MERRILL LYNCH
CAPITAL FUND, INC.
FUND LOGO
Annual Report
March 31, 1997
Officers and Directors
Arthur Zeikel, President and Director
Donald Cecil, Director
M. Colyer Crum, Director
Edward H. Meyer, Director
Jack B. Sunderland, Director
J. Thomas Touchton, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Kurt Schansinger, Vice President and
Portfolio Manager
Gerald M. Richard, Treasurer
Mark B. Goldfus, Secretary
<PAGE>
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original
cost.Statements and other information herein are as dated and are
subject to change.
Merrill Lynch
Capital Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH CAPITAL FUND, INC.
PORTFOLIO SUMMARY
Security Diversification
As a Percentage of Net Assets
As of March 31, 1997
A pie chart illustrating the following percentages:
<PAGE>
US Bonds 38.8%
Non-US Bonds 3.2%
Cash & Cash Equivalents 3.0%
US Stocks 43.7%
Non-US Stocks 11.3%
Security Representation
As a Percentage of Equities
As of March 31, 1997
A pie chart illustrating the following percentages:
Financial Services 24.6%
Consumer Services 6.3%
Utilities 2.5%
Transportation 1.5%
Capital Goods--Technology 13.1%
Consumer Cyclicals 9.1%
Energy 15.3%
Basic Industries 8.7%
Diversified 2.1%
Credit Cyclicals 2.7%
Consumer Staples 9.7%
Capital Goods 4.4%
Geographic Diversification Percent of
As of March 31, 1997 Net Assets*
United States 85.3%
Argentina 4.2
United Kingdom 4.2
Switzerland 1.8
Brazil 0.9
Finland 0.6
France 0.5
Netherlands 0.5
Italy 0.5
Japan 0.3
Chile 0.3
Singapore 0.2
Mexico 0.2
Hong Kong 0.2
Thailand 0.1
Peru 0.1
Czech Republic 0.1
[FN]
*Includes investments in short-term securities.
<PAGE>
US Common Stock Investments S&P
As of March 31, 1997 Fund 500*
Average Capitalization (in billions) $16.9 $11.5
Price/Book Value 2.8 4.3
Price/Earnings Ratio** 14.7 18.0
Yield Based on Current Dividend 2.1% 2.0%
[FN]
*An unmanaged broad-based index comprised of common stocks.
**Based on 1997 earnings estimates.
Fixed-Income Investments Merrill Lynch
As of March 31, 1997 Fund DOAO Index*
Duration 5.4 Years 5.1 Years
Average Maturity 8.8 Years 12.8 Years
Asset Breakdown:
Corporates 49.6% 17.1%
US Treasuries/Agencies 44.0% 55.0%
Mortgage-Backed 1.4% 27.9%
International Governments 5.0% --
[FN]
*An unmanaged market-weighted corporate, Government and mortgage
master bond index reflecting approximately 97% of total outstanding
bonds.
DEAR SHAREHOLDER
The performance of the US financial markets during the first quarter
of 1997 was characterized by two very distinct periods. During the
first six weeks of the quarter ended March 31, 1997, the equity
market continued its extraordinary advance with a gain in excess of
10%, fueled by evidence of accelerating economic growth, continued
low inflation, strong corporate profits performance and near-record
equity mutual fund cash inflows. However, during the latter six
weeks of the March quarter, rising interest rates, coupled with an
increasing number of first-quarter corporate earnings
disappointments, precipitated a sharp decline in both stock and bond
prices. The equity market retraced about 8% of its early gain, while
long-term interest rates exceeded 7% for the first time since
September 1996. For the first quarter as a whole, the stock market,
as measured by the unmanaged Standard & Poor's 500 Index (S&P 500),
generated a +2.66% total return. The bond market, as measured by the
unmanaged Merrill Lynch Domestic Bond Master Index, provided a 0.55%
total return, the first negative quarterly return since the
comparable quarter of 1996, and only the third since the second
quarter of 1994. Short-term investments earned a +1.28% total return
for the March quarter. Total returns for Merrill Lynch Capital Fund,
Inc.'s Class A, Class B, Class C and Class D Shares for the quarter
ended March 31, 1997 were +1.10%, +0.85%, +0.83% and +1.03%,
respectively.
<PAGE>
On the economic front, fourth-quarter 1996 economic growth was quite
strong with gross domestic product rising at a revised 3.8% rate,
driven by positive trade flows and increased construction activity,
and indicators suggested continued strong growth in the first
quarter of 1997 as well. Personal consumption expenditures in
January and February accelerated and retail sales were solid,
reflecting rising employment levels, improving personal incomes and
high consumer confidence. The housing market remained quite robust,
with mild weather contributing to near-record levels of existing
home sales in February. On the industrial side, durable goods orders
rose sharply, boosted by a reversal in the key electronics and
communications equipment sectors. Industrial production posted its
biggest advance in February in three months, while the Index of
Leading Economic Indicators also rose. Finally, the National
Association of Purchasing Managers survey reported the third
consecutive month of expansion in the manufacturing sector.
This accumulating body of evidence of strong economic growth
prompted the Federal Reserve Board to increase short-term interest
rates on March 25, 1997. While noting that current indicators of
inflation remain subdued, Federal Reserve Board Chairman Alan
Greenspan expressed concern about the sustainability of this
condition in the context of continued strong economic activity. The
Federal Reserve Board justified its decision to increase the Federal
Funds rate by 25 basis points (0.25%) to 5.5% as a preemptive
measure to forestall any such acceleration in inflation. Further,
several company-specific earnings disappointments in both the
bellwether technology sector and among many prominent consumer
products companies resulted in broadening investor concern over the
anticipated rate of corporate profits growth in 1997. This
combination of factors resulted in a sharp decline in US financial
asset prices during the latter half of the March quarter.
Portfolio Matters
Our investment position at March 31, 1997 showed 55.0% of portfolio
net assets invested in equities, 42.0% in bonds, and 3.0% in cash
and cash equivalents. This compares to 52.8% in equities, 43.8% in
bonds, and 3.7% in cash and cash equivalents at the end of the
December 1996 quarter; and 49.2% in equities, 47.1% in bonds, and
3.7% in cash and cash equivalents at the end of the September 1996
quarter.
<PAGE>
The modest shift in asset mix over the past six months reflects
several factors. First, we began to reduce our fixed-income exposure
in December when long-term interest rates declined in response to
evidence of an economic slowdown, lowering real, inflation-adjusted
interest rates toward more normal historical levels. Second, we
further reduced our bond exposure in early March, when the growing
preponderance of evidence suggested a strengthening economy and the
high likelihood of further increases in interest rates. Third, our
research identified several attractive new equity investment
opportunities which were subsequently added to the portfolio.
Finally, there existed a relative outperformance of equities to
bonds over this period. With long-term interest rates having
returned to the 7% level which prevailed last September, real bond
yields are back at historically high levels and, we believe,
represent good value. Conversely, we believe a further, significant
advance in the broad equity market averages is likely to be more
challenging because of the apparent slowdown in the rate of
corporate profits growth, near-record high current valuations and
the risk of further increases in interest rates. We will continue,
as always, to take advantage of individual equity investment
opportunities as they arise.
Within the equity component of the portfolio, we added seven new
investments during the quarter ended March 31, 1997 and eliminated
22 holdings. We increased our holdings in 29 stocks, while reducing
our ownership position in 22 companies. The recent sharp declines in
the share prices of a number of companies afforded us some excellent
new investment opportunities. Notable among the Fund's new positions
is Computer Associates International, Inc., the world's third-
largest independent computer software vendor. This company's
products help systems professionals manage, monitor and optimize
computer performance. The stock, at the time of our initial
purchase, had declined over 20% in 1997 and over 40% from its 1996
peak in reaction to an earnings shortfall in the fourth quarter. The
company enjoys high market shares, is highly profitable with a five-
year average return on shareholders' equity of 38%, has no debt,
generates free cash flow and is aggressively repurchasing shares in
response to the recent sharp price decline. The earnings shortfall
appears to be both short-term in nature and the causes resolvable,
and we expect earnings growth to resume at a 20% rate later in 1997.
