MERRILL LYNCH
CAPITAL FUND, INC.
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.
STRATEGIC
Performance
[GRAPHIC ART OMITTED]
Merrill Lynch
Capital Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #10252--3/98
Annual Report
March 31, 1998
Printed on post-consumer recycled paper
<PAGE>
MERRILL LYNCH CAPITAL FUND, INC.
PORTFOLIO SUMMARY
Security Diversification
As a Percentage of Net Assets
As of March 31, 1998
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
US Stocks 53.4%
US Bonds 29.5%
Non-US Stocks 9.9%
Non-US Bonds 3.6%
Cash & Cash Equivalents 3.6%
Sector Representation
As a Percentage of Equities
As of March 31, 1998
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
Financial Services 23.6%
Consumer Services 6.9%
Utiliities 0.9%
Transportation 4.3%
Capital Goods--Technology 13.4%
Consumer Cylcicals 14.7%
Energy 13.2%
Basic Industries 7.5%
Diversified 3.6%
Credit Cyclicals 1.9%
Consumer Staples 6.6%
Capital Goods 3.4%
Geographic Diversification Percent of
As of March 31, 1998 Net Assets*
- ----------------------------------------------------
United States 85.8%
- ----------------------------------------------------
United Kingdom 3.8
- ----------------------------------------------------
Argentina 3.0
- ----------------------------------------------------
Switzerland 1.9
- ----------------------------------------------------
Mexico 1.1
- ----------------------------------------------------
Brazil 0.7
- ----------------------------------------------------
Netherlands 0.6
- ----------------------------------------------------
Italy 0.6
- ----------------------------------------------------
France 0.6
- ----------------------------------------------------
Turkey 0.5
- ----------------------------------------------------
Japan 0.3
- ----------------------------------------------------
India 0.3
- ----------------------------------------------------
Chile 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 March 31, 1998 Fund 500*
- -----------------------------------------------------------------------
Average Capitalization (in billions) $23.0 $17.0
- -----------------------------------------------------------------------
Price/Book Value 3.4 6.1
- -----------------------------------------------------------------------
Price/Earnings Ratio** 19.8 24.3
- -----------------------------------------------------------------------
Yield Based on Current Dividend 1.5% 1.4%
- -----------------------------------------------------------------------
* An unmanaged broad-based index comprised of common stocks.
** Based on 1998 earnings estimates.
Fixed-Income Investments Merrill Lynch
As of March 31, 1998 Fund DOAO Index*
- ---------------------------------------------------------------------------
Duration 5.5 Years 5.1 Years
- ---------------------------------------------------------------------------
Average Maturity 9.1 Years 8.9 Years
- ---------------------------------------------------------------------------
Asset Breakdown:
- ---------------------------------------------------------------------------
Corporates 53.6% 20.1%
- ---------------------------------------------------------------------------
US Treasuries/Agencies 39.0% 52.1%
- ---------------------------------------------------------------------------
Mortgage-Backed 0.8% 27.8%
- ---------------------------------------------------------------------------
International Governments 6.6% --
- ---------------------------------------------------------------------------
* An unmanaged market-weighted corporate, Government and mortgage master bond
index reflecting approximately 97% of total outstanding bonds.
1
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
DEAR SHAREHOLDER
A continuation of favorable political, economic and inflationary trends, coupled
with very positive investor sentiment, propelled the stock market to a series of
record highs during the March quarter. Beginning late last year, a series of
factors prompted strong buying interest in US equities. Retrenchments by US
investors from emerging markets accelerated. US financial assets also became
more attractive to foreign investors because of their perceived safety and
security and the continued strength of the US dollar, which reached a five-year
high against the Japanese yen and a seven-year high against the German mark.
This interest continued through January, as the most dire forecasts about the
impact of the Asian crisis on global financial markets proved extreme and early
fourth quarter of 1997 US corporate profits performance proved respectable.
Furthermore, the recovery in the prices of two key commodities, oil and gold,
appeared to confirm that the crisis was over.
By February, evidence of moderating economic growth, continued benign inflation
and additional solid fourth quarter corporate earnings results further
encouraged the view that the impact of the Asian financial crisis on US
companies and financial markets would be modest and manageable, supporting
continued capital flows into the equity market. By March, ongoing gains in
important economic measures such as consumer income, housing and manufacturing
activity confirmed a solid growth outlook for the US economy, despite the crisis
in Asia. Moreover, this growth occurred without reigniting inflationary
pressures. The annualized rate of consumer price inflation has fallen in each of
the past five months to a 1.4% annual rate. Finally, the strong performance of
the US equity market precipitated an acceleration in equity mutual fund inflows.
This combination of factors drove the unman aged Standard & Poor's 500 Composite
Index (S&P 500) to a +13.95% total return for the first calendar quarter of
1998. The US bond market continued to provide positive returns as well, with the
unmanaged Merrill Lynch Domestic Bond Master Index providing a +1.62% total
return, benefiting from the continued benign inflationary environment and
expectations for more moderate economic growth in the periods ahead. Cash
equivalents earned a +1.25% 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, 1998 were +8.84%, +8.55%, +8.58% and
+8.79%, respectively. (Fund results shown do not reflect sales charges; results
would be lower if sales charges were included. Complete performance information,
including average annual total returns, can be found on pages 6 - 8 of this
report to shareholders.)
While these factors supporting the US stock market's extraordinary advance are
unlikely to abate in the near term, we question whether the stock market can
provide significant appreciation from current levels because of two primary
factors. First, corporate earnings growth is slowing. Currently, most analysts
expect corporate profits to continue rising at a 12%- 13% annual rate over the
next three years-five years, but we are hard-pressed to see how recent profit
increases can be sustained. Wage gains are increasing and finding skilled labor
is becoming more difficult. Meanwhile, international competitive pressures are
keeping price levels flat to down. These forces point toward margin contraction
and a deceleration in the rate of corporate earnings advances. Second, stock
market valuations are at record high levels on virtually every measure. We do
not believe this combination represents a formula for sustained further gains
for the broad equity market averages. While current conditions remain favorable,
we believe risks are rising and, at current price levels, the equity market
offers little room for disappointment. Meanwhile, bonds continue to represent
good value, in our view, with inflation-adjusted interest rates at above-average
historic levels and inflationary pressures continuing to moderate. Consequently,
we continued to maintain the Fund's bond weighting. Our investment position at
March quarter-end showed 63.3% of net assets invested in equities, 33.1% in
fixed-income securities and 3.6% in cash equivalents.
2
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
This compares to 62.5% in equities, 34.1% in fixed-income securities and 3.4% in
cash equivalents at December 31, 1997.
Portfolio Matters
Within the equity component of the portfolio, we added five new investments
during the March quarter, increased our position in 26 stocks, eliminated four
holdings and reduced our ownership in an additional 11 stocks.
Among the new positions is Rockwell International Corporation, a global
electronics company which maintains leadership positions in three major markets:
industrial automation, avionics and communications and semiconductors systems.
We sold the stock early in 1997, based on its high valuation and uncertain
semiconductor systems prospects. Disappointing results from this division
precipitated a subsequent 25% decline in the share price, creating what we
consider to be an attractive reentry point. Rockwell's core businesses of
factory automation and avionics, accounting for 80% of sales and 83% of
operating profits, enjoy leading global market shares and generate above-average
returns. The semiconductor division has disappointed investors as a result of
increased competition, new product transition, a weaker product mix and higher
research and development expenses. We believe this business is poised to improve
in response to a new industry standard and sequential margin improvements going
forward. Rockwell targets revenue growth of 8% and earnings per share growth of
13%-15% annually. The company also maintains a strong balance sheet and an
ongoing share repurchase program. The stock appears inexpensive compared to its
own historical valuation history, its electrical equipment peer group and broad
market averages. Another valuation methodology suggests we are buying the
semiconductor business at essentially no cost. This combination of strong
industrial positions, steady earnings and cash flow growth, rising margins and
returns, free cash flow, active share repurchases and a reasonable valuation
make Rockwell an attractive addition to the portfolio.
