N-30D 1 d02-37417.txt ANNUAL REPORT [LOGO] Merrill Lynch Investment Managers Annual Report March 31, 2002 Merrill Lynch Balanced Capital Fund, Inc. www.mlim.ml.com MERRILL LYNCH BALANCED CAPITAL FUND, INC. DEAR SHAREHOLDER Economic Environment US equity markets proved extremely volatile during the past six months as investors struggled to discern trends in economic growth and corporate earnings prospects, while digesting the impact and implications of the war on terrorism. At the beginning of the period, the events of September 11, 2001 appeared to exacerbate an already weak economic and corporate profit environment, pushing the US economy into a full-blown recession and precipitating further significant reductions in earnings expectations and equity prices. Indeed, the equity markets appeared trapped in a vicious circle of lower earnings, lower valuations and lower prices. The unmanaged Standard & Poor's 500 (S&P 500) Index declined more than 8% for the month of September 2001, including its largest one-week decrease since the Great Depression in the immediate aftermath of the terrorist attacks. The technology-laden NASDAQ Composite Index declined 17%. However, in the fourth quarter of 2001, equity markets posted strong gains with most major indexes enjoying double-digit returns. Early reports that the massive fiscal and monetary stimulus underway had begun to take effect combined with stable interest rates, lower stock prices and military successes to encourage strong buying interest. Positive data on employment trends, industrial order activity, housing and automobile sales and business inventory levels complemented evidence of corporate earnings stability to produce solid results. In early 2002, while proof of an economic recovery continued to build, ongoing debates about the pace of corporate earnings growth, accounting quality and equity valuations resulted in stagnant performance for most major market indexes. For the six months ended March 31, 2002, the S&P 500 Index provided a +10.97% total return, while the NASDAQ Composite Index rose +23.12%. Growth stocks handsomely outperformed value stocks during the period as the unmanaged S&P/Barra Growth Index rose 12.2%, while the S&P/Barra Value Index gained 9.4% as investors gravitated toward shares of faster growth and more economically sensitive companies, particularly in the industrial and consumer cyclical sectors. The fixed-income market was flat for the period as the benefit from expectations for continued low inflation as well as the safe haven appeal of bonds in an uncertain equity market environment were offset by concerns about the accelerating pace of economic growth and the risk of subsequent Federal Reserve Board monetary tightening initiatives. The total return for the unmanaged Merrill Lynch U.S. Domestic Bond Master Index was -0.06% for the six-month period ended March 31, 2002. Portfolio Matters Total returns for Merrill Lynch Balanced Capital Fund, Inc.'s Class A, Class B, Class C and Class D Shares for the six-month period ended March 31, 2002 were +12.19%, +11.63%, +11.60% and +12.05%, respectively. (Fund results shown do not reflect sales charges and would be lower if sales charges were included. Complete performance information can be found on pages 3-5 of this report to shareholders.) Within the equity portfolio, positive contributions from our positions in industrial, financial and consumer cyclical companies, many of which provided greater than 40% returns for the period, more than offset weakness in the energy and technology sectors. Within the fixed-income portfolio, we benefited from our overweighted position in corporate bonds as yield spreads narrowed, and from our decision to reduce the Fund's average duration to a more neutral five years as interest rates rose and the yield curve steepened. At March 31, 2002, 68.0% of the Fund's net assets were invested in equities, 29.5% in fixed-income securities and 2.5% in cash and cash equivalents compared to 64.4% in equities, 32.4% in fixed-income securities and 3.2% in cash and cash equivalents on September 30, 2001. We remain constructive about the outlook for the US equity market in 2002, given the resurgent economy, favorable monetary indicators and psychological factors. We are confident about the strategy we adopted in the summer of 2001 1 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 that increased our equity exposure as well as our position in more economically sensitive securities. However, in the near-term, we believe some profit-taking may be in order, given extended valuations, rising bond yields and uncertain corporate earnings prospects. Simply put, we believe bond yields must stabilize and corporate earnings need to show improvement before higher stock price levels can be established. In the interim, we believe markets will likely remain volatile, affording opportunities to adjust our equity exposure in response to substantive price movements. We expect the flexibility of our investment approach to prove extremely valuable as we move through the remainder of the year. We continued to adjust our holdings during the period in response to ongoing price volatility. Within the equity portfolio, we increased our financial stock exposure, establishing positions in regional banks, FleetBoston Financial Corporation and PNC Bank Corp., as well as increasing our position in J.P. Morgan Chase & Co., where stock prices have declined on near-term credit concerns. These companies are selling at low multiples of current earnings and offer high dividend yields, and we believe the risk/reward profile is attractive with the upside driven by improved earnings and credit trends in a recovering economy. We also added Schering-Plough Corporation to the portfolio as shares of this once top-performing, highly valued pharmaceutical company declined to attractive valuation levels. We reduced the Fund's exposure in a number of health care, technology and retail holdings where recent strong stock price performance made investments in companies such as American Home Products Corporation, Applied Materials, Inc. and The Home Depot, Inc. less attractive. We also eliminated a number of disappointing investments in companies such as Halliburton Company and Nextel Communications, Inc., where results failed to match expectations. Within the fixed-income portfolio, we continued to increase our corporate bond exposure to capture higher yields, while reducing our average duration to slightly above the Merrill Lynch U.S. Domestic Bond Master Index average of five years. At March 31, 2002, investment-grade corporate bonds represented 68.0% of fixed-income assets, with 13.7% high-yield corporate bonds, 17.4% US Treasury securities and less than 1% mortgage-backed securities compared to 68.1% in investment-grade corporate bonds, with 11.5% high-yield corporate bonds, 19.2% US Treasury securities and 1.2% mortgage-backed securities on September 30, 2001. Average quality ratings declined from A3/A- at the beginning of the period to Baa1/BBB+, while the Fund's average yield to maturity increased 66 basis points (0.66%) to 7.80%. Fiscal Year in Review For the fiscal year ended March 31, 2002, the Fund performed well, generating total returns for Class A, Class B, Class C and Class D Shares of +5.07%, +4.01%, +4.01% and +4.78%, respectively. This compares favorably to the Fund's unmanaged equity benchmark, the S&P 500 Index, which had a total return of +0.21% for the same 12-month period. The results of the last 12 months incorporated two very distinct periods of performance. During the first half of the period, equity markets were generally weak as the economic slowdown precipitated reduced corporate earnings expectations and lower valuations. During this extremely challenging period, we maintained the Fund's conservative investment position, emphasizing management of risk and preservation of capital. Equities averaged a modest 63.6% of the Fund's net assets, reflecting our view that declining earnings, coupled with high market valuations, did not represent an attractive formula for stock market appreciation. In contrast, bonds appeared to offer good value, as inflation-adjusted interest rates remained high, while inflation pressures continued to moderate. Within the equity portfolio, we emphasized investments in companies whose ability to create shareholder value was not captive to economic growth, particularly in the consumer product and health care sectors of the market. Within the fixed-income portfolio, we maintained a relatively long average duration in an effort to enhance the impact of declining interest rates. As discussed, during the latter half of the period, market conditions changed. Anticipating this improvement in economic and stock market conditions, we began to adopt a more aggressive investment stance in August 2001, increasing our equity exposure to an average 66.2% of the Fund's net assets, as well as our position in more economically 2 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 sensitive securities. Within the equity portfolio, we added positions in basic industry and industrial companies as well as media and entertainment concerns, which we expect to be the primary beneficiaries of resurgent economic growth. Within the fixed-income portfolio, we increased our corporate bond exposure to capture higher returns, while reducing our average duration in anticipation of a cessation of declining interest rates. Both of these strategies proved successful and represent the most significant factors affecting the Fund's results for the year. In Conclusion We appreciate your continued interest and participation in Merrill Lynch Balanced Capital Fund, Inc., and we look forward to assisting you with your financial needs in the months and years to come. Sincerely, /s/ Terry K. Glenn Terry K. Glenn President and Director /s/ Kurt Schansinger Kurt Schansinger Senior Vice President and Portfolio Manager May 2, 2002 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 Effective June 1, 2001, Class B Shares are subject to a maximum contingent deferred sales charge of 4% declining to 0% after six years. All Class B Shares purchased prior to June 1, 2001 will maintain the four-year schedule. 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 eight 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. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 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. 3 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 PERFORMANCE DATA (continued) Total Return Based on a $10,000 Investment ML Balanced Capital Fund, Inc. Edgar Total Return Based on a $10,000 Investment--Class A & Class B Shares A line graph depicting the growth of an investment in the Fund's Class A Shares and Class B Shares compared to growth of an investment in the S&P 500 Index and the ML U.S. Domestic Bond Master Index. Values are from March 1992 to March 2002.