Senior management, led by founder and CEO Charles Wang, owns
significant amounts of stock, and appears appropriately motivated to
create shareholder value. Finally, the stock was attractively
valued, selling at 13.5 times estimated March 1998 fiscal year
earnings of $3.00 per share, which is the low end of the company's
historical valuation range. This combination of a strong industrial
position, excellent financial characteristics, solid management and
an anticipated resumption of earnings growth, coupled with a major
decline in the share price, made Computer Associates an attractive
addition to the portfolio.
<PAGE>
The Black & Decker Corporation, the tool and appliance manufacturer,
is another new addition to the portfolio. The company has an
excellent brand name, global distribution capability and has enjoyed
consistent new product success. Management targeted an aggressive
margin improvement goal, which suggests a possible 15% per share
earnings growth through the end of the decade. Black & Decker's CEO
controls in excess of two million options, providing a strong
incentive for improved performance. Selling at a modest 13 times
estimated 1997 earnings per share, we believe the stock offers
excellent value.
We eliminated our holding in CVS Corp., the retail pharmacy chain.
The stock had performed handsomely, appreciating 35% in 1996 and a
further 6% in 1997. The attractive industry and company-specific
characteristics of CVS were therefore much more adequately reflected
in the share price, selling in excess of 23 times estimated 1997
earnings per share, so we decided to sell the stock and redeploy the
proceeds into more attractive investment opportunities.
We also sold our position in Dexter Corporation, a specialty
chemical company. The stock performed quite well, up 35% in 1996
based upon expectations for declining raw material costs and
improved results for the company's majority-owned Life Technologies
Inc. subsidiary. However, from recent price levels the stock offered
no discernible upside catalyst from either an earnings or valuation
standpoint without more aggressive strategies to realize the value
of Life Technologies for Dexter shareholders, which did not appear
to be forthcoming.
We also eliminated our investment in the diversified insurer St.
Paul Companies, Inc. during the March quarter. While the company's
financial condition is sound, increasingly competitive commercial
insurance markets suggested continued sluggish earnings growth for
the company and sustained, below-average, returns. With the stock
selling at above historical average valuation parameters, further
upside potential in the stock appeared limited.
Examining the industry concentration of the Fund's equity holdings,
we continue to maintain relatively low weightings relative to the
S&P 500 Index in the consumer sector and the broad utility area,
while energy and financial services, specifically insurance, remain
relatively heavily weighted in the Fund's mix. The consumer segment
of the equity market is represented by many high-quality companies,
but the stocks tend to sell at high valuation levels, limiting their
current investment appeal. We eliminated virtually all of our
holdings in electric utility companies based upon our view that the
deregulation of electric power generation will prove extremely
disruptive to this industry, as it has for every other deregulated
industry, until capacity is rationalized, consolidation further
advanced and capital more effectively allocated. This process can
take several years to unfold, during which time, we believe, the
risks outweigh the potential rewards of ownership of equity
securities of these companies.
<PAGE>
We believe the insurance industry offers many attractive investment
opportunities as many companies are well-advanced in the process of
restructuring to concentrate on select, high return lines of
business, freeing up substantial excess capital as a result. This,
in turn, is being reinvested in acquisitions or share repurchases
which will help build value for shareholders. In addition, many
insurance companies are managed by individuals with significant
stock ownership, making for a mutuality of interest in achieving
this objective. Finally, this is among the more reasonably valued
segments of the market.
While most of our energy stock investments benefited from the strong
commodity price environment of 1996, our investment position in this
sector is not based upon a top-down, commodity price forecast. Many
companies offer attractive unit volume growth and substantial
restructuring opportunities, while selling at reasonable prices with
high current dividend yields.
Within the fixed-income component of the portfolio, the average
yield to maturity of our holdings rose from 6.82% at the end of the
December 1996 quarter to 7.36% at the end of the March quarter,
partly a function of the overall rise in domestic interest rates and
partly attributable to tactical swap trades of corporate bonds
designed to enhance yield as well as improve the creditworthiness of
our corporate debt investments. While average duration and quality
were stable at 5.4 years and A1/A+, respectively, we widened the
dispersion of bond maturities within the portfolio to take advantage
of the flattening yield curve that began in the latter part of the
March quarter. This helped to partially offset the effects of rising
interest rates since year-end. Investment-grade corporate bonds
represent the largest sector of the portfolio at 44.8% of bond
assets, followed by US Treasury securities at 44.0%, foreign
government/agency issues at 5.0%, high-yield corporate bonds at 4.8%
and mortgage-backed securities at 1.4%. This compares to 44.0% in
investment-grade corporate bonds, 45.9% in US Treasury securities,
4.7% in foreign government/agency issues, 4.3% in high-yield
corporate bonds and 1.1% in mortgage-backed securities on December
31, 1996. US Treasury securities remained relatively heavily
weighted in the mix based upon our view that corporate yield
premiums for many borrowers provide insufficient reward for the
higher risk associated with the corporate sector and, indeed,
corporate yield premiums recently began to widen.
<PAGE>
Despite the high overall level of the stock market, we continue to
identify and invest in above-average companies whose stocks sell at
below-average valuation levels. We define an above-average company
as one which 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 which does not
adequately or accurately reflect what we believe to be the company's
underlying intrinsic value. On average, the stocks held in Merrill
Lynch Capital Fund, Inc. generated comparable returns on shareholders'
equity and have stronger balance sheets, while offering faster
earnings growth than the average company as measured by the S&P
500. However, these stocks sell at an average price/earnings ratio
of 14.7 times estimated 1997 earnings per share in comparison
to 18 times for the S&P 500, at 2.7 times current book value versus
4.3 times for the S&P 500, and provide a 2.1% dividend yield
compared to 1.9% for the S&P 500. We believe this formula will
provide superior risk-adjusted returns over time.
Fiscal Year In Review
Total returns of Merrill Lynch Capital Fund, Inc. for the 12 months
ended March 31, 1997 trailed the continued strong performance of the
unmanaged S&P 500 Index. While each individual asset class within
the Fund performed reasonably well, overall equity returns were
greatly in excess of those available in the fixed-income market. The
large representation of bonds within the portfolio consequently
restrained overall results. Within the equity component of the Fund,
the large representation of financial companies positively
contributed to performance as the bank, insurance and diversified
financial sectors of the market performed well. The energy group, in
which the Fund was also sizably represented, was a strong performer
over the past year, aided by a favorable commodity price
environment.
While we substantially increased our investments in the broad
technology area, we remain underweighted relative to the S&P 500 in
this group, which was a market leader over most of the past year. In
addition, the Fund was not exposed to many consumer-related
companies, whose stocks outperformed the overall stock market
averages. While this segment of the market is represented by many
outstanding global companies, the high valuation levels these stocks
command limited their appeal.
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,
<PAGE>
(Arthur Zeikel)
Arthur Zeikel
President
(Kurt Schansinger)
Kurt Schansinger
Vice President and Portfolio Manager
May 5, 1997
PORTFOLIO INFORMATION
Percent of
Ten Largest Stock Holdings Net Assets
Williams Companies, Inc. 2.5%
YPF S.A. (ADR) 1.8
The Goodyear Tire & Rubber Co. 1.7
Travelers Group, Inc. 1.5
United Technologies Corp. 1.5
Allstate Corporation 1.5
Glaxo Wellcome PLC (ADR) 1.3
The Chase Manhattan Corp. 1.3
Nestle S.A. 1.3
Provident Companies, Inc. 1.2
Percent of
Ten Largest Industries Net Assets*
Insurance 9.6%
Banking 6.3
Oil--Integrated 4.7
Natural Gas Suppliers 4.2
Financial Services 4.2
Telecommunications 3.4
Finance 3.3
Diversified Companies 3.1
Chemicals 2.9
Pharmaceuticals 2.6
<PAGE>
[FN]
*Based on total holdings in common stocks and bonds.
Common Stock Portfolio Changes for the
Quarter Ended March 31, 1997
Additions
The Black & Decker
Corporation
cisco Systems, Inc.
Computer Associates
International, Inc.
Grace (W.R.) & Co.
Grand Metropolitan
PLC (ADR)
McDonald's Corporation
Nucor Corporation
Deletions
Bangkok Bank Public
Company Ltd.
Bumrungrad Hospital Public
Company, Ltd. (Foreign)
CVS Corp.
Cameco Corp.
