MERRILL LYNCH
CAPITAL FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
performance
Semi-Annual Report
September 30, 1998
<PAGE>
MERRILL LYNCH CAPITAL FUND, INC.
PORTFOLIO SUMMARY
Security Diversification
As a Percentage of Net Assets
As of September 30, 1998
A pie chart illustrating the following percentages:
US Bonds 30.6%
Non-US Bonds 4.4%
Cash & Cash
Equivalents 3.7%
US Stocks 52.2%
Non-US Stocks 9.1%
Sector Representation
As a Percentage of Equities
As of September 30, 1998
A pie chart illustrating the following percentages:
Financial Services 21.0%
Consumer Services 5.3%
Utilities 2.7%
Transportation 4.3%
Capital Goods--Technology 9.5%
Consumer Cyclicals 12.5%
Energy 13.6%
Basic Industries 4.5%
Diversified 2.5%
Credit Cyclicals 2.0%
Consumer Staples 11.8%
Capital Goods 10.3%
Geographic Diversification Percent of
As of September 30, 1998 Net Assets*
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United States 84.4%
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United Kingdom 3.6
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Argentina 2.6
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Switzerland 2.3
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Bermuda 1.2
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Mexico 1.1
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France 1.1
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Bahamas 0.9
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Brazil 0.5
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Netherlands 0.4
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Turkey 0.4
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Chile 0.4
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Panama 0.3
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India 0.3
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Colombia 0.2
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Hong Kong 0.1
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South Korea 0.1
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Guatemala 0.1
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* Includes investments in short-term securities.
US Common Stock Investments S&P
As of September 30, 1998 Fund 500*
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Average Capitalization (in billions) $19.4 $16.1
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Price/Book Value 2.5 5.6
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Price/Earnings Ratio** 18.3 23.8
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Yield Based on Current Dividend 2.1% 1.6%
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* An unmanaged broad-based index comprised of common stocks.
** Based on 1998 earnings estimates.
Fixed-Income Investments Merrill Lynch
As of September 30, 1998 Fund DOAO Index*
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Duration 5.4 Years 5.1 Years
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Average Maturity 8.9 Years 8.4 Years
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Asset Breakdown:
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Corporates 56.5% 20.6%
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US Treasuries/Agencies 35.2% 51.2%
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Mortgage-Backed 0.8% 28.2%
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International Governments 7.5% --
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* An unmanaged market-weighted corporate, Government and mortgage master bond
index reflecting approximately 97% of total outstanding US bonds.
1
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
DEAR SHAREHOLDER
During the quarter ended September 30, 1998, a series of adverse global
business, economic and political developments necessitated a moderation of US
corporate profits expectations and prompted a significant correction in US
equity prices. Beginning in the month of July, a combination of slowing economic
growth, weak corporate profits and renewed political turmoil drove stock prices
lower. Revised second-quarter gross domestic product growth of 1.8% represented
a marked slowdown from the 5.5% rate of growth in the first quarter of 1998.
While the consumer sector of the economy remained robust, the industrial sector
deteriorated, as evidenced by consecutive monthly declines in the index of
leading economic indicators in the months of May and June, as well as nominal
growth in June's rate of industrial production and the first negative Purchasing
Manager's Survey in two years. During this period, the Asian economic crisis
began to impair US economic activity. This was further manifest in the slow rate
of US corporate profits growth in the second quarter of 1998 as operating income
advanced at a mere 3% rate. Finally, concerns about a weakened or distracted US
political leadership precipitated the second monthly decline in stock prices of
1998.
An implosion in the Russian economy and financial markets exacerbated ongoing
deterioration of emerging markets in Asia and Latin America in the month of
August, which further restrained expectations for growth in US corporate
profits. With equity prices and valuations still at or near record highs, the
market offered precious little room for such disappointments. The moderation of
earnings expectations resulted in a significant decline in stock prices, as the
unmanaged Standard & Poor's 500 Index (S&P 500) declined 14.6% in August and
almost 20% from its July peak. This significant decline in the broad market
indexes masked even more serious declines within various segments of the market,
as the average New York Stock Exchange-listed stock declined over 30% from its
52-week high.
A modest recovery ensued in September based on expectations for a more
accommodative monetary policy and the potential for a coordinated global
reduction in interest rates. With the US economy weakened from ongoing economic
turmoil in emerging markets, investors anticipated Federal Reserve Board action
to lower interest rates in order to alleviate these growing economic pressures.
With the risk of deflation superceding that of inflation in many investors'
minds, the lower interest rate structure was expected to facilitate more
growth-oriented policies and precipitate a more stable economic environment.
Such actions were indeed forthcoming as the Federal Reserve Board lowered the
Federal Funds rate by 25 basis points (0.25%) in September. Equities began to
weaken again toward month-end as this modest step was considered insufficient to
reverse the deceleration in the US economy. However, the central bank
unexpectedly cut the Federal Funds rate another quarter point in October, which
investors viewed positively.
For the September quarter, the US stock market, as measured by the S&P 500, had
a -9.95% total return, its worst quarterly decline since the third quarter of
1990. The US bond market continued to be a significant beneficiary of these
developments as investors' appetite for safety and security in this volatile
environment, coupled with moderating economic growth and continued benign
inflation, produced a strong advance in US Treasury security prices and sent
long-term Government bond yields to record low levels. The benchmark unmanaged
Merrill Lynch Domestic Bond Master Index generated a +4.22% total return for the
September quarter, while cash equivalents earned a +1.42% total return.
Portfolio Matters
Total returns for Merrill Lynch Capital Fund, Inc.'s Class A, Class B, Class C
and Class D Shares for the quarter ended September 30, 1998 were -11.41%,
- -11.65%, -11.66% and -11.46%, respectively. (Fund results shown do not reflect
sales charges and would be lower if sales charges were included.)
For much of the year, our investment position reflected our view that equities
were expensive and offered limited upside potential. Since we viewed bonds as
attractively valued and expected them to provide competitive returns, we
maintained a significant bond weighting within the Fund. Despite September's
advance, we remain concerned about near-term prospects for the stock market. In
our opinion, the powerful forces currently constraining economic and corporate
profits growth are unlikely to abate in the near term, and stock prices have not
yet fully adjusted to this slower-growth scenario. Therefore, we modestly
reduced our equity allocation during the quarter ended September 30, 1998, with
an asset allocation at quarter-end of 61.3% of net assets invested in equities,
35.0% in fixed-income securities
2
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
and 3.8% in cash equivalents. This compares to 62.3% of the Fund's net assets
invested in equities, 33.8% in fixed-income securities and 3.9% in cash
equivalents at June 30, 1998. However, with bonds more fairly valued and stocks
becoming significantly less expensive, our long-term strategy will be to pursue
opportunities to increase the Fund's equity allocation in order to seek to take
advantage of recent precipitous stock price declines.
While our asset allocation posture helped mitigate the impact of declining stock
prices during the September quarter, the Fund's relative performance was
significantly impaired by adverse stock selection. The largest-capitalization
stocks continued to significantly outperform smaller-capitalization equities as
investors were willing to pay increasingly higher prices for liquidity. While
the S&P 500 Index declined by approximately 10% during the September quarter,
the unmanaged S&P Mid-Cap Index of medium-sized companies declined 15%, and the
unmanaged Russell 2000 Index of smaller companies fell over 20% during the same
period. Also, more than 56% of NYSE-listed stocks and more than 73% of NASDAQ
stocks fell 30% or more from their 52-week highs during the September quarter.
In addition, the value style of investing continued to underperform the growth
style of investing, as the unmanaged Russell 1000 Value Index decreased more
than 12% during the quarter while the Russell 1000 Growth Index declined by less
than 9%. The Fund's value orientation and investments in many moderate-sized
companies ultimately hindered performance. Although we have some holdings among
the select group of large-capitalization, consumer-oriented stocks that
continued to perform well, our holdings were nominal based on the very high
valuation parameters these stocks command in the market. Furthermore, some
traditionally defensive market segments, such as insurance, which represented
the Fund's largest sector weighting, also performed poorly in this environment
as a result of investors' concerns about asset quality and industry pricing
trends. Finally, our exposure to the weak energy sector was a contributing
factor to disappointing equity results during the quarter. However, we continue
to believe our stock selection methodologies are sound and will provide superior
risk-adjusted equity returns over the long term.