3/92 3/93 3/94 3/95 3/96 3/97 ML Balanced Capital Fund, Inc.+--C1ass A Shares* $ 9,475 $10,549 $11,118 $12,335 $15,357 $17,295 ML Balanced Capital Fund, Inc.+--Class B Shares* $10,000 $11,016 $11,496 $12,624 $15,555 $17,341 S&P 5OO Index++ $10,000 $11,523 $11,693 $13,513 $17,851 $21,390 ML U.S. Domestic Bond Master Index+++ $10,000 $11,351 $11,657 $12,232 $13,564 $14,224 3/98 3/99 3/00 3/01 3/02 ML Balanced Capital Fund, Inc.+--Class A Shares* $22,606 $22,452 $23,480 $23,217 $24,394 ML Balanced Capital Fund, Inc.+--Class B Shares* $22,436 $22,066 $22,834 $22,352 $23,248 S&P 500 Index++ $31,657 $37,502 $44,229 $34,642 $34,715 ML U.S. Domestic Bond Master Index+++ $15,938 $16,975 $17,305 $19,457 $20,463
Total Return Based on a $10,000 Investment--Class C & Class D Shares A line graph depicting the growth of an investment in the Fund's Class C Shares and Class D Shares compared to growth of an investment in the S&P 500 Index and the ML U.S. Domestic Bond Master Index. Values are from October 21, 1994 to March 2002.
10/21/94** 3/95 3/96 3/97 3/98 3/99 ML Balanced Capital Fund, Inc.+--Class C Shares* $10,000 $10,607 $13,073 $14,570 $18,854 $18,533 ML Balanced Capital Fund, Inc.+--Class D Shares* $ 9,475 $10,083 $12,524 $14,069 $18,346 $18,177 S&P 500 Index++ $10,000 $10,731 $14,176 $16,986 $25,139 $29,780 ML U.S. Domestic Bond Master Index+++ $10,000 $10,556 $11,705 $12,275 $13,755 $14,650 3/00 3/01 3/02 ML Balanced Capital Fund, Inc.+--Class C Shares* $19,182 $18,773 $19,526 ML Balanced Capital Fund, Inc.+--Class D Shares* $18,957 $18,701 $19,595 S&P 500 Index++ $35,122 $27,509 $27,567 ML U.S. Domestic Bond Master Index+++ $14,935 $16,793 $17,661
* Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. ** Commencement of operations. + ML Balanced Capital Fund, Inc., through a fully managed investment policy, utilizes equity, debt and convertible securities. ++ This unmanaged broad-based Index is comprised of common stocks. The starting date for the Index in the Class C & Class D Shares' graph is from 10/31/94. +++ This unmanaged Index is comprised of the entire universe of domestic investment-grade bonds including US Treasury bonds, corporate bonds and mortgages. The starting date for the Index in the Class C & Class D Shares' graph is from 10/31/94. Past performance is not indicative of future results. 4 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 PERFORMANCE DATA (concluded) Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** ================================================================================ Class A Shares* ================================================================================ One Year Ended 3/31/02 +5.07% -0.44% -------------------------------------------------------------------------------- Five Years Ended 3/31/02 +7.12 +5.97 -------------------------------------------------------------------------------- Ten Years Ended 3/31/02 +9.92 +9.33 -------------------------------------------------------------------------------- * Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class A Shares were offered at a higher sales charge. Thus, actual returns would have been lower than shown for the ten-year period.) ** Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** ================================================================================ Class B Shares* ================================================================================ One Year Ended 3/31/02 +4.01% +0.13% -------------------------------------------------------------------------------- Five Years Ended 3/31/02 +6.04 +5.78 -------------------------------------------------------------------------------- Ten Years Ended 3/31/02 +8.80 +8.80 -------------------------------------------------------------------------------- * Maximum contingent deferred sales charge is 4% and is reduced to 0% after six years. ** Assuming payment of applicable contingent deferred sales charge. ================================================================================ % Return % Return Without CDSC With CDSC** ================================================================================ Class C Shares* ================================================================================ One Year Ended 3/31/02 +4.01% +3.04% -------------------------------------------------------------------------------- Five Years Ended 3/31/02 +6.03 +6.03 -------------------------------------------------------------------------------- Inception (10/21/94) through 3/31/02 +9.41 +9.41 -------------------------------------------------------------------------------- * Maximum contingent deferred sales charge is 1% and is reduced to 0% after one year. ** Assuming payment of applicable contingent deferred sales ================================================================================ % Return Without % Return With Sales Charge Sales Charge** ================================================================================ Class D Shares* ================================================================================ One Year Ended 3/31/02 + 4.78% -0.72% -------------------------------------------------------------------------------- Five Years Ended 3/31/02 + 6.85 +5.70 -------------------------------------------------------------------------------- Inception (10/21/94) through 3/31/02 +10.26 +9.46 -------------------------------------------------------------------------------- * Maximum sales charge is 5.25%. ** Assuming maximum sales charge. Recent Performance Results
Ten Years/ 6-Month 12-Month Since Inception As of March 31, 2002 Total Return Total Return Total Return ==================================================================================================== ML Balanced Capital Fund, Inc. Class A Shares* +12.19% +5.07% +157.46% ---------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class B Shares* +11.63 +4.01 +132.51 ---------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class C Shares* +11.60 +4.01 + 95.26 ---------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class D Shares* +12.05 +4.78 +106.83 ---------------------------------------------------------------------------------------------------- Standard & Poor's 500 Index** +10.97 +0.21 +247.15/+175.67 ---------------------------------------------------------------------------------------------------- ML U.S. Domestic Bond Master Index*** -0.06 +5.17 +104.64/+76.59 ----------------------------------------------------------------------------------------------------
* 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/since inception periods are ten years for Class A & Class B Shares and from 10/21/94 for Class C & Class D Shares. ** An unmanaged broad-based index comprised of common stocks. Ten years/since inception total returns are ten years and from 10/31/94, respectively. *** This unmanaged Index is comprised of the entire universe of domestic investment-grade bonds including US Treasury bonds, corporate bonds and mortgages. Ten years/since inception total returns are ten years and from 10/31/94, respectively. 5 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 SCHEDULE OF INVESTMENTS
Shares Percent of Industries Held Stocks Cost Value Net Assets =========================================================================================================================== Aerospace & Defense 750,000 General Dynamics Corporation $ 48,985,355 $ 70,462,500 1.5% 1,300,000 Honeywell International Inc. 43,588,345 49,751,000 1.1 300,000 Raytheon Company 8,109,291 12,315,000 0.3 650,000 United Technologies Corporation 9,729,948 48,230,000 1.0 ------------ ------------ ----- 110,412,939 180,758,500 3.9 =========================================================================================================================== Airlines 500,000 +AMR Corporation 19,429,284 13,205,000 0.3 =========================================================================================================================== Banks 500,000 FleetBoston Financial Corporation 16,610,175 17,500,000 0.4 1,400,000 Mellon Financial Corporation 50,407,974 54,026,000 1.1 250,000 PNC Bank Corp. 14,025,253 15,372,500 0.3 1,500,000 Wells Fargo Company 61,173,335 74,100,000 1.6 ------------ ------------ ----- 142,216,737 160,998,500 3.4 =========================================================================================================================== Beverages 1,500,000 Anheuser-Busch Companies, Inc. 54,849,720 78,300,000 1.7 =========================================================================================================================== Chemicals 1,250,000 E.I. du Pont de Nemours and Company 66,288,019 58,937,500 1.3 =========================================================================================================================== Communications 2,000,000 +CommScope, Inc. 45,219,289 34,800,000 0.8 Equipment 5,000,000 Lucent Technologies Inc. 31,107,819 23,650,000 0.5 4,000,000 Motorola, Inc. 64,173,200 56,800,000 1.2 ------------ ------------ ----- 140,500,308 115,250,000 2.5 =========================================================================================================================== Computers & 1,573,600 Compaq Computer Corporation 28,265,364 16,444,120 0.3 Peripherals 750,000 International Business Machines Corporation 76,076,200 78,000,000 1.7 ------------ ------------ ----- 104,341,564 94,444,120 2.0 =========================================================================================================================== Diversified Financials 1,900,000 Citigroup Inc. 6,480,318 94,088,000 2.0 1,000,000 Fannie Mae 24,890,985 79,880,000 1.7 1,600,000 J.P. Morgan Chase & Co. 48,980,487 57,040,000 1.2 1,000,000 Morgan Stanley Dean Witter & Co. 60,094,215 57,310,000 1.2 1,500,000 Stilwell Financial, Inc. 24,006,039 36,735,000 0.8 ------------ ------------ ----- 164,452,044 325,053,000 6.9 =========================================================================================================================== Diversified 1,500,000 Verizon Communications 94,718,577 68,475,000 1.5 Telecommunication Services =========================================================================================================================== Electronic 1,750,000 +Agilent Technologies, Inc. 52,759,981 61,180,000 1.3 Equipment & 1,000,000 +Sanmina Corporation 17,623,074 11,750,000 0.3 Instruments ------------ ------------ ----- 70,383,055 72,930,000 1.6 =========================================================================================================================== Food Products 300,000 Nestle SA (Registered Shares) 31,283,348 66,714,235 1.4 =========================================================================================================================== Gas Utilities 1,500,000 El Paso Corporation 25,337,490 66,045,000 1.4 =========================================================================================================================== Health Care 1,000,000 +Aetna Inc. (New Shares) 28,017,830 38,820,000 0.8 Providers & Services 1,250,000 HCA Inc. 48,672,398 55,100,000 1.2 900,000 +Tenet Healthcare Corporation 24,028,774 60,318,000 1.3 ------------ ------------ ----- 100,719,002 154,238,000 3.3 =========================================================================================================================== Hotels, Restaurants 400,000 Carnival Corporation 7,297,948 13,060,000 0.3 & Leisure 400,000 +Harrah's Entertainment, Inc. 6,282,511 17,704,000 0.4 2,000,000 McDonald's Corporation 47,532,936 55,500,000 1.2 300,000 Starwood Hotels & Resorts Worldwide, Inc. 5,580,710 11,283,000 0.2 20,000 Wendy's Financing I, Series A 1,044,750 1,343,400 0.0 ------------ ------------ ----- 67,738,855 98,890,400 2.1 ===========================================================================================================================
6 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 SCHEDULE OF INVESTMENTS (continued)