Dexter Corporation
Footstar, Inc.
GATX Corp.
Hillsdown Holding PLC
Illinova Corp.
Jefferson Smurfit Group PLC
(ADR)
Medusa Corp.
Public Service Company of
North Carolina
Ruam Pattana II Fund
(Foreign)
Ruam Pattana II Fund (Local)
SouthTrust Corp.
Sphere Drake Holdings Ltd.
St. Paul Companies, Inc.
Texas Utilities Co.
Thai Military Bank Public
Company, Ltd.
TransCanada Pipelines Ltd.
Unicom Corp.
Wellman Inc.
<PAGE>
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
* 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.)
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" 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.
<PAGE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/97 +12.62% + 6.70%
Five Years Ended 3/31/97 +12.79 +11.58
Ten Years Ended 3/31/97 +11.68 +11.08
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/97 +11.48% + 7.48%
Five Years Ended 3/31/97 +11.64 +11.64
Inception (10/21/88)
through 3/31/97 +12.01 +12.01
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 3/31/97 +11.45% +10.45%
Inception (10/21/94)
through 3/31/97 +16.67 +16.67
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 3/31/97 +12.34% + 6.44%
Inception (10/21/94)
through 3/31/97 +17.58 +15.01
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's
Shares compared to an investment in the Standard & Poor's 500.
Beginning and ending values are:
3/87 3/97
ML Capital Fund, Inc.++--
Class A Shares* $ 9,475 $28,610
S&P 500 Index++++ $10,000 $35,049
10/21/88** 3/97
ML Capital Fund, Inc.++--
Class B Shares* $10,000 $26,053
S&P 500 Index++++ $10,000 $34,178
10/21/94** 3/96
ML Capital Fund, Inc.++--
Class C Shares $10,000 $14,570
ML Capital Fund, Inc.++--
Class D Shares* $ 9,475 $14,070
<PAGE>
S&P 500 Index++++ $10,000 $17,252
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses including advisory fees.
**Commencement of Operations.
++Merrill Lynch Capital Fund, Inc. through a fully managed
investment policy utilizes equity, debt and convertible securities.
++++This unmanaged broad-based Indwx is comprised of common stocks.
Past performance is not predictive of future performance.
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 $16,654.11 on
March 31, 1997.
<TABLE>
Recent Performance Results
<CAPTION>
12 Month 3 Month
3/31/97 12/31/96 3/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Capital Fund, Inc. Class A Shares* $31.39 $31.05 $30.90 + 6.57%(1) +1.10%
ML Capital Fund, Inc. Class B Shares* 30.72 30.46 30.30 + 6.45(1) +0.85
ML Capital Fund, Inc. Class C Shares* 30.44 30.19 30.08 + 6.30(1) +0.83
ML Capital Fund, Inc. Class D Shares* 31.34 31.02 30.86 + 6.54(1) +1.03
Dow Jones Industrial Average 6,583.48 6,448.27 5,587.14 +17.83 +2.10
Standard & Poor's 500 Index** 757.12 740.74 645.50 +17.29 +2.21
ML Capital Fund, Inc. Class A Shares--Total Return* +12.62(2) +1.10
ML Capital Fund, Inc. Class B Shares--Total Return* +11.48(3) +0.85
ML Capital Fund, Inc. Class C Shares--Total Return* +11.45(4) +0.83
ML Capital Fund, Inc. Class D Shares--Total Return* +12.34(5) +1.03
Dow Jones Industrial Average--Total Return +20.43 +2.57
Standard & Poor's 500 Index--Total Return** +19.81 +2.66
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
**An unmanaged broad-based index comprised of common stocks. Total
investment returns for unmanaged indexes are based on estimates.
(1)Percent change includes reinvestment of $1.464 per share capital
gains distributions.
(2)Percent change includes reinvestment of $1.725 per share ordinary
income dividends and $1.464 per share capital gains distributions.
(3)Percent change includes reinvestment of $1.412 per share ordinary
income dividends and $1.464 per share capital gains distributions.
(4)Percent change includes reinvestment of $1.437 per share ordinary
income dividends and $1.464 per share capital gains distributions.
(5)Percent change includes reinvestment of $1.652 per share ordinary
income dividends and $1.464 per share capital gains distributions.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Value Percent of
Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Aerospace 1,125,000 Lockheed Martin Corp. $ 83,216,555 $ 94,500,000 1.0%
650,000 Rockwell International Corporation 22,013,254 42,168,750 0.5
-------------- -------------- ------
105,229,809 136,668,750 1.5
Automobile 1,900,000 Echlin Inc. 60,716,252 64,600,000 0.7
Equipment
Automotive 1,000,000 General Motors Corp. 47,511,108 55,375,000 0.6
Banking 1,300,000 The Chase Manhattan Corp. (a) 91,963,256 121,712,500 1.3
596,200 Union Planters Corp. 11,935,569 24,220,625 0.3
-------------- -------------- ------
103,898,825 145,933,125 1.6
Building Materials 2,400,000 Masco Corporation 75,254,389 85,800,000 0.9
Capital Goods 731,500 Kennametal, Inc. 25,706,750 26,516,875 0.3
1,500,000 United Dominion Industries, Ltd. 34,449,123 36,562,500 0.4
-------------- -------------- ------
60,155,873 63,079,375 0.7
Chemicals 500,000 du Pont (E.I.) de Nemours & Co. 40,114,877 53,000,000 0.6
1,340,000 Engelhard Corp. 24,234,839 28,140,000 0.3
700,000 Grace (W.R.) & Co. 36,613,755 33,162,500 0.3
2,000,000 Imperial Chemical Industries PLC
(ADR)* 98,975,520 91,000,000 1.0
500,000 Millennium Chemicals Inc. 13,552,415 9,375,000 0.1
-------------- -------------- ------
213,491,406 214,677,500 2.3
<PAGE>
Communications 300,000 ++cisco Systems, Inc. 14,198,982 14,437,500 0.2
Equipment
Computer Software 1,100,000 Computer Associates International,
Inc. 48,167,431 42,762,500 0.5
450,000 ++Creative Technology, Ltd. 5,840,746 4,106,250 0.0
-------------- -------------- ------
54,008,177 46,868,750 0.5
Consumer Electronics 400,000 Nintendo Corp. Ltd. 28,474,285 28,675,577 0.3
Diversified 2,100,000 Tenneco, Inc. 85,408,129 81,900,000 0.9
Companies 6,000,000 Tomkins PLC 24,678,005 26,870,880 0.3
1,900,000 United Technologies Corp. 56,635,222 142,975,000 1.5
600,000 Varian Associates, Inc. 32,201,899 32,100,000 0.3
-------------- -------------- ------
198,923,255 283,845,880 3.0
Drug Stores 2,150,000 Rite Aid Corp. 68,282,570 90,300,000 1.0
Electrical 1,139,100 Belden Inc. 35,776,659 40,580,438 0.4
Equipment 900,000 Cooper Industries, Inc. 35,594,061 39,037,500 0.4
800,000 General Electric Co. 40,557,953 79,400,000 0.9
600,000 Philips Electronics N.V. (NY
Registered Shares) (b) 18,270,763 26,700,000 0.3
-------------- -------------- ------
130,199,436 185,717,938 2.0
Electronic Components 1,500,000 Avnet, Inc. 83,947,762 84,562,500 0.9
Financial Services 2,000,000 Federal National Mortgage Association 52,392,099 72,250,000 0.8
1,100,000 Transamerica Corporation 81,108,138 98,450,000 1.0
-------------- -------------- ------
133,500,237 170,700,000 1.8
Food Distribution 15,000,000 Dairy Farm International Holdings
Ltd. (Ordinary) 16,436,481 11,325,000 0.1
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Foods/Food 2,000,000 Archer-Daniels-Midland Co. $ 34,105,377 $ 35,750,000 0.4%
Processing 1,559,600 Grand Metropolitan PLC (ADR)* 47,735,069 49,712,250 0.5
99,000 Nestle S.A. 103,564,527 116,085,595 1.3
145,000 Thai Theparos Food Product Public
Company Limited (Foreign) 661,718 458,189 0.0
-------------- -------------- ------
186,066,691 202,006,034 2.2
<PAGE>
Footwear 40,000,000 Yue Yuen Industrial (Holdings
Limited) 10,727,086 16,519,326 0.2
Forest Products 1,800,000 Weyerhaeuser Co. 82,324,720 80,325,000 0.9
Hardware & Tools 1,650,000 The Black & Decker Corporation 54,750,192 53,006,250 0.6
Hospital 3,200,000 Columbia/HCA Healthcare Corp. 102,856,502 107,600,000 1.2
Management 3,600,000 ++Tenet Healthcare Corp. 52,634,362 88,650,000 0.9
-------------- -------------- ------
155,490,864 196,250,000 2.1
Insurance 2,300,000 Allstate Corporation 69,292,895 136,562,500 1.5
800,000 American International Group, Inc. 54,533,179 93,900,000 1.0
1,000,000 Ayudhya Insurance Company, Ltd.