During the quarter ended September 30, 1998, we added six new investments to the
equity sector of the Fund, increased our position in 36 stocks, reduced our
ownership in six stocks and eliminated eight holdings from the Fund. Notable
among the new positions is Waste Management, Inc., the nation's largest
environmental services company, which offers substantial opportunities for
sustained earnings growth, rising profit margins and returns, significant free
cash flow generation and an expanded valuation. This enterprise will command a
25% share of an increasingly consolidated market, and will be run by a
management team that has provided superior results to shareholders over the past
five years. With revenue growth of 3%-8%, significant cost efficiencies and more
efficient capital allocation, the company has the potential to produce near-30%
operating margins, a 14% or better return on capital and generate more than $2
billion in annual free cash flow. Insiders own or control approximately 15% of
the outstanding shares and management has proven itself to be an excellent value
creator. Selling at 15 times estimated 1998 earnings, we believe Waste
Management offers attractive upside potential with limited downside risk.
Another new position is LucasVarity PLC, an auto parts and aerospace company,
whose stock declined by approximately 35% from its 1998 high, representing an
attractive entry price in the shares of this highly shareholder-focused company.
LucasVarity is reincorporating in the United States from the United Kingdom to
facilitate a more active recapitalization and acquisition strategy. The company
is debt free, generates ample free cash flow and possesses proven consolidation
skills, but is constrained by the UK investment community from establishing a
more efficient capital structure and participating in the ongoing consolidation
of the auto parts industry. As part of its US-based strategy, LucasVarity plans
to repurchase 20% of its outstanding shares over an 18-month period while
retaining strong financial resources. The company intends to pursue acquisition
opportunities to leverage its market leadership position in brake systems,
electrical systems and fuel injection systems. The company has fully embraced
the economic value-added approach to management, and employs a 20% pre-tax
return hurdle for assessing capital commitments. If acquisitions are not
forthcoming at compensatory returns, share repurchases will continue. With very
attractive operating and financial characteristics, a highly disciplined senior
management team and ample opportunities for internal and external growth, we
believe LucasVarity represents
3
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
very good value, selling at less than nine times estimated 1998 earnings and
yielding almost 3%.
We eliminated our positions in two insurance company investments, TIG Holdings,
Inc. and Penncorp Financial Group, Inc. While we believed that each company
possessed unique competitive advantages in niche insurance markets, the intense
price competition characterizing current business conditions was ultimately
overwhelming, resulting in deteriorating levels of profitability and poor stock
price performance. We chose to concentrate our insurance holdings in those
companies that possess strong market shares, proprietary distribution
capabilities and/or the ability to generate excess capital. These are
characteristics that should create value in this challenging pricing
environment. Such companies include American International Group, Inc., The
Allstate Corporation, Provident Companies, Inc. and EXEL Limited.
Despite the stock market's recent volatility and our near-term concerns about
stock market prospects, we continued to identify and invest in above-average
companies whose stock sell at below-average valuation levels. We define an
above-average company as one that maintains a strong competitive position, earns
consistently high returns on capital, is financially sound, generates cash in
excess of its internal reinvestment requirements and is managed by individuals
motivated to create value for shareholders. We define a below-average price as
one that does not adequately or accurately reflect what we believe to be the
company's underlying intrinsic value. On average, the stocks held in the Fund
generated comparable returns on shareholders' equity and have much stronger
balance sheets and offer faster earnings growth than the average company, as
measured by the S&P 500. However, these same stocks sell at an average
price/earnings ratio of 18.3 times estimated 1998 earnings per share compared to
23.8 times for the S&P 500, at 2.5 times current book value per share compared
to 5.6 times for the S&P 500, and provide a 2.1% dividend yield compared to a
yield of 1.6% for the S&P 500.
Within the fixed-income sector of the Fund, two important themes were in
evidence during the September quarter. One was the dramatic decline of domestic
interest rates on US Government bonds to historically low levels. The other was
a rapid expansion of the premium or yield differential between US Treasury
securities and other sectors of the bond market. Because of weakening economies
and continued turmoil in Asia and Latin America during the quarter, high-yield
and emerging-market securities were particularly hard hit. The Fund benefited
from its relatively long duration of 5.4 years as well as a relatively high
proportion of US Government bonds in its mix. However, this was offset by our
exposure to foreign government bonds, such as those in Mexico and Argentina,
which have fallen in price and now offer yields in excess of 10%. We took
advantage of these dynamics by reducing our exposure to US Treasury securities
from 40.3% of fixed-income assets at June 30, 1998 to 35.2% at September 30,
1998 and high-yield corporate bonds from 7.8% to 7.3%. The proceeds were
reinvested in investment-grade corporate bonds, increasing the sector from 44.0%
of the Fund's bond assets at June 30, 1998 to 49.2% at September 30, 1998.
Proceeds were also redistributed into additional foreign government sector
bonds, which now represent 7.5% of bond assets, up from 7.1% from the June
quarter. As a result, the average quality of our bonds declined slightly from
A1/A+ to A2/A. The average yield-to-maturity of our bonds declined only six
basis points to 6.47%, while intermediate-term interest rates declined more than
100 basis points during the September quarter.
In Conclusion
We appreciate your continued interest and participation in Merrill Lynch Capital
Fund, Inc., and we look forward to assisting you with your financial needs in
the months and years to come.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Kurt Schansinger
Kurt Schansinger
Senior Vice President and Portfolio Manager
November 5, 1998
4
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select Pricing(SM) System, which offers four pricing alternatives:
o Class A Shares incur a maximum initial sales charge (front-end load) of
5.25% and bear no ongoing distribution or account maintenance fees. Class
A Shares are available only to eligible investors.
o Class B Shares are subject to a maximum contingent deferred sales charge
of 4% if redeemed during the first year, decreasing 1% each year
thereafter to 0% after the fourth year. In addition, Class B Shares are
subject to a distribution fee of 0.75% and an account maintenance fee of
0.25%. These shares automatically convert to Class D Shares after
approximately 8 years. (There is no initial sales charge for automatic
share conversions.)
o Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
o Class D Shares incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of
future performance. Figures shown in the "Recent Performance Results" and
"Average Annual Total Return" tables assume reinvestment of all dividends
and capital gains distributions at net asset value on the ex-dividend
date. Investment return and principal value of shares will fluctuate so
that shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer agency
fees applicable to each class, which are deducted from the income
available to be paid to shareholders.
Recent Performance Results
<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* -3.05% -11.41% +234.04%
- ---------------------------------------------------------------------------------------
ML Capital Fund, Inc. Class B Shares* -4.04 -11.65 +194.54
- ---------------------------------------------------------------------------------------
ML Capital Fund, Inc. Class C Shares* -4.03 -11.66 + 64.71
- ---------------------------------------------------------------------------------------
ML Capital Fund, Inc. Class D Shares* -3.28 -11.46 + 69.84
- ---------------------------------------------------------------------------------------
Dow Jones Industrial Average** +0.41 -12.01 +394.85/+385.10/+120.11
- ---------------------------------------------------------------------------------------
Standard & Poor's 500 Index** +9.05 - 9.95 +392.61/+371.71/+137.75
=======================================================================================
</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 periods are:
Class A Shares, for the ten years ended 9/30/98; Class B Shares, from
10/21/88 to 9/30/98; and Class C & Class D Shares, from 10/21/94 to
9/30/98.
** An unmanaged broad-based index comprised of common stocks. Total
investment returns for unmanaged indexes are based on estimates. Ten
years/since inception total returns are: for the ten years ended 9/30/98;
from 10/21/88 to 9/30/98; and from 10/21/94 to 9/30/98, respectively.