Shares Percent of Industries Held Stocks Cost Value Net Assets =========================================================================================================================== Household Products 750,000 Kimberly-Clark Corporation $ 35,368,924 $ 48,487,500 1.0% =========================================================================================================================== IT Consulting & 300,000 +Computer Sciences Corporation 11,670,266 15,225,000 0.3 Services =========================================================================================================================== Industrial 1,000,000 General Electric Company 47,436,640 37,450,000 0.8 Conglomerates 100,000 Minnesota Mining and Manufacturing Company (3M) 8,649,610 11,501,000 0.2 ------------ ------------ ----- 56,086,250 48,951,000 1.0 =========================================================================================================================== Insurance 1,500,000 ACE Limited 51,072,761 62,550,000 1.3 1,100,000 American International Group, Inc. 23,533,641 79,354,000 1.7 500,000 +Prudential Financial, Inc. 13,750,000 15,525,000 0.3 750,000 XL Capital Ltd. (Class A) 14,590,710 70,012,500 1.5 ------------ ------------ ----- 102,947,112 227,441,500 4.8 =========================================================================================================================== Leisure Equipment & 400,000 Eastman Kodak Company 13,908,976 12,468,000 0.3 Products =========================================================================================================================== Machinery 1,250,000 Dover Corporation 46,424,866 51,250,000 1.1 1,200,000 ITT Industries, Inc. 38,732,953 75,648,000 1.6 650,000 +SPX Corporation 37,625,600 92,027,000 2.0 ------------ ------------ ----- 122,783,419 218,925,000 4.7 =========================================================================================================================== Media 1,500,000 +Clear Channel Communications, Inc. 84,561,717 77,115,000 1.6 1,400,000 +Liberty Media Corporation (Class A) 18,443,310 17,696,000 0.4 1,250,000 The New York Times Company (Class A) 50,498,787 59,825,000 1.3 500,000 Tribune Company 15,697,172 22,730,000 0.5 1,750,000 +Viacom, Inc. (Class B) 89,909,433 84,647,500 1.8 500,000 The Walt Disney Company 8,031,952 11,540,000 0.2 ------------ ------------ ----- 267,142,371 273,553,500 5.8 =========================================================================================================================== Metals & Mining 1,250,000 Alcoa Inc. 50,007,392 47,175,000 1.0 1,000,000 Nucor Corporation 46,809,670 64,240,000 1.4 ------------ ------------ ----- 96,817,062 111,415,000 2.4 =========================================================================================================================== Multi-Utilities & 2,750,000 The Williams Companies, Inc. 33,935,824 64,790,000 1.4 Unregulated Power =========================================================================================================================== Multiline Retail 1,750,000 The May Department Stores Company 62,770,839 60,987,500 1.3 =========================================================================================================================== Oil & Gas 1,250,000 Anadarko Petroleum Corporation 44,023,928 70,550,000 1.5 100,000 ChevronTexaco Corporation 8,345,750 9,027,000 0.2 40,000 Unocal Capital Trust 2,136,250 2,040,000 0.0 ------------ ------------ ----- 54,505,928 81,617,000 1.7 =========================================================================================================================== Paper & Forest 28,000 International Paper Capital Trust (b) 1,331,400 1,298,500 0.0 Products 1,350,000 International Paper Company 49,850,680 58,063,500 1.2 700,000 Weyerhaeuser Company 36,911,204 44,002,000 1.0 ------------ ------------ ----- 88,093,284 103,364,000 2.2 =========================================================================================================================== Personal Products 1,250,000 Avon Products, Inc. 48,149,509 67,900,000 1.5 750,000 The Gillette Company 21,932,481 25,507,500 0.5 ------------ ------------ ----- 70,081,990 93,407,500 2.0 ===========================================================================================================================
7 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 SCHEDULE OF INVESTMENTS
Shares Percent of Industries Held Stocks Cost Value Net Assets ================================================================================================================================ Pharmaceuticals 1,500,000 Pharmacia Corporation $ 60,599,890 $ 67,620,000 1.5% 500,000 Schering-Plough Corporation 16,844,428 15,650,000 0.3 1,000,000 Wyeth 48,077,088 65,650,000 1.4 -------------- -------------- ---- 125,521,406 148,920,000 3.2 ================================================================================================================================ Road & Rail 32,000 Union Pacific Capital Trust (6.25% Convertible) 1,513,875 1,600,000 0.0 ================================================================================================================================ Semiconductor 1,750,000 +Advanced Micro Devices, Inc. 27,761,101 25,742,500 0.5 Equipment & 3,500,000 +Agere Systems Inc. (Class A) 17,829,989 13,615,000 0.3 Products 100,000 +Applied Materials, Inc. 4,383,366 5,427,000 0.1 500,000 Texas Instruments Incorporated 23,192,590 16,550,000 0.4 -------------- -------------- ---- 73,167,046 61,334,500 1.3 ================================================================================================================================ Specialty Retail 1,100,000 The Gap, Inc. 14,867,426 16,544,000 0.4 300,000 The Home Depot, Inc. 10,467,870 14,583,000 0.3 1,400,000 The Limited, Inc. 18,628,369 25,060,000 0.5 200,000 RadioShack Corporation 5,375,090 6,008,000 0.1 -------------- -------------- ---- 49,338,755 62,195,000 1.3 ================================================================================================================================ Total Stocks 2,458,324,269 3,188,921,255 68.0 ================================================================================================================================ Face Amount Corporate Bonds ================================================================================================================================ Aerospace & US$ 7,500,000 Lockheed Martin Corporation, Defense 7.20% due 5/01/2036 7,660,365 7,865,602 0.2 25,000,000 Raytheon Company, 6.15% due 11/01/2008 24,004,355 24,320,375 0.5 ----------- ----------- ---- 31,664,720 32,185,977 0.7 ================================================================================================================================ Airlines 10,000,000 Continental Airlines, 8% due 12/15/2005 10,000,000 9,400,000 0.2 Northwest Airlines, Inc.: 15,000,000 7.625% due 3/15/2005 14,657,930 13,950,000 0.3 5,000,000 8.875% due 6/01/2006 4,950,000 4,760,555 0.1 5,000,000 7.875% due 3/15/2008 4,614,708 4,515,895 0.1 ----------- ----------- ---- 34,222,638 32,626,450 0.7 ================================================================================================================================ Auto 22,000,000 The Goodyear Tire & Rubber Company, Components 6.625% due 12/01/2006 21,576,000 21,069,840 0.4 ================================================================================================================================ Banks 20,000,000 BankAmerica Corp., 6.625% due 10/15/2007 19,268,736 20,556,580 0.4 10,000,000 First Union Corp., 6.55% due 10/15/2035 9,957,150 10,277,290 0.2 21,500,000 Firstbank Puerto Rico, 7.625% due 12/20/2005 21,173,430 21,597,266 0.5 10,000,000 FleetBoston Financial Corporation, 6.375% due 5/15/2008 10,190,095 9,937,050 0.2 12,000,000 PNC Funding Corp., 6.125% due 2/15/2009 10,940,645 11,607,996 0.3 20,000,000 Peoples Bank Bridgeport, 9.875% due 11/15/2010 19,852,200 20,858,840 0.5 20,000,000 Provident Bank, 6.375% due 1/15/2004 19,736,713 20,428,200 0.4 Union Planters Corp.: 17,500,000 6.75% due 11/01/2005 17,111,539 18,005,995 0.4 10,000,000 7.75% due 3/01/2011 9,982,000 10,628,440 0.2 15,000,000 Washington Mutual Inc., 5.625% due 1/15/2007 14,983,650 14,715,000 0.3 ----------- ----------- ---- 153,196,158 158,612,657 3.4 ================================================================================================================================ Beverages 10,000,000 Panamerican Beverages Inc., 7.25% due 7/01/2009 10,026,476 9,553,480 0.2 ================================================================================================================================
8 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 SCHEDULE OF INVESTMENTS (continued)
Face Percent of Industries Amount Corporate Bonds Cost Value Net Assets ================================================================================================================================= Chemicals US$ 35,000,000 Equistar Chemicals LP, 6.50% due 2/15/2006 $ 34,049,418 $ 32,507,230 0.7% 20,500,000 FMC Corp., 6.75% due 5/05/2005 20,361,690 20,713,569 0.4 18,000,000 International Flavors & Fragrance, 6.45% due 5/15/2006 18,148,243 17,899,884 0.4 ------------ ------------ --- 72,559,351 71,120,683 1.5 ================================================================================================================================= Commercial 15,000,000 Browning-Ferris Industries, Inc., Services & 6.375% due 1/15/2008 14,720,400 13,589,385 0.3 Supplies ================================================================================================================================= Communications 10,000,000 Harris Corporation, 6.35% due 2/01/2028 9,415,500 9,281,320 0.2 Equipment 20,000,000 Nortel Networks Limited, 6.125% due 2/15/2006 18,347,353 14,800,000 0.3 ------------ ------------ --- 27,762,853 24,081,320 0.5 ================================================================================================================================= Diversified 20,000,000 Boeing Capital Corporation, 6.50% due 2/15/2012 19,956,728 19,871,060 0.4 Financials 20,000,000 Ford Motor Credit Co., 7.75% due 2/15/2007 19,904,140 20,317,200 0.4 GATX Capital Corporation: 25,000,000 6.69% due 11/30/2005 24,984,750 22,642,100 0.5 25,000,000 7.75% due 12/01/2006 24,827,000 23,522,775 0.5 20,000,000 General Electric Capital Corporation, 5% due 2/15/2007 19,964,200 19,486,640 0.4 General Motors Acceptance Corp.: 5,000,000 6.15% due 4/05/2007 4,741,234 4,905,835 0.1 5,000,000 6.375% due 5/01/2008 4,870,950 4,830,420 0.1 30,000,000 5.85% due 1/14/2009 27,024,998 27,813,390 0.6 25,000,000 8% due 11/01/2031 24,725,500 25,022,900 0.6 Hertz Corp.: 10,000,000 7.625% due 8/15/2007 9,909,200 9,824,100 0.2 25,000,000 6.25% due 3/15/2009 24,066,335 22,193,750 0.5 Household Finance Corp.: 10,000,000 6.50% due 11/15/2008 9,773,291 9,714,920 0.2 25,000,000 6.75% due 5/15/2011 24,909,500 24,257,950 0.5 ------------ ------------ --- 239,657,826 234,403,040 5.0 ================================================================================================================================= Diversified 7,000,000 Intermedia Communications Inc., Telecommunication 8.60% due 6/01/2008 6,390,717 6,055,000 0.1 Services Worldcom Inc.: 10,000,000 6.40% due 8/15/2005 9,703,624 8,651,490 0.2 18,000,000 7.375% due 1/15/2006 18,206,507 15,732,504 0.3 15,000,000 8.25% due 5/15/2031 13,791,508 12,098,985 0.3 ------------ ------------ --- 48,092,356 42,537,979 0.9 ================================================================================================================================= Electric Utilities 24,000,000 Empresa Nacional de Electricidad SA (Endesa), 7.325% due 2/01/2037 24,000,000 22,926,528 0.5 ================================================================================================================================= Energy Transocean Sedco Forex: Equipment & 10,000,000 6.75% due 4/15/2005 10,275,592 10,182,790 0.2 Services 10,000,000 6.95% due 4/15/2008 10,167,701 10,125,430 0.2 ------------ ------------ --- 20,443,293 20,308,220 0.4 ================================================================================================================================= Food Products 20,000,000 Conagra Inc., 6.70% due 8/01/2027 19,770,179 20,031,860 0.4 ================================================================================================================================= Health Care 14,000,000 HealthSouth Corporation, 7.375% due 10/01/2006 14,000,000 14,035,000 0.3 Providers & 8,000,000 Quest Diagnostic Inc., 6.75% due 7/12/2006 7,954,560 8,080,896 0.2 Services ------------ ------------ --- 21,954,560 22,115,896 0.5 =================================================================================================================================