Another new position is Motorola, Inc., the semiconductor and communications
equipment manufacturer. This stock has declined sharply and is now selling at
the same price as in 1993 following downward earnings revisions resulting from
weakness in Asian semiconductor, handset and paging sales, creating what we
believe to be an attractive buying opportunity in the stock. While 1998 will be
a challenging year, a number of factors are expected to converge which could
propel rapid earnings growth into 1999: new digital handset products, continued
growth in land mobile products, further market share gains in wireless
infrastructure and a swing in operating profits from the company's satellite
venture. Downside risk in the stock appears quite limited, since it sells at the
low-end of the company's five-year historical range. Substantial upside
potential exists if earnings power is realized and the stock's valuation expands
toward the upper end of this range. The stock's rapid ascent late last year,
before its subsequent decline, is indicative of the powerful potential this
stock enjoys when business conditions improve. With limited downside risk and a
reasonable likelihood of an improving trend in revenues and earnings into next
year, Motorola appears to offer very good value at its current price.
We sold our position in Nokia Corp. OY, the Finnish telecommunications equipment
company. This has been an outstanding investment, up over 60% year-to-date at
March 31, 1998 and nearly triple the price at the beginning of 1996, which has
resulted in a dramatic expansion of valuation multiples. While the company
possesses many attractive qualities, we see a rising near-term risk profile
which, at current lofty multiples, suggests the potential for significant
downside risk in the stock. In our view, the Asian economic crisis is likely to
impair prospects for the company's telecommunications infrastructure business,
with delays and/or cancellations increasingly possible as these countries
attempt to resolve their current financial problems. In addition, competition in
this business is intensifying. Furthermore, several new competitors are entering
the handset business,
3
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
suggesting forthcoming margin pressures. We believe that any evidence of
accelerating price competition and/or loss of market share will be adverse to
the stock price. With the upside potential from current levels constrained as
the stock appears to reflect virtually all the recent good news, and the
downside risk rising, we decided to eliminate our profitable position and
redeploy proceeds into more attractive investment opportunities.
We also sold Nucor Corporation, the specialty steel company. The original
investment thesis on Nucor was predicated upon the company's ability to create
value for shareholders through both favorable and adverse market conditions.
However, following a recent meeting with company management, we were compelled
to reassess this view and concluded that the stock no longer represented good
value. We are concerned that the company may not be able to successfully execute
its strategy of capturing market share through the addition of low-cost
capacity, prompting our decision to eliminate our position with a modest gain.
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 much stronger balance sheets, while offering
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 19.8 times
estimated 1998 earnings per share compared to 24.3 times for the S&P 500, at 3.4
times current book value per share versus 6.1 times for the S&P 500, and provide
a 1.5% dividend yield which approximates that of the S&P 500. We believe this
formula will provide superior risk-adjusted returns over time.
Within the fixed-income component of the portfolio, we shortened the average
duration of our bond holdings from 5.6 years to 5.4 years when long-term
interest rates reached their lowest levels in over four years in early January.
We also shifted a modest amount of assets from investment-grade corporate bonds
into below investment-grade corporate bonds to seek to capture their higher
yields. At the same time, we increased our holdings of US Treasury securities
and foreign government bonds, while reducing our mortgage securities holdings.
As a result of these transactions, we maintained our average quality rating at
A2/A+ by Moody's Investors Service, Inc. and Standard & Poor's Corp. At March
quarter-end, investment-grade corporate bonds represented 45.3% of fixed-income
assets; US Treasury securities represented 39.0%; foreign government bonds,
6.6%; below investment-grade corporate bonds, 8.3%; and mortgage-backed
securities, 0.8%. This compares to 48.0% in investment-grade corporate bonds,
37.8% in US Treasury securities, 6.1% in foreign government bonds, 6.9% in below
investment-grade corporate bonds and 1.2% in mortgage-backed securities at
December quarter-end. The average duration of our bonds at March quarter-end was
5.5 years, average maturity was 9.1 years, and the average yield-to- maturity
was 6.55%.
Fiscal Year in Review
For the 12 months ended March 31, 1998, the total returns of Merrill Lynch
Capital Fund, Inc. 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. For the fiscal year ended
March 31, 1998, total returns for Merrill Lynch Capital Fund, Inc.'s Class A,
Class B, Class C and Class D Shares were +30.71%, +29.38%, +29.40% and +30.40%,
respectively. For the same 12-month period, the S&P 500 provided a +48.01% total
return, the Merrill Lynch Domestic Bond Master Index generated a +12.05% total
return, and cash equivalents earned a +5.31% total return.
4
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
Within the equity component of the Fund, the large representation of financial
companies positively contributed to performance since the bank, insurance and
diversified financial sectors of the market performed well. The consumer
cyclical group, in which the Fund was also sizably represented, also performed
strongly during the fiscal year, aided by high employment levels, rising
consumer incomes and strong consumer confidence. The Fund was not exposed to
many consumer staple companies whose stocks outperformed the overall market
averages. While this segment of the market is represented by many outstanding
global companies, the premium valuation levels these stocks command limited
their appeal. In addition, the Fund's investment in the energy group negatively
impacted overall returns, since a weak commodity price environment impaired this
group's ability to fully participate in the strong market advance.
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
May 5, 1998
5
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 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 "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.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 3/31/98 +30.71% +23.85%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/98 +16.47 +15.22
- --------------------------------------------------------------------------------
Ten Years Ended 3/31/98 +14.91 +14.29
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
================================================================================
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
Year Ended 3/31/98 +29.40% +28.40%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/98 +20.23 +20.23
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after 1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 3/31/98 +29.38% +25.38%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/98 +15.29 +15.29
- --------------------------------------------------------------------------------
Inception (10/21/88)
through 3/31/98 +13.74 +13.74
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
4 years.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class D Shares*
================================================================================
Year Ended 3/31/98 +30.40% +23.55%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/98 +21.17 +19.29
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
6
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment
Class A Shares
[LINE CHART OMITTED]
Class B Shares
[LINE CHART OMITTED]
Class C & Class D Shares
[LINE CHART OMITTED]
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ ML Capital Fund, Inc., through a fully managed investment policy, utilizes
equity, debt and convertible securities.
++ This unmanaged broad-based Index is comprised of common stocks.
Past performance is not predictive of future performance.
7
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 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)
[AREA CHART OMITTED]
Recent Performance Results
<TABLE>
<CAPTION>
Ten Years/
12 Month 3 Month Since Inception
Total Return Total Return Total Return
===========================================================================================
<S> <C> <C> <C>
ML Capital Fund, Inc. Class A Shares* +30.71% +8.84% +301.46%
- -------------------------------------------------------------------------------------------
ML Capital Fund, Inc. Class B Shares* +29.38 +8.55 +237.07
- -------------------------------------------------------------------------------------------
ML Capital Fund, Inc. Class C Shares* +29.40 +8.58 + 88.54
- -------------------------------------------------------------------------------------------
ML Capital Fund, Inc. Class D Shares* +30.40 +8.79 + 93.64
- -------------------------------------------------------------------------------------------
Dow Jones Industrial Average +36.04 +11.73 +496.77/+439.69/+144.89
- -------------------------------------------------------------------------------------------
Standard & Poor's 500 Index** +48.01 +13.95 +465.74/+405.55/+155.25
===========================================================================================
</TABLE>
* 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 dates are:
Class A Shares, ten years ended 3/31/98; Class B Shares, 10/21/88; and
Class C and Class D Shares, 10/21/94.
** 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 3/31/98;
from 10/21/88 to 3/31/98; and from 10/21/94 to 3/31/98, respectively.
