be offered and sold to "qualified institutional buyers" under Rule 144A of the Securities Act of 1933. (a) 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 Varian Associates, Companies Inc. -- -- $350,000 Insurance Berkley (W.R.) Corporation -- -- 432,000 Insurance Fremont General Corp. 100,000 $ 4,362,426 615,000 Insurance Horace Mann Educators Corp. 166,100 4,749,102 352,000 Hotels & Sun International Casinos Hotels Ltd. 700,000 30,579,500 ++ Machinery & SPX Corp. 250,000 14,370,962 ++ Machine Tools Real Estate Walden Residential Investment Properties, Inc. -- -- 482,500 Trusts - -------------------------------------------------------------------------------- stated on pg. 13 See Notes to Financial Statements. 14 Merrill Lynch Capital Fund, Inc. September 30, 1998 FINANCIAL INFORMATION Statement of Assets and Liabilities as of September 30, 1998 Assets: Investments, at value (identified cost--$9,220,410,811) (Note 1a) ..... $10,412,906,527 Cash .................................................................. 799,716 Receivables: Interest ........................................................... $ 58,352,604 Capital shares sold ................................................ 18,550,744 Dividends .......................................................... 11,648,480 Paydowns ........................................................... 294,500 88,846,328 -------------- Prepaid registration fees and other assets (Note 1f) .................. 186,458 --------------- Total assets .......................................................... 10,502,739,029 --------------- =================================================================================================================================== Liabilities: Payables: Securities purchased ............................................... 56,086,839 Capital shares redeemed ............................................ 33,617,707 Distributor (Note 2) ............................................... 4,824,675 Investment adviser (Note 2) ........................................ 3,435,979 97,965,200 -------------- Accrued expenses and other liabilities ................................ 4,104,979 --------------- Total liabilities ..................................................... 102,070,179 --------------- =================================================================================================================================== Net Assets: Net assets ............................................................ $10,400,668,850 =============== =================================================================================================================================== Net Assets Class A Shares of Common Stock, $.10 par value, 400,000,000 Consist of: shares authorized ..................................................... $ 11,143,117 Class B Shares of Common Stock, $.10 par value, 400,000,000 shares authorized ..................................................... 16,256,751 Class C Shares of Common Stock, $.10 par value, 200,000,000 shares authorized ..................................................... 1,675,061 Class D Shares of Common Stock, $.10 par value, 200,000,000 shares authorized ..................................................... 4,110,582 Paid-in capital in excess of par ...................................... 9,022,838,826 Undistributed investment income--net .................................. 68,368,399 Undistributed realized capital gains on investments and foreign currency transactions--net ............................................ 83,663,309 Unrealized appreciation on investments and foreign currency transactions--net ............................................ 1,192,612,805 --------------- Net assets ............................................................ $10,400,668,850 =============== =================================================================================================================================== Net Asset Value: Class A--Based on net assets of $3,537,599,410 and 111,431,172 shares outstanding ........................................... $ 31.75 =============== Class B--Based on net assets of $5,046,721,350 and 162,567,513 shares outstanding ........................................... $ 31.04 =============== Class C--Based on net assets of $513,762,999 and 16,750,610 shares outstanding ........................................... $ 30.67 =============== Class D--Based on net assets of $1,302,585,091 and 41,105,818 shares outstanding ........................................... $ 31.69 =============== ===================================================================================================================================
See Notes to Financial Statements. 15 Merrill Lynch Capital Fund, Inc. September 30, 1998 FINANCIAL INFORMATION (continued) Statement of Operations for the Six Months Ended September 30, 1998 Investment Interest and discount earned .......................................... $ 147,474,560 Income Dividends (net of $1,057,586 foreign withholding tax) ................. 57,633,159 (Notes 1d & 1e): Other ................................................................. 370,808 --------------- Total income .......................................................... 205,478,527 --------------- =============================================================================================================================== Expenses: Account maintenance and distribution fees--Class B (Note 2) ........... $ 28,403,052 Investment advisory fees (Note 2) ..................................... 23,322,277 Transfer agent fees--Class B (Note 2) ................................. 4,624,460 Transfer agent fees--Class A (Note 2) ................................. 2,926,698 Account maintenance and distribution fees--Class C (Note 2) ........... 2,738,658 Account maintenance fees--Class D (Note 2) ............................ 