9 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 SCHEDULE OF INVESTMENTS (continued)
Face Percent of Industries Amount Corporate Bonds Cost Value Net Assets ================================================================================================================================= Hotels, US$ 20,000,000 Royal Caribbean Cruises Ltd., 7.25% due 8/15/2006 $ 19,820,155 $ 18,400,000 0.4% Restaurants & Leisure ================================================================================================================================= Household 25,000,000 Champion Enterprises, Inc., 7.625% due 5/15/2009 21,546,090 19,500,000 0.4 Durables ================================================================================================================================= Machinery 20,000,000 Cummins Engine, 6.75% due 2/15/2027 19,705,819 18,759,920 0.4 ================================================================================================================================= Marine 20,000,000 Transportacion Maritima Mexicana, SA de CV, 10.25% due 11/15/2006 19,468,827 16,700,000 0.4 ================================================================================================================================= Media 10,000,000 AOL Time Warner Inc., 6.75% due 4/15/2011 10,150,903 9,892,220 0.2 20,000,000 News America Inc., 6.75% due 1/09/2038 19,786,800 19,227,920 0.4 10,000,000 Univision Communication Inc., 7.85% due 7/15/2011 9,982,400 10,219,880 0.2 ------------- ------------- ---- 39,920,103 39,340,020 0.8 ================================================================================================================================= Oil & Gas 27,500,000 The Coastal Corporation, 6.70% due 2/15/2027 27,225,400 26,806,945 0.6 20,000,000 Devon Financing Corporation, 6.875% due 9/30/2011 19,765,700 19,451,200 0.4 10,000,000 Diamond Shamrock, 7.65% due 7/01/2026 9,920,000 10,373,470 0.2 14,000,000 Giant Industries, Inc., 9% due 9/01/2007 (a) 13,731,755 13,370,000 0.3 30,000,000 Perez Companc SA, 8.125% due 7/15/2007 (a) 27,570,204 17,100,000 0.3 10,000,000 Ultramar Diamond Shamrock, 6.75% due 10/15/2037 9,979,800 9,713,270 0.2 15,000,000 United Refining Co., 10.75% due 6/15/2007 15,000,000 12,600,000 0.3 Williams Holdin of Delaware, Inc.: 15,000,000 6.25% due 2/01/2006 14,881,840 14,528,550 0.3 10,000,000 6.50% due 12/01/2008 10,182,786 9,373,370 0.2 ------------- ------------- ---- 148,257,485 133,316,805 2.8 ================================================================================================================================= Paper & Forest Boise Cascade Corporation: Products 5,000,000 7.35% due 10/11/2004 5,068,926 5,015,570 0.1 20,000,000 7.66% due 5/27/2005 20,000,000 20,053,260 0.4 30,000,000 Champion International Corp., 6.65% due 12/15/2037 29,755,480 30,270,090 0.7 6,500,000 Weyerhaeuser Company, 6.75% due 3/15/2012 (a) 6,458,010 6,386,016 0.1 ------------- ------------- ---- 61,282,416 61,724,936 1.3 ================================================================================================================================= Road & Rail CSX Corporation: 20,000,000 6.25% due 10/15/2008 19,440,744 19,790,980 0.4 5,000,000 6.75% due 3/15/2011 4,985,950 5,014,665 0.1 20,000,000 Ryder Systems, Inc., 6.50% due 5/15/2005 19,960,600 19,856,740 0.5 ------------- ------------- ---- 44,387,294 44,662,385 1.0 ================================================================================================================================= Wireless Nextel Communications, Inc.: Telecommunication 20,000,000 9.375% due 11/15/2009 19,633,095 13,300,000 0.3 Services 1,500,000 5.25% due 1/15/2010 (a) 1,500,000 750,000 0.0 10,000,000 Pacific Telecom, Inc., 6.625% due 10/20/2005 10,000,000 10,137,480 0.2 Sprint Capital Corporation: 10,000,000 8.375% due 3/15/2012 (a) 9,985,300 9,847,390 0.2 25,000,000 6.90% due 5/01/2019 23,448,097 20,483,450 0.5 ------------- ------------- ---- 64,566,492 54,518,320 1.2 ================================================================================================================================= Total Corporate Bonds 1,178,601,491 1,132,085,701 24.1 =================================================================================================================================
10 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 SCHEDULE OF INVESTMENTS (concluded)
Face Percent of Amount Collateralized Mortgage Obligations* Cost Value Net Assets ================================================================================================================================== US$ 13,000,000 Freddie Mac, 6% due 2/15/2011 $ 12,020,937 $ 13,291,560 0.3% ================================================================================================================================== Total Collateralized Mortgage Obligations 12,020,937 13,291,560 0.3 ================================================================================================================================== US Government Obligations ================================================================================================================================== 45,000,000 US Treasury Bonds, 6.25% due 8/15/2023 40,590,351 46,082,790 1.0 200,000,000 US Treasury Notes, 4.75% due 11/15/2008 198,933,379 194,859,400 4.1 ================================================================================================================================== Total US Government Obligations 239,523,730 240,942,190 5.1 ================================================================================================================================== Short-Term Investments ================================================================================================================================== Commercial 63,233,000 General Motors Acceptance Corp., Paper** 1.85% due 4/01/2002 63,223,252 63,223,252 1.4 ================================================================================================================================== US Government 30,000,000 Federal Home Loan Bank, 1.77% due 5/08/2002 29,941,000 29,941,000 0.6 Agency Obligations** ================================================================================================================================== Total Short-Term Investments 93,164,252 93,164,252 2.0 ================================================================================================================================== Total Investments $3,981,634,679 4,668,404,958 99.5 Other Assets Less Liabilities ============== 23,464,086 0.5 -------------- ----- Net Assets $4,691,869,044 100.0% ============== ===== ==================================================================================================================================
* Subject to principal paydowns. ** Commercial Paper and certain US Government Agency Obligations are traded on a discount basis; the interest rates shown reflect the discount rates paid at the time of purchase by the Fund. + Non-income producing security. (a) The security may be offered and sold to "qualified institutional buyers" under Rule 144A of the Securities Act of 1933. (b) Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $1,299,000, representing 0.03% of net assets. -------------------------------------------------------------------------------- Acquisition Issue Date Cost Value -------------------------------------------------------------------------------- International Paper Capital Trust 1/16/1997 $1,331,400 $1,298,500 -------------------------------------------------------------------------------- Total $1,331,400 $1,298,500 ========== ========== -------------------------------------------------------------------------------- See Notes to Financial Statements. 11 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 FINANCIAL INFORMATION Statement of Assets and Liabilities as of March 31, 2002
============================================================================================================================ Assets: Investments, at value (including securities loaned of $686,355,328) (identified cost--$3,981,634,679) .................................... $4,668,404,958 Foreign cash (cost--$1,110,977) ...................................... 1,094,660 Investments held as collateral for loaned securities, at value ....... 707,160,131 Receivables: Interest ......................................................... $ 25,608,402 Securities sold .................................................. 13,015,005 Capital shares sold .............................................. 2,750,004 Dividends ........................................................ 2,005,355 Loaned securities ................................................ 88,279 43,467,045 -------------- Prepaid registration fees and other assets ........................... 104,527 -------------- Total assets ......................................................... 5,420,231,321 -------------- ============================================================================================================================ Liabilities: Collateral on securities loaned, at value ............................ 707,160,131 Payables: Capital shares redeemed .......................................... 16,350,029 Investment adviser ............................................... 1,418,625 Distributor ...................................................... 1,355,983 Securities purchased ............................................. 450,970 19,575,607 -------------- Accrued expenses and other liabilities ............................... 1,626,539 -------------- Total liabilities .................................................... 728,362,277 -------------- ============================================================================================================================ Net Aseets: Net assets ........................................................... $4,691,869,044 ============== ============================================================================================================================ Net Assets Class A Shares of Common Stock, $.10 par value, 400,000,000 Consist of: shares authorized .................................................... $ 7,099,022 Class B Shares of Common Stock, $.10 par value, 500,000,000 shares authorized .................................................... 4,570,176 Class C Shares of Common Stock, $.10 par value, 200,000,000 shares authorized .................................................... 759,862 Class D Shares of Common Stock, $.10 par value, 200,000,000 shares authorized .................................................... 4,769,290 Paid-in capital in excess of par ..................................... 3,940,852,289 Undistributed investment income--net ................................. $ 29,918,751 Undistributed realized capital gains on investments and foreign currency transactions--net ........................................... 17,145,691 Unrealized appreciation on investments and foreign currency transactions--net ........................................... 686,753,963 -------------- Total accumulated earnings--net ...................................... 733,818,405 -------------- Net assets ........................................................... $4,691,869,044 ============== ============================================================================================================================ Net Asset Value: Class A--Based on net assets of $1,957,868,958 and 70,990,224 shares outstanding .......................................... $ 27.58 ============== Class B--Based on net assets of $1,222,487,296 and 45,701,762 shares outstanding .......................................... $ 26.75 ============== Class C--Based on net assets of $199,773,994 and 7,598,623 shares outstanding .......................................... $ 26.29 ============== Class D--Based on net assets of $1,311,738,796 and 47,692,901 shares outstanding .......................................... $ 27.50 ============== ============================================================================================================================
