-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AIXAyd23HchBeAEEWaf4v1h04rRHrjEO95/GJ1uaSg9mVZl9ehNii4lVfO7Ixfm1 VS1FlvWY/JKWKeS/5qqIMg== 0001169232-02-003160.txt : 20021121 0001169232-02-003160.hdr.sgml : 20021121 20021121152727 ACCESSION NUMBER: 0001169232-02-003160 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021121 EFFECTIVENESS DATE: 20021121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH BALANCE CAPITAL FUND INC CENTRAL INDEX KEY: 0000110055 IRS NUMBER: 132757134 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-02405 FILM NUMBER: 02836089 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL ROAD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092823319 MAIL ADDRESS: STREET 1: P.O. BOX 9066 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 FORMER COMPANY: FORMER CONFORMED NAME: LIONEL D EDIE CAPITAL FUND INC DATE OF NAME CHANGE: 19760810 FORMER COMPANY: FORMER CONFORMED NAME: MERRILL LYNCH CAPITAL FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 d52715_n-30d.txt SEMI-ANNUAL REPORT [LOGO] Merrill Lynch Investment Managers Semi-Annual Report September 30, 2002 Merrill Lynch Balanced Capital Fund, Inc. www.mlim.ml.com Merrill Lynch Balanced Capital Fund, Inc. DEAR SHAREHOLDER Economic Environment During the six-month period ended September 30, 2002, U.S. equity markets fell sharply as investors struggled through a "crisis of confidence" driven by uncertain economic and corporate earnings prospects, a series of corporate governance scandals and geopolitical concerns. During the first half of the period, a series of high profile bankruptcies, accounting scandals, earnings restatements and fraud allegations caused investors to question the integrity of all corporate managements and the accuracy of their financial statements. Despite a growing body of evidence that the economy was on sounder footing with associated positive implications for earnings and increasingly attractive valuation levels given stock price and interest rate declines, investors' skepticism drove broad market indexes toward new lows. The bear market in U.S. equities reached historic proportions in the second half of the period with a decline comparable to that of the third quarter of 1987, which included the October crash, and the third quarter of 1974, which ended the 1973-1974 bear market. Most major U.S. market indexes, as well as those of the United Kingdom and Europe, declined approximately 20%. Decelerating economic growth, continued reductions in corporate earnings expectations, the growing possibility of war with Iraq and investor capitulation combined to drive prices dramatically lower. For the six months ended September 30, 2002, the unmanaged benchmark Standard & Poor's (S&P) 500 Index had a -28.36% total return, while the NASDAQ Composite Index fell 36.4%. The growth and value styles of investing performed comparably with the unmanaged S&P Barra Growth Index declining 28%, while the unmanaged S&P Barra Value Index fell 28.9%. Bonds continued to be the preferred asset class as sluggish economic growth, low inflation and a flight to quality drove investors to the fixed income market. U.S. government securities in particular benefited from their safety and soundness in this uncertain period. The unmanaged benchmark Merrill Lynch U.S. Domestic Bond Master Index had a +8.70% total return for the six-month period ended September 30, 2002. Portfolio Matters Total returns for Merrill Lynch Balanced Capital Fund's Class A, Class B, Class C and Class D Shares for the six-month period ended September 30, 2002 were - -20.24%, -20.66%, -20.63% and -20.34%, 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 and 4 of this report to shareholders.) Each asset class within the Fund underperformed its respective benchmark. Within the equity portfolio, positive contributions from our positions in consumer staples, energy, health care and selected media companies were more than offset by relative weakness in the consumer cyclical, basic material, technology and financial sectors. Within the fixed income portfolio, the dramatic widening of yield spreads during the period proved costly given the portfolio's concentration in corporate debt securities. Deteriorating credit quality, aggressive rating agency downgrade actions and investors' heightened risk aversion drove U.S. Treasury yields to their lowest levels in 40 years, and investment-grade corporate and high yield spreads to near record-wide levels. With less than 20% of the fixed income portfolio invested in U.S. Treasury securities, these conditions produced severe underperformance for our bonds. 