5
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
PERFORMANCE DATA (concluded)
Results of a $1,000 Investment Since Inception--Class A Shares
(5.25% sales charge--$947.50 net amount invested; assuming reinvestment of all
dividends and capital gains distributions)
A mountain chart depicting the growth of an investment in the Fund's Class A
Shares from $947.50 on November 8, 1973 to $19,120.27 on September 30, 1998.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 9/30/98 - 3.05% - 8.14%
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Five Years Ended 9/30/98 +12.36 +11.15
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Ten Years Ended 9/30/98 +12.82 +12.21
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* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 9/30/98 - 4.04% - 7.59%
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Five Years Ended 9/30/98 +11.22 +11.22
- --------------------------------------------------------------------------------
Inception (10/21/88)
through 9/30/98 +11.48 +11.48
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
4 years.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
Year Ended 9/30/98 - 4.03% - 4.92%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 9/30/98 +13.49 +13.49
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class D Shares*
================================================================================
Year Ended 9/30/98 - 3.28% - 8.36%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 9/30/98 +14.38 +12.83
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* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
6
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 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 2,500,000 Boeing Co. (The) $ 122,280,349 $ 85,781,250 0.8%
1,500,000 Lockheed Martin Corporation 136,266,348 151,218,750 1.5
-------------- --------------- -----
258,546,697 237,000,000 2.3
====================================================================================================================================
Apparel 3,000,000 ++Fruit of the Loom, Inc. (Class A) 86,426,095 45,187,500 0.4
====================================================================================================================================
Automobile Parts 2,600,000 Federal-Mogul Corp. 119,255,101 121,550,000 1.2
====================================================================================================================================
Automotive 393,500 LucasVarity PLC (ADR)* 12,725,700 12,296,875 0.1
====================================================================================================================================
Banking 2,100,000 Chase Manhattan Corporation (The) 87,690,574 90,825,000 0.9
====================================================================================================================================
Building Materials 2,300,000 ++American Standard Companies, Inc. 106,290,321 60,662,500 0.6
5,100,000 Masco Corporation 83,288,716 125,587,500 1.2
-------------- --------------- -----
189,579,037 186,250,000 1.8
====================================================================================================================================
Capital Goods 2,000,000 United Dominion Industries, Ltd. 50,002,195 36,250,000 0.3
====================================================================================================================================
Chemicals 2,100,000 du Pont (E.I.) de Nemours & Co. 108,372,212 117,862,500 1.1
2,200,000 Imperial Chemical Industries PLC (ADR)* 111,272,802 69,850,000 0.7
-------------- --------------- -----
219,645,014 187,712,500 1.8
====================================================================================================================================
Computer Software 1,900,000 Computer Associates International, Inc. 58,102,793 70,300,000 0.7
====================================================================================================================================
Diversified 2,700,000 Corning, Inc. 103,956,918 79,481,250 0.8
Companies 2,000,000 GenCorp, Inc. 58,220,920 38,500,000 0.4
2,100,000 Rockwell International Corp. 116,109,160 75,862,500 0.7
1,796,000 Tenneco, Inc. 77,862,249 59,043,500 0.6
12,500,000 Tomkins PLC 56,833,792 58,574,100 0.5
2,000,000 United Technologies Corporation 63,643,951 152,875,000 1.5
1,750,000 Varian Associates, Inc. (a) 93,141,060 61,687,500 0.6
-------------- --------------- -----
569,768,050 526,023,850 5.1
====================================================================================================================================
Drug Stores 4,300,000 Rite Aid Corp. 68,282,570 152,650,000 1.5
====================================================================================================================================
Electrical Equipment 1,500,000 General Electric Co. 38,165,328 119,343,750 1.1
750,000 Philips Electronics N.V. (NY Registered Shares) 50,507,781 40,031,250 0.4
-------------- --------------- -----
88,673,109 159,375,000 1.5
====================================================================================================================================
Electronic 1,500,000 Avnet, Inc. 83,947,762 55,218,750 0.5
Components
====================================================================================================================================
Financial Services 2,000,000 Federal National Mortgage Association 52,392,099 128,500,000 1.2
1,000,000 Transamerica Corporation 76,009,264 106,000,000 1.0
-------------- --------------- -----
128,401,363 234,500,000 2.2
====================================================================================================================================
Food & Beverage 3,230,800 Diageo PLC (ADR)* 145,087,956 117,116,500 1.1
2,000,000 McCormick & Company, Inc. 66,067,228 58,125,000 0.6
-------------- --------------- -----
211,155,184 175,241,500 1.7
====================================================================================================================================
Foods/Food 75,000 Nestle S.A. (Registered Shares) 78,575,411 149,252,114 1.4
Processing
====================================================================================================================================
Footwear 2,000,000 Nike, Inc. (Class B) 92,141,145 73,625,000 0.7
8,000,000 Yue Yuen Industrial (Holdings Limited) 10,727,086 14,145,586 0.1
-------------- --------------- -----
102,868,231 87,770,586 0.8
====================================================================================================================================
Hospital 4,300,000 ++Tenet Healthcare Corp. 74,755,706 123,625,000 1.2
Management
====================================================================================================================================
</TABLE>
7
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 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>
Hotels & Casinos 2,500,000 ++Sun International Hotels Ltd. (a) $ 99,267,368 $ 94,843,750 0.9%
====================================================================================================================================
Information Systems 2,750,000 Reynolds & Reynolds Company (Class A) 55,569,130 48,984,375 0.5
====================================================================================================================================
Insurance 3,600,000 Allstate Corporation (The) 57,144,863 150,075,000 1.4
1,500,000 American International Group, Inc. 46,545,446 115,500,000 1.1
1,800,000 Berkley (W.R.) Corporation (a) 62,155,679 53,775,000 0.5
2,000,000 EXEL Limited (Class A) 48,930,546 126,000,000 1.2
2,100,000 Fremont General Corp. (a) 37,724,811 100,800,000 1.0
2,366,100 Horace Mann Educators Corp. (a) 39,300,095 70,983,000 0.7
1,450,000 ITT Industries Inc. 48,310,473 49,118,750 0.5
4,200,000 Provident Companies, Inc. 86,546,428 141,750,000 1.4
4,700,000 ++Travelers Group, Inc. 47,951,392 176,250,000 1.7
-------------- --------------- -----
474,609,733 984,251,750 9.5
====================================================================================================================================
Leisure/Hotels 4,500,000 Carnival Corp. (Class A) 61,184,278 143,156,250 1.4
3,500,000 ++Harrah's Entertainment, Inc. 63,703,248 46,593,750 0.4
-------------- --------------- -----
124,887,526 189,750,000 1.8
====================================================================================================================================
Machinery & 1,000,000 ++SPX Corp. (a) 58,441,924 41,312,500 0.4
Machine Tools
====================================================================================================================================
Natural Gas 3,750,000 Coastal Corporation (The) 81,382,658 126,562,500 1.2
2,600,000 El Paso Energy Corporation 57,509,409 84,337,500 0.8
8,000,000 Williams Companies, Inc. 71,579,900 230,000,000 2.2
-------------- --------------- -----
210,471,967 440,900,000 4.2
====================================================================================================================================
Oil--Integrated 1,750,000 TOTAL S.A. (ADR)* 73,032,394 109,921,875 1.1
3,168,700 Unocal Corporation 118,671,046 114,865,375 1.1
5,000,000 YPF S.A. (ADR)* 95,920,616 130,000,000 1.2
-------------- --------------- -----
287,624,056 354,787,250 3.4
====================================================================================================================================
Oil--Service 2,500,000 Halliburton Co. 69,699,584 71,406,250 0.7
====================================================================================================================================
Paper & Forest 2,100,000 Kimberly-Clark Corp. 105,243,201 85,050,000 0.8
Products 800,000 Temple-Inland, Inc. 36,743,614 38,300,000 0.4
1,500,000 Weyerhaeuser Co. 68,318,476 63,281,250 0.6
-------------- --------------- -----
210,305,291 186,631,250 1.8
====================================================================================================================================
Pharmaceuticals 1,750,000 Glaxo Wellcome PLC (ADR)* 47,298,375 99,968,750 1.0
60,000 Novartis AG (Registered Shares) 78,569,582 96,206,373 0.9
-------------- --------------- -----
125,867,957 196,175,123 1.9
====================================================================================================================================
Railroads 5,000,000 Kansas City Southern Industries, Inc. 83,444,911 175,000,000 1.7
2,300,000 Union Pacific Corporation 135,110,114 98,037,500 0.9
-------------- --------------- -----
218,555,025 273,037,500 2.6
====================================================================================================================================
Real Estate 1,000,000 CarrAmerica Realty Corp. 26,832,805 22,812,500 0.2
Investment Trusts 2,700,000 Patriot American Hospitality, Inc. 71,717,053 34,425,000 0.4