8
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aerospace 2,400,000 Boeing Co. (The) $ 116,958,469 $ 125,100,000 1.0%
815,000 Lockheed Martin Corporation 69,418,145 91,687,500 0.8
------------- ------------- -----
186,376,614 216,787,500 1.8
- ------------------------------------------------------------------------------------------------------------------------
Apparel 2,500,000++ Fruit of the Loom, Inc. (Class A) 70,546,151 76,562,500 0.6
- ------------------------------------------------------------------------------------------------------------------------
Appliances & 2,750,000 Sunbeam Corporation 113,382,466 121,171,875 1.0
Furniture
- ------------------------------------------------------------------------------------------------------------------------
Automobile Parts 1,850,000 Federal-Mogul Corp. 77,609,094 98,396,875 0.8
- ------------------------------------------------------------------------------------------------------------------------
Automotive 1,000,000 General Motors Corp. 44,944,948 67,437,500 0.6
- ------------------------------------------------------------------------------------------------------------------------
Banking 1,000,000 Chase Manhattan Corporation (The) 81,222,073 134,875,000 1.1
- ------------------------------------------------------------------------------------------------------------------------
Building Materials 2,000,000++ American Standard Companies, Inc. 93,322,961 91,750,000 0.8
2,400,000 Masco Corporation 75,254,389 142,800,000 1.2
------------- ------------- -----
168,577,350 234,550,000 2.0
- ------------------------------------------------------------------------------------------------------------------------
Capital Goods 1,650,000 United Dominion Industries, Ltd. 38,856,970 53,521,875 0.5
- ------------------------------------------------------------------------------------------------------------------------
Chemicals 1,600,000 du Pont (E.I.) de Nemours and Co. 74,606,947 108,800,000 0.9
2,000,000 Imperial Chemical Industries PLC (ADR)* 100,317,691 143,750,000 1.2
------------- ------------- -----
174,924,638 252,550,000 2.1
- ------------------------------------------------------------------------------------------------------------------------
Communications 600,000++ Cisco Systems, Inc. 18,761,482 41,025,000 0.3
Equipment
- ------------------------------------------------------------------------------------------------------------------------
Computer Software 1,500,000 Computer Associates International, Inc. 44,432,476 86,625,000 0.7
- ------------------------------------------------------------------------------------------------------------------------
Consumer Electronics 400,000 Nintendo Corp. Ltd. 28,474,285 34,565,675 0.3
- ------------------------------------------------------------------------------------------------------------------------
Diversified 1,100,000 Corning, Inc. 43,667,986 48,675,000 0.4
Companies 310,000 GenCorp Inc. 9,173,452 9,532,500 0.1
1,200,000 Rockwell International Corporation 68,537,356 68,850,000 0.6
2,500,000 Tenneco, Inc. 102,219,111 106,718,750 0.9
10,000,000 Tomkins PLC 44,821,118 60,964,500 0.5
2,000,000 United Technologies Corp. 63,643,951 184,625,000 1.6
1,750,000 Varian Associates, Inc. (a) 93,141,060 96,906,250 0.8
------------- ------------- -----
425,204,034 576,272,000 4.9
- ------------------------------------------------------------------------------------------------------------------------
Drug Stores 4,300,000 Rite Aid Corp. 68,282,570 147,275,000 1.2
- ------------------------------------------------------------------------------------------------------------------------
Electrical Equipment 1,500,000 Belden Inc. (a) 47,721,621 62,812,500 0.5
1,500,000 General Electric Co. 38,165,328 129,281,250 1.1
1,000,000 Philips Electronics N.V. (NY Registered
Shares) 70,415,130 73,437,500 0.6
------------- ------------- -----
156,302,079 265,531,250 2.2
- ------------------------------------------------------------------------------------------------------------------------
Electronic 1,500,000 Avnet, Inc. 83,947,762 86,343,750 0.7
Components
- ------------------------------------------------------------------------------------------------------------------------
Financial Services 2,000,000 Federal National Mortgage Association 52,392,099 126,500,000 1.1
1,000,000 Transamerica Corporation 76,009,264 116,500,000 1.0
------------- ------------- -----
128,401,363 243,000,000 2.1
- ------------------------------------------------------------------------------------------------------------------------
Food & Beverage 2,500,000 Diageo PLC (ADR)* 96,190,207 121,406,250 1.0
- ------------------------------------------------------------------------------------------------------------------------
Foods/Food 75,000 Nestle S.A. (Registered) 78,575,411 143,535,247 1.2
Processing
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Footwear 1,625,000 Nike, Inc. (Class B) $ 76,992,273 $ 71,906,250 0.6%
8,000,000 Yue Yuen Industrial (Holdings Limited) 10,727,086 15,591,120 0.1
------------- ------------- -----
87,719,359 87,497,370 0.7
- ------------------------------------------------------------------------------------------------------------------------
Hospital Management 3,600,000++ Tenet Healthcare Corp. 52,634,362 130,725,000 1.1
- ------------------------------------------------------------------------------------------------------------------------
Hotels & Casinos 1,800,000++ Sun International Hotels Ltd. 68,687,868 85,275,000 0.7
- ------------------------------------------------------------------------------------------------------------------------
Information Systems 3,500,000 Reynolds & Reynolds Company (Class A) 70,124,940 76,562,500 0.7
- ------------------------------------------------------------------------------------------------------------------------
Insurance 2,300,000 Allstate Corporation 69,292,895 211,456,250 1.8
1,000,000 American International Group, Inc. 46,545,446 125,937,500 1.1
1,800,000 Berkley (W.R.) Corporation (a) 62,155,679 85,275,000 0.7
1,900,000 EXEL Ltd. 41,181,437 147,250,000 1.2
2,000,000 Fremont General Corp. (a) 33,362,385 117,625,000 1.0
2,200,000 Horace Mann Educators Corp. 34,550,993 77,275,000 0.6
2,000,000 Penncorp Financial Group, Inc. (a) 62,850,797 57,750,000 0.5
4,000,000 Provident Companies, Inc. 79,650,937 137,250,000 1.2
1,800,000 TIG Holdings, Inc. 54,108,848 47,362,500 0.4
4,500,000 Travelers Group, Inc. 39,986,618 270,000,000 2.3
------------- ------------- -----
523,686,035 1,277,181,250 10.8
- ------------------------------------------------------------------------------------------------------------------------
Iron & Steel 1,600,000 Birmingham Steel Corp. (a) 28,005,214 26,200,000 0.2
- ------------------------------------------------------------------------------------------------------------------------
Leisure/Hotels 2,200,000 Carnival Corp. (Class A) 57,830,550 153,450,000 1.3
3,000,000++ Harrah's Entertainment, Inc. 55,543,541 73,687,500 0.6
------------- ------------- -----
113,374,091 227,137,500 1.9
- ------------------------------------------------------------------------------------------------------------------------
Machinery & Machine 750,000++ SPX Corp. (a) 44,070,962 57,234,375 0.5
Tools
- ------------------------------------------------------------------------------------------------------------------------
Natural Gas 1,650,000 Coastal Corp. 66,552,668 107,456,250 0.9
Suppliers 1,300,000 El Paso Natural Gas Co. 56,192,288 91,731,250 0.8
8,290,000 Williams Companies, Inc. 74,032,333 265,280,000 2.2
------------- ------------- -----
196,777,289 464,467,500 3.9
- ------------------------------------------------------------------------------------------------------------------------
Oil Field Equipment 210,000 McCormick & Company, Inc. 6,699,376 6,772,500 0.1
- ------------------------------------------------------------------------------------------------------------------------
Oil -- Integrated 1,100,000 Ente Nazionale Idrocarburi S.p.A.(ENI)
(ADR)* 54,064,994 74,525,000 0.6
1,100,000 TOTAL S.A.(ADR)* 36,453,868 66,068,750 0.6
2,500,000 Unocal Corporation 95,486,005 96,718,750 0.8
5,000,000 Yacimientos Petroliferos