(Foreign) 7,458,665 8,863,198 0.1
1,200,000 Berkley (W.R.) Corporation (e) 62,155,679 60,900,000 0.7
1,900,000 EXEL Ltd. 41,181,437 80,275,000 0.9
2,300,000 Fremont General Corp. (e) 36,637,574 64,687,500 0.7
1,100,000 Horace Mann Educators Corp. 34,550,993 48,537,500 0.5
2,000,000 Lowndes Lambert Group Holdings PLC 4,960,638 3,556,440 0.0
2,000,000 Penncorp Financial Group, Inc. (e) 62,850,797 64,000,000 0.7
2,000,000 Provident Companies, Inc. 79,650,937 109,500,000 1.2
1,600,000 TIG Holdings, Inc. 48,600,848 50,800,000 0.5
3,000,000 Travelers Group, Inc. 39,986,618 143,625,000 1.5
-------------- -------------- ------
541,860,260 865,207,138 9.3
Iron & Steel 1,600,000 Birmingham Steel Corp. (e) 28,005,214 28,000,000 0.3
594,600 Cleveland-Cliffs, Inc. (e) 19,673,194 25,121,850 0.3
900,000 Nucor Corporation 45,502,522 41,175,000 0.4
-------------- -------------- ------
93,180,930 94,296,850 1.0
Leisure/Hotels 2,200,000 Carnival Corp. (Class A) 57,830,550 81,400,000 0.9
3,000,000 ++Harrah's Entertainment, Inc. 55,543,541 51,375,000 0.5
4,400,000 Mandarin Oriental International Ltd. 4,670,990 5,412,000 0.1
-------------- -------------- ------
118,045,081 138,187,000 1.5
Machinery & 789,300 Cincinnati Milacron, Inc. 19,182,130 14,799,375 0.2
Machine Tools
<PAGE>
Metals & Basic 1,200,000 Industrias Penoles S.A. 5,465,971 5,903,128 0.1
Materials 1,721,275 Minsura Sociedad Limitada S.A.
(T Shares) 5,179,884 6,753,794 0.1
-------------- -------------- ------
10,645,855 12,656,922 0.2
Natural Gas 1,300,000 Coastal Corp. 46,005,120 62,400,000 0.7
Suppliers 1,100,000 El Paso Natural Gas Co. 44,841,788 62,287,500 0.6
5,200,000 Williams Companies, Inc. (e) 92,336,036 231,400,000 2.5
-------------- -------------- ------
183,182,944 356,087,500 3.8
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Oil--Integrated 900,000 ++Ente Nazionale Idrocarburi S.p.A.
(ENI) (ADR)* $ 42,218,082 $ 45,562,500 0.5%
200,000 Mobil Corporation 22,250,853 26,125,000 0.3
1,300,000 Phillips Petroleum Company 44,480,705 53,137,500 0.6
1,000,000 TOTAL S.A. (ADR)* 31,610,031 42,375,000 0.4
6,300,000 YPF S.A. (ADR)* 120,155,257 166,950,000 1.8
-------------- -------------- ------
260,714,928 334,150,000 3.6
Oil--Service 2,900,000 Dresser Industries, Inc. 77,166,439 87,725,000 0.9
Paper 790,000 Temple-Inland, Inc. 36,163,014 41,475,000 0.4
Pharmaceuticals 176,200 Block Drug, Inc. (Class A) 6,909,930 7,576,600 0.1
3,500,000 Glaxo Wellcome PLC (ADR)* (c) 91,075,165 123,812,500 1.3
400,000 Merck & Co., Inc. 19,645,017 33,700,000 0.4
40,000 Novartis AG (d) 46,608,686 49,714,683 0.5
300,000 Pfizer, Inc. 17,304,400 25,237,500 0.3
-------------- -------------- ------
181,543,198 240,041,283 2.6
Railroads 1,500,000 Kansas City Southern Industries, Inc. 65,462,741 75,000,000 0.8
Real Estate 825,000 CarrAmerica Realty Corp. 22,317,053 25,368,750 0.3
Investment Trusts 1,800,000 RFS Hotel Investors, Inc. (e) 27,076,754 31,275,000 0.3
742,200 Walden Residential Properties, Inc. 13,173,382 17,905,575 0.2
-------------- -------------- ------
62,567,189 74,549,325 0.8
Restaurants 500,000 McDonald's Corporation 23,648,532 23,625,000 0.3
<PAGE>
Retail Trade 3,060,000 Wal-Mart Stores, Inc. 74,771,939 85,297,500 0.9
Telecommunications 1,900,000 Frontier Corporation 54,362,106 33,962,500 0.4
1,800,000 GTE Corp. 59,065,028 83,925,000 0.9
1,000,000 Nokia Corp. (ADR)* 40,607,101 58,250,000 0.6
800,000 Telecomunicacoes Brasileiras
S.A.--Telebras (ADR)* 43,785,833 81,900,000 0.9
-------------- -------------- ------
197,820,068 258,037,500 2.8
Tires & Rubber 3,000,000 The Goodyear Tire & Rubber Co. 119,321,790 156,750,000 1.7
Utilities--Electric, 365,700 Pinnacle West Capital Corp. 7,773,323 11,016,713 0.1
Gas & Water
Total Common Stocks 3,956,638,761 5,099,575,611 55.0
<CAPTION>
Face Amount Corporate Bonds
Aerospace US$ 15,000,000 Lockheed Martin Corp., 6.85% due
5/15/2001 14,987,850 14,851,950 0.2
Automobile Parts 20,000,000 Eaton Corp., 6.50% due 6/01/2025 19,929,200 18,893,400 0.2
Automotive Hertz Corp.:
25,000,000 6.70% due 6/15/2002 24,815,300 24,232,500 0.3
13,000,000 6% due 1/15/2003 12,891,670 12,185,030 0.1
-------------- -------------- ------
37,706,970 36,417,530 0.4
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Face Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Banking US$ 10,000,000 Banco Rio de la Plata, 8.75% due
12/15/2003 $ 10,045,700 $ 9,850,000 0.1%
25,000,000 Bank of Boston Corp., 6.625% due
12/01/2005 23,519,000 23,528,500 0.2
BankAmerica Corp.:
15,000,000 6.875% due 6/01/2003 14,149,050 14,637,450 0.2
30,000,000 6.75% due 9/15/2005 29,591,750 28,552,200 0.3
Bankers Trust Company:
10,000,000 7.50% due 1/15/2002 9,688,700 10,055,600 0.1
35,000,000 7.125% due 3/15/2006 34,548,800 33,907,300 0.4
The Chase Manhattan Corp.:
20,000,000 6.50% due 8/01/2005 19,403,800 18,770,800 0.2
10,000,000 6.25% due 1/15/2006 9,137,000 9,192,000 0.1
6,000,000 First Hawaiian, Inc., 6.25% due
8/15/2000 5,841,600 5,819,760 0.1
20,000,000 First Security Corp., 7% due
7/15/2005 19,803,850 19,205,280 0.2
30,000,000 First Union Corp., 6.55% due
10/15/2035 29,953,350 28,313,700 0.3
22,750,000 Firstbank Puerto Rico, 7.625% due
12/15/2005 22,140,802 22,199,223 0.2
10,000,000 Great Western Financial Corp.,
6.375% due 7/01/2000 9,998,800 9,791,300 0.1
Household Bank:
10,000,000 6.87% due 5/15/2001 9,868,800 9,885,500 0.1
20,000,000 6.875% due 3/17/2003 19,886,200 19,518,000 0.2
10,300,000 6.50% due 7/15/2003 10,202,253 9,816,724 0.1
NationsBank Corp.:
40,000,000 5.60% due 2/07/2001 40,000,000 37,946,800 0.4
10,000,000 6.20% due 8/15/2003 9,670,360 9,425,300 0.1
25,000,000 6.50% due 8/15/2003 22,104,200 23,986,250 0.3
25,500,000 PNC Funding Corp., 6.125% due
9/01/2003 24,922,025 23,867,235 0.3
20,000,000 People's Bank-Bridgeport, 7.20%
due 12/01/2006 19,956,700 19,191,000 0.2
25,000,000 Provident Bank, 6.375% due 1/15/2004 24,296,430 23,442,000 0.2