1,000,000 Walden Residential Properties, Inc. (a) 20,679,751 23,000,000 0.2
-------------- --------------- -----
119,229,609 80,237,500 0.8
====================================================================================================================================
Restaurants 2,000,000 McDonald's Corporation 98,086,085 119,375,000 1.1
====================================================================================================================================
Retail--Stores 850,000 Sears, Roebuck and Co. 38,406,410 37,559,375 0.4
====================================================================================================================================
</TABLE>
8
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 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>
Retail Trade 1,500,000 Wal-Mart Stores, Inc. $ 37,077,170 $ 81,937,500 0.8%
====================================================================================================================================
Semiconductors 2,400,000 Motorola, Inc. 129,670,703 102,450,000 1.0
====================================================================================================================================
Telecommunications 2,707,100 Frontier Corporation 77,508,146 74,106,863 0.7
700,000 ++Telecomunicacoes Brasileiras S.A.--
Telebras (ADR)* 76,408,230 49,306,250 0.5
-------------- --------------- -----
153,916,376 123,413,113 1.2
====================================================================================================================================
Tires & Rubber 2,500,000 Goodyear Tire & Rubber Company (The) 100,281,864 128,437,500 1.2
====================================================================================================================================
Waste Management 2,500,000 Waste Management, Inc. 129,827,858 120,156,250 1.2
====================================================================================================================================
Wireless 2,400,000 ++Nextel Communications, Inc. 55,877,780 48,450,000 0.5
Communication--
Domestic Paging &
Cellular
====================================================================================================================================
Total Common Stocks 5,286,074,008 6,375,124,661 61.3
====================================================================================================================================
<CAPTION>
Face
Amount Corporate Bonds
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Aerospace Boeing Company (The):
$ 12,500,000 6.44% due 12/20/2004 12,560,000 13,172,250 0.1
10,000,000 Series X, 6.18% due 3/15/2005 10,000,000 10,103,080 0.1
-------------- --------------- -----
22,560,000 23,275,330 0.2
====================================================================================================================================
Automotive Hertz Corp.:
10,000,000 7% due 5/01/2002 10,305,500 10,489,800 0.1
25,000,000 6.70% due 6/15/2002 24,815,300 25,952,500 0.3
13,000,000 6% due 1/15/2003 12,891,670 13,197,730 0.1
20,000,000 Hyundai Motor Co., Ltd., 7.60% due 7/15/2007+++ 19,916,100 12,200,000 0.1
-------------- --------------- -----
67,928,570 61,840,030 0.6
====================================================================================================================================
Banking 30,000,000 Banco Nacional de Commercio Exterior SNC,
Global Bonds, 7.25% due 2/02/2004 28,187,700 24,000,000 0.2
13,600,000 Banco Rio de la Plata, 8.75% due 12/15/2003 13,751,700 11,900,000 0.1
29,000,000 Bank of Boston Corp., 6.625% due 12/01/2005 27,575,520 29,900,450 0.3
BankAmerica Corp.:
15,000,000 6.875% due 6/01/2003 14,149,050 15,912,600 0.2
30,000,000 6.75% due 9/15/2005 29,591,750 31,848,000 0.3
Chase Manhattan Corporation (The):
15,000,000 6.50% due 8/01/2005 14,552,850 15,482,850 0.2
15,000,000 6.25% due 1/15/2006 13,892,250 15,247,050 0.1
20,000,000 First Security Corp., 7% due 7/15/2005 19,803,850 21,411,700 0.2
30,000,000 First Union Corp., 6.55% due 10/15/2035 29,953,350 31,519,500 0.3
22,750,000 Firstbank Puerto Rico, 7.625% due 12/20/2005 22,140,802 24,119,618 0.2
10,000,000 Great Western Financial Corp., 6.375% due 7/01/2000 9,998,800 10,152,600 0.1
Household Bank:
10,000,000 6.87% due 5/15/2001 9,868,800 10,338,040 0.1
20,000,000 6.875% due 3/17/2003 19,886,200 20,961,240 0.2
10,300,000 6.50% due 7/15/2003 10,202,253 10,771,637 0.1
40,000,000 NationsBank Corp., 5.60% due 2/07/2001 40,000,000 40,454,400 0.4
25,500,000 PNC Funding Corp., 6.125% due 9/01/2003 24,922,025 26,288,970 0.2
20,000,000 People's Bank--Bridgeport, 7.20% due 12/01/2006 19,956,700 19,856,800 0.2
26,000,000 Provident Bank, 6.375% due 1/15/2004 25,287,430 26,855,660 0.3
</TABLE>
9
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 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 Union Planters Corp.:
(concluded) $ 20,000,000 6.25% due 11/01/2003 $ 18,756,100 $ 20,795,000 0.2%
12,500,000 6.75% due 11/01/2005 12,001,875 12,912,750 0.1
-------------- --------------- -----
404,479,005 420,728,865 4.0
====================================================================================================================================
Beverages 22,000,000 Coca-Cola Femsa, S.A., 8.95% due 11/01/2006 21,984,595 19,602,616 0.2
10,000,000 Panamerican Beverages, Inc., 7.25% due 7/01/2009 10,037,500 9,175,000 0.1
-------------- --------------- -----
32,022,095 28,777,616 0.3
====================================================================================================================================
Broadcasting 20,000,000 British Sky Broadcasting Group PLC, 7.30%
due 10/15/2006 20,037,440 20,657,600 0.2
====================================================================================================================================
Building Materials 10,000,000 Armstrong World, 6.50% due 8/15/2005 9,980,400 10,451,700 0.1
====================================================================================================================================
Chemicals 12,000,000 Airgas, Inc., 7.14% due 3/08/2004 12,007,480 12,733,104 0.1
37,000,000 Lyondell Petrochemical Company, 6.50%
due 2/15/2006 35,447,016 33,733,640 0.3
40,000,000 Union Carbide Corp., 6.79% due 6/01/2025 40,292,500 41,814,800 0.4
-------------- --------------- -----
87,746,996 88,281,544 0.8
====================================================================================================================================
Consumer Services Loewen Group, Inc.+++:
16,000,000 6.70% due 10/01/1999 15,970,340 15,432,400 0.1
20,000,000 8.25% due 10/15/2003 20,208,132 19,600,160 0.2
-------------- --------------- -----
36,178,472 35,032,560 0.3
====================================================================================================================================
Electronics Tandy Corp.:
20,000,000 6.125% due 1/15/2003 19,971,600 20,855,600 0.2
15,000,000 6.95% due 9/01/2007 14,944,120 15,962,250 0.2
-------------- --------------- -----
34,915,720 36,817,850 0.4
====================================================================================================================================
Finance General Motors Acceptance Corp.:
30,000,000 6.375% due 4/04/2000 29,932,500 30,403,260 0.3
55,000,000 5.625% due 2/15/2001 54,450,000 55,578,050 0.5
30,000,000 6.75% due 6/10/2002 29,520,300 31,603,200 0.3
15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 15,231,150 0.2
-------------- --------------- -----
128,898,600 132,815,660 1.3
====================================================================================================================================
Financial Leasing GATX Corp.:
25,000,000 6.875% due 11/01/2004 24,938,000 26,451,500 0.2
25,000,000 6.69% due 11/30/2005 24,984,750 26,708,000 0.3
20,000,000 XTRA Corp., 6.68% due 11/30/2001 20,000,000 20,939,960 0.2
-------------- --------------- -----
69,922,750 74,099,460 0.7
====================================================================================================================================
Financial Other 14,000,000 Case Credit Corp., 5.95% due 8/01/2000 13,988,380 14,151,788 0.1
====================================================================================================================================
Financial Services Finova Capital Corp.:
25,000,000 6.45% due 6/01/2000 24,766,550 25,371,250 0.2
15,000,000 5.98% due 2/27/2001 14,968,950 15,157,110 0.2
10,000,000 6.56% due 11/15/2002 10,000,000 10,411,400 0.1
20,000,000 McDonnell Douglas Finance Corp., 6.965%
due 9/12/2005 20,049,200 21,955,380 0.2
35,000,000 Morgan Stanley Group, Inc., 5.75% due 2/15/2001 34,968,150 35,365,435 0.3
13,000,000 Norwest Financial, Inc., 6.625% due 7/15/2004 13,000,000 13,830,960 0.1
Salomon, Inc.:
10,000,000 6.75% due 2/15/2003 9,804,000 10,418,340 0.1
5,000,000 6.875% due 12/15/2003 4,968,500 5,255,985 0.1
</TABLE>
10
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 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 Services Smith Barney Shearson Holdings, Inc.:
(concluded) $ 25,000,000 6.625% due 7/01/2002 $ 24,994,000 $ 25,899,500 0.3%
20,000,000 7% due 3/15/2004 19,951,800 21,167,280 0.2
-------------- --------------- -----
177,471,150 184,832,640 1.8
====================================================================================================================================
Food & Tobacco Nabisco, Inc.:
21,500,000 6.125% due 2/01/2033 21,405,450 21,595,890 0.2
20,000,000 6.375% due 2/01/2035 19,939,200 20,357,800 0.2
-------------- --------------- -----
41,344,650 41,953,690 0.4
====================================================================================================================================
Foreign Government 10,000,000 Province of Mendoza, 10% due 9/04/2007+++ 9,931,700 6,550,000 0.1
Obligations Republic of Argentina:
59,500,000 8.75% due 7/10/2002+++ 55,708,750 41,352,500 0.4
18,815,500 Floating Rate Brady Bonds, Series L,
6.187% due 3/31/2005+ 14,891,800 14,864,245 0.2
20,000,000 Global Bonds, 8.375% due 12/20/2003 19,773,750 17,850,000 0.2
15,000,000 Global Bonds, 11.375% due 1/30/2017 14,198,750 13,762,500 0.1
35,000,000 Republic of Colombia, Global Bonds, 7.625%
due 2/15/2007 32,457,325 24,412,500 0.2
15,000,000 Republic of Guatemala, 8.50% due 8/03/2007+++ 15,082,250 12,750,000 0.1
39,500,000 Republic of Panama, 8.25% due 4/22/2008 39,272,995 33,575,000 0.3
Republic of Turkey+++:
15,000,000 9.875% due 2/23/2005 14,853,700 12,000,000 0.1
40,000,000 10% due 9/19/2007 39,980,625 32,800,000 0.3
75,000,000 United Mexican States, Global Bonds, 8.625%
due 3/12/2008 72,597,500 63,937,500 0.6
-------------- --------------- -----
328,749,145 273,854,245 2.6
====================================================================================================================================
Hospital Medpartners, Inc.:
Management 29,125,000 6.875% due 9/01/2000 28,915,910 24,631,595 0.2