Fiscales S.A. (YPF) (ADR)* 95,920,616 170,000,000 1.4
------------- ------------- -----
281,925,483 407,312,500 3.4
- ------------------------------------------------------------------------------------------------------------------------
Oil -- Service 2,500,000 Dresser Industries, Inc. 69,699,584 120,156,250 1.0
- ------------------------------------------------------------------------------------------------------------------------
Paper & Forest 1,900,000 Kimberly-Clark Corp. 95,282,857 95,237,500 0.8
Products 800,000 Temple-Inland, Inc. 36,743,614 49,700,000 0.4
1,641,500 Weyerhaeuser Co. 74,855,268 92,744,750 0.8
------------- ------------- -----
206,881,739 237,682,250 2.0
- ------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 2,000,000 Glaxo Wellcome PLC (ADR)* 54,175,864 108,250,000 0.9
50,000 Novartis AG (Registered) 61,610,822 88,627,554 0.8
------------- ------------- -----
115,786,686 196,877,554 1.7
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Railroads 4,900,000 Kansas City Southern Industries, Inc. $ 74,694,146 $ 215,600,000 1.8%
1,925,000 Union Pacific Corporation 117,418,836 108,160,938 0.9
------------- ------------- -----
192,112,982 323,760,938 2.7
- ------------------------------------------------------------------------------------------------------------------------
Real Estate 1,000,000 CarrAmerica Realty Corp. 26,832,805 30,000,000 0.3
Investment Trusts 2,600,000 Patriot American Hospitality, Inc. 69,867,303 70,200,000 0.6
1,000,000 Walden Residential Properties, Inc. (a) 20,679,751 25,250,000 0.2
------------- ------------- -----
117,379,859 125,450,000 1.1
- ------------------------------------------------------------------------------------------------------------------------
Restaurants 2,000,000 McDonald's Corporation 98,086,085 120,000,000 1.0
- ------------------------------------------------------------------------------------------------------------------------
Retail Trade 250,000 Sears, Roebuck and Co. 11,748,382 14,359,375 0.1
3,000,000 Wal-Mart Stores, Inc. 73,541,970 152,437,500 1.3
------------- ------------- -----
85,290,352 166,796,875 1.4
- ------------------------------------------------------------------------------------------------------------------------
Semiconductors 900,000 Motorola, Inc. 51,015,893 54,562,500 0.5
- ------------------------------------------------------------------------------------------------------------------------
Telecommunications 2,000,000 Frontier Corporation 55,148,100 65,125,000 0.5
600,000 Telecomunicacoes Brasileiras S.A. --
Telebras (ADR)* 51,096,291 77,887,500 0.7
------------- ------------- -----
106,244,391 143,012,500 1.2
- ------------------------------------------------------------------------------------------------------------------------
Tires & Rubber 2,500,000 Goodyear Tire & Rubber Co. (The) 98,262,526 189,375,000 1.6
- ------------------------------------------------------------------------------------------------------------------------
Total Common Stocks 4,699,477,049 7,525,471,659 63.3
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Face
Amount Corporate Bonds
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aerospace $ 12,500,000 Boeing Co. (The), 6.44% due 12/20/2004 12,560,000 12,546,875 0.1
- ------------------------------------------------------------------------------------------------------------------------
Automotive Hertz Corp.:
10,000,000 7% due 5/01/2002 10,305,500 10,179,800 0.1
25,000,000 6.70% due 6/15/2002 24,815,300 25,203,500 0.2
13,000,000 6% due 1/15/2003 12,891,670 12,733,630 0.1
20,000,000 Hyundai Motor Co., Ltd., 7.60% due
7/15/2007+++ 19,916,100 15,000,000 0.1
------------- ------------- -----
67,928,570 63,116,930 0.5
- ------------------------------------------------------------------------------------------------------------------------
Banking 30,000,000 Banco Nacional de Commercio Exterior SNC,
Global Bonds, 7.25% due 2/02/2004 28,187,700 28,650,000 0.2
13,600,000 Banco Rio de la Plata, 8.75% due 12/15/2003 13,751,700 13,974,000 0.1
29,000,000 Bank of Boston Corp., 6.625% due 12/01/2005 27,575,520 29,323,930 0.2
BankAmerica Corp.:
15,000,000 6.875% due 6/01/2003 14,149,050 15,378,300 0.1
30,000,000 6.75% due 9/15/2005 29,591,750 30,637,800 0.3
Chase Manhattan Corporation (The):
15,000,000 6.50% due 8/01/2005 14,552,850 15,053,550 0.1
15,000,000 6.25% due 1/15/2006 13,892,250 14,849,400 0.1
20,000,000 First Security Corp., 7% due 7/15/2005 19,803,850 20,662,060 0.2
30,000,000 First Union Corp., 6.55% due 10/15/2035 29,953,350 30,504,300 0.3
` 22,750,000 Firstbank Puerto Rico, 7.625% due
12/20/2005 22,140,802 23,363,841 0.2
10,000,000 Great Western Financial Corp., 6.375%
due 7/01/2000 9,998,800 10,020,200 0.1
Household Bank:
10,000,000 6.87% due 5/15/2001 9,868,800 10,158,090 0.1
20,000,000 6.875% due 3/17/2003 19,886,200 20,464,200 0.2
10,300,000 6.50% due 7/15/2003 10,202,253 10,344,187 0.1
</TABLE>
11
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Banking NationsBank Corp.:
(concluded) $ 40,000,000 5.60% due 2/07/2001 $ 40,000,000 $ 39,533,600 0.3%
10,000,000 6.20% due 8/15/2003 9,670,360 10,015,300 0.1
25,000,000 6.50% due 8/15/2003 22,104,200 25,199,500 0.2
25,500,000 PNC Funding Corp., 6.125% due 9/01/2003 24,922,025 25,147,335 0.2
20,000,000 People's Bank -- Bridgeport, 7.20% due
12/01/2006 19,956,700 20,493,400 0.2
26,000,000 Provident Bank, 6.375% due 1/15/2004 25,287,430 26,034,580 0.2
Union Planters Corp.:
20,000,000 6.25% due 11/01/2003 18,756,100 19,906,000 0.2
12,500,000 6.75% due 11/01/2005 12,001,875 12,634,625 0.1
------------- ------------- -----
436,253,565 452,348,198 3.8
- ------------------------------------------------------------------------------------------------------------------------
Beverages 22,000,000 Coca-Cola Femsa S.A., 8.95% due 11/01/2006 21,984,595 23,224,476 0.2
10,000,000 Panamerican Beverages, Inc., 7.25% due
7/01/2009+++ 10,037,500 9,825,000 0.1
------------- ------------- -----
32,022,095 33,049,476 0.3
- ------------------------------------------------------------------------------------------------------------------------
Broadcasting 20,000,000 British Sky Broadcasting Group PLC,
7.30% due 10/15/2006 20,037,440 20,712,000 0.2
- ------------------------------------------------------------------------------------------------------------------------
Cable 10,000,000 Comcast Cable Communications, Inc.,
8.125% due 5/01/2004 9,991,000 10,758,600 0.1
- ------------------------------------------------------------------------------------------------------------------------
Chemicals 8,000,000 Airgas, Inc., 7.14% due 3/08/2004 8,000,000 8,331,120 0.1
37,000,000 Lyondell Petrochemical Company, 6.50%
due 2/15/2006 35,447,015 36,518,260 0.3
40,000,000 Union Carbide Corp., 6.79% due 6/01/2025 40,292,500 40,234,000 0.3
------------- ------------- -----
83,739,515 85,083,380 0.7
- ------------------------------------------------------------------------------------------------------------------------
Computers 15,000,000 Digital Equipment Corp., 8.625% due
11/01/2012 17,050,650 17,254,200 0.2
- ------------------------------------------------------------------------------------------------------------------------
Consumer Services Loewen Group, Inc.:
16,000,000 6.70% due 10/01/1999 15,970,340 16,067,296 0.1
20,000,000 8.25% due 10/15/2003+++ 20,208,132 21,242,580 0.2
------------- ------------- -----
36,178,472 37,309,876 0.3
- ------------------------------------------------------------------------------------------------------------------------
Electronics Tandy Corp.:
20,000,000 6.125% due 1/15/2003 19,971,600 19,821,600 0.2
15,000,000 6.95% due 9/01/2007 14,944,120 15,292,950 0.1
------------- ------------- -----
34,915,720 35,114,550 0.3
- ------------------------------------------------------------------------------------------------------------------------
Finance 40,000,000 Ford Motor Credit Co., 5.75% due 1/25/2001 39,596,900 39,567,600 0.3
General Motors Acceptance Corp.:
30,000,000 6.375% due 4/04/2000 29,932,500 30,152,940 0.2
55,000,000 5.625% due 2/15/2001 54,450,000 54,331,200 0.5
30,000,000 6.75% due 6/10/2002 29,520,300 30,599,400 0.3