1 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 At September 30, 2002, 64.5% of the Fund's net assets were invested in equities, 31.0% in fixed income securities and 4.5% in cash and cash equivalents. This compares to 68.0% in equities, 29.5% in fixed income securities and 2.5% in cash and cash equivalents at March 31, 2002. While near-term prospects for the equity markets remain cloudy given sluggish economic conditions, uncertain corporate earnings prospects and poor investor psychology, we remain constructive on the longer-term outlook for stocks and believe our strategy of maintaining a relatively high equity exposure will ultimately prove rewarding. Reminiscent of the late 1999 and early 2000 period when high valuations could not be justified and our conservative posture proved appropriate, we believe the current low valuation level of the market is equally unjustified and our constructive posture will prove appropriate in the period ahead. Just as the investment pendulum swung too far in the bullish direction then, we believe it has swung too far in the bearish direction today, creating many very attractive investment opportunities. Simply put, the lower stock prices go, the more value we perceive and the more opportunities we will seek to exploit. We believe that this is the appropriate strategy to generate above-average, risk-adjusted returns in the period ahead and expect our disciplined investment approach to prove extremely valuable as we move through this challenging period. During the six-month period ended September 30, 2002, we continued to adjust our holdings in response to ongoing price volatility. Within the equity portfolio, we further increased our energy exposure, initiating positions in Devon Energy Corporation, Murphy Oil Corporation and Exxon Mobil Corporation. Concerns about the pace of economic growth and the associated impact on oil demand combined with fears over a torrent of Iraqi oil coming to market subsequent to a resolution of that conflict to drive these stocks to very attractive valuation levels. We believe that Exxon Mobil remains one of the world's best-managed and most profitable companies, while Devon and Murphy offer a superior production profile and exciting exploration prospects. We also increased our technology exposure, establishing initial positions in Microsoft Corporation and Accenture Ltd. The recent sharp correction in technology stock prices has afforded us an opportunity to begin to invest in several superior companies that offer strong competitive positions, solid financial characteristics, high returns and proven managements, while selling at attractive valuation levels for the first time in many years. We further increased our position in the industrial sector, adding to existing positions in Honeywell International Inc. and United Technologies Corporation, while introducing Tyco International Ltd. to the portfolio. Recent price declines, driven by actual or perceived earnings risk in a decelerating economy, have driven these stocks to record-low valuation levels, which creates attractive opportunities in the shares of what we believe are fine companies. Tyco appears particularly interesting given the quality of its new management team, low investor expectations and very low valuation levels. We eliminated holdings in selected retailers such as The Home Depot, Inc. and Circuit City where deteriorating fundamental trends have yet to be fully reflected in reduced valuations, suggesting high near-term risk. We also eliminated positions in such companies as The Williams Companies, Inc. and Applied Materials, Inc., where rapid weakening in business conditions suggested risk of further stock price erosion. We also reduced or eliminated holdings in a number of companies including Anheuser-Busch Companies, Inc., Minnesota Mining and Manufacturing Company (3M), Harrah's Entertainment, Inc. and Wells Fargo Company, where strong relative stock performance reduced their attractiveness. At September 30, 2002, within the fixed income portfolio, investment-grade corporate bonds continued to 2 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 represent the largest sector at 65.2% of fixed income assets, reflecting this sector's very attractive total return potential. High yield corporate bonds represented 15.2% of fixed income assets and U.S. Treasury securities represented 19.6% of fixed income assets. This compares to 68% in investment- grade corporate bonds, 13.7% in high yield corporate bonds, 17.4% in U.S. Treasury securities and less than 1% in mortgage-backed securities at March 31, 2002. Average quality ratings were unchanged at Baa1/BBB+, while average yield to maturity declined only three basis points (0.03%) to 7.77%. 