5,500,000 7.375% due 10/01/2006 4,886,570 4,543,770 0.1
-------------- --------------- -----
33,802,480 29,175,365 0.3
====================================================================================================================================
Industrial 20,000,000 Browning-Ferris Industries, Inc., 6.375%
due 1/15/2008 19,627,200 20,574,400 0.2
Interface, Inc.:
7,800,000 9.50% due 11/15/2005 7,552,000 8,034,000 0.1
8,000,000 7.30% due 4/01/2008 7,999,520 7,999,784 0.1
20,000,000 Reliance Industries Ltd., 8.25% due 1/15/2027+++ 19,526,999 16,250,000 0.1
25,000,000 Triton Energy Ltd., 8.75% due 4/15/2002 25,363,000 23,917,350 0.2
15,000,000 United Refining Co., 10.75% due 6/15/2007 15,000,000 12,000,000 0.1
Williams Holdings of Delaware, Inc.:
20,000,000 6.625% due 11/15/2004 19,908,000 20,912,200 0.2
50,000,000 6.25% due 2/01/2006 49,739,500 50,976,500 0.5
-------------- --------------- -----
164,716,219 160,664,234 1.5
====================================================================================================================================
Information Systems Reynolds & Reynolds Company:
10,000,000 5.875% due 3/20/2000 9,992,900 10,105,000 0.1
37,500,000 6.12% due 3/02/2001 37,500,000 37,875,000 0.4
-------------- --------------- -----
47,492,900 47,980,000 0.5
====================================================================================================================================
</TABLE>
11
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 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>
Machinery $ 20,000,000 FMC Corp., 6.75% due 5/05/2005 $ 19,890,200 $ 21,087,800 0.2%
22,500,000 Harris Corp., 6.375% due 8/15/2002 22,461,850 23,349,375 0.2
-------------- --------------- -----
42,352,050 44,437,175 0.4
====================================================================================================================================
Media/Publishing 15,000,000 News American, Inc., 6.75% due 1/09/2038 15,000,000 15,512,700 0.2
====================================================================================================================================
Natural Gas-- 15,000,000 Enron Corp., 6.40% due 7/15/2006 14,976,600 15,352,950 0.2
Pipelines
====================================================================================================================================
Natural Gas Coastal Corporation (The):
Suppliers 10,000,000 6.50% due 6/02/2008 9,938,550 10,243,700 0.1
27,500,000 6.70% due 2/15/2027 27,225,400 28,840,570 0.3
-------------- --------------- -----
37,163,950 39,084,270 0.4
====================================================================================================================================
Oil--Integrated 10,000,000 Compania Naviera Perez Compac S.A.C.F.I.M.F.A.,
9% due 1/30/2004+++ 10,125,000 9,125,000 0.1
10,000,000 Giant Industries, Inc., 9% due 9/01/2007+++ 10,000,000 9,400,000 0.1
Occidental Petroleum Corp.:
18,375,000 6.24% due 11/24/2000 18,135,306 18,667,530 0.2
20,000,000 6.50% due 4/01/2005 19,805,815 20,369,800 0.2
20,500,000 Perez Companc S.A., 8.125% due 7/15/2007+++ 20,201,470 16,605,000 0.1
Union Texas Petroleum Holdings, Inc.:
23,250,000 6.70% due 11/18/2002 23,190,070 24,530,075 0.2
20,000,000 6.81% due 12/05/2007 20,000,000 21,769,800 0.2
10,000,000 Unocal Corporation, 6.11% due 2/17/2004 10,000,000 10,345,800 0.1
20,000,000 YPF, 8% due 2/15/2004 18,334,375 18,150,000 0.2
-------------- --------------- -----
149,792,036 148,963,005 1.4
====================================================================================================================================
Oil Field 20,000,000 R & B Falcon Corp., 6.75% due 4/15/2005 19,663,800 20,638,020 0.2
Equipment
====================================================================================================================================
Paper & Forest Boise Cascade Corporation:
Products 10,000,000 7.35% due 10/11/2004 10,316,700 10,374,200 0.1
20,000,000 7.66% due 5/27/2005 20,000,000 20,944,800 0.2
25,000,000 Champion International Corp., 6.65%
due 12/15/2037 25,000,000 25,463,000 0.3
-------------- --------------- -----
55,316,700 56,782,000 0.6
====================================================================================================================================
Real Estate 10,000,000 Franchise Finance Corp. of America, 6.95%
Investment Trusts due 8/29/2007 10,000,000 10,113,690 0.1
====================================================================================================================================
Telecommunications 10,000,000 Pacific Telecom, Inc., 6.625% due 10/20/2005 10,000,000 10,713,710 0.1
10,000,000 WorldCom Inc., 6.40% due 8/15/2005 10,013,350 10,552,200 0.1
-------------- --------------- -----
20,013,350 21,265,910 0.2
====================================================================================================================================
Tires & Rubber 40,000,000 Goodyear Tire & Rubber Company (The), 6.625%
due 12/01/2006 39,840,000 42,074,400 0.4
====================================================================================================================================
Transportation 12,500,000 Northwest Airlines, Inc., 7.625% due 3/15/2005 12,471,225 11,888,750 0.1
20,000,000 Ryder Systems, Inc., 6.50% due 5/15/2005 19,960,600 21,034,420 0.2
17,000,000 Transportacion Maritima Mexicana, S.A. de C.V.,
10% due 11/15/2006 17,152,730 13,175,000 0.1
15,000,000 Union Pacific Corp., 6.625% due 2/01/2008 14,776,750 15,521,550 0.2
-------------- --------------- -----
64,361,305 61,619,720 0.6
====================================================================================================================================
</TABLE>
12
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 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>
Travel & Lodging Royal Caribbean Cruises Ltd.:
$ 10,000,000 7.125% due 9/18/2002 $ 9,900,050 $ 10,379,100 0.1%
13,500,000 7.25% due 8/15/2006 13,513,945 14,144,490 0.1
-------------- --------------- -----
23,413,995 24,523,590 0.2
====================================================================================================================================
Trucking 9,000,000 Ryder System Inc., 6.30% due 7/21/2003 9,000,000 9,289,404 0.1
====================================================================================================================================
Utilities-- 28,250,000 Connecticut Light & Power Co., 7.75%
Electric, Gas, due 6/01/2002+++ 28,173,725 29,707,418 0.3
& Water 33,000,000 Empresa Nacional de Electricidad S.A. (Endesa),
7.325% due 2/01/2037 33,065,750 27,839,064 0.2
30,000,000 Enron Corp., 6.75% due 7/01/2005 29,387,285 31,198,800 0.3
20,000,000 Niagara Mohawk Power Corp., 5.875%
due 9/01/2002 19,504,200 19,651,800 0.2
24,750,000 Tata Electric Co., 8.50% due 8/19/2017+++ 23,737,525 17,448,750 0.2
-------------- --------------- -----
133,868,485 125,845,832 1.2
====================================================================================================================================
Yankee Corporates 15,000,000 Enersis S.A., 6.60% due 12/01/2026 14,350,102 13,345,950 0.1
====================================================================================================================================
Total Corporate Bonds 2,371,347,345 2,334,238,793 22.4
====================================================================================================================================
Collateralized Mortgage Obligations
====================================================================================================================================
Federal Home Loan Mortgage Corp.:
9,241,900 6.50% due 5/15/2008 8,831,790 9,290,974 0.1
5,000,000 7% due 8/15/2008 4,762,500 5,142,150 0.1
13,000,000 6% due 2/15/2011 12,020,938 13,210,223 0.1
====================================================================================================================================
Total Collateralized Mortgage Obligations 25,615,228 27,643,347 0.3
====================================================================================================================================
US Government Obligations
====================================================================================================================================
US Treasury Bonds:
190,000,000 6.25% due 8/15/2023 175,748,828 217,460,700 2.1
20,000,000 6% due 2/15/2026 20,228,125 22,375,000 0.2
US Treasury Notes:
65,000,000 5.875% due 7/31/1999 65,207,617 65,618,800 0.6
575,000,000 5.875% due 11/15/2005 558,272,731 626,658,000 6.0
325,000,000 5.625% due 2/15/2006 324,570,703 350,441,000 3.4
====================================================================================================================================
Total US Government Obligations 1,144,028,004 1,282,553,500 12.3
====================================================================================================================================
Short-Term Investments
====================================================================================================================================
Commercial Paper** 25,000,000 Citicorp, 5.50% due 10/15/1998 24,946,528 24,946,528 0.2
84,326,000 General Motors Acceptance Corp., 5.88%
due 10/01/1998 84,326,000 84,326,000 0.8
40,000,000 Goldman Sachs Group, L.P., 5.51% due 10/14/1998 39,920,411 39,920,411 0.4
Lexington Parker Capital Co. LLC:
30,000,000 5.54% due 10/06/1998 29,976,917 29,976,917 0.3
25,000,000 5.54% due 10/08/1998 24,973,069 24,973,069 0.2
50,000,000 Morgan Stanley Group, Inc., 5.53% due 10/20/1998 49,854,069 49,854,069 0.5
38,565,000 Repeat Offering Securitisation Entity (ROSE) Inc.,
5.55% due 10/05/1998 38,541,218 38,541,218 0.4
30,000,000 Riverwoods Funding Corp., 5.52% due 10/05/1998 29,981,600 29,981,600 0.3
</TABLE>
13
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Short-Term Investments Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Commercial Paper** Variable Funding Capital Corp.:
(concluded) $ 31,000,000 5.54% due 10/09/1998 $ 30,961,836 $ 30,961,836 0.3%
40,000,000 5.54% due 10/23/1998 39,864,578 39,864,578 0.4
====================================================================================================================================
Total Short-Term Investments 393,346,226 393,346,226 3.8
====================================================================================================================================
Total Investments $9,220,410,811 10,412,906,527 100.1
==============
Liabilities in Excess of Other Assets (12,237,677) (0.1)
--------------- ------
Net Assets $10,400,668,850 100.0%
=============== ======
====================================================================================================================================
</TABLE>
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis. The interest rates shown
reflect the rates in effect on September 30, 1998.