15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 14,897,700 0.1
------------- ------------- -----
168,495,500 169,548,840 1.4
- ------------------------------------------------------------------------------------------------------------------------
Financial Leasing GATX Corp.:
25,000,000 6.875% due 11/01/2004 24,938,000 25,338,000 0.2
25,000,000 6.69% due 11/30/2005 24,984,750 25,437,000 0.2
XTRA Corp.:
20,000,000 6.79% due 8/01/2001 19,945,800 20,388,040 0.2
20,000,000 6.68% due 11/30/2001 20,000,000 20,325,320 0.2
------------- ------------- -----
89,868,550 91,488,360 0.8
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Finova Capital Corp.:
Services $ 25,000,000 6.45% due 6/01/2000 $ 24,766,550 $ 25,160,000 0.2%
15,000,000 5.98% due 2/27/2001 14,968,950 14,888,775 0.1
10,000,000 6.56% due 11/15/2002 10,000,000 10,141,200 0.1
McDonnell Douglas Finance Corp.:
7,500,000 6.78% due 12/19/2003 7,497,525 7,610,775 0.1
20,000,000 6.965% due 9/12/2005 20,049,200 20,861,360 0.2
35,000,000 Morgan Stanley Group, Inc., 5.75% due
2/15/2001 34,968,150 34,703,620 0.3
13,000,000 Norwest Financial, Inc., 6.625% due
7/15/2004 13,000,000 13,253,240 0.1
Salomon, Inc.:
10,000,000 6.75% due 2/15/2003 9,804,000 10,157,940 0.1
5,000,000 6.875% due 12/15/2003 4,968,500 5,114,525 0.0
Smith Barney Shearson Holdings, Inc.:
25,000,000 6.625% due 7/01/2002 24,994,000 25,336,000 0.2
30,000,000 7% due 3/15/2004 29,927,700 30,801,060 0.3
------------- ------------- -----
194,944,575 198,028,495 1.7
- ------------------------------------------------------------------------------------------------------------------------
Food & Tobacco Nabisco Inc.:
20,000,000 6.125% due 2/01/2033 19,915,200 19,640,400 0.1
20,000,000 6.375% due 2/01/2035 19,939,200 19,676,000 0.2
------------- ------------- -----
39,854,400 39,316,400 0.3
- ------------------------------------------------------------------------------------------------------------------------
Foreign Government 10,000,000 Province of Mendoza, 10% due 9/04/2007+++ 9,931,700 9,750,000 0.1
Obligations Republic of Argentina:
45,000,000 8.75% due 7/10/2002 43,707,500 41,428,125 0.4
33,360,000 Floating Rate Brady Bonds, Series L,
6.6875% due 3/31/2005+ 24,661,342 30,774,600 0.3
40,000,000 Global Bonds, 8.375% due 12/20/2003 38,561,250 39,850,000 0.3
20,000,000 Republic of Colombia, Global Bonds, 7.625%
due 2/15/2007 18,825,650 18,850,000 0.2
15,000,000 Republic of Guatemala, 8.50% due
8/03/2007+++ 15,082,250 14,887,500 0.1
Republic of Turkey+++:
15,000,000 9.875% due 2/23/2005 14,853,700 15,187,500 0.1
40,000,000 10% due 9/19/2007 39,980,625 40,400,000 0.3
50,000,000 United Mexican States, Global Bonds, 8.625%
due 3/12/2008 50,000,000 49,625,000 0.4
------------- ------------- -----
255,604,017 260,752,725 2.2
- ------------------------------------------------------------------------------------------------------------------------
Hospital Management 34,625,000 Medpartners, Inc., 6.875% due 9/01/2000 34,411,290 34,319,608 0.3
26,500,000 Tenet Healthcare Corp., 8% due 1/15/2005 26,470,375 27,228,750 0.2
------------- ------------- -----
60,881,665 61,548,358 0.5
- ------------------------------------------------------------------------------------------------------------------------
Industrial Interface, Inc.:
7,800,000 9.50% due 11/15/2005 7,552,000 8,326,500 0.1
8,000,000 7.30% due 4/01/2008 7,999,520 7,999,520 0.1
20,000,000 Reliance Industries Ltd., 8.25% due
1/15/2027+++ 19,526,999 18,600,000 0.1
25,000,000 Triton Energy Ltd., 8.75% due 4/15/2002 25,363,000 25,865,675 0.2
15,000,000 United Refining Co., 10.75% due 6/15/2007 15,000,000 15,750,000 0.1
Williams Holdings of Delaware, Inc.:
20,000,000 6.625% due 11/15/2004 19,908,000 20,113,000 0.2
50,000,000 6.25% due 2/01/2006 49,739,500 49,678,000 0.4
------------- ------------- -----
145,089,019 146,332,695 1.2
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Information Reynolds & Reynolds Company:
Systems $ 10,000,000 5.875% due 3/20/2000 $ 9,992,900 $ 9,972,400 0.1%
28,750,000 6.12% due 3/02/2001 28,750,000 28,738,500 0.2
------------- ------------- -----
38,742,900 38,710,900 0.3
- ------------------------------------------------------------------------------------------------------------------------
Machinery 20,000,000 FMC Corp., 6.375% due 9/01/2003 18,940,800 19,680,800 0.2
22,500,000 Harris Corp., 6.375% due 8/15/2002 22,461,850 22,641,525 0.2
------------- ------------- -----
41,402,650 42,322,325 0.4
- ------------------------------------------------------------------------------------------------------------------------
Media/Publishing 15,000,000 News American, Inc., 6.75% due 1/09/2038+++ 15,000,000 14,756,250 0.1
- ------------------------------------------------------------------------------------------------------------------------
Natural Gas 27,500,000 Coastal Corp., 6.70% due 2/15/2027 27,225,400 28,690,998 0.3
Suppliers 15,000,000 ENSERCH Corporation, 7.125% due 6/15/2005 15,095,150 15,492,000 0.1
------------- ------------- -----
42,320,550 44,182,998 0.4
- ------------------------------------------------------------------------------------------------------------------------
Oil -- Integrated 10,000,000 Giant Industries, Inc., 9% due 9/01/2007+++ 10,000,000 10,225,000 0.1
18,375,000 Occidental Petroleum Corp., 6.24% due
11/24/2000 18,135,306 18,416,160 0.1
Perez Companc S.A.+++:
10,000,000 9% due 1/30/2004 10,125,000 10,300,000 0.1
20,500,000 8.125% due 7/15/2007 20,201,470 20,090,000 0.2
Union Texas Petroleum Holdings, Inc.:
23,250,000 6.70% due 11/18/2002 23,190,070 23,598,634 0.2
20,000,000 6.81% due 12/05/2007 20,000,000 20,576,600 0.2
10,000,000 Unocal Corporation, 6.11% due 2/17/2004 10,000,000 9,935,830 0.0
20,000,000 Yacimientos Petroliferos Fiscales S.A.
(YPF), 8% due 2/15/2004 18,334,375 20,317,400 0.2
------------- ------------- -----
129,986,221 133,459,624 1.1
- ------------------------------------------------------------------------------------------------------------------------
Paper & Forest Boise Cascade Corporation:
Products 10,000,000 7.35% due 10/11/2004 10,316,700 10,300,000 0.1
20,000,000 7.66% due 5/27/2005 20,000,000 20,898,200 0.2
25,000,000 Champion International Corp., 6.65%
due 12/15/2037 25,000,000 25,382,500 0.2
------------- ------------- -----
55,316,700 56,580,700 0.5
- ------------------------------------------------------------------------------------------------------------------------
Real Estate 10,000,000 Franchise Finance Corp. of America, 6.95%
Investment Trusts due 8/29/2007 10,000,000 9,843,190 0.1
- ------------------------------------------------------------------------------------------------------------------------
Telecommunications 10,000,000 Pacific Telecom, Inc., 6.625% due
10/20/2005 10,000,000 10,195,240 0.1
25,000,000 WorldCom, Inc., 7.55% due 4/01/2004 24,958,500 26,349,500 0.2
------------- ------------- -----
34,958,500 36,544,740 0.3
- ------------------------------------------------------------------------------------------------------------------------
Tires & Rubber 40,000,000 Goodyear Tire & Rubber Co. (The), 6.625%
due 12/01/2006 39,840,000 40,149,200 0.3
- ------------------------------------------------------------------------------------------------------------------------
Transportation 12,500,000 Northwest Airlines Inc., 7.625% due
3/15/2005 12,471,225 12,421,875 0.1
17,000,000 Transportacion Maritima Mexicana, S.A.
de C.V., 10% due 11/15/2006 17,152,730 17,063,750 0.2
15,000,000 Union Pacific Corp., 6.625% due 2/01/2008 14,776,750 14,784,900 0.1
------------- ------------- -----
44,400,705 44,270,525 0.4
- ------------------------------------------------------------------------------------------------------------------------
Travel & Lodging Royal Caribbean Cruises Ltd.:
10,000,000 7.125% due 9/18/2002 9,900,050 10,227,700 0.1
10,000,000 7.25% due 8/15/2006 9,854,415 10,273,400 0.1
------------- ------------- -----
19,754,465 20,501,100 0.2
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Utilities -- Connecticut Light & Power Co.:
Electric, $ 28,250,000 7.75% due 6/01/2002+++ $ 28,173,725 $ 28,589,847 0.2%
Gas & Water 20,000,000 7.875% due 10/01/2024 20,431,000 20,433,800 0.2
33,000,000 Empresa Nacional de Electricidad S.A.