See Notes to Financial Statements. 12 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 FINANCIAL INFORMATION (continued) Statement of Operations for the Year Ended March 31, 2002
============================================================================================================ Investment Interest .............................................. $114,214,691 Income: Dividends (net of $191,972 foreign withholding tax) ... 41,900,908 Securities lending--net ............................... 627,153 Other ................................................. 86,695 ------------ Total income .......................................... 156,829,447 ------------ ============================================================================================================ Expenses: Investment advisory fees .............................. $ 20,077,251 Account maintenance and distribution fees--Class B .... 14,189,941 Account maintenance fees--Class D ..................... 3,268,008 Transfer agent fees--Class A .......................... 2,936,077 Transfer agent fees--Class B .......................... 2,392,629 Account maintenance and distribution fees--Class C .... 2,034,314 Transfer agent fees--Class D .......................... 1,902,109 Transfer agent fees--Class C .......................... 361,196 Printing and shareholder reports ...................... 297,672 Custodian fees ........................................ 231,650 Professional fees ..................................... 119,322 Registration fees ..................................... 80,765 Directors' fees and expenses .......................... 69,509 Accounting services ................................... 27,016 Pricing fees .......................................... 9,748 Other ................................................. 153,641 ------------ Total expenses ........................................ 48,150,848 ------------ Investment income--net ................................ 108,678,599 ============================================================================================================ Realized & Realized gain (loss) on: Unrealized Gain Investments--net .................................. 67,216,031 (Loss) on Foreign currency transactions--net ................ (119,318) 67,096,713 Investments & Change in unrealized appreciation/depreciation on: ------------ Foreign Currency Investments--net .................................. 38,429,726 Transactions--Net: Foreign currency transactions--net ................ 131,299 38,561,025 ------------ ------------ Net Increase in Net Assets Resulting from Operations .. $214,336,337 ============ ============================================================================================================
See Notes to Financial Statements. 13 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the Year Ended March 31, ----------------------------------- Increase (Decrease) in Net Assets: 2002 2001 ================================================================================================================================== Operations: Investment income--net ............................................... $ 108,678,599 $ 152,169,922 Realized gain on investments and foreign currency transactions--net .. 67,096,713 526,507,269 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net ................................... 38,561,025 (739,073,241) --------------- --------------- Net increase (decrease) in net assets resulting from operations ...... 214,336,337 (60,396,050) --------------- --------------- ================================================================================================================================== Dividends & Investment income--net: Distributions to Class A .......................................................... (55,115,369) (76,804,873) Shareholders: Class B .......................................................... (24,279,414) (45,037,021) Class C .......................................................... (3,747,630) (5,367,445) Class D .......................................................... (32,663,244) (40,725,111) Realized gain on investments--net: Class A .......................................................... (102,586,999) (226,122,510) Class B .......................................................... (76,419,829) (205,231,002) Class C .......................................................... (10,936,875) (24,101,581) Class D .......................................................... (66,197,251) (130,949,074) --------------- --------------- Net decrease in net assets resulting from dividends and distributions to shareholders ........................................ (371,946,611) (754,338,617) --------------- --------------- ================================================================================================================================== Capital Share Net decrease in net assets derived from capital Transactions: share transactions ................................................... (476,749,756) (1,170,508,598) --------------- --------------- ================================================================================================================================== Net Assets: Total decrease in net assets ......................................... (634,360,030) (1,985,243,265) Beginning of year .................................................... 5,326,229,074 7,311,472,339 --------------- --------------- End of year* ......................................................... $ 4,691,869,044 $ 5,326,229,074 =============== =============== ================================================================================================================================== *Undistributed investment income--net ................................. $ 29,918,751 $ 32,501,333 =============== =============== ==================================================================================================================================
See Notes to Financial Statements. 14 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 FINANCIAL INFORMATION (continued) Financial Highlights
Class A The following per share data and ratios have been derived ------------------------------------------------------------------- from information provided in the financial statements. For the Year Ended March 31, ------------------------------------------------------------------- Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998 =================================================================================================================================== Per Share Net asset value, beginning of year ....... $ 28.38 $ 32.66 $ 35.03 $ 37.56 $ 31.39 Operating ---------- ----------- ----------- ----------- ----------- Performance: Investment income--net+ .................. 71 .90 .94 1.00 1.11 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ........................ .66 (1.18) .62 (1.28) 8.14 ---------- ----------- ----------- ----------- ----------- Total from investment operations ......... 1.37 (.28) 1.56 (.28) 9.25 ---------- ----------- ----------- ----------- ----------- Less dividends and distributions: Investment income--net ............... (.76) (1.01) (.94) (1.08) (1.11) Realized gain on investments--net .... (1.41) (2.99) (2.99) (1.17) (1.97) ---------- ----------- ----------- ----------- ----------- Total dividends and distributions ........ (2.17) (4.00) (3.93) (2.25) (3.08) ========== =========== =========== =========== =========== Net asset value, end of year ............. $ 27.58 $ 28.38 $ 32.66 $ 35.03 $ 37.56 ========== =========== =========== =========== =========== =================================================================================================================================== Total Investment Based on net asset value per share ....... 5.07% (1.12%) 4.58% (.68%) 30.71% Return:* ========== =========== =========== =========== =========== =================================================================================================================================== Ratios to Expenses ................................. .57% .59% .56% .57% .55% Average ========== =========== =========== =========== =========== Net Assets: Investment income--net ................... 2.60% 2.89% 2.74% 2.86% 3.21% ========== =========== =========== =========== =========== =================================================================================================================================== Supplemental Net assets, end of year (in thousands) ... $1,957,869 $ 2,142,945 $ 2,721,503 $ 3,631,440 $ 4,155,677 Data: ========== =========== =========== =========== =========== Portfolio turnover ....................... 31% 46% 33% 33% 38% ========== =========== =========== =========== =========== ===================================================================================================================================
* Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. See Notes to Financial Statements. 15 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
The following per share data and ratios have been derived Class B from information provided in the financial statements. ------------------------------------------------------------------ For the Year Ended March 31, ------------------------------------------------------------------ Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998 ============================================================================================================================= Per Share Net asset value, beginning of year.... $ 27.56 $ 31.77 $ 34.25 $ 36.68 $ 30.72 Operting ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net+ .............. 42 .56 .57 .63 .74 Realized and unrealized gain (loss) on investments and foreign currency transactions--net .................... .64 (1.13) .60 (1.25) 7.96 ---------- ---------- ---------- ---------- ---------- Total from investment operations ..... 1.06 (.57) 1.17 (.62) 8.70 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net ........... (.46) (.65) (.66) (.64) (.77) Realized gain on investments--net (1.41) (2.99) (2.99) (1.17) (1.97) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions .... (1.87) (3.64) (3.65) (1.81) (2.74) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ......... $ 26.75 $ 27.56 $ 31.77 $ 34.25 $ 36.68 ========== ========== ========== ========== ========== ============================================================================================================================= Total Investment Based on net asset value per share ... 4.01% (2.11%) 3.48% (1.65%) 29.38% Return:* ========== ========== ========== ========== ========== ============================================================================================================================= Ratios to Expenses ............................. 1.59% 1.61% 1.58% 1.59% 1.57% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net ............... 1.58% 1.87% 1.71% 1.85% 2.19% ========== ========== ========== ========== ========== ============================================================================================================================= Supplemental Net assets, end of year (in thousands) $1,222,487 $1,659,152 $2,853,699 $4,866,564 $5,938,708 Data: ========== ========== ========== ========== ========== Portfolio turnover ................... 31% 46% 33% 33% 38% ========== ========== ========== ========== ========== =============================================================================================================================
* Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. See Notes to Financial Statements. 16 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