1,676,729 Transfer agent fees--Class D (Note 2) ................................. 982,615 Transfer agent fees--Class C (Note 2) ................................. 468,936 Custodian fees ........................................................ 414,033 Printing and shareholder reports ...................................... 269,820 Registration fees (Note 1f) ........................................... 174,064 Professional fees ..................................................... 42,008 Directors' fees and expenses .......................................... 23,899 Pricing fees .......................................................... 14,734 Other ................................................................. 50,969 ------------- Total expenses ........................................................ 66,132,952 --------------- Investment income--net ................................................ 139,345,575 --------------- =============================================================================================================================== Realized & Realized gain (loss) from: Unrealized Gain Investments--net .................................................... 86,211,259 (Loss) on Foreign currency transactions--net .................................. (115,683) 86,095,576 Investments & ------------- Foreign Currency Change in unrealized appreciation/depreciation on: Transactions--Net Investments--net .................................................... (1,724,362,083) (Notes 1b, 1c, Foreign currency transactions--net .................................. 121,068 (1,724,241,015) 1e & 3): ------------- --------------- Net realized and unrealized loss on investments and foreign currency transactions ................................................. (1,638,145,439) --------------- Net Decrease in Net Assets Resulting from Operations .................. $(1,498,799,864) =============== ===============================================================================================================================
See Notes to Financial Statements. 16 Merrill Lynch Capital Fund, Inc. September 30, 1998 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: 1998 1998 ========================================================================================================================= Operations: Investment income--net ............................................ $ 139,345,575 $ 272,540,546 Realized gain on investments and foreign currency transactions--net 86,095,576 569,208,611 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net ................................ (1,724,241,015) 1,874,025,315 --------------- --------------- Net increase (decrease) in net assets resulting from operations ... (1,498,799,864) 2,715,774,472 --------------- --------------- ========================================================================================================================= Dividends & Investment income--net: Distributions to Class A ........................................................ (65,135,078) (115,518,688) Shareholders Class B ........................................................ (53,177,674) (119,396,439) (Note 1g): Class C ........................................................ (5,968,407) (8,523,951) Class D ........................................................ (19,861,017) (26,653,341) Realized gain on investments--net: Class A ........................................................ (92,143,043) (204,758,968) Class B ........................................................ (134,419,587) (306,423,980) Class C ........................................................ (13,242,884) (21,655,996) Class D ........................................................ (30,940,507) (51,231,087) --------------- --------------- Net decrease in net assets resulting from dividends and distributions to shareholders ..................................... (414,888,197) (854,162,450) --------------- --------------- ========================================================================================================================= Capital Share Net increase in net assets derived from capital share transactions 426,871,517 744,669,554 Transactions --------------- -------------- (Note 4): ========================================================================================================================= Net Assets: Total increase (decrease) in net assets ........................... (1,486,816,544) 2,606,281,576 Beginning of period ............................................... 11,887,485,394 9,281,203,818 --------------- --------------- End of period* .................................................... $10,400,668,850 $11,887,485,394 =============== =============== ========================================================================================================================= * Undistributed investment income--net .............................. $ 68,368,399 $ 73,165,000 =============== =============== =========================================================================================================================
See Notes to Financial Statements. Merrill Lynch Capital Fund, Inc. September 30, 1998 FINANCIAL INFORMATION (continued) Financial Highlights