(Endesa), 7.325% due 2/01/2037 33,065,750 32,885,622 0.3
38,500,000 Enron Corp., 6.75% due 7/01/2005 37,527,310 38,897,705 0.3
20,000,000 Niagara Mohawk Power Corp., 5.875% due
9/01/2002 19,504,200 19,486,600 0.2
17,500,000 Tata Electric Co., 8.50% due 8/19/2017+++ 17,313,775 15,692,250 0.1
------------- ------------- -----
156,015,760 155,985,824 1.3
- ------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds 2,333,153,204 2,371,617,334 20.0
- ------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations
- ------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.:
9,241,900 6.50% due 5/15/2008 8,831,790 9,054,104 0.1
5,000,000 7% due 8/15/2008 4,762,500 5,042,150 0.0
13,000,000 6% due 2/15/2011 12,020,937 12,593,750 0.1
5,010,000 Federal National Mortgage Association,
6.50% due 4/25/2008 4,653,037 4,995,909 0.0
- ------------------------------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations 30,268,264 31,685,913 0.2
- ------------------------------------------------------------------------------------------------------------------------
US Government Obligations
- ------------------------------------------------------------------------------------------------------------------------
US Treasury Bonds:
200,000,000 6.25% due 8/15/2023 184,808,984 206,156,000 1.7
75,000,000 6% due 2/15/2026 74,730,469 74,929,500 0.6
US Treasury Notes:
175,000,000 5.875% due 7/31/1999 175,533,203 175,602,000 1.5
200,000,000 5.75% due 8/15/2003 191,405,078 200,718,000 1.7
650,000,000 5.875% due 11/15/2005 634,453,981 655,278,000 5.5
225,000,000 5.625% due 2/15/2006 224,046,875 223,276,500 1.9
- ------------------------------------------------------------------------------------------------------------------------
Total US Government Obligations 1,484,978,590 1,535,960,000 12.9
- ------------------------------------------------------------------------------------------------------------------------
Short-Term Investments
- ------------------------------------------------------------------------------------------------------------------------
Commercial 35,000,000 Associates Corp. of North America, 6.07%
Paper** due 4/01/1998 35,000,000 35,000,000 0.3
25,000,000 BTAB Holdings Funding Corp., 5.65% due
4/21/1998 24,921,528 24,921,528 0.2
25,000,000 CXC Inc., 5.50% due 4/03/1998 24,992,361 24,992,361 0.2
Corporate Asset Funding Co. Inc.:
34,500,000 5.52% due 4/20/1998 34,399,490 34,399,490 0.3
20,000,000 5.52% due 4/22/1998 19,935,600 19,935,600 0.2
20,000,000 Finova Capital Corp., 5.49% due 4/17/1998 19,951,200 19,951,200 0.2
28,771,000 General Motors Acceptance Corp., 6.13%
due 4/01/1998 28,771,000 28,771,000 0.2
Lehman Brothers Holdings Inc.:
40,400,000 5.52% due 4/06/1998 40,369,027 40,369,027 0.3
20,000,000 5.52% due 4/13/1998 19,963,200 19,963,200 0.2
14,700,000 Lexington Parker Capital Co. LLC, 5.48%
due 4/02/1998 14,697,762 14,697,762 0.1
</TABLE>
15
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Short-Term Investments Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 12,131,000 Park Avenue Receivables Corp., 5.57%
Paper** due 4/17/1998 $ 12,100,969 $ 12,100,969 0.1%
(concluded) 50,000,000 Riverwoods Funding Corp., 5.53% due
5/01/1998 49,769,583 49,769,583 0.4
------------- ------------- -----
324,871,720 324,871,720 2.7
- ------------------------------------------------------------------------------------------------------------------------
US Government 30,000,000 Federal Home Loan Banks, 5.45% due
Agency 4/08/1998 29,968,208 29,968,208 0.3
Obligations**
- ------------------------------------------------------------------------------------------------------------------------
Total Short-Term Investments 354,839,928 354,839,928 3.0
- ------------------------------------------------------------------------------------------------------------------------
Total Investments $8,902,717,035 11,819,574,834 99.4
==============
Other Assets Less Liabilities 67,910,560 0.6
--------------- -----
Net Assets $11,887,485,394 100.0%
=============== =====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Commercial Paper 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.
+ 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.
See Notes to Financial Statements.
(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. 1,150,000 $60,939,161 $570,433
Electrical Belden Inc. 360,900 11,944,962 295,000
Equipment
Insurance Berkley (W.R.)
Corporation 600,000 -- 792,000
Insurance Fremont General
Corp. (300,000) (3,275,189) 1,200,000
Insurance Penncorp Financial
Group, Inc. -- -- 400,000
Iron & Steel Birmingham Steel
Corp. -- -- 640,000
Machinery & SPX Corp. 750,000 44,070,962 ++
Machine
Tools
Real Estate Walden Residential
Investment Properties, Inc. 257,800 7,506,369 1,491,987
Trusts
- --------------------------------------------------------------------------------
++ Non-income producing security.
16
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of March 31, 1998
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost --
$8,902,717,035) (Note 1a) ............................... $11,819,574,834
Cash .................................................... 93,561
Foreign cash (Note 1c) .................................. 605,832
Receivables:
Securities sold ...................................... $ 67,934,654
Interest ............................................. 60,790,954
Capital shares sold .................................. 23,371,632
Dividends ............................................ 11,047,785 163,145,025
-------------
Prepaid registration fees and other assets (Note 1f) .... 179,474
---------------
Total assets ............................................ 11,983,598,726
---------------
- ------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ................................. 47,591,638
Capital shares redeemed .............................. 35,846,597
Distributor (Note 2) ................................. 5,854,636
Investment adviser (Note 2) .......................... 4,141,004 93,433,875
-------------
Accrued expenses and other liabilities .................. 2,679,457
---------------
Total liabilities ....................................... 96,113,332
---------------
- ------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets .............................................. $11,887,485,394
===============
- ------------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 400,000,000 shares authorized ........................... $ 11,064,324
Class B Shares of Common Stock, $0.10 par value,
400,000,000 shares authorized ........................... 16,188,770
Class C Shares of Common Stock, $0.10 par value,
200,000,000 shares authorized ........................... 1,412,405
Class D Shares of Common Stock, $0.10 par value,
200,000,000 shares authorized ........................... 3,415,522
Paid-in capital in excess of par ........................ 8,597,071,799
Undistributed investment income -- net .................. 73,165,000
Undistributed realized capital gains on investments
and foreign currency transactions -- net ................ 268,313,754
Unrealized appreciation on investments and foreign
currency transactions -- net ............................ 2,916,853,820
---------------
Net assets .............................................. $11,887,485,394
===============
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A -- Based on net assets of $4,155,677,231
and 110,643,239 shares outstanding ...................... $ 37.56
===============
Class B -- Based on net assets of $5,938,708,616 and
161,887,699 shares outstanding .......................... $ 36.68
===============
Class C -- Based on net assets of $512,782,732 and
14,124,050 shares outstanding ........................... $ 36.31
===============
Class D -- Based on net assets of $1,280,316,815 and
34,155,217 shares outstanding ........................... $ 37.49
===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
Statement of Operations for the Year Ended March 31, 1998
<TABLE>
<S> <C> <C> <C>
Investment Interest and discount earned ............................ $ 278,880,820
Income Dividends (net of $2,428,105 foreign withholding tax) ... 111,518,341
(Notes 1d & 1e): Other ................................................... 647,445
---------------
Total income ............................................ 391,046,606
---------------
- ------------------------------------------------------------------------------------------------------------------
Expenses: Account maintenance and distribution fees --
Class B (Note 2) ........................................ $ 53,880,781
Investment advisory fees (Note 2) ....................... 41,894,654
Transfer agent fees -- Class B (Note 2) ................. 8,024,817
Transfer agent fees -- Class A (Note 2) ................. 4,858,453
Account maintenance and distribution fees -- Class C
(Note 2) ................................................ 3,866,998
Account maintenance fees -- Class D (Note 2) ............ 2,351,416
Transfer agent fees -- Class D (Note 2) ................. 1,250,921
Custodian fees .......................................... 734,998
Transfer agent fees -- Class C (Note 2) ................. 613,773
Printing and shareholder reports ........................ 395,906
Registration fees (Note 1f) ............................. 386,555
Professional fees ....................................... 99,032
Directors' fees and expenses ............................ 47,273
Pricing fees ............................................ 16,858
Other ................................................... 83,625