The following per share data and ratios have been derived Class C from information provided in the financial statements. ------------------------------------------------------------------ For the Year Ended March 31, ------------------------------------------------------------------ Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998 ============================================================================================================================= Per Share Net asset value, beginning of year ... $ 27.14 $ 31.36 $ 33.82 $ 36.31 $ 30.44 Operating ---------- ---------- ---------- ---------- ---------- Performanc: Investment income--net+ .............. .41 .55 .57 .62 .73 Realized and unrealized gain (loss) on investments and foreign currency transactions--net .................... .63 (1.12) .59 (1.25) 7.89 ---------- ---------- ---------- ---------- ---------- Total from investment operations ..... 1.04 (.57) 1.16 (.63) 8.62 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net ........... (.48) (.66) (.63) (.69) (.78) Realized gain on investments--net (1.41) (2.99) (2.99) (1.17) (1.97) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions .... (1.89) (3.65) (3.62) (1.86) (2.75) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ......... $ 26.29 $ 27.14 $ 31.36 $ 33.82 $ 36.31 ========== ========== ========== ========== ========== ============================================================================================================================= Total Investment Based on net asset value per share ... 4.01% (2.13%) 3.50% (1.70%) 29.40% Return:* ========== ========== ========== ========== ========== ============================================================================================================================= Ratios to Expenses ............................. 1.61% 1.62% 1.59% 1.59% 1.58% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net ............... 1.59% 1.86% 1.70% 1.83% 2.18% ========== ========== ========== ========== ========== ============================================================================================================================= Supplemental Net assets, end of year (in thousands) $ 199,774 $ 212,278 $ 308,150 $ 491,234 $ 512,783 Data: ========== ========== ========== ========== ========== Portfolio turnover ................... 31% 46% 33% 33% 38% ========== ========== ========== ========== ========== =============================================================================================================================
* Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. See Notes to Financial Statements. 17 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
The following per share data and ratios have been derived Class D from information provided in the financial statements. ------------------------------------------------------------------ For the Year Ended March 31, ------------------------------------------------------------------ Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998 ============================================================================================================================= Per Share Net asset value, beginning of year ... $ 28.31 $ 32.58 $ 34.97 $ 37.49 $ 31.34 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net+ .............. .64 .82 .86 .91 1.02 Realized and unrealized gain (loss) on investments and foreign currency transactions--net .................... .65 (1.17) .60 (1.28) 8.14 ---------- ---------- ---------- ---------- ---------- Total from investment operations ..... 1.29 (.35) 1.46 (.37) 9.16 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net ........... (.69) (.93) (.86) (.98) (1.04) Realized gain on investments--net (1.41) (2.99) (2.99) (1.17) (1.97) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions .... (2.10) (3.92) (3.85) (2.15) (3.01) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year ......... $ 27.50 $ 28.31 $ 32.58 $ 34.97 $ 37.49 ========== ========== ========== ========== ========== ============================================================================================================================= Total Investment Based on net asset value per share ... 4.78% (1.35%) 4.29% (.92%) 30.40% Return* ========== ========== ========== ========== ========== ============================================================================================================================= Ratios to Expenses ............................. .82% .84% .81% .82% .80% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net ............... 2.35% 2.64% 2.50% 2.60% 2.95% ========== ========== ========== ========== ========== ============================================================================================================================= Supplemental Net assets, end of year (in thousands) $1,311,739 $1,311,854 $1,428,120 $1,513,406 $1,280,317 Data: ========== ========== ========== ========== ========== Portfolio turnover ................... 31% 46% 33% 33% 38% ========== ========== ========== ========== ========== =============================================================================================================================
* Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. See Notes to Financial Statements. 18 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Balanced Capital Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. 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. Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses on investments and foreign currency transactions are allocated daily to each class based on its relative net assets. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities that 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 that 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 investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. 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 19 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 NOTES TO FINANCIAL STATEMENTS (continued) transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. 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 is recognized on the accrual basis. As required, effective April 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing all premiums and discounts on debt securities. The cumulative effect of this accounting change had no impact on total net assets of the Fund, but resulted in a $3,346,857 increase in cost of securities (which in return results in a corresponding $3,346,857 decrease in net unrealized appreciation and a corresponding $3,346,857 increase in undistributed net investment income), based on securities held by the Fund as of March 31, 2001. The effect of this change for the year ended March 31, 2002 was to increase net investment income by $455,884, decrease net unrealized appreciation by $5,119,678 and increase net realized capital gains by $1,316,936. The statement of changes in net assets and financial highlights for prior periods have not been restated to reflect this change in presentation. (f) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and distributions--Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. (h) Securities lending--The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the US government as collateral, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. The Fund typically receives the income on the loaned securities but does not receive the income on the collateral. Where the Fund receives securities as collateral for the loaned securities, it collects a fee from the borrower. The Fund may receive a flat fee for its loans. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder's, lending agent, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral. The Fund also could suffer a loss where the value of the collateral falls below the market value of the borrowed securities, in the event of borrower default or in the event of losses on investments made with cash collateral. (i) Reclassification--Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, the current year's permanent book/tax differences of $1,197,618 have been reclassified between undistributed realized capital gains and undistributed net investment income and $1 has been reclassified between paid-in capital in excess of par and undistributed realized capital gains. These reclassifications have no effect on net assets or net asset values per share. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Investment Managers L.P. ("MLIM"). The general partner of MLIM 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 FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLIM 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: .50% of the Fund's average daily net assets not exceeding $250 million; .45% of average daily net assets in excess of $250 million but not exceeding $300 million; .425% of average daily net assets in excess of $300 million but not exceeding $400 million; and .40% of average daily net assets in excess of $400 million. 20 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 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 .................................... .25% .75% Class C .................................... .25% .75% Class D .................................... .25% -- -------------------------------------------------------------------------------- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended March 31, 2002, FAMD 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: -------------------------------------------------------------------------------- FAMD MLPF&S -------------------------------------------------------------------------------- Class A.................................... $ 6,994 $ 75,861 Class D.................................... $12,579 $157,138 -------------------------------------------------------------------------------- For the year ended March 31, 2002, MLPF&S received contingent deferred sales charges of $891,502 and $20,907 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $85 relating to transactions subject to front-end sales charge waivers in Class D Shares. The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to MLPF&S, a subsidiary of ML & Co., or its affiliates. As of March 31, 2002, the Fund lent securities with a value of $261,323,513 to MLPF&S or its affiliates. Pursuant to that order, the Fund also has retained QA Advisors, LLC ("QA Advisors"), an affiliate of MLIM, as the securities lending agent for a fee based on a share of the returns on investment of cash collateral. QA Advisors may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by QA Advisors or in registered money market funds advised by MLIM or its affiliates. As of March 31, 2002, cash collateral of $212,397,441 was invested in the Money Market Series of the Merrill Lynch Liquidity Series, LLC and $494,762,690 was invested in the Merrill Lynch Premier Institutional Fund. For the year ended March 31, 2002, QA Advisors received $25,982 in securities lending agent fees. In addition, MLPF&S received $320,025 in commissions on the execution of portfolio security transactions for the year ended March 31, 2002. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. For the year ended March 31, 2002, Merrill Lynch Security Pricing System, an affiliate of MLPF&S, earned $4,959 for providing security price quotations to complete the Fund's net asset value. Certain officers and/or directors of the Fund are officers and/or directors of MLIM, PSI, FDS, FAMD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended March 31, 2002 were $1,491,868,310 and $2,043,775,560, respectively. Net realized gains (losses) for the year ended March 31, 2002 and net unrealized gains (losses) as of March 31, 2002 were as follows: -------------------------------------------------------------------------------- Realized Unrealized Gains (Losses) Gains (Losses) -------------------------------------------------------------------------------- Long-term investments ................. $ 67,216,153 $ 686,770,279 Short-term investments ................ (122) -- Foreign currency transactions ......... (119,318) (16,316) ------------- ------------- Total ................................. $ 67,096,713 $ 686,753,963 ============= ============= -------------------------------------------------------------------------------- 21 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 NOTES TO FINANCIAL STATEMENTS (concluded) As of March 31, 2002, net unrealized appreciation for Federal income tax purposes aggregated $681,530,018, of which $878,375,718 related to appreciated securities and $196,845,700 related to depreciated securities. At March 31, 2002, the aggregate cost of investments for Federal income tax purposes was $3,986,874,940. 4. Capital Share Transactions: Net decrease in net assets derived from capital share transactions was $476,749,756 and $1,170,508,598 for the years ended March 31, 2002 and March 31, 2001, respectively. Transactions in capital shares for each class were as follows: -------------------------------------------------------------------------------- Class A Shares for the Year Dollar Ended March 31, 2002 Shares Amount -------------------------------------------------------------------------------- Shares sold ................................ 6,452,642 $ 177,473,586 Shares issued to shareholders in reinvestment of dividends and distributions .......................... 4,888,040 132,394,454 ------------- ------------- Total issued ............................... 11,340,682 309,868,040 Shares redeemed ............................ (15,861,076) (431,669,919) ------------- ------------- Net decrease ............................... (4,520,394) $(121,801,879) ============= ============= -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Class A Shares for the Dollar Year Ended March 31, 2001 Shares Amount -------------------------------------------------------------------------------- Shares sold ................................ 6,834,053 $ 212,539,850 Shares issued resulting from reorganization ........................ 817,530 24,150,327 Shares issued to shareholders in reinvestment of dividends and distributions .......................... 9,155,120 274,478,459 ------------- ------------- Total issued ............................... 16,806,703 511,168,636 Shares redeemed ............................ (24,633,092) (771,606,412) ------------- ------------- Net decrease ............................... (7,826,389) $(260,437,776) ============= ============= -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Class B Shares for the Year Dollar Ended March 31, 2002 Shares Amount -------------------------------------------------------------------------------- Shares sold ................................ 4,131,938 $ 110,246,621 Shares issued to shareholders in reinvestment of dividends and distributions .......................... 3,233,327 85,247,072 ------------- ------------- Total issued ............................... 7,365,265 195,493,693 Automatic conversion of shares .................................. (7,499,528) (200,803,234) Shares redeemed ............................ (14,364,815) (382,144,098) ------------- ------------- Net decrease ............................... (14,499,078) $(387,453,639) ============= ============= -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Class B Shares for the Dollar Year Ended March 31, 2001 Shares Amount -------------------------------------------------------------------------------- Shares sold ................................ 4,658,327 $ 139,921,754 Shares issued resulting from reorganization ........................ 236,628 6,808,388 Shares issued to shareholders in reinvestment of dividends and distributions .......................... 7,208,695 210,768,066 ------------- ------------- Total issued ............................... 12,103,650 357,498,208 Automatic conversion of shares .................................. (11,770,037) (360,216,197) Shares redeemed ............................ (29,955,115) (917,640,802) ------------- ------------- Net decrease ............................... (29,621,502) $(920,358,791) ============= ============= -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Class C Shares for the Year Dollar Ended March 31, 2002 Shares Amount -------------------------------------------------------------------------------- Shares sold ................................ 1,366,686 $ 35,815,840 Shares issued to shareholders in reinvestment of dividends and distributions .......................... 476,476 12,351,872 ------------- ------------- Total issued ............................... 1,846,162 48,167,712 Shares redeemed ............................ (2,065,570) (53,647,779) ------------- ------------- Net decrease ............................... (222,408) $ (5,480,067) ============= ============= -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Class C Shares for the Dollar Year Ended March 31, 2001 Shares Amount -------------------------------------------------------------------------------- Shares sold ................................ 704,790 $ 20,716,886 Shares issued resulting from reorganization ........................ 60,273 1,707,923 Shares issued to shareholders in reinvestment of dividends and distributions .......................... 859,812 24,759,980 ------------- ------------- Total issued ............................... 1,624,875 47,184,789 Shares redeemed ............................ (3,630,606) (109,662,206) ------------- ------------- Net decrease ............................... (2,005,731) $ (62,477,417) ============= ============= -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Class D Shares for the Year Dollar Ended March 31, 2002 Shares Amount -------------------------------------------------------------------------------- Shares sold ................................ 3,572,657 $ 96,909,860 Automatic conversion of shares .................................. 7,297,200 200,803,234 Shares issued to shareholders in reinvestment of dividends and distributions .......................... 3,223,999 87,168,201 ------------- ------------- Total issued ............................... 14,093,856 384,881,295 Shares redeemed ............................ (12,747,284) (346,895,466) ------------- ------------- Net increase ............................... 1,346,572 $ 37,985,829 ============= ============= -------------------------------------------------------------------------------- 22 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 -------------------------------------------------------------------------------- Class D Shares for the Dollar Year Ended March 31, 2001 Shares Amount -------------------------------------------------------------------------------- Shares sold ................................ 3,709,799 $ 115,263,839 Shares issued resulting from reorganization ........................ 91,654 2,702,408 Automatic conversion of shares .................................. 11,474,133 360,216,197 Shares issued to shareholders in reinvestment of dividends and distributions .......................... 5,098,349 152,467,014 ------------- ------------- Total issued ............................... 20,373,935 630,649,458 Shares redeemed ............................ (17,864,970) (557,884,072) ------------- ------------- Net increase ............................... 2,508,965 $ 72,765,386 ============= ============= -------------------------------------------------------------------------------- 5. Short-Term Borrowings: The Fund, along with certain other funds managed by MLIM and its affiliates, renewed and amended a $1,000,000,000 credit agreement with Bank One, N.A. and certain other lenders. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of .09% per annum based on the Fund's pro rata share of the unused portion of the credit agreement. Amounts borrowed under the credit agreement bear interest at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or a base rate as determined by Bank One, N.A. On November 30, 2001, the credit agreement was renewed for one year under the same terms. The Fund did not borrow under the credit agreement during the year ended March 31, 2002. 6. Distributions to Shareholders: The tax character of distributions paid during the fiscal years ended March 31, 2002 and March 31, 2001 was as follows: -------------------------------------------------------------------------------- 3/31/2002 3/31/2001 -------------------------------------------------------------------------------- Distributions paid from: Ordinary income ........................ $131,878,836 $201,602,401 Net long-term capital gains .......................... 240,067,775 552,736,216 ------------ ------------ Total taxable distributions .............. $371,946,611 $754,338,617 ============ ============ -------------------------------------------------------------------------------- As of March 31, 2002, the components of accumulated earnings (losses) on a tax basis were as follows: -------------------------------------------------------------------------------- Undistributed ordinary income--net ......................... $ 26,877,384 Undistributed long-term capital gains--net ......................................... 40,459,687 ------------- Total undistributed earnings--net .......................... 67,337,071 ------------- Capital loss carryforward .................................. (7,516,184)* Unrealized gains--net ...................................... 673,997,518** ------------- Total accumulated earnings--net ............................ $ 733,818,405 ============= -------------------------------------------------------------------------------- * On March 31, 2002, the Fund had a net capital loss carryforward of approximately $7,516,184, of which $4,243,197 expires in 2008 and $3,272,987 expires in 2009. This amount will be available to offset like amounts of any future taxable gains. ** The difference between book-basis and tax-basis net unrealized gains is attributable primarily to the tax deferral of losses on wash sales, the difference between book and tax amortization methods for discounts on fixed-income securities, accrued interest income on trusts held and purchased interest on payments. 23 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch Balanced Capital Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Merrill Lynch Balanced Capital Fund, Inc. as of March 31, 2002, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years presented. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at March 31, 2002 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Merrill Lynch Balanced Capital Fund, Inc. as of March 31, 2002, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP New York, New York May 14, 2002 24 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 IMPORTANT TAX INFORMATION (unaudited) The following information summarizes all per share distributions paid by the Fund during the year ended March 31, 2002:
==================================================================================================================================== Record Payable Domestic Qualifying Interest from Domestic Non-Qualifying Total Long-Term Date Date Ordinary Income Federal Obligations Ordinary Income Ordinary Income Capital Gains ==================================================================================================================================== Class A Shares: ==================================================================================================================================== 7/10/2001 7/16/2001 $.136911 $.073374 $.279821 $.490106 $1.112993 ------------------------------------------------------------------------------------------------------------------------------------ 12/03/2001 12/07/2001 $.116435 $.035496 $.205310 $.357241 $ .205982 ==================================================================================================================================== Class B Shares: ==================================================================================================================================== 7/10/2001 7/16/2001 $.092712 $.049687 $.189484 $.331883 $1.112993 ------------------------------------------------------------------------------------------------------------------------------------ 12/03/2001 12/07/2001 $.069765 $.021268 $.123015 $.214048 $ .205982 ==================================================================================================================================== Class C Shares: ==================================================================================================================================== 7/10/2001 7/16/2001 $.097116 $.052047 $.198485 $.347648 $1.112993 ------------------------------------------------------------------------------------------------------------------------------------ 12/03/2001 12/07/2001 $.072032 $.021959 $.127015 $.221006 $ .205952 ==================================================================================================================================== Class D Shares: ==================================================================================================================================== 7/10/2001 7/16/2001 $.126798 $.067954 $.259152 $.453904 $1.112993 ------------------------------------------------------------------------------------------------------------------------------------ 12/03/2001 12/07/2001 $.105242 $.032083 $.185572 $.322897 $ .205982 ------------------------------------------------------------------------------------------------------------------------------------