Class A ------------------------------------------------------------- For the The following per share data and ratios have been derived Six Months from information provided in the financial statements. Ended For the Year Ended March 31, Sept. 30, ------------------------------------------------ Increase (Decrease) in Net Asset Value: 1998+ 1998+ 1997+ 1996 1995 ========================================================================================================================== Per Share Net asset value, beginning of period $ 37.56 $ 31.39 $ 30.90 $ 27.74 $ 27.46 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net .............. .53 1.11 1.25 1.21 1.01 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ................... (4.92) 8.14 2.43 5.41 1.77 ---------- ---------- ---------- ---------- ---------- Total from investment operations .... (4.39) 9.25 3.68 6.62 2.78 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net ........... (.59) (1.11) (1.25) (1.16) (.94) Realized gain on investments--net (.83) (1.97) (1.94) (2.30) (1.56) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions ... (1.42) (3.08) (3.19) (3.46) (2.50) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period ...... $ 31.75 $ 37.56 $ 31.39 $ 30.90 $ 27.74 ========== ========== ========== ========== ========== ========================================================================================================================== Total Investment Based on net asset value per share .. (12.17%)++ 30.71% 12.62% 24.50% 10.95% Return:** ========== ========== ========== ========== ========== ========================================================================================================================== Ratios to Average Expenses ............................ .56%* .55% .55% .56% .57% Net Assets: ========== ========== ========== ========== ========== Investment income--net .............. 2.97%* 3.21% 3.99% 4.09% 3.81% ========== ========== ========== ========== ========== ========================================================================================================================== Supplemental Net assets, end of period Data: (in thousands) .................... $3,537,600 $4,155,677 $3,291,219 $3,225,758 $2,507,767 ========== ========== ========== ========== ========== Portfolio turnover .................. 17% 38% 47% 84% 89% ========== ========== ========== ========== ========== ==========================================================================================================================
* Annualized. ** Total investment returns exclude the effects of sales loads. + Based on average shares outstanding. ++ Aggregate total investment return. See Notes to Financial Statements. 18 Merrill Lynch Capital Fund, Inc. September 30, 1998 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class B ------------------------------------------------------------- For the The following per share data and ratios have been derived Six Months from information provided in the financial statements. Ended For the Year Ended March 31, Sept. 30, ------------------------------------------------ Increase (Decrease) in Net Asset Value: 1998+ 1998+ 1997+ 1996 1995 ========================================================================================================================== Per Share Net asset value, beginning of period $ 36.68 $ 30.72 $ 30.30 $ 27.28 $ 27.04 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net .34 .74 .91 .90 .74 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ................... (4.82) 7.96 2.39 5.29 1.72 ---------- ---------- ---------- ---------- ---------- Total from investment operations .... (4.48) 8.70 3.30 6.19 2.46 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net ........... (.33) (.77) (.94) (.87) (.66) Realized gain on investments--net (.83) (1.97) (1.94) (2.30) (1.56) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions ... (1.16) (2.74) (2.88) (3.17) (2.22) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period ...... $ 31.04 $ 36.68 $ 30.72 $ 30.30 $ 27.28 ========== ========== ========== ========== ========== ========================================================================================================================== Total Investment Based on net asset value per share .. (12.62%)++ 29.38% 11.48% 23.22% 9.81% Return:** ========== ========== ========== ========== ========== ========================================================================================================================== Ratios to Average Expenses ............................ 1.58%* 1.57% 1.57% 1.58% 1.59% Net Assets: ========== ========== ========== ========== ========== Investment income--net .............. 1.97%* 2.19% 2.97% 3.07% 2.79% ========== ========== ========== ========== ========== ========================================================================================================================== Supplemental Net assets, end of period Data: (in thousands) .................... $5,046,721 $5,938,708 $4,977,431 $5,025,504 $3,664,250 ========== ========== ========== ========== ========== Portfolio turnover .................. 17% 38% 47% 84% 89% ========== ========== ========== ========== ========== ==========================================================================================================================
* Annualized. ** Total investment returns exclude the effects of sales loads. + Based on average shares outstanding. ++ Aggregate total investment return. See Notes to Financial Statements. 19 Merrill Lynch Capital Fund, Inc. September 30, 1998 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class C ------------------------------------------------------------- For the For the Period The following per share data and ratios have been derived Six Months For the Year Oct. 21, from information provided in the financial statements. Ended Ended March 31, 1994+ to Sept. 30, ------------------------------------ March 31, Increase (Decrease) in Net Asset Value: 1998++ 1998++ 1997++ 1996 1995 =========================================================================================================================== Per Share Net asset value, beginning of period .. $ 36.31 $ 30.44 $ 30.08 $ 27.17 $ 26.81 Operating ---------- --------- ---------- ---------- --------- Performance: Investment income--net ................ .34 .73 .90 .92 .49 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ..................... (4.78) 7.89 2.36 5.24 1.03 ---------- ---------- ---------- ---------- --------- Total from investment operations ...... (4.44) 8.62 3.26 6.16 1.52 ---------- ---------- ---------- ---------- --------- Less dividends and distributions: Investment income--net ............. (.37) (.78) (.96) (.95) (.43) Realized gain on investments--net .. (.83) (1.97) (1.94) (2.30) (.73) ---------- ---------- ---------- ---------- --------- Total dividends and distributions ..... (1.20) (2.75) (2.90) (3.25) (1.16) ---------- ---------- ---------- ---------- --------- Net asset value, end of period ........ $ 30.67 $ 36.31 $ 30.44 $ 30.08 $ 27.17 ========== ========== ========== ========== ========= =========================================================================================================================== Total Investment Based on net asset value per share .... (12.64%)++ 29.40% 11.45% 23.25% 6.07%++ Return:** ========== ========== ========== ========== ========= =========================================================================================================================== Ratios to Expenses .............................. 1.59%* 1.58% 1.58% 1.59% 1.64%* Average ========== ========== ========== ========== ========= Net Assets: Investment income--net ................ 1.95%* 2.18% 2.96% 3.08% 3.22%* ========== ========== ========== ========== ========= =========================================================================================================================== Supplemental Net assets, end of period (in thousands) $ 513,763 $ 512,783 $ 322,438 $ 259,131 $ 46,902 Data: ========== ========== ========== ========== ========= Portfolio turnover .................... 17% 38% 47% 84% 89% ========== ========== ========== ========== ========= ===========================================================================================================================
* Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. ++ Based on average shares outstanding. ++ Aggregate total investment return. See Notes to Financial Statements. 20 Merrill Lynch Capital Fund, Inc. September 30, 1998 FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
Class D ------------------------------------------------------------- For the For the Period The following per share data and ratios have been derived Six Months For the Year Oct. 21, from information provided in the financial statements. Ended Ended March 31, 1994+ to Sept. 30, ------------------------------------ March 31, Increase (Decrease) in Net Asset Value: 1998++ 1998++ 1997++ 1996 1995 =========================================================================================================================== Per Share Net asset value, beginning of period .. $ 37.49 $ 31.34 $ 30.86 $ 27.72 $ 27.27 Operating ---------- --------- ---------- ---------- --------- Performance: Investment income--net ................ .49 1.02 1.17 1.16 .48 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ..................... (4.93) 8.14 2.43 5.38 1.15 ---------- ---------- ---------- ---------- --------- Total from investment operations ...... (4.44) 9.16 3.60 6.54 1.63 ---------- ---------- ---------- ---------- --------- Less dividends and distributions: Investment income--net ............. (.53) (1.04) (1.18) (1.10) (.45) Realized gain on investments--net .. (.83) (1.97) (1.94) (2.30) (.73) ---------- ---------- ---------- ---------- --------- Total dividends and distributions ..... (1.36) (3.01) (3.12) (3.40) (1.18) ---------- ---------- ---------- ---------- --------- Net asset value, end of period ........ $ 31.69 $ 37.49 $ 31.34 $ 30.86 $ 27.72 ========== ========== ========== ========== ========= =========================================================================================================================== Total Investment Based on net asset value per share .... (12.29%)++ 30.40% 12.34% 24.21% 6.42%++ Return:** ========== ========== ========== ========== ========= =========================================================================================================================== Ratios to Expenses .............................. .82%* .80% .80% .81% .87%* Average ========== ========== ========== ========== ========= Net Assets: Investment income--net ................ 2.73%* 2.95% 3.75% 3.84% 3.94%* ========== ========== ========== ========== ========= =========================================================================================================================== Supplemental Net assets, end of period (in thousands) $1,302,585 $1,280,317 $ 690,116 $ 521,599 $ 171,201 Data: ========== ========== ========== ========== ========= Portfolio turnover .................... 17% 38% 47% 84% 89% ========== ========== ========== ========== ========= ===========================================================================================================================
* Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. ++ Based on average shares outstanding. ++ Aggregate total investment return. See Notes to Financial Statements. 21 Merrill Lynch Capital Fund, Inc. September 30, 1998 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Capital Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. These unaudited financial statements reflect all adjustments 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, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities which are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Securities traded in the over-the-counter market are valued at the last available bid price prior to the time of valuation. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Board of Directors as the primary market. Securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market. Options written or purchased are valued at the last sale price in the case of exchange-traded options. In the case of options traded in the over-the-counter market, valuation is the last asked price (options written) or the last bid price (options purchased). 