-------------
Total expenses .......................................... 118,506,060
---------------
Investment income -- net ............................... 272,540,546
---------------
- ------------------------------------------------------------------------------------------------------------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments -- net ................................... 571,665,488
(Loss) on Foreign currency transactions -- net ................. (2,456,877) 569,208,611
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments -- net ................................... 1,873,957,408
(Notes 1b, 1c, Foreign currency transactions -- net ................. 67,907 1,874,025,315
1e & 3): -------------- ---------------
Net realized and unrealized gain on investments
and foreign currency transactions ....................... 2,443,233,926
---------------
Net Increase in Net Assets Resulting from Operations .... $ 2,715,774,472
===============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year
Ended March 31,
-------------------------------
Increase (Decrease) in Net Assets: 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment income -- net ................................ $ 272,540,546 $ 315,581,262
Realized gain on investments and foreign currency
transactions -- net ..................................... 569,208,611 526,748,104
Change in unrealized appreciation on investments
and foreign currency transactions -- net ................ 1,874,025,315 208,655,806
-------------- --------------
Net increase in net assets resulting from operations .... 2,715,774,472 1,050,985,172
-------------- --------------
- ------------------------------------------------------------------------------------------------------------------
Dividends & Investment income -- net:
Distributions to Class A .............................................. (115,518,688) (129,132,730)
Shareholders Class B .............................................. (119,396,439) (153,592,754)
(Note 1g): Class C .............................................. (8,523,951) (9,633,153)
Class D .............................................. (26,653,341) (22,687,022)
Realized gain on investments -- net:
Class A .............................................. (204,758,968) (200,341,016)
Class B .............................................. (306,423,980) (318,637,995)
Class C .............................................. (21,655,996) (19,360,951)
Class D .............................................. (51,231,087) (37,329,858)
-------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders ....................... (854,162,450) (890,715,479)
-------------- --------------
- ------------------------------------------------------------------------------------------------------------------
Capital Share Net increase in net assets derived from capital
Transactions share transactions ...................................... 744,669,554 88,941,831
(Note 4): -------------- --------------
- ------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets ............................ 2,606,281,576 249,211,524
Beginning of year ....................................... 9,281,203,818 9,031,992,294
-------------- --------------
End of year* ............................................ $11,887,485,394 $9,281,203,818
=============== ==============
- ------------------------------------------------------------------------------------------------------------------
* Undistributed investment income -- net (Note 1h) ........ $ 73,165,000 $ 73,174,307
=============== ==============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------
For the Year Ended March 31,
------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998++ 1997++ 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........ $ 31.39 $ 30.90 $ 27.74 $ 27.46 $ 27.89
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income -- net .................. 1.11 1.25 1.21 1.01 .97
Realized and unrealized gain on investments
and foreign currency transactions -- net .. 8.14 2.43 5.41 1.77 .50
---------- ---------- ---------- ---------- ----------
Total from investment operations .......... 9.25 3.68 6.62 2.78 1.47
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income -- net ............... (1.11) (1.25) (1.16) (.94) (.95)
Realized gain on investments -- net .... (1.97) (1.94) (2.30) (1.56) (.95)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions ......... (3.08) (3.19) (3.46) (2.50) (1.90)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year .............. $ 37.56 $ 31.39 $ 30.90 $ 27.74 $ 27.46
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........ 30.71% 12.62% 24.50% 10.95% 5.39%
Return:* ========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses .................................. .55% .55% .56% .57% .53%
Average ========== ========== ========== ========== ==========
Net Assets: Investment income -- net .................. 3.21% 3.99% 4.09% 3.81% 3.52%
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .... $4,155,677 $3,291,219 $3,225,758 $2,507,767 $2,237,492
Data: ========== ========== ========== ========== ==========
Portfolio turnover ........................ 38% 47% 84% 89% 86%
========== ========== ========== ========== ==========
Average commission rate paid+ ............. $ .0478 $ .0432 $ .0382 -- --
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
+ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
++ Based on average shares outstanding.
See Notes to Financial Statements.
20
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
For the Year Ended March 31,
------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998++ 1997++ 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........ $ 30.72 $ 30.30 $ 27.28 $ 27.04 $ 27.49
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income -- net .................. .74 .91 .90 .74 .70
Realized and unrealized gain on investments
and foreign currency transactions -- net .. 7.96 2.39 5.29 1.72 .48
---------- ---------- ---------- ---------- ----------
Total from investment operations .......... 8.70 3.30 6.19 2.46 1.18
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income -- net ............... (.77) (.94) (.87) (.66) (.68)
Realized gain on investments -- net .... (1.97) (1.94) (2.30) (1.56) (.95)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions ......... (2.74) (2.88) (3.17) (2.22) (1.63)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year .............. $ 36.68 $ 30.72 $ 30.30 $ 27.28 $ 27.04
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ........ 29.38% 11.48% 23.22% 9.81% 4.36%
Return:* ========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses .................................. 1.57% 1.57% 1.58% 1.59% 1.55%
Average ========== ========== ========== ========== ==========
Net Assets: Investment income -- net .................. 2.19% 2.97% 3.07% 2.79% 2.50%
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) .... $5,938,708 $4,977,431 $5,025,504 $3,664,250 $3,079,332
Data: ========== ========== ========== ========== ==========
Portfolio turnover ........................ 38% 47% 84% 89% 86%
========== ========== ========== ========== ==========
Average commission rate paid+ ............. $ .0478 $ .0432 $ .0382 -- --
========== ========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
+ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
++ Based on average shares outstanding.
See Notes to Financial Statements.
21
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Class C
---------------------------------------------------
For the
Period
For the Year Oct. 21,
Ended March 31, 1994++ to
------------------------------------- March 31,
Increase (Decrease) in Net Asset Value: 1998+++ 1997+++ 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period .......... $ 30.44 $ 30.08 $ 27.17 $ 26.81
Operating --------- --------- --------- ---------
Performance: Investment income -- net ...................... .73 .90 .92 .49
Realized and unrealized gain on investments and
foreign currency transactions -- net .......... 7.89 2.36 5.24 1.03
--------- --------- --------- ---------
Total from investment operations .............. 8.62 3.26 6.16 1.52
--------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net ................... (.78) (.96) (.95) (.43)
Realized gain on investments -- net ........ (1.97) (1.94) (2.30) (.73)
--------- --------- --------- ---------
Total dividends and distributions ............. (2.75) (2.90) (3.25) (1.16)
--------- --------- --------- ---------
Net asset value, end of period ................ $ 36.31 $ 30.44 $ 30.08 $ 27.17
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ............ 29.40% 11.45% 23.25% 6.07%++++
Return:** ========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses ...................................... 1.58% 1.58% 1.59% 1.64%*
Average ========= ========= ========= =========
Net Assets: Investment income -- net ...................... 2.18% 2.96% 3.08% 3.22%*
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ...... $ 512,783 $ 322,438 $ 259,131 $ 46,902
Data: ========= ========= ========= =========
Portfolio turnover ............................ 38% 47% 84% 89%
========= ========= ========= =========
Average commission rate paid+ ................. $ .0478 $ .0432 $ .0382 --
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
++ Commencement of operations.
+++ Based on average shares outstanding.
++++ Aggregate total investment return.
See Notes to Financial Statements.