Union Planters Corp.:
20,000,000 6.25% due 11/01/2003 18,756,100 18,693,800 0.2
7,500,000 6.75% due 11/01/2005 7,205,925 7,075,350 0.1
-------------- -------------- ------
444,691,195 436,671,072 4.7
<PAGE>
Beverages 19,000,000 Coca-Cola Femsa S.A., 8.95% due
11/01/2006 18,969,595 18,841,692 0.2
Broadcasting 20,000,000 British Sky Broadcasting Group
PLC, 7.30% due 10/15/2006 20,037,440 19,477,200 0.2
Chemicals 8,000,000 Airgas, Inc., 7.14% due 3/08/2004 8,000,000 7,861,784 0.1
24,250,000 Lyondell Petrochemical Company,
6.50% due 2/15/2006 23,022,540 22,341,525 0.2
25,000,000 Union Carbide Corp., 6.79% due
6/01/2025 25,000,000 23,837,750 0.3
-------------- -------------- ------
56,022,540 54,041,059 0.6
Consumer Loewen Group, Inc.:
Services 12,000,000 7.75% due 10/15/2001 11,994,600 11,981,400 0.1
20,000,000 8.25% due 10/15/2003 20,130,300 20,018,860 0.2
-------------- -------------- ------
32,124,900 32,000,260 0.3
Diversified 10,000,000 Tenneco, Inc., 6.70% due 12/15/2005 9,808,500 9,505,370 0.1
Companies
Electronics 16,000,000 Litton Industries, Inc., 6.98% due
3/15/2006 16,000,000 15,463,696 0.2
15,000,000 Philips Electronics N.V., 7.125%
due 5/15/2025 14,954,200 14,487,600 0.2
-------------- -------------- ------
30,954,200 29,951,296 0.4
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Face Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Finance Ford Motor Credit Co.:
US$ 40,000,000 5.75% due 1/25/2001 $ 39,596,900 $ 38,231,200 0.4%
9,000,000 5.90% due 2/23/2001 8,704,260 8,648,460 0.1
General Motors Acceptance Corp.:
50,000,000 6.375% due 4/04/2000 49,887,500 49,201,900 0.5
55,000,000 5.625% due 2/15/2001 54,450,000 52,309,400 0.6
30,000,000 6.75% due 6/10/2002 29,520,300 29,362,500 0.3
15,000,000 Household Finance Corp., 7.05% due
6/06/2001 15,013,950 14,970,600 0.2
20,000,000 International Lease Finance Corp.,
5.62% due 2/01/2000 19,876,200 19,353,200 0.2
10,000,000 Margaretten Financial Corp., 6.75%
due 6/15/2000 9,621,060 9,882,100 0.1
Sears, Roebuck Acceptance Corp.:
25,000,000 5.71% due 2/06/2001 25,000,000 23,885,000 0.3
50,000,000 5.63% due 2/07/2001 49,996,500 47,676,250 0.5
15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 14,332,500 0.1
-------------- -------------- ------
316,662,470 307,853,110 3.3
<PAGE>
Financial GATX Corp.:
Leasing 7,000,000 6.66% due 3/15/2001 6,997,900 6,868,400 0.1
12,000,000 6.27% due 12/05/2001 11,823,270 11,512,920 0.1
25,000,000 6.69% due 11/30/2005 24,984,750 23,608,250 0.3
XTRA Corp.:
20,000,000 6.79% due 8/01/2001 19,945,800 19,675,720 0.2
20,000,000 6.68% due 11/30/2001 20,000,000 19,543,140 0.2
-------------- -------------- ------
83,751,720 81,208,430 0.9
Financial 10,000,000 American Express Credit Corp.,
Services 6.125% due 11/15/2001 9,963,300 9,607,200 0.1
Finova Capital Corp.:
25,000,000 6.45% due 6/01/2000 24,766,550 24,536,750 0.3
15,000,000 5.98% due 2/27/2001 14,968,950 14,391,870 0.2
10,000,000 6.56% due 11/15/2002 10,000,000 9,640,800 0.1
McDonnell Douglas Finance Corp.:
5,000,000 5.48% due 2/08/1999 4,997,600 4,865,250 0.0
20,000,000 6.78% due 12/19/2003 19,993,400 19,069,000 0.2
20,000,000 6.965% due 9/12/2005 20,049,200 19,371,520 0.2
35,000,000 Morgan Stanley Group, Inc., 5.75%
due 2/15/2001 34,968,150 33,431,510 0.4
Salomon Inc.:
10,000,000 6.75% due 2/15/2003 9,804,000 9,647,810 0.1
5,000,000 6.875% due 12/15/2003 4,968,500 4,818,530 0.0
15,000,000 7.20% due 2/01/2004 15,088,650 14,707,950 0.2
Smith Barney Shearson Holdings, Inc.:
10,000,000 5.875% due 2/01/2001 9,621,300 9,608,300 0.1
15,000,000 6.50% due 10/15/2002 14,690,800 14,473,800 0.2
30,000,000 7% due 3/15/2004 29,927,700 29,302,830 0.3
-------------- -------------- ------
223,808,100 217,473,120 2.4
Food & Tobacco Nabisco Inc.:
20,000,000 6.70% due 6/15/2002 19,838,770 19,394,400 0.2
20,000,000 6.85% due 6/15/2005 20,000,000 19,148,200 0.2
-------------- -------------- ------
39,838,770 38,542,600 0.4
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Face Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Foreign Republic of Argentina:
Government US$ 50,634,000 Floating Rate Brady Bonds, Series
Obligations L, 6.75% due 3/31/2005++++++ $ 33,835,320 $ 45,190,845 0.5%
97,000,000 Global Bonds, 8.375% due 12/20/2003 79,422,500 92,271,250 1.0
35,000,000 Global Bonds, 11% due 10/09/2006 36,846,700 35,918,750 0.4
10,000,000 Global Bonds, 11.375% due 1/30/2017 9,941,600 10,300,000 0.1
-------------- -------------- ------
160,046,120 183,680,845 2.0
<PAGE>
Forest Products 20,400,000 Champion International Corp., 6.40%
due 2/15/2026 20,238,456 19,038,157 0.2
Hardware & Tools 20,000,000 The Black & Decker Corporation,
6.625% due 11/15/2000 19,217,900 19,654,000 0.2
Hospital 22,000,000 Tenet Healthcare Corp., 8% due
Management 1/15/2005 21,997,750 21,505,000 0.2
Industrial 7,000,000 Cummins Engine Company, Inc., 6.75%
due 2/15/2007 6,978,790 6,670,412 0.1
12,750,000 Diamond Shamrock, Inc., 7.65% due
7/01/2026 12,741,187 13,034,325 0.1
7,800,000 Interface, Inc., 9.50% due 11/15/2005 7,552,000 7,761,000 0.1
50,000,000 Williams Holdings of Delaware, Inc.,
6.25% due 2/01/2006 49,739,500 45,885,500 0.5
-------------- -------------- ------
77,011,477 73,351,237 0.8
Insurance 10,125,000 Integon Corp., 8% due 8/15/1999 10,208,769 10,210,759 0.1
20,000,000 Travelers Inc., 6.875% due 6/01/2025 20,037,200 19,429,400 0.2
-------------- -------------- ------
30,245,969 29,640,159 0.3
Machinery 20,000,000 FMC Corp., 6.375% due 9/01/2003 18,940,800 18,825,400 0.2
22,500,000 Harris Corp., 6.375% due 8/15/2002 22,461,850 21,510,900 0.2
-------------- -------------- ------
41,402,650 40,336,300 0.4
Manufactured 3,000,000 Oakwood Homes Corp., 9.125% due
Housing 6/01/2007 3,000,000 2,958,750 0.0
Natural Gas 20,000,000 Coastal Corp., 6.70% due 2/15/2027 19,800,400 19,123,560 0.2
Suppliers 15,000,000 ENSERCH Corporation, 7.125% due
6/15/2005 15,095,150 14,601,000 0.2