+ Brady Bonds are securities which have been issued to refinance commercial
bank loans and other debt. The risk associated with these instruments is
the amount of any uncollateralized principal or interest payments since
there is a high default rate of commercial bank loans by countries issuing
these securities.
++ Non-income producing security.
+++ The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(a) Investments in companies 5% or more of whose outstanding securities are
held by the Fund (such companies are defined as "Affiliated Companies" in
section 2(a)(3) of the Investment Company Act of 1940) are as follows:
- --------------------------------------------------------------------------------
Net Share Net Dividend
Industry Affiliate Activity Cost Income
- --------------------------------------------------------------------------------
Diversified Varian Associates,
Companies Inc. -- -- $350,000
Insurance Berkley (W.R.)
Corporation -- -- 432,000
Insurance Fremont General
Corp. 100,000 $ 4,362,426 615,000
Insurance Horace Mann
Educators Corp. 166,100 4,749,102 352,000
Hotels & Sun International
Casinos Hotels Ltd. 700,000 30,579,500 ++
Machinery & SPX Corp. 250,000 14,370,962 ++
Machine
Tools
Real Estate Walden Residential
Investment Properties, Inc. -- -- 482,500
Trusts
- --------------------------------------------------------------------------------
++ Non-income producing security.
See Notes to Financial Statements.
14
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of September 30, 1998
<TABLE>
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$9,220,410,811) (Note 1a) ..... $10,412,906,527
Cash .................................................................. 799,716
Receivables:
Interest ........................................................... $ 58,352,604
Capital shares sold ................................................ 18,550,744
Dividends .......................................................... 11,648,480
Paydowns ........................................................... 294,500 88,846,328
--------------
Prepaid registration fees and other assets (Note 1f) .................. 186,458
---------------
Total assets .......................................................... 10,502,739,029
---------------
===================================================================================================================================
Liabilities: Payables:
Securities purchased ............................................... 56,086,839
Capital shares redeemed ............................................ 33,617,707
Distributor (Note 2) ............................................... 4,824,675
Investment adviser (Note 2) ........................................ 3,435,979 97,965,200
--------------
Accrued expenses and other liabilities ................................ 4,104,979
---------------
Total liabilities ..................................................... 102,070,179
---------------
===================================================================================================================================
Net Assets: Net assets ............................................................ $10,400,668,850
===============
===================================================================================================================================
Net Assets Class A Shares of Common Stock, $.10 par value, 400,000,000
Consist of: shares authorized ..................................................... $ 11,143,117
Class B Shares of Common Stock, $.10 par value, 400,000,000
shares authorized ..................................................... 16,256,751
Class C Shares of Common Stock, $.10 par value, 200,000,000
shares authorized ..................................................... 1,675,061
Class D Shares of Common Stock, $.10 par value, 200,000,000
shares authorized ..................................................... 4,110,582
Paid-in capital in excess of par ...................................... 9,022,838,826
Undistributed investment income--net .................................. 68,368,399
Undistributed realized capital gains on investments and foreign
currency transactions--net ............................................ 83,663,309
Unrealized appreciation on investments and foreign
currency transactions--net ............................................ 1,192,612,805
---------------
Net assets ............................................................ $10,400,668,850
===============
===================================================================================================================================
Net Asset Value: Class A--Based on net assets of $3,537,599,410 and 111,431,172
shares outstanding ........................................... $ 31.75
===============
Class B--Based on net assets of $5,046,721,350 and 162,567,513
shares outstanding ........................................... $ 31.04
===============
Class C--Based on net assets of $513,762,999 and 16,750,610
shares outstanding ........................................... $ 30.67
===============
Class D--Based on net assets of $1,302,585,091 and 41,105,818
shares outstanding ........................................... $ 31.69
===============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Statement of Operations for the Six Months Ended September 30, 1998
<TABLE>
<S> <C> <C> <C>
Investment Interest and discount earned .......................................... $ 147,474,560
Income Dividends (net of $1,057,586 foreign withholding tax) ................. 57,633,159
(Notes 1d & 1e): Other ................................................................. 370,808
---------------
Total income .......................................................... 205,478,527
---------------
===============================================================================================================================
Expenses: Account maintenance and distribution fees--Class B (Note 2) ........... $ 28,403,052
Investment advisory fees (Note 2) ..................................... 23,322,277
Transfer agent fees--Class B (Note 2) ................................. 4,624,460
Transfer agent fees--Class A (Note 2) ................................. 2,926,698
Account maintenance and distribution fees--Class C (Note 2) ........... 2,738,658
Account maintenance fees--Class D (Note 2) ............................ 1,676,729
Transfer agent fees--Class D (Note 2) ................................. 982,615
Transfer agent fees--Class C (Note 2) ................................. 468,936
Custodian fees ........................................................ 414,033
Printing and shareholder reports ...................................... 269,820
Registration fees (Note 1f) ........................................... 174,064
Professional fees ..................................................... 42,008
Directors' fees and expenses .......................................... 23,899
Pricing fees .......................................................... 14,734
Other ................................................................. 50,969
-------------
Total expenses ........................................................ 66,132,952
---------------
Investment income--net ................................................ 139,345,575
---------------
===============================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net .................................................... 86,211,259
(Loss) on Foreign currency transactions--net .................................. (115,683) 86,095,576
Investments & -------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net .................................................... (1,724,362,083)
(Notes 1b, 1c, Foreign currency transactions--net .................................. 121,068 (1,724,241,015)
1e & 3): ------------- ---------------
Net realized and unrealized loss on investments and foreign
currency transactions ................................................. (1,638,145,439)
---------------
Net Decrease in Net Assets Resulting from Operations .................. $(1,498,799,864)
===============
===============================================================================================================================
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
Six Months Year
Ended Ended
September 30, March 31,
Increase (Decrease) in Net Assets: 1998 1998
=========================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ............................................ $ 139,345,575 $ 272,540,546
Realized gain on investments and foreign currency transactions--net 86,095,576 569,208,611
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net ................................ (1,724,241,015) 1,874,025,315
--------------- ---------------
Net increase (decrease) in net assets resulting from operations ... (1,498,799,864) 2,715,774,472
--------------- ---------------
=========================================================================================================================
Dividends & Investment income--net:
Distributions to Class A ........................................................ (65,135,078) (115,518,688)
Shareholders Class B ........................................................ (53,177,674) (119,396,439)
(Note 1g): Class C ........................................................ (5,968,407) (8,523,951)
Class D ........................................................ (19,861,017) (26,653,341)
Realized gain on investments--net:
Class A ........................................................ (92,143,043) (204,758,968)
Class B ........................................................ (134,419,587) (306,423,980)
Class C ........................................................ (13,242,884) (21,655,996)
Class D ........................................................ (30,940,507) (51,231,087)
--------------- ---------------
Net decrease in net assets resulting from dividends and
distributions to shareholders ..................................... (414,888,197) (854,162,450)
--------------- ---------------
=========================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions 426,871,517 744,669,554
Transactions --------------- --------------
(Note 4):
=========================================================================================================================
Net Assets: Total increase (decrease) in net assets ........................... (1,486,816,544) 2,606,281,576
Beginning of period ............................................... 11,887,485,394 9,281,203,818
--------------- ---------------
End of period* .................................................... $10,400,668,850 $11,887,485,394
=============== ===============
=========================================================================================================================