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. o Options--The Fund is authorized to write covered call 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 options are non-income producing investments. (c) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends, and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into 22 Merrill Lynch Capital Fund, Inc. September 30, 1998 (the trade dates). Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income (including amortization of discount) is recognized on the accrual basis. Realized gains and losses on security transactions are determined on the identified cost basis. (f) 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 subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds Distributor ("MLFD" or "Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee 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 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 maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the six months ended September 30, 1998, MLFD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: - -------------------------------------------------------------------------------- MLFD MLPF&S - -------------------------------------------------------------------------------- Class A ............................... $16,210 $219,966 Class D ............................... $66,875 $912,035 - -------------------------------------------------------------------------------- For the six months ended September 30, 1998, MLPF&S received contingent deferred sales charges of $2,932,755 and $99,880 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $54,988 relating to transactions subject to front-end sales charge waivers in Class A Shares. In addition, MLPF&S received $247,432 in commissions on the execution of portfolio security transactions for the six months ended September 30, 1998. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. During the six months ended September 30, 1998, Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, received $454 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 MLAM, PSI, FDS, PFD, and/or ML & Co. 23 Merrill Lynch Capital Fund, Inc. September 30, 1998 NOTES TO FINANCIAL STATEMENTS (concluded) 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended September 30, 1998 were $2,061,962,429 and $1,874,463,270, respectively. Net realized gains (losses) for the six months ended September 30, 1998 and net unrealized gains as of September 30, 1998 were as follows: - -------------------------------------------------------------------------------- Realized Unrealized Gains (Losses) Gains - -------------------------------------------------------------------------------- Long-term investments .................. $ 86,211,166 $1,192,495,716 Short-term investments ................. 93 -- Foreign currency transactions ........................... (115,683) 117,089 ------------- -------------- Total .................................. $ 86,095,576 $1,192,612,805 ============= ============== - -------------------------------------------------------------------------------- As of September 30, 1998, net unrealized appreciation for Federal income tax purposes aggregated $1,192,495,716, of which $1,946,199,907 related to appreciated securities and $753,704,191 related to depreciated securities. At September 30, 1998, the aggregate cost of investments for Federal income tax purposes was $9,220,410,811. 4. Capital Share Transactions: Net increase in net assets derived from capital share transactions was $426,871,517 and $744,669,554 for the six months ended September 30, 1998 and for the year ended March 31, 1998, respectively. Transactions in capital shares for each class were as follows: - -------------------------------------------------------------------------------- Class A Shares for the Six Months Dollar Ended September 30, 1998 Shares Amount - -------------------------------------------------------------------------------- Shares sold ............................ 9,213,239 $ 330,648,079 Shares issued to shareholders in reinvestment of dividends and distributions ...................... 3,976,982 144,443,997 ------------- ------------- Total issued ........................... 13,190,221 475,092,076 Shares redeemed ........................ (12,402,288) (432,982,048) ------------- ------------- Net increase ........................... 787,933 $ 42,110,028 ============= ============= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class A Shares for the Dollar Year Ended March 31, 1998 Shares Amount - -------------------------------------------------------------------------------- Shares sold ............................ 18,254,019 $ 634,543,940 Shares issued to shareholders in reinvestment of dividends and distributions ...................... 8,638,512 294,091,362 ------------- ------------- Total issued ........................... 26,892,531 928,635,302 Shares redeemed ........................ (21,089,819) (727,078,860) ------------- ------------- Net increase ........................... 5,802,712 $ 201,556,442 ============= ============= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class B Shares for the Six Months Dollar Ended September 30, 1998 Shares Amount - -------------------------------------------------------------------------------- Shares sold ............................ 17,669,681 $ 617,316,063 Shares issued to shareholders in reinvestment of dividends and distributions ...................... 4,626,832 164,715,227 ------------- ------------- Total issued ........................... 22,296,513 782,031,290 Automatic conversion of shares .............................. (4,621,164) (159,314,707) Shares redeemed ........................ (16,995,535) (583,814,093) ------------- ------------- Net increase ........................... 