-------------- -------------- ------
34,895,550 33,724,560 0.4
Oil--Integrated 18,375,000 Occidental Petroleum Corp., 6.24%
due 11/24/2000 18,135,306 17,822,464 0.2
Oryx Energy Co.:
5,500,000 8% due 10/15/2003 5,380,610 5,536,465 0.0
15,000,000 8.375% due 7/15/2004 15,024,550 15,373,320 0.2
Union Texas Petroleum Holdings, Inc.:
10,000,000 6.70% due 11/18/2002 10,000,000 9,651,390 0.1
20,000,000 6.81% due 12/05/2007 20,000,000 18,785,800 0.2
10,000,000 Unocal Corporation, 6.11% due 2/17/2004 10,000,000 9,280,280 0.1
30,000,000 YPF S.A., 8% due 2/15/2004 26,252,500 28,800,000 0.3
-------------- -------------- ------
104,792,966 105,249,719 1.1
Oil--Related Tosco Corporation:
20,000,000 7% due 7/15/2000 19,894,250 19,852,400 0.2
20,000,000 7.25% due 1/01/2007++++ 20,299,500 19,500,020 0.2
-------------- -------------- ------
40,193,750 39,352,420 0.4
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Face Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Services US$ 20,000,000 ADT Operations, 8.25% due 8/01/2000 $ 20,158,312 $ 20,500,000 0.2%
Telecommuni- 10,000,000 Pacific Telecom, Inc., 6.625% due
cations 10/20/2005 10,000,000 9,434,070 0.1
23,200,000 PanAmSat L.P., 9.42%*** due 8/01/2003 21,968,973 21,808,000 0.2
25,000,000 Worldcom Inc., 7.55% due 4/01/2004 24,958,500 24,843,750 0.3
-------------- -------------- ------
56,927,473 56,085,820 0.6
Tires & Rubber 40,000,000 The Goodyear Tire & Rubber Co.,
6.625% due 12/01/2006 39,840,000 37,460,000 0.4
Transportation 10,000,000 General American Transportation
Corp., 6.44% due 11/13/2001 10,000,000 9,667,600 0.1
15,000,000 Transportacion Maritima Mexicana,
S.A. de C.V., 10% due 11/15/2006 15,130,250 14,325,000 0.2
-------------- -------------- ------
25,130,250 23,992,600 0.3
Travel & Lodging Royal Caribbean Cruises Ltd.:
10,000,000 7.125% due 9/18/2002 9,900,050 9,877,500 0.1
10,000,000 7.25% due 8/15/2006 9,854,415 9,662,700 0.1
-------------- -------------- ------
19,754,465 19,540,200 0.2
Utilities--Electric, 25,000,000 Empresa Nacional de Electricidad
Gas & Water S.A. (Endesa), 7.325% due 2/01/2037 25,000,000 24,295,575 0.3
30,000,000 Enron Corp., 6.75% due 7/01/2005 28,878,400 28,680,900 0.3
5,000,000 Long Island Lighting Co., 7.625%
due 4/15/1998 4,986,210 5,056,800 0.1
20,000,000 PECO Energy Co., 5.625% due 11/01/2001 18,908,800 18,873,000 0.2
5,000,000 United Illuminating Co., 6.20% due
1/15/1999 4,693,050 4,952,450 0.0
-------------- -------------- ------
82,466,460 81,858,725 0.9
Total Corporate Bonds 2,146,612,998 2,123,656,581 22.9
<PAGE>
Collateralized Mortgage Obligations
Federal Home Loan Mortgage Corp.:
9,241,900 6.50% due 5/15/2008 8,831,790 8,612,600 0.1
5,000,000 7% due 8/15/2008 4,762,500 4,762,500 0.1
13,000,000 6% due 2/15/2011 12,020,937 11,598,438 0.1
Federal National Mortgage
Association:
13,400,000 7% due 7/25/2006 13,236,687 13,035,654 0.2
12,000,000 6.50% due 1/25/2008 11,608,125 11,373,720 0.1
5,010,000 6.50% due 4/25/2008 4,653,037 4,645,992 0.0
Total Collateralized Mortgage
Obligations 55,113,076 54,028,904 0.6
US Government Obligations
US Treasury Notes:
525,000,000 5.75% due 8/15/2003 509,755,000 495,552,750 5.3
420,000,000 5.875% due 2/15/2004 417,427,344 397,294,800 4.3
760,000,000 5.875% due 11/15/2005 746,852,419 707,871,600 7.6
135,000,000 6.25% due 8/15/2023 121,434,766 119,622,150 1.3
Total US Government Obligations 1,795,469,529 1,720,341,300 18.5
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Industries Face Amount Short-Term Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Commercial US$ 43,919,000 Clipper Receivables Corp., 5.54%
Paper** due 4/21/1997 $ 43,783,827 $ 43,783,827 0.5%
12,000,000 GTE Corporation, 5.56% due 4/14/1997 11,975,907 11,975,907 0.1
84,615,000 General Motors Acceptance Corp.,
6.75% due 4/01/1997 84,615,000 84,615,000 0.9
40,982,000 International Securitization Corp.,
5.40% due 4/14/1997 40,902,085 40,902,085 0.5
21,000,000 Transamerica Finance Corp., 5.55%
due 4/07/1997 20,980,575 20,980,575 0.2
-------------- -------------- ------
202,257,394 202,257,394 2.2
Commercial Czk 300,000,000 International Bank for Reconstruction
Paper-- & Development, 11.50% due 10/09/1997 11,157,441 10,289,800 0.1
Foreign**
US Government US$ 50,000,000 Federal Home Loan Mortgage Corp.,
& Agency 5.39% due 4/18/1997 49,872,736 49,872,736 0.5
Obligations**
<PAGE>
Total Short-Term Investments 263,287,571 262,419,930 2.8
Total Investments $8,217,121,935 9,260,022,326 99.8
==============
Other Assets Less Liabilities 21,181,492 0.2
-------------- ------
Net Assets $9,281,203,818 100.0%
============== ======
<FN>
*American Depositary Receipt (ADR).
**Commercial Paper, Commercial Paper--Foreign and certain US
Government & Agency Obligations are traded on a discount basis; the
interest rates shown are the discount rates paid at the time of
purchase by the Fund.
***Represents a step-up bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
++Non-income producing security.
++++The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
++++++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.
(a)Formerly Chemical Banking Corp.
(b)Shares of Philips Electronics N.V. (ADR) were converted into
shares of Philips Electronics N.V. (NY Registered Shares).
(c)Formerly Glaxo Holdings PLC (ADR).
(d)Formerly Sandoz AG.
(e)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
Insurance Berkley (W.R.)
Corporation 1,200,000 $62,155,679 $ 289,226
Insurance Fremont General
Corp. 142,000 6,697,088 1,440,255
Insurance Penncorp Financial
Group, Inc. 1,800,000 56,478,296 260,400
Iron & Steel Birmingham Steel
Corp. 1,108,000 17,678,280 498,180
Iron & Steel Cleveland-Cliffs, Inc. (259,400) (9,246,929) 1,027,650
Natural Gas Williams
Suppliers Companies, Inc. 1,440,000 (8,811,012) 5,311,000
Real Estate RFS Hotel
Investment Investors, Inc. 46,000 605,705 2,571,260
Trusts
<PAGE>
See Notes to Financial Statements.