* Undistributed investment income--net .............................. $ 68,368,399 $ 73,165,000
=============== ===============
=========================================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended For the Year Ended March 31,
Sept. 30, ------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1998+ 1997+ 1996 1995
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 37.56 $ 31.39 $ 30.90 $ 27.74 $ 27.46
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .............. .53 1.11 1.25 1.21 1.01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ................... (4.92) 8.14 2.43 5.41 1.77
---------- ---------- ---------- ---------- ----------
Total from investment operations .... (4.39) 9.25 3.68 6.62 2.78
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net ........... (.59) (1.11) (1.25) (1.16) (.94)
Realized gain on investments--net (.83) (1.97) (1.94) (2.30) (1.56)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions ... (1.42) (3.08) (3.19) (3.46) (2.50)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period ...... $ 31.75 $ 37.56 $ 31.39 $ 30.90 $ 27.74
========== ========== ========== ========== ==========
==========================================================================================================================
Total Investment Based on net asset value per share .. (12.17%)++ 30.71% 12.62% 24.50% 10.95%
Return:** ========== ========== ========== ========== ==========
==========================================================================================================================
Ratios to Average Expenses ............................ .56%* .55% .55% .56% .57%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net .............. 2.97%* 3.21% 3.99% 4.09% 3.81%
========== ========== ========== ========== ==========
==========================================================================================================================
Supplemental Net assets, end of period
Data: (in thousands) .................... $3,537,600 $4,155,677 $3,291,219 $3,225,758 $2,507,767
========== ========== ========== ========== ==========
Portfolio turnover .................. 17% 38% 47% 84% 89%
========== ========== ========== ========== ==========
==========================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
18
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------------
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended For the Year Ended March 31,
Sept. 30, ------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1998+ 1997+ 1996 1995
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 36.68 $ 30.72 $ 30.30 $ 27.28 $ 27.04
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .34 .74 .91 .90 .74
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ................... (4.82) 7.96 2.39 5.29 1.72
---------- ---------- ---------- ---------- ----------
Total from investment operations .... (4.48) 8.70 3.30 6.19 2.46
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net ........... (.33) (.77) (.94) (.87) (.66)
Realized gain on investments--net (.83) (1.97) (1.94) (2.30) (1.56)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions ... (1.16) (2.74) (2.88) (3.17) (2.22)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period ...... $ 31.04 $ 36.68 $ 30.72 $ 30.30 $ 27.28
========== ========== ========== ========== ==========
==========================================================================================================================
Total Investment Based on net asset value per share .. (12.62%)++ 29.38% 11.48% 23.22% 9.81%
Return:** ========== ========== ========== ========== ==========
==========================================================================================================================
Ratios to Average Expenses ............................ 1.58%* 1.57% 1.57% 1.58% 1.59%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net .............. 1.97%* 2.19% 2.97% 3.07% 2.79%
========== ========== ========== ========== ==========
==========================================================================================================================
Supplemental Net assets, end of period
Data: (in thousands) .................... $5,046,721 $5,938,708 $4,977,431 $5,025,504 $3,664,250
========== ========== ========== ========== ==========
Portfolio turnover .................. 17% 38% 47% 84% 89%
========== ========== ========== ========== ==========
==========================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
19
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------------
For the
For the Period
The following per share data and ratios have been derived Six Months For the Year Oct. 21,
from information provided in the financial statements. Ended Ended March 31, 1994+ to
Sept. 30, ------------------------------------ March 31,
Increase (Decrease) in Net Asset Value: 1998++ 1998++ 1997++ 1996 1995
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period .. $ 36.31 $ 30.44 $ 30.08 $ 27.17 $ 26.81
Operating ---------- --------- ---------- ---------- ---------
Performance: Investment income--net ................ .34 .73 .90 .92 .49
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ..................... (4.78) 7.89 2.36 5.24 1.03
---------- ---------- ---------- ---------- ---------
Total from investment operations ...... (4.44) 8.62 3.26 6.16 1.52
---------- ---------- ---------- ---------- ---------
Less dividends and distributions:
Investment income--net ............. (.37) (.78) (.96) (.95) (.43)
Realized gain on investments--net .. (.83) (1.97) (1.94) (2.30) (.73)
---------- ---------- ---------- ---------- ---------
Total dividends and distributions ..... (1.20) (2.75) (2.90) (3.25) (1.16)
---------- ---------- ---------- ---------- ---------
Net asset value, end of period ........ $ 30.67 $ 36.31 $ 30.44 $ 30.08 $ 27.17
========== ========== ========== ========== =========
===========================================================================================================================
Total Investment Based on net asset value per share .... (12.64%)++ 29.40% 11.45% 23.25% 6.07%++
Return:** ========== ========== ========== ========== =========
===========================================================================================================================
Ratios to Expenses .............................. 1.59%* 1.58% 1.58% 1.59% 1.64%*
Average ========== ========== ========== ========== =========
Net Assets: Investment income--net ................ 1.95%* 2.18% 2.96% 3.08% 3.22%*
========== ========== ========== ========== =========
===========================================================================================================================
Supplemental Net assets, end of period (in thousands) $ 513,763 $ 512,783 $ 322,438 $ 259,131 $ 46,902
Data: ========== ========== ========== ========== =========
Portfolio turnover .................... 17% 38% 47% 84% 89%
========== ========== ========== ========== =========
===========================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
20
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
-------------------------------------------------------------
For the
For the Period
The following per share data and ratios have been derived Six Months For the Year Oct. 21,
from information provided in the financial statements. Ended Ended March 31, 1994+ to
Sept. 30, ------------------------------------ March 31,
Increase (Decrease) in Net Asset Value: 1998++ 1998++ 1997++ 1996 1995
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period .. $ 37.49 $ 31.34 $ 30.86 $ 27.72 $ 27.27
Operating ---------- --------- ---------- ---------- ---------
Performance: Investment income--net ................ .49 1.02 1.17 1.16 .48
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net ..................... (4.93) 8.14 2.43 5.38 1.15
---------- ---------- ---------- ---------- ---------
Total from investment operations ...... (4.44) 9.16 3.60 6.54 1.63
---------- ---------- ---------- ---------- ---------
Less dividends and distributions:
Investment income--net ............. (.53) (1.04) (1.18) (1.10) (.45)
Realized gain on investments--net .. (.83) (1.97) (1.94) (2.30) (.73)
---------- ---------- ---------- ---------- ---------
Total dividends and distributions ..... (1.36) (3.01) (3.12) (3.40) (1.18)
---------- ---------- ---------- ---------- ---------
Net asset value, end of period ........ $ 31.69 $ 37.49 $ 31.34 $ 30.86 $ 27.72
========== ========== ========== ========== =========
===========================================================================================================================
Total Investment Based on net asset value per share .... (12.29%)++ 30.40% 12.34% 24.21% 6.42%++
Return:** ========== ========== ========== ========== =========
===========================================================================================================================
Ratios to Expenses .............................. .82%* .80% .80% .81% .87%*
Average ========== ========== ========== ========== =========
Net Assets: Investment income--net ................ 2.73%* 2.95% 3.75% 3.84% 3.94%*
========== ========== ========== ========== =========
===========================================================================================================================
Supplemental Net assets, end of period (in thousands) $1,302,585 $1,280,317 $ 690,116 $ 521,599 $ 171,201
Data: ========== ========== ========== ========== =========
Portfolio turnover .................... 17% 38% 47% 84% 89%
========== ========== ========== ========== =========
===========================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
21
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Capital Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
These unaudited financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal recurring nature.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market. Securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. Options written
or purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the over-the-counter market, valuation
is the last asked price (options written) or the last bid price (options
purchased). Short-term securities are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not available are valued at fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt and currency markets. Losses may arise due
to changes in the value of the contract or if the counterparty does not perform
under the contract.
o Options--The Fund is authorized to write covered call options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked to market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written options are non-income producing investments.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into
22
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
(the trade dates). Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend date.