22
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Class D
---------------------------------------------------
For the
Period
For the Year Oct. 21,
Ended March 31, 1994++ to
------------------------------------- March 31,
Increase (Decrease) in Net Asset Value: 1998+++ 1997+++ 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period .......... $ 31.34 $ 30.86 $ 27.72 $ 27.27
Operating --------- --------- --------- ---------
Performance: Investment income -- net ...................... 1.02 1.17 1.16 .48
Realized and unrealized gain on investments and
foreign currency transactions -- net .......... 8.14 2.43 5.38 1.15
--------- --------- --------- ---------
Total from investment operations .............. 9.16 3.60 6.54 1.63
--------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net ................... (1.04) (1.18) (1.10) (.45)
Realized gain on investments -- net ........ (1.97) (1.94) (2.30) (.73)
--------- --------- --------- ---------
Total dividends and distributions ............. (3.01) (3.12) (3.40) (1.18)
--------- --------- --------- ---------
Net asset value, end of period ................ $ 37.49 $ 31.34 $ 30.86 $ 27.72
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ............ 30.40% 12.34% 24.21% 6.42%++++
Return:** ========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses ...................................... .80% .80% .81% .87%*
Average ========= ========= ========= =========
Net Assets: Investment income -- net ...................... 2.95% 3.75% 3.84% 3.94%*
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ...... $1,280,317 $ 690,116 $ 521,599 $ 171,201
Data: ========= ========= ========= =========
Portfolio turnover ............................ 38% 47% 84% 89%
========= ========= ========= =========
Average commission rate paid+ ................. $ .0478 $ .0432 $ .0382 --
========= ========= ========= =========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been converted
into US dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
++ Commencement of operations.
+++ Based on average shares outstanding.
++++ Aggregate total investment return.
See Notes to Financial Statements.
23
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 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.
The Fund offers four classes of shares under the Merrill Lynch Select PricingSM
System. Shares of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B, Class C and
Class D Shares bear certain expenses related to the account maintenance of such
shares, and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments -- Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market. Securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. Options written
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities are valued at
amortized cost, which approximates market value. 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 invest ment 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
24
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
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.
(h) Reclassification -- Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $2,457,434 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.
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 year ended March 31, 1998, 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 ............ $ 43,421 $ 509,945
Class D ............ $137,456 $1,903,313
- -------------------------------------------------------
For the year ended March 31, 1998, MLPF&S received contingent deferred sales
charges of $5,593,399 and $91,818 relating to transactions in Class B and Class
C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $60,049 and $18,937 relating to transactions subject to front-end
sales charge waivers in Class A Shares and Class D Shares, respectively.
In addition, MLPF&S received $279,047 in commissions on the execution of
portfolio security transactions for the year ended March 31, 1998.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
During the year ended March 31, 1998, Merrill Lynch Security Pricing Service, an
affiliate of MLPF&S, received $3,755 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.
25
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended March 31, 1998 were $3,821,996,903 and $3,809,744,862, respectively.
Net realized gains (losses) for the year ended March 31, 1998 and net unrealized
gains (losses) as of March 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments ............. $573,598,239 $2,916,857,799
Short-term investments ............ (1,932,751) --
Foreign currency
transactions ...................... (2,456,877) (3,979)
------------ --------------
Total ............................. $569,208,611 $2,916,853,820
============ ==============
- --------------------------------------------------------------------------------
As of March 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $2,914,425,533, of which $2,959,300,597 related to
appreciated securities and $44,875,064 related to depreciated securities. At
March 31, 1998, the aggregate cost of investments for Federal income tax
purposes was $8,905,149,301.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$744,669,554 and $88,941,831 for the years ended March 31, 1998 and March 31,
1997, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
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 A Shares for the Dollar
Year Ended March 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 17,867,783 $ 553,401,282
Shares issued to shareholders
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 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 B Shares for the Dollar
Year Ended March 31, 1997 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
Automatic conversion
of shares ................................ (1,163,610) (35,786,707)
Shares redeemed .......................... (44,055,095) (1,317,756,891)
----------- ---------------
Net decrease ............................. (3,835,137) $ (130,532,455)
=========== ===============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
=========== ===============
- --------------------------------------------------------------------------------
26
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
- --------------------------------------------------------------------------------
Class C Shares for the Dollar
Year Ended March 31, 1997 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
========== =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
========== =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Dollar
Year 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
========== =============
- --------------------------------------------------------------------------------
5. Loaned Securities:
At March 31, 1998, the Fund held US Treasury Notes having an aggregate value of
approximately $26,856,000 as collateral for portfolio securities loaned having a
market value of approximately $24,111,000.
27
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Capital Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Capital Fund, Inc. as of March 31,
1998, 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, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, 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, 1998, 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 14, 1998
28
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by Merrill
Lynch Capital Fund, Inc. during its fiscal year ended March 31, 1998:
<TABLE>
<CAPTION>
======================================================================================================
Qualifying Interest Domestic Total
Record Payable Domestic from Federal Non-Qualifying Ordinary Long-Term
Date Date Ordinary Income Obligations Ordinary Income Income Capital Gains
======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Class A Shares:
======================================================================================================
7/02/97 7/11/97 $.136571 $.141343 $.372494 $.650408 $.911909*
- ------------------------------------------------------------------------------------------------------
12/09/97 12/17/97 $.123167 $.108383 $.385139 $.616689 $.896217**
======================================================================================================
Class B Shares:
======================================================================================================
7/02/97 7/11/97 $.101708 $.105263 $.277407 $.484378 $.911909*
- ------------------------------------------------------------------------------------------------------
12/09/97 12/17/97 $.087562 $.077052 $.273804 $.438418 $.896217**
======================================================================================================
Class C Shares:
======================================================================================================
7/02/97 7/11/97 $.102680 $.106269 $.280059 $.489008 $.911909*
- ------------------------------------------------------------------------------------------------------
12/09/97 12/17/97 $.089121 $.078424 $.278679 $.446224 $.896217**
======================================================================================================
Class D Shares:
======================================================================================================
7/02/97 7/11/97 $.128626 $.133121 $.350826 $.612573 $.911909*
- ------------------------------------------------------------------------------------------------------
12/09/97 12/17/97 $.114997 $.101194 $.359591 $.575782 $.896217**
======================================================================================================
</TABLE>
* All of this long-term capital gain distribution is subject to the 28% tax
rate.
** Of this long-term capital gain distribution, 22.90% is subject to the 28%
tax rate and 77.10% is subject to the 20% tax rate.
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, 1997 .................. 16.48%
September 30, 1997 ............. 15.01%
December 31, 1997 .............. 12.72%
March 31, 1998 ................. 12.99%
- ---------------------------------------------------
+ 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.
29
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 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
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
30
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
PORTFOLIO INFORMATION (unaudited)
As of March 31, 1998:
Percent of
Ten Largest Common Stock Holdings Net Assets
Travelers Group, Inc. ............................... 2.3%
Williams Companies, Inc. ............................ 2.2
Kansas City Southern Industries, Inc. ............... 1.8
Allstate Corporation ................................ 1.8
Goodyear Tire & Rubber Co. (The) .................... 1.6
United Technologies Corp. ........................... 1.6
Yacimientos Petroliferos
Fiscales S.A. (YPF)(ADR) ............................ 1.4
Carnival Corp. (Class A) ............................ 1.3
Wal-Mart Stores, Inc. ............................... 1.3
Rite Aid Corp. ...................................... 1.2
Percent of
Ten Largest Industries .............................. Net Assets*
Insurance ........................................... 10.8%
Banking ............................................. 4.9
Diversified Companies ............................... 4.9
Oil -- Integrated ................................... 4.5
Natural Gas Suppliers ............................... 4.3
Financial Services .................................. 3.8
Chemicals ........................................... 2.8
Railroads ........................................... 2.7
Paper & Forest Products ............................. 2.5
Electrical Equipment ................................ 2.2
* Based on total holdings in common stocks and bonds.
Common Stock Portfolio Changes for the Quarter Ended March 31, 1998
Additions
Corning, Inc.
GenCorp Inc.
McCormick & Company, Inc.
*Morrison Knudsen Corporation
Motorola, Inc.
Rockwell International Corporation
Deletions
Columbia/HCA Healthcare Corp.
Grace (W.R.) & Co.
*Morrison Knudsen Corporation
Nokia Corp. OY (ADR)
Nucor Corporation
* Added and deleted in the same quarter.
31