FINANCIAL INFORMATION
</TABLE>
<TABLE>
Statement of Assets and Liabilities as of March 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$8,217,121,935)
(Note 1a) $9,260,022,326
Foreign cash (Note 1c) 102,850
Receivables:
Interest $ 64,355,674
Securities sold 28,616,621
Capital shares sold 16,755,706
Dividends 13,146,885 122,874,886
--------------
Prepaid registration fees and other assets (Note 1f) 89,854
--------------
Total assets 9,383,089,916
--------------
Liabilities: Payables:
Capital shares redeemed 52,074,008
Securities purchased 37,903,976
Distributor (Note 2) 4,796,896
Investment adviser (Note 2) 3,279,289 98,054,169
--------------
Accrued expenses and other liabilities 3,831,929
--------------
Total liabilities 101,886,098
--------------
Net Assets: Net assets $9,281,203,818
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 400,000,000
Consist of: shares authorized $ 10,484,053
Class B Shares of Common Stock, $0.10 par value, 400,000,000
shares authorized 16,200,528
Class C Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 1,059,087
Class D Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 2,201,859
Paid-in capital in excess of par 7,854,537,739
Undistributed investment income--net 73,174,307
Undistributed realized capital gains on investments and
foreign currency transactions--net 280,717,740
Unrealized appreciation on investments and foreign
currency transactions--net 1,042,828,505
--------------
Net assets $9,281,203,818
==============
<PAGE>
Net Asset Value: Class A--Based on net assets of $3,291,219,375 and
104,840,527 shares outstanding $ 31.39
==============
Class B--Based on net assets of $4,977,430,637 and
162,005,280 shares outstanding $ 30.72
==============
Class C--Based on net assets of $322,437,598 and
10,590,867 shares outstanding $ 30.44
==============
Class D--Based on net assets of $690,116,208 and
22,018,591 shares outstanding $ 31.34
==============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended March 31, 1997
<S> <S> <C> <C>
Investment Interest and discount earned $ 305,335,388
Income Dividends (net of $3,200,996 foreign withholding tax) 118,405,274
(Notes 1d & 1e): Other 246,545
--------------
Total income 423,987,207
--------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 51,006,246
Investment advisory fees (Note 2) 37,585,806
Transfer agent fees--Class B (Note 2) 7,549,478
Transfer agent fees--Class A (Note 2) 4,213,126
Account maintenance and distribution fees--Class C (Note 2) 3,085,780
Account maintenance fees--Class D (Note 2) 1,545,620
Transfer agent fees--Class D (Note 2) 792,666
Custodian fees 781,110
Printing and shareholder reports 618,405
Transfer agent fees--Class C (Note 2) 489,379
Registration fees (Note 1f) 487,319
Professional fees 106,956
Directors' fees and expenses 41,192
Pricing fees 13,342
Other 89,520
--------------
Total expenses 108,405,945
--------------
Investment income--net 315,581,262
--------------
<PAGE>
Realized & Realized gain from:
Unrealized Gain Investments--net 526,239,016
(Loss) on Foreign currency transactions--net 509,088 526,748,104
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 208,721,438
(Notes 1b, 1c, Foreign currency transactions--net (65,632) 208,655,806
1e & 3): -------------- --------------
Net realized and unrealized gain on investments and foreign
currency transactions 735,403,910
--------------
Net Increase in Net Assets Resulting from Operations $1,050,985,172
==============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 315,581,262 $ 271,962,871
Realized gain on investments and foreign currency transactions
--net 526,748,104 843,050,533
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 208,655,806 481,215,982
-------------- --------------
Net increase in net assets resulting from operations 1,050,985,172 1,596,229,386
-------------- --------------
<PAGE>
Dividends & Investment income--net:
Distributions to Class A (129,132,730) (107,615,888)
Shareholders Class B (153,592,754) (124,808,348)
(Note 1g): Class C (9,633,153) (4,109,418)
Class D (22,687,022) (12,210,426)
Realized gain on investments--net:
Class A (200,341,016) (215,994,688)
Class B (318,637,995) (336,099,182)
Class C (19,360,951) (11,431,655)
Class D (37,329,858) (27,764,995)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (890,715,479) (840,034,600)
-------------- --------------
Capital Share Net increase in net assets derived from capital shares
Transactions transactions 88,941,831 1,885,677,575
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 249,211,524 2,641,872,361
Beginning of year 9,031,992,294 6,390,119,933
-------------- --------------
End of year* $9,281,203,818 $9,031,992,294
============== ==============
<FN>
*Undistributed investment income--net (Note 1h) $ 73,174,307 $ 71,862,639
============== ==============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 30.90 $ 27.74 $ 27.46 $ 27.89 $ 26.90
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net 1.25 1.21 1.01 .97 .87
Realized and unrealized gain on
investments and foreign currency
transactions--net 2.43 5.41 1.77 .50 1.99
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.68 6.62 2.78 1.47 2.86
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (1.25) (1.16) (.94) (.95) (.87)
Realized gain on investments--net (1.94) (2.30) (1.56) (.95) (1.00)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (3.19) (3.46) (2.50) (1.90) (1.87)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 31.39 $ 30.90 $ 27.74 $ 27.46 $ 27.89
========== ========== ========== ========== ==========
<PAGE>
Total Investment Based on net asset value per share 12.62% 24.50% 10.95% 5.39% 11.33%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses .55% .56% .57% .53% .55%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 3.99% 4.09% 3.81% 3.52% 3.56%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $3,291,219 $3,225,758 $2,507,767 $2,237,492 $2,056,023
========== ========== ========== ========== ==========
Portfolio turnover 47% 84% 89% 86% 55%
========== ========== ========== ========== ==========
Average commission rate paid++ $ .0432 $ .0382 -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effect of sales loads.
++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity securities.
The "Average Commission Rate Paid" includes commissions paid
in foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may
significantly affect the rate shown.
++++Based on average shares outstanding during the year.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .91 .90 .74 .70 .65
Realized and unrealized gain on
investments and foreign currency
transactions--net 2.39 5.29 1.72 .48 1.89
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.30 6.19 2.46 1.18 2.54
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.94) (.87) (.66) (.68) (.63)
Realized gain on investments--net (1.94) (2.30) (1.56) (.95) (1.00)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (2.88) (3.17) (2.22) (1.63) (1.63)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 30.72 $ 30.30 $ 27.28 $ 27.04 $ 27.49
========== ========== ========== ========== ==========
<PAGE>
Total Investment Based on net asset value per share 11.48% 23.22% 9.81% 4.36% 10.16%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.57% 1.58% 1.59% 1.55% 1.56%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 2.97% 3.07% 2.79% 2.50% 2.53%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $4,977,431 $5,025,504 $3,664,250 $3,079,332 $2,694,774
========== ========== ========== ========== ==========
Portfolio turnover 47% 84% 89% 86% 55%
========== ========== ========== ========== ==========
Average commission rate paid++ $ .0432 $ .0382 -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effect of sales loads.
++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity securities.
The "Average Commission Rate Paid" includes commissions paid
in foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of
the transaction. Such conversions may
significantly affect the rate shown.
++++Based on average shares outstanding during the year.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
<PAGE>
For the For the
The following per share data and ratios have Period Period
been derived from information provided in the For the Oct. 21, For the Oct. 21,
financial statements. Year Ended 1994++++ to Year Ended 1994++++ to
March 31, March 31, March 31, March 31,
Increase (Decrease) in Net Asset Value: 1997++++++ 1996 1995 1997++++++ 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 30.08 $ 27.17 $ 26.81 $ 30.86 $ 27.72 $ 27.27
Performance: -------- -------- -------- -------- -------- --------
Investment income--net .90 .92 .49 1.17 1.16 .48
Realized and unrealized
gain on investments and
foreign currency
transactions--net 2.36 5.24 1.03 2.43 5.38 1.15
-------- -------- -------- -------- -------- --------
Total from investment
operations 3.26 6.16 1.52 3.60 6.54 1.63
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net (.96) (.95) (.43) (1.18) (1.10) (.45)
Realized gain on
investments--net (1.94) (2.30) (.73) (1.94) (2.30) (.73)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (2.90) (3.25) (1.16) (3.12) (3.40) (1.18)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 30.44 $ 30.08 $ 27.17 $ 31.34 $ 30.86 $ 27.72
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 11.45% 23.25% 6.07%+++ 12.34% 24.21% 6.42%+++
======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.58% 1.59% 1.64%* .80% .81% .87%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 2.96% 3.08% 3.22%* 3.75% 3.84% 3.94%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $322,438 $259,131 $ 46,902 $690,116 $521,599 $171,201
======== ======== ======== ======== ======== ========
Portfolio turnover 47% 84% 89% 47% 84% 89%
======== ======== ======== ======== ======== ========
Average commission rate
paid++ $ .0432 $ .0382 -- $ .0432 $ .0382 --
======== ======== ======== ======== ======== ========
<PAGE>
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
++For the fiscal years beginning on or after September 1,
1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity
securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
++++Commencement of Operations.