The domestic qualifying ordinary income quali fies for the dividends received deduction for corporations. The law varies in each state as to whether and what percentage of dividend income attribut able to Federal obligations is exempt from state income tax. We recom mend that you consult your tax adviser to determine if any portion of the dividends you received is exempt from state income tax. Please retain this information for your records. PORTFOLIO INFORMATION (unaudited) As of March 31, 2002 Percent of Ten Largest Common Stock Holdings Net Assets Citigroup Inc.......................................... 2.0% SPX Corporation........................................ 2.0 Viacom, Inc. (Class B)................................. 1.8 Fannie Mae............................................. 1.7 American International Group, Inc...................... 1.7 Anheuser-Busch Companies, Inc.......................... 1.7 International Business Machines Corporation............ 1.7 Clear Channel Communications, Inc...................... 1.6 ITT Industries, Inc.................................... 1.6 Wells Fargo Company.................................... 1.6 Percent of Five Largest Industries Net Assets Diversified Financials................................. 11.9% Banks.................................................. 6.8 Media.................................................. 6.6 Machinery.............................................. 5.1 Insurance.............................................. 4.8 Percent of Geographic Allocation Net Assets United States.......................................... 93.7% Bermuda................................................ 2.8 Switzerland............................................ 1.4 Chile.................................................. 0.5 Argentina.............................................. 0.4 Mexico................................................. 0.4 Canada................................................. 0.3 25 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002 OFFICERS AND DIRECTORS
Number of Portfolios Other in Fund Director- Position(s) Length Complex ships Held of Time Overseen by Held by Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director ---------------------------------------------------------------------------------------------------------------------------------- Interested Director ---------------------------------------------------------------------------------------------------------------------------------- Terry K. Glenn* President 1999 to Chairman Americas Region since 2001, and 127 Funds None 800 Scudders Mill Road and present Executive Vice President since 1983 of Fund 184 Portfolios Plainsboro, NJ 08536 Director Asset Management, L.P. ("FAM") and Merrill Age: 61 Lynch Investment Managers, L.P. ("MLIM"); President of FAM Distributors, Inc. ("FAMD") since 1986 and Director thereof since 1991; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; President of Princeton Administrators, L.P. since 1988; Director of Financial Data Services, Inc. since 1985. ================================================================================================================================== * Mr. Glenn is a director, trustee or member of an advisory board of certain other investment Companies for which FAM or MLIM act as investment advisers. Mr. Glenn is an "interested person," as described in the Investment Company Act, of each Acquired Fund based on his positions as Chairman (Americas Region) and Executive Vice President of FAM and MLIM; President of FAMD; Executive Vice President of Princeton Services; and President of Princeton Administrators, L.P. ================================================================================================================================== Number of Portfolios Other in Fund Director- Position(s) Length Complex ships Held of Time Overseen by Held by Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director ---------------------------------------------------------------------------------------------------------------------------------- Independent Directors ---------------------------------------------------------------------------------------------------------------------------------- Donald W. Burton Director 2002 to General Partner of The Burton Partnership. 25 Funds ITC Delta- 614 West Bay Street present Limited Partnership; Managing General Partner 41 Portfolios Com, Inc.; Tampa, FL 33606 of The South Atlantic Venture Funds; Member ITC Holding Age: 58 of the Investment Advisory Committee of the Company, Florida State Board of Administration. Inc.; Knology, Inc.; Main- Bancorp, N.A.; Pri- Care, Inc.; Sumbion, Inc. ================================================================================================================================== M. Colyer Crum Director 1978 to James R. Williston Professor of Investment 25 Funds Cambridge 104 Westcliff Road present Management Emeritus, Harvard Business 41 Portfolios Bancorp Weston, MA 02493 School since 1996. Age: 69 ================================================================================================================================== Laurie Simon Hodrick Director 1999 to Professor of Finance and Economics, Graduate 25 Funds Junior 809 Uris Hall present School of Business, Columbia University since 41 Portfolios League of 3022 Broadway 1998; Associate Professor of Finance and Central New York, NY 10027 Economics, Graduate School of Business, Westchester Age: 39 Columbia University from 1996 to 1998. ================================================================================================================================== J. Thomas Touchton Director 1977 to Managing Partner of the Witt Touchton Company 25 Funds Tampa Bay One Tampa City Center present since 1972. 41 Portfolios History Suite 3405 Center 201 North Franklin Street Tampa, FL 33062 Age: 63 ==================================================================================================================================
26 Merrill Lynch Balanced Capital Fund, Inc. March 31, 2002
Number of Portfolios Other in Fund Director- Position(s) Length Complex ships Held of Time Overseen by Held by Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director ---------------------------------------------------------------------------------------------------------------------------------- Independent Directors (concluded) ---------------------------------------------------------------------------------------------------------------------------------- Fred G. Weiss Director 1999 to Managing Director of FGW Associates since 25 Funds Watson 16450 Maddalena Place present 1997; Vice President, Planning Investment, and 46 Portfolios Pharma- Delray Beach, FL 33446 Development of Warner Lambert Co. from ceuticals, Age: 60 1979 to 1997. Inc.; BTG Interna- tional PLC; and the Michael J. Fox Founda- tion for Parkinson's Research. ================================================================================================================================== * The Director's term is unlimited. ================================================================================================================================== Position(s) Length Held of Time Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years ------------------------------------------------------------------------------------------------------------------------------------ Fund Officers ------------------------------------------------------------------------------------------------------------------------------------ Donald C. Burke Vice 1993 to First Vice President of FAM and MLIM since 1997 and the Treasurer there- P.O. Box 9011 President present of since 1999; Senior Vice President and Treasurer of Princeton Services Princeton, NJ 08543-9011 and and since 1999; Vice President of FAMD since 1999; Vice President of FAM and Age: 41 Treasurer 1999 to MLIM from 1990 to 1997; Director of Taxation of MLIM since 1990. present ==================================================================================================================================== Walter Cuje Senior 2001 to First Vice President of of the Investment Adviser since 1997; Associate P.O. Box 9011 Vice present Portfolio Manager of the Investment Adviser since 1993; Vice President Princeton, NJ 08543-9011 President of the Investment Adviser from 1991 to 1997. Age: 42 ==================================================================================================================================== Robert C. Doll, Jr. Senior 2000 to President of FAM and MLIM since 2001; Co-Head (Americas Region) of FAM P.O. Box 9011 Vice present and MLIM from 2000 to 2002; Director of Princeton Services since 1999; Princeton, NJ 08543-9011 President Chief Investment Officer of Oppenheimer Funds, Inc. in 1999 and Executive Age: 47 Vice President thereof from 1991 to 1999. ==================================================================================================================================== Kurt Schansinger Senior 2001 to First Vice President of the Investment Adviser since 1997; Vice President P.O. Box 9011 Vice present of the Investment Adviser from January 1996 to 1997. Prior to joining the Princeton, NJ 08543-9011 President Investment Adviser, Mr. Schansinger spent 12 years with Oppenheimer Age: 40 Capital, where he rose to Senior Vice President. ==================================================================================================================================== Susan B. Baker Secretary 2002 to Director (Legal Advisory) of the Manager since 1999; Vice President P.O. Box 9011 present of the Manager from1993 to 1999; Attorney associated with the Princeton, NJ 08543-9011 Manager since 1987. Age: 44 ==================================================================================================================================== * Officers of the Fund serve at the pleasure of the Board of Directors. ==================================================================================================================================== Further information about the Fund's Officers and Directors is available in the Fund's Statement of Additional Information, which can be obtained without charge by calling 1-800-MER-FUND. ====================================================================================================================================
Custodian Transfer Agent The Bank of New York Financial Data Services, Inc. 90 Washington Street, 12th Floor 4800 Deer Lake Drive East New York, NY 10286 Jacksonville, FL 32246-6484 (800) 637-3863 27 [LOGO] Merrill Lynch Investment Managers [GRAPHICS OMITTED] 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 Balanced Capital Fund, Inc. Box 9011 Princeton, NJ 08543-9011 [RECYCLE LOGO] Printed on post-consumer recycled paper #10252--3/02