679,814 $ 38,902,490 ============= ============= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class B Shares for the Dollar Year Ended March 31, 1998 Shares Amount - -------------------------------------------------------------------------------- Shares sold ............................ 26,936,302 $ 915,743,174 Shares issued to shareholders in reinvestment of dividends and distributions ...................... 11,273,540 376,017,355 ------------- ------------- Total issued ........................... 38,209,842 1,291,760,529 Automatic conversion of shares .............................. (7,065,614) (239,303,799) Shares redeemed ........................ (31,261,809) (1,049,566,557) ------------- ------------- Net increase (decrease) ................ (117,581) $ 2,890,173 ============= ============= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class C Shares for the Six Months Dollar Ended September 30, 1998 Shares Amount - -------------------------------------------------------------------------------- Shares sold ............................ 4,080,791 $ 142,584,317 Shares issued to shareholders in reinvestment of dividends and distributions ...................... 485,672 17,085,929 ------------- ------------- Total issued ........................... 4,566,463 159,670,246 Shares redeemed ........................ (1,939,903) (64,886,108) ------------- ------------- Net increase ........................... 2,626,560 $ 94,784,138 ============= ============= - -------------------------------------------------------------------------------- 24 Merrill Lynch Capital Fund, Inc. September 30, 1998 - -------------------------------------------------------------------------------- Class C Shares for the Dollar Year Ended March 31, 1998 Shares Amount - -------------------------------------------------------------------------------- Shares sold ............................ 5,470,865 $ 185,136,065 Shares issued to shareholders in reinvestment of dividends and distributions ...................... 812,551 26,837,937 ------------- ------------- Total issued ........................... 6,283,416 211,974,002 Shares redeemed ........................ (2,750,233) (91,023,357) ------------- ------------- Net increase ........................... 3,533,183 $ 120,950,645 ============= ============= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class D Shares for the Six Months Dollar Ended September 30, 1998 Shares Amount - -------------------------------------------------------------------------------- Shares sold ............................ 6,650,091 $ 239,084,367 Automatic conversion of shares .............................. 4,525,961 159,314,707 Shares issued to shareholders in reinvestment of dividends and distributions ...................... 1,275,337 46,269,233 ------------- ------------- Total issued ........................... 12,451,389 444,668,307 Shares redeemed ........................ (5,500,788) (193,593,446) ------------- ------------- Net increase ........................... 6,950,601 $ 251,074,861 ============= ============= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Class D Shares for the Dollar Year Ended March 31, 1998 Shares Amount - -------------------------------------------------------------------------------- Shares sold ............................ 9,630,431 $ 333,114,038 Automatic conversion of shares .............................. 6,920,593 239,303,799 Shares issued to shareholders in reinvestment of dividends and distributions ...................... 2,068,449 70,372,205 ------------- ------------- Total issued ........................... 18,619,473 642,790,042 Shares redeemed ........................ (6,482,847) (223,517,748) ------------- ------------- Net increase ........................... 12,136,626 $ 419,272,294 ============= ============= - -------------------------------------------------------------------------------- 5. Loaned Securities: At September 30, 1998, the Fund held US Treasury notes and bonds having an aggregate value of approximately $68,641,000 as collateral for portfolio securities loaned having a market value of approximately $62,733,000. 25 Merrill Lynch Capital Fund, Inc. September 30, 1998 PORTFOLIO INFORMATION As of September 30, 1998 Percent of Ten Largest Common Stock Holdings Net Assets Williams Companies, Inc. 2.2% Travelers Group, Inc. 1.7 Kansas City Southern Industries, Inc. 1.7 United Technologies Corporation 1.5 Rite Aid Corp. 1.5 Lockheed Martin Corporation 1.5 Allstate Corporation (The) 1.4 Nestle S.A. (Registered Shares) 1.4 Carnival Corp. (Class A) 1.4 Provident Companies, Inc. 1.4 Percent of Ten Largest Industries Net Assets* Insurance 9.5% Diversified Companies 5.1 Banking 4.9 Oil--Integrated 4.8 Natural Gas 4.2 Financial Services 4.0 Chemicals 2.6 Railroads 2.6 Aerospace 2.5 Paper & Forest Products 2.4 * Based on total holdings in common stocks and bonds. Common Stock Portfolio Changes for the Quarter Ended September 30, 1998 Additions EXEL Limited (Class A) ITT Industries Inc. LucasVarity PLC (ADR) Nextel Communications, Inc. Sears, Roebuck and Co. Waste Management, Inc. Deletions Belden Inc. Birmingham Steel Corp. EXEL Ltd. (US Registered Shares) Ente Nazionale Idrocarburi S.p.A. (ENI) (ADR) General Motors Corp. Nintendo Corp. Ltd. Penncorp Financial Group, Inc. TIG Holdings, Inc. 26 Merrill Lynch Capital Fund, Inc. September 30, 1998 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 Fred G. Weiss, Director Terry K. Glenn, Executive Vice President Norman R. Harvey, Senior Vice President Kurt Schansinger, Senior Vice President and Portfolio Manager Donald C. Burke, Vice President Walter Cuje, Vice President Gerald M. Richard, Treasurer Thomas D. Jones, III, Secretary Custodian The Bank of New York 90 Washington Street, 12th Floor New York, NY 10286 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 (800) 637-3863 27 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 #10252--9/98 [RECYCLE LOGO] Printed on post-consumer recycled paper -----END PRIVACY-ENHANCED MESSAGE-----