++++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
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. 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.
<PAGE>
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Securities and assets for which market quotations are
not available are valued at fair value as determined in good faith
by or under the direction of the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Options--The Fund is authorized to write covered call options.
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.
<PAGE>
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
NOTES TO FINANCIAL STATEMENTS (continued)
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$776,065 have been reclassified between undistributed net realized
capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
<PAGE>
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 (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 year ended March 31, 1997, MLFD earned underwriting
discounts and commissions and MLPF&S earned dealer concessions on
sales of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 41,749 $ 579,434
Class D $144,815 $1,963,772
For the year ended March 31, 1997, MLPF&S received contingent
deferred sales charges of $6,950,823 and $202,197 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $456,609 in commissions on the
execution of portfolio security transactions for the year ended
March 31, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
<PAGE>
During the year ended March 31, 1997, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, received $7,139 for security price
quotations to compute the net asset value of the Fund.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended March 31, 1997 were $4,235,082,311 and
$4,613,872,337, respectively.
Net realized and unrealized gains (losses) as of March 31, 1997 were
as follows:
Realized Unrealized
Gains Gains (Losses)
Long-term investments $526,109,522 $1,043,768,032
Short-term investments 7,326 (867,641)
Paydowns 122,168 --
Foreign currency
transactions 509,088 (71,886)
------------ --------------
Total $526,748,104 $1,042,828,505
============ ==============
As of March 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $1,040,426,260 of which $1,246,338,886
related to appreciated securities and $205,912,626 related to
depreciated securities. At March 31, 1997, the aggregate cost of
investments for Federal income tax purposes was $8,219,596,066.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $88,941,831 and $1,885,677,575 for the years ended March 31,
1997 and March 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Year Ended Dollar
March 31, 1997 Shares Amount
<PAGE>
Shares sold 17,867,783 $553,401,282
Shares issued to share-
holders in reinvestment of
dividends and
distributions 9,986,061 300,989,719
------------ ------------
Total issued 27,853,844 854,391,001
Shares redeemed (27,414,603) (850,370,114)
------------ ------------
Net increase 439,241 $ 4,020,887
============ ============
Class A Shares for the
Year Ended Dollar
March 31, 1996 Shares Amount
Shares sold 19,027,848 $584,244,547
Shares issued to shareholders
in reinvestment of dividends
and distributions 9,847,092 289,450,802
------------ ------------
Total issued 28,874,940 873,695,349
Shares redeemed (14,880,078) (451,792,754)
------------ ------------
Net increase 13,994,862 $421,902,595
============ ============
Class B Shares for the
Year Ended Dollar
March 31, 1996 Shares Amount
Shares sold 27,179,336 $ 802,909,943
Shares issued to shareholders
in reinvestment of dividends
and distributions 14,204,232 420,101,200
-------------- --------------
Total issued 41,383,568 1,223,011,143
Shares redeemed (44,055,095) (1,317,756,891)
Automatic conversion of
shares (1,163,610) (35,786,707)
-------------- --------------
Net decrease (3,835,137) $ (130,532,455)
============== ==============
<PAGE>
Class B Shares for the
Year Ended Dollar
March 31, 1996 Shares Amount
Shares sold 45,146,025 $1,369,296,478
Shares issued to shareholders
in reinvestment of dividends
and distributions 13,896,514 386,369,306
------------- --------------
Total issued 59,042,539 1,755,665,784
Shares redeemed (25,082,439) (748,567,202)
Automatic conversion of
shares (2,447,861) (71,651,206)
------------- --------------
Net increase 31,512,239 $ 935,447,376
============== ==============
Class C Shares for the
Year Ended Dollar
March 31, 1996 Shares Amount
Shares sold 4,367,744 $ 131,117,286
Shares issued to shareholders
in reinvestment of dividends
and distributions 889,233 26,090,088
------------- --------------
Total issued 5,256,977 157,207,374
Shares redeemed (3,280,962) (98,987,162)
------------- --------------
Net increase 1,976,015 $ 58,220,212
============= ==============
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
Shares sold 7,451,321 $ 221,649,300
Shares issued to shareholders
in reinvestment of dividends
and distributions 474,830 13,924,668
------------- --------------
Total issued 7,926,151 235,573,968
Shares redeemed (1,037,499) (31,045,232)
------------- --------------
Net increase 6,888,652 $ 204,528,736
============= ==============
<PAGE>
Class D Shares for the Year Dollar
Ended March 31, 1997 Shares Amount
Shares sold 7,903,395 $244,928,191
Automatic conversion of
shares 1,141,681 35,786,707
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,738,833 52,347,617
------------ ------------
Total issued 10,783,909 333,062,515
Shares redeemed (5,669,032) (175,829,328)
------------ ------------
Net increase 5,114,877 $157,233,187
============ ============
Class D Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
Shares sold 10,198,663 $303,203,877
Automatic conversion of
shares 2,406,945 71,651,206
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,173,178 35,170,384
------------ ------------
Total issued 13,778,786 410,025,467
Shares redeemed (3,050,741) (86,226,599)
------------ ------------
Net increase 10,728,045 $323,798,868
============ ============
5. Loaned Securities:
At March 31, 1997, the Fund held US Treasury Notes having an
aggregate value of approximately $188,691,000 as collateral for
portfolio securities loaned having a market value of approximately
$187,125,000.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Capital Fund, Inc.:
<PAGE>
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Capital Fund, Inc. as of March 31, 1997, the related statements of
operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period
then ended. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at March
31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Capital Fund, Inc. as of March 31, 1997, the results
of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 9, 1997
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
<TABLE>
The following information summarizes all per share distributions
paid by Merrill Lynch Capital Fund, Inc. during its fiscal year
ended March 31, 1997:
<CAPTION>
Record Payable Qualifying Domestic Interest from Domestic Non-Qualifying Total Long-Term
Date Date Ordinary Income Federal Obligations Ordinary Income Ordinary Income Capital Gains
<PAGE>
Class A Shares:
<S> <S> <C> <C> <C> <C> <C>
7/01/96 7/10/96 $.158406 $.179563 $.739154 $1.077123 $.675088
12/10/96 12/18/96 $.141324 $.162325 $.344057 $.647706 $.789394
Class B Shares:
7/01/96 7/10/96 $.136125 $.154306 $.635185 $.925616 $.675088
12/10/96 12/18/96 $.106190 $.121971 $.258523 $.486684 $.789394
Class C Shares:
7/01/96 7/10/96 $.139212 $.157805 $.649588 $.946605 $.675088
12/10/96 12/18/96 $.107028 $.122933 $.260562 $.490523 $.789394
Class D Shares:
7/01/96 7/10/96 $.153450 $.173945 $.716027 $1.043422 $.675088
12/10/96 12/18/96 $.132698 $.152418 $.323057 $ .608173 $.789394
The qualifying domestic ordinary income qualifies for the dividends-
received deduction for corporations.
The law varies in each state as to whether and what percentage of
dividend income attributable to Federal obligations is exempt from
state income tax. We recommend that you consult your tax adviser to
determine if any portion of the dividends you received are exempt
from state income tax.
Listed at right are the percentages of total assets of the Fund
invested in Federal obligations for each quarter ended during the
fiscal year.
Please retain this information for your records.
Percentage of
For the Quarter Ended Federal Obligations*
June 30, 1996 20.74%
September 30, 1996 20.73%
December 31, 1996 19.89%
March 31, 1997 18.17%
<FN>
*For purposes of this calculation, Federal Obligations include US
Treasury Notes, US Treasury Bills and US Treasury Bonds. Also
included are obligations issued by the following agencies: Banks for
Cooperatives, Federal Intermediate Credit Banks, Federal Land Banks,
Federal Home Loan Banks and the Student Loan Marketing Association.
Repurchase Agreements are not included in this calculation.
</TABLE>
<PAGE>