Interest income (including amortization of discount) is recognized on the
accrual basis. Realized gains and losses on security transactions are determined
on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered
into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds
Distributor ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
based upon the average daily value of the Fund's net assets at the following
annual rates: 0.50% of the Fund's average daily net assets not exceeding $250
million; 0.45% of average daily net assets in excess of $250 million but not
exceeding $300 million; 0.425% of average daily net assets in excess of $300
million but not exceeding $400 million; and 0.40% of average daily net assets in
excess of $400 million.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class B ............................... 0.25% 0.75%
Class C ............................... 0.25% 0.75%
Class D ............................... 0.25% --
- --------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the six months ended September 30, 1998, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
- --------------------------------------------------------------------------------
MLFD MLPF&S
- --------------------------------------------------------------------------------
Class A ............................... $16,210 $219,966
Class D ............................... $66,875 $912,035
- --------------------------------------------------------------------------------
For the six months ended September 30, 1998, MLPF&S received contingent deferred
sales charges of $2,932,755 and $99,880 relating to transactions in Class B and
Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred
sales charges of $54,988 relating to transactions subject to front-end sales
charge waivers in Class A Shares.
In addition, MLPF&S received $247,432 in commissions on the execution of
portfolio security transactions for the six months ended September 30, 1998.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
During the six months ended September 30, 1998, Merrill Lynch Security Pricing
Service, an affiliate of MLPF&S, received $454 for security price quotations to
compute the net asset value of the Fund.
Certain officers and/or directors of the Fund are officers and/or directors
MLAM, PSI, FDS, PFD, and/or ML & Co.
23
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
six months ended September 30, 1998 were $2,061,962,429 and $1,874,463,270,
respectively.
Net realized gains (losses) for the six months ended September 30, 1998 and net
unrealized gains as of September 30, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments .................. $ 86,211,166 $1,192,495,716
Short-term investments ................. 93 --
Foreign currency
transactions ........................... (115,683) 117,089
------------- --------------
Total .................................. $ 86,095,576 $1,192,612,805
============= ==============
- --------------------------------------------------------------------------------
As of September 30, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $1,192,495,716, of which $1,946,199,907 related to
appreciated securities and $753,704,191 related to depreciated securities. At
September 30, 1998, the aggregate cost of investments for Federal income tax
purposes was $9,220,410,811.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$426,871,517 and $744,669,554 for the six months ended September 30, 1998 and
for the year ended March 31, 1998, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended September 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 9,213,239 $ 330,648,079
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 3,976,982 144,443,997
------------- -------------
Total issued ........................... 13,190,221 475,092,076
Shares redeemed ........................ (12,402,288) (432,982,048)
------------- -------------
Net increase ........................... 787,933 $ 42,110,028
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class A Shares for the Dollar
Year Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 18,254,019 $ 634,543,940
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 8,638,512 294,091,362
------------- -------------
Total issued ........................... 26,892,531 928,635,302
Shares redeemed ........................ (21,089,819) (727,078,860)
------------- -------------
Net increase ........................... 5,802,712 $ 201,556,442
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class B Shares for the Six Months Dollar
Ended September 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 17,669,681 $ 617,316,063
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 4,626,832 164,715,227
------------- -------------
Total issued ........................... 22,296,513 782,031,290
Automatic conversion
of shares .............................. (4,621,164) (159,314,707)
Shares redeemed ........................ (16,995,535) (583,814,093)
------------- -------------
Net increase ........................... 679,814 $ 38,902,490
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class B Shares for the Dollar
Year Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 26,936,302 $ 915,743,174
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 11,273,540 376,017,355
------------- -------------
Total issued ........................... 38,209,842 1,291,760,529
Automatic conversion
of shares .............................. (7,065,614) (239,303,799)
Shares redeemed ........................ (31,261,809) (1,049,566,557)
------------- -------------
Net increase (decrease) ................ (117,581) $ 2,890,173
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Six Months Dollar
Ended September 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 4,080,791 $ 142,584,317
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 485,672 17,085,929
------------- -------------
Total issued ........................... 4,566,463 159,670,246
Shares redeemed ........................ (1,939,903) (64,886,108)
------------- -------------
Net increase ........................... 2,626,560 $ 94,784,138
============= =============
- --------------------------------------------------------------------------------
24
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
- --------------------------------------------------------------------------------
Class C Shares for the Dollar
Year Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 5,470,865 $ 185,136,065
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 812,551 26,837,937
------------- -------------
Total issued ........................... 6,283,416 211,974,002
Shares redeemed ........................ (2,750,233) (91,023,357)
------------- -------------
Net increase ........................... 3,533,183 $ 120,950,645
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Six Months Dollar
Ended September 30, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 6,650,091 $ 239,084,367
Automatic conversion
of shares .............................. 4,525,961 159,314,707
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 1,275,337 46,269,233
------------- -------------
Total issued ........................... 12,451,389 444,668,307
Shares redeemed ........................ (5,500,788) (193,593,446)
------------- -------------
Net increase ........................... 6,950,601 $ 251,074,861
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Dollar
Year Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 9,630,431 $ 333,114,038
Automatic conversion
of shares .............................. 6,920,593 239,303,799
Shares issued to shareholders
in reinvestment of dividends
and distributions ...................... 2,068,449 70,372,205
------------- -------------
Total issued ........................... 18,619,473 642,790,042
Shares redeemed ........................ (6,482,847) (223,517,748)
------------- -------------
Net increase ........................... 12,136,626 $ 419,272,294
============= =============
- --------------------------------------------------------------------------------
5. Loaned Securities:
At September 30, 1998, the Fund held US Treasury notes and bonds having an
aggregate value of approximately $68,641,000 as collateral for portfolio
securities loaned having a market value of approximately $62,733,000.
25
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
PORTFOLIO INFORMATION
As of September 30, 1998
Percent of
Ten Largest Common Stock Holdings Net Assets
Williams Companies, Inc. 2.2%
Travelers Group, Inc. 1.7
Kansas City Southern Industries, Inc. 1.7
United Technologies Corporation 1.5
Rite Aid Corp. 1.5
Lockheed Martin Corporation 1.5
Allstate Corporation (The) 1.4
Nestle S.A. (Registered Shares) 1.4
Carnival Corp. (Class A) 1.4
Provident Companies, Inc. 1.4
Percent of
Ten Largest Industries Net Assets*
Insurance 9.5%
Diversified Companies 5.1
Banking 4.9
Oil--Integrated 4.8
Natural Gas 4.2
Financial Services 4.0
Chemicals 2.6
Railroads 2.6
Aerospace 2.5
Paper & Forest Products 2.4
* Based on total holdings in common stocks and bonds.
Common Stock Portfolio Changes for the
Quarter Ended September 30, 1998
Additions
EXEL Limited (Class A)
ITT Industries Inc.
LucasVarity PLC (ADR)
Nextel Communications, Inc.
Sears, Roebuck and Co.
Waste Management, Inc.
Deletions
Belden Inc.
Birmingham Steel Corp.
EXEL Ltd. (US Registered Shares)
Ente Nazionale Idrocarburi S.p.A. (ENI) (ADR)
General Motors Corp.
Nintendo Corp. Ltd.
Penncorp Financial Group, Inc.
TIG Holdings, Inc.
26
<PAGE>
Merrill Lynch Capital Fund, Inc. September 30, 1998
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Donald Cecil, Director
M. Colyer Crum, Director
Edward H. Meyer, Director
Jack B. Sunderland, Director
J. Thomas Touchton, Director
Fred G. Weiss, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Kurt Schansinger, Senior Vice President and Portfolio Manager
Donald C. Burke, Vice President
Walter Cuje, Vice President
Gerald M. Richard, Treasurer
Thomas D. Jones, III, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
27
<PAGE>
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
Capital Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #10252--9/98
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