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 October 30, 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. September 30, 2002 PERFORMANCE DATA (concluded) Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** ================================================================================ Class A Shares* ================================================================================ One Year Ended 9/30/02 -10.51% -15.21% - -------------------------------------------------------------------------------- Five Years Ended 9/30/02 - 1.02 - 2.08 - -------------------------------------------------------------------------------- Ten Years Ended 9/30/02 + 7.33 + 6.75 - -------------------------------------------------------------------------------- * 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 9/30/02 -11.43% -14.85% - -------------------------------------------------------------------------------- Five Years Ended 9/30/02 - 2.02 - 2.28 - -------------------------------------------------------------------------------- Ten Years Ended 9/30/02 + 6.24 + 6.24 - -------------------------------------------------------------------------------- * 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 9/30/02 -11.42% -12.27% - -------------------------------------------------------------------------------- Five Years Ended 9/30/02 - 2.02 - 2.02 - -------------------------------------------------------------------------------- Inception (10/21/94) through 9/30/02 + 5.67 + 5.67 - -------------------------------------------------------------------------------- * Maximum contingent deferred sales charge is 1% and is reduced to 0% after one year. ** Assuming payment of applicable contingent deferred sales charge. ================================================================================ % Return Without % Return With Sales Charge Sales Charge** ================================================================================ Class D Shares* ================================================================================ One Year Ended 9/30/02 -10.74% -15.43% - -------------------------------------------------------------------------------- Five Years Ended 9/30/02 - 1.27 - 2.33 - -------------------------------------------------------------------------------- Inception (10/21/94) through 9/30/02 + 6.49 + 5.77 - -------------------------------------------------------------------------------- * Maximum sales charge is 5.25%. ** Assuming maximum sales charge. Recent Performance Results
Ten Years/ 6-Month 12-Month Since Inception As of September 30, 2002 Total Return Total Return Total Return ============================================================================================================== ML Balanced Capital Fund, Inc. Class A Shares* -20.24% -10.51% +102.81% - -------------------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class B Shares* -20.66 -11.43 + 83.18 - -------------------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class C Shares* -20.63 -11.42 + 54.98 - -------------------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class D Shares* -20.34 -10.74 + 64.76 - -------------------------------------------------------------------------------------------------------------- Standard & Poor's 500 Index** -28.36 -20.49 +136.66/+97.55 - -------------------------------------------------------------------------------------------------------------- ML U.S. Domestic Bond Master Index*** + 8.70 + 8.63 +104.64/+91.96 ==============================================================================================================
* 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 for ten years and from 10/31/94, respectively. *** This unmanaged Index is comprised of the entire universe of domestic investment-grade bonds including U.S. Treasury bonds, corporate bonds and mortgages. Ten years/since inception total returns are for ten years and from 10/31/94, respectively. 4 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 SCHEDULE OF INVESTMENTS
Shares Percent of Industries Held Stocks Cost Value Net Assets ================================================================================================================================ Aerospace & Defense 200,000 General Dynamics Corporation $ 12,599,350 $ 16,266,000 0.5% 1,500,000 Honeywell International Inc. 50,860,655 32,490,000 0.9 350,000 Raytheon Company 10,214,531 10,255,000 0.3 1,000,000 United Technologies Corporation 32,787,608 56,490,000 1.7 ------------ ------------ ----- 106,462,144 115,501,000 3.4 ================================================================================================================================ Airlines 500,000 +AMR Corporation 19,429,284 2,090,000 0.1 ================================================================================================================================ Banks 1,000,000 FleetBoston Financial Corporation 31,158,930 20,330,000 0.6 1,500,000 Mellon Financial Corporation 53,126,144 38,895,000 1.1 250,000 PNC Bank Corp. 14,025,253 10,542,500 0.3 1,250,000 Wells Fargo Company 50,866,960 60,200,000 1.8 ------------ ------------ ----- 149,177,287 129,967,500 3.8 ================================================================================================================================ Beverages 1,000,000 Anheuser-Busch Companies, Inc. 36,171,384 50,600,000 1.5 ================================================================================================================================ Building Products 500,000 Macso Corporation 10,271,725 9,775,000 0.3 ================================================================================================================================ Chemicals 1,300,000 E.I. du Pont de Nemours and Company 68,523,564 46,891,000 1.4 ================================================================================================================================ Communications 2,000,000 +CommScope, Inc. 45,219,289 13,560,000 0.4 Equipment 4,000,000 Motorola, Inc. 64,173,200 40,720,000 1.2 ------------ ------------ ----- 109,392,489 54,280,000 1.6 ================================================================================================================================ Computers & 600,000 Hewlett-Packard Company 13,638,442 7,002,000 0.2 Peripherals 750,000 International Business Machines Corporation 76,076,200 43,792,500 1.3 ------------ ------------ ----- 89,714,642 50,794,500 1.5 ================================================================================================================================ Diversified Financials 2,000,000 Citigroup Inc. 8,868,534 59,300,000 1.8 900,000 Fannie Mae 21,874,876 53,586,000 1.6 1,500,000 J.P. Morgan Chase & Co. 43,851,977 28,485,000 0.8 1,000,000 Morgan Stanley 60,094,215 33,880,000 1.0 1,500,000 Stilwell Financial, Inc. 24,006,039 18,105,000 0.5 ------------ ------------ ----- 158,695,641 193,356,000 5.7 ================================================================================================================================ Diversified 1,600,000 Verizon Communications 98,883,787 43,904,000 1.3 Telecommunication Services ================================================================================================================================ Electronic 1,750,000 +Agilent Technologies, Inc. 52,759,981 22,855,000 0.7 Equipment & Instruments ================================================================================================================================ Food Products 442,600 General Mills, Inc. 17,791,600 19,660,292 0.6 250,000 Nestle SA (Registered Shares) 26,030,329 54,642,954 1.6 ------------ ------------ ----- 43,821,929 74,303,246 2.2 ================================================================================================================================ Health Care 1,100,000 Aetna Inc. (New Shares) 33,486,482 39,391,000 1.2 Providers & Services 1,250,000 HCA Inc. 48,672,398 59,512,500 1.7 900,000 +Tenet Healthcare Corporation 15,979,760 44,550,000 1.3 ------------ ------------ ----- 98,138,640 143,453,500 4.2 ================================================================================================================================ Hotels, Restaurants 1,100,000 Carnival Corporation 26,662,953 27,610,000 0.8 & Leisure 2,000,000 McDonald's Corporation 47,532,936 35,320,000 1.1 200,000 Starwood Hotels & Resorts Worldwide, Inc. 3,685,330 4,460,000 0.1 ------------ ------------ ----- 77,881,219 67,390,000 2.0 ================================================================================================================================
5 Merrill Lynch Balanced Capital Fund, Inc. September 30, 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 $ 42,480,000 1.2% ================================================================================================================================ IT Consulting & 750,000 +Accenture Ltd. 'A' 14,946,680 10,710,000 0.3 Services 300,000 +Computer Sciences Corporation 11,651,177 8,337,000 0.3 ------------ ------------ ----- 26,597,857 19,047,000 0.6 ================================================================================================================================ Industrial 1,250,000 General Electric Company 54,294,041 30,812,500 0.9 Conglomerates 500,000 Tyco International Ltd. 6,986,040 7,050,000 0.2 ------------ ------------ ----- 61,280,081 37,862,500 1.1 ================================================================================================================================ Insurance 1,750,000 ACE Limited 60,317,086 51,817,500 1.5 1,100,000 American International Group, Inc. 21,563,151 60,170,000 1.8 500,000 +Prudential Financial, Inc. 13,750,000 14,280,000 0.4 90,000 +Travelers Property Casualty Corp. (Class A) 235,936 1,188,000 0.0 200,000 +Travelers Property Casualty Corp. (Class B) 755,677 2,706,000 0.1 750,000 XL Capital Ltd. (Class A) 14,590,710 55,125,000 1.6 ------------ ------------ ----- 111,212,560 185,286,500 5.4 ================================================================================================================================ Machinery 1,250,000 Dover Corporation 46,424,866 31,725,000 0.9 750,000 ITT Industries, Inc. 23,780,247 46,747,500 1.4 650,000 +SPX Corporation 37,625,600 65,585,000 1.9 ------------ ------------ ----- 107,830,713 144,057,500 4.2 ================================================================================================================================ Media 1,700,000 +Clear Channel Communications, Inc. 92,428,837 59,075,000 1.7 2,250,000 +Liberty Media Corporation (Class A) 26,584,330 16,155,000 0.5 1,000,000 The New York Times Company (Class A) 39,999,143 45,450,000 1.3 500,000 Tribune Company 15,697,172 20,905,000 0.6 1,600,000 +Viacom, Inc. (Class B) 81,484,873 64,880,000 1.9 750,000 The Walt Disney Company 12,334,092 11,355,000 0.4 ------------ ------------ ----- 268,528,447 217,820,000 6.4 ================================================================================================================================ Metals & Mining 1,250,000 Alcoa Inc. 50,007,392 24,125,000 0.7 900,000 Nucor Corporation 41,606,630 34,110,000 1.0 ------------ ------------ ----- 91,614,022 58,235,000 1.7 ================================================================================================================================ Multiline Retail 1,400,000 The May Department Stores Company 49,286,371 31,878,000 0.9 ================================================================================================================================ Oil & Gas 500,000 Anadarko Petroleum Corporation 16,890,637 22,270,000 0.6 750,000 Devon Energy Corporation 35,383,054 36,187,500 1.1 500,000 Exxon Mobil Corporation 16,066,520 15,950,000 0.5 250,000 Murphy Oil Corporation 17,012,849 20,517,500 0.6 40,000 Unocal Capital Trust 2,136,250 1,960,000 0.0 ------------ ------------ ----- 87,489,310 96,885,000 2.8 ================================================================================================================================ Paper & Forest 28,000 International Paper Capital Trust 1,331,400 1,218,000 0.0 Products 1,350,000 International Paper Company 49,850,680 45,076,500 1.3 750,000 Weyerhaeuser Company 39,488,369 32,827,500 1.0 ------------ ------------ ----- 90,670,449 79,122,000 2.3 ================================================================================================================================ Personal Products 1,150,000 Avon Products, Inc. 44,253,889 53,015,000 1.6 750,000 The Gillette Company 21,932,481 22,200,000 0.6 ------------ ------------ ----- 66,186,370 75,215,000 2.2 ================================================================================================================================
6 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 SCHEDULE OF INVESTMENTS (continued)
Shares Percent of Industries Held Stocks Cost Value Net Assets ==================================================================================================================================== Pharmaceuticals 1,000,000 Pharmacia Corporation $ 37,522,267 $ 38,880,000 1.2% 1,000,000 Schering-Plough Corporation 29,701,853 21,320,000 0.6 1,000,000 Wyeth 44,058,373 31,800,000 0.9 -------------- -------------- ----- 111,282,493 92,000,000 2.7 ==================================================================================================================================== Road & Rail 32,000 Union Pacific Capital Trust (6.25% Convertible) 1,513,875 1,628,000 0.0 ==================================================================================================================================== Semiconductor 1,250,000 +Advanced Micro Devices, Inc. 14,627,460 6,675,000 0.2 Equipment & 3,500,000 +Agere Systems Inc. (Class A) 17,717,744 3,850,000 0.1 Products 1,325,000 +Agere Systems Inc. (Class B) 5,155,873 1,311,750 0.0 1,000,000 +Micron Technology, Inc. 16,411,135 12,370,000 0.4 500,000 Texas Instruments Incorporated 23,192,590 7,385,000 0.2 -------------- -------------- ----- 77,104,802 31,591,750 0.9 ==================================================================================================================================== Specialty Retail 1,900,000 The Gap, Inc. 25,140,526 20,615,000 0.6 1,900,000 The Limited, Inc. 26,590,519 27,246,000 0.8 -------------- -------------- ----- 51,731,045 47,861,000 1.4 ==================================================================================================================================== Software 800,000 +Microsoft Corporation 37,729,903 34,992,000 1.0 ==================================================================================================================================== Total Stocks 2,394,750,938 2,201,121,996 64.5 ==================================================================================================================================== Face Amount Corporate Bonds ==================================================================================================================================== Aerospace & US$ 25,000,000 Raytheon Co., 6.15% due 11/01/2008 24,066,038 26,895,450 0.8 Defense ==================================================================================================================================== Airlines 8,000,000 Continental Airlines, 8% due 12/15/2005 8,000,000 3,760,000 0.1 Northwest Airlines, Inc.: 15,000,000 7.625% due 3/15/2005 14,705,619 8,700,000 0.2 4,000,000 7.875% due 3/15/2008 3,711,754 1,880,000 0.1 -------------- -------------- ----- 26,417,373 14,340,000 0.4 ==================================================================================================================================== Auto 13,000,000 The Goodyear Tire & Rubber Company, Components 6.625% due 12/01/2006 12,644,368 11,146,200 0.3 ==================================================================================================================================== Banks 12,000,000 BankBoston NA, 6.375% due 3/25/2008 12,472,240 12,988,980 0.4 21,500,000 Firstbank Puerto Rico, 7.625% due 12/20/2005 21,201,777 23,417,456 0.7 10,000,000 FleetBoston Financial Corporation, 6.375% due 5/15/2008 10,176,836 10,810,470 0.3 12,000,000 PNC Funding Corp., 6.125% due 2/15/2009 10,999,426 12,610,248 0.4 20,000,000 Provident Bank, 6.375% due 1/15/2004 19,789,975 20,894,400 0.6 -------------- -------------- ----- 74,640,254 80,721,554 2.4 ==================================================================================================================================== Beverages 10,000,000 Panamerican Beverages Inc., 7.25% due 7/01/2009 10,025,028 10,044,380 0.3 ==================================================================================================================================== Chemicals 27,000,000 Equistar Chemicals LP, 6.50% due 2/15/2006 26,282,133 23,355,000 0.7 20,500,000 FMC Corp., 6.75% due 5/05/2005 20,365,837 18,999,584 0.5 -------------- -------------- ----- 46,647,970 42,354,584 1.2 ==================================================================================================================================== Communications 10,000,000 Harris Corporation, 6.35% due 2/01/2028 9,415,500 10,108,030 0.3 Equipment ====================================================================================================================================
7 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 SCHEDULE OF INVESTMENTS (continued)
Face Percent of Industries Amount Corporate Bonds Cost Value Net Assets ==================================================================================================================================== Diversified US$ 20,000,000 Ford Motor Credit Co., 7.75% due 2/15/2007 $ 19,904,140 $ 20,209,060 0.6% Financials GATX Capital Corporation: 25,000,000 6.69% due 11/30/2005 24,984,750 23,069,625 0.7 25,000,000 7.75% due 12/01/2006 24,827,000 22,623,025 0.6 20,000,000 General Electric Capital Corporation, 6% due 6/15/2012 19,849,800 21,546,340 0.6 General Motors Acceptance Corp.: 5,000,000 6.375% due 5/01/2008 4,879,770 5,025,445 0.1 35,000,000 5.85% due 1/14/2009 32,083,571 33,924,835 1.0 10,000,000 8% due 11/01/2031 9,890,200 9,692,720 0.3 Hertz Corp.: 10,000,000 7.625% due 8/15/2007 9,909,200 9,976,610 0.3 25,000,000 6.25% due 3/15/2009 24,110,806 22,751,200 0.7 Household Finance Corp.: 10,000,000 6.50% due 11/15/2008 9,787,254 9,763,040 0.3 25,000,000 6.75% due 5/15/2011 24,909,500 23,883,700 0.7 10,000,000 J.P. Morgan & Co. Inc., 6.25% due 1/15/2009 9,864,700 10,663,990 0.3 ------------ ------------ ----- 215,000,691 213,129,590 6.2 ==================================================================================================================================== Diversified 15,000,000 Verizon Global Funding Corporation, Telecommunication 7.375% due 9/01/2012 14,996,015 15,793,365 0.5 Services ==================================================================================================================================== Electric Utilities 24,000,000 Empresa Nacional de Electricidad SA (Endesa), 7.325% due 2/01/2037 24,000,000 22,272,864 0.7 ==================================================================================================================================== Food Products 20,000,000 Conagra Inc., 6.70% due 8/01/2027 19,769,625 22,683,760 0.7 ==================================================================================================================================== Health Care HealthSouth Corporation: Providers & 10,000,000 7.375% due 10/01/2006 10,000,000 7,400,000 0.2 Services 16,000,000 7.625% due 6/01/2012 (a) 15,949,488 11,120,000 0.3 ------------ ------------ ----- 25,949,488 18,520,000 0.5 ==================================================================================================================================== Household 26,000,000 Champion Enterprises, Inc., 7.625% due 5/15/2009 22,327,825 9,100,000 0.3 Durables ==================================================================================================================================== Machinery 20,000,000 Cummins Engine, 6.75% due 2/15/2027 19,706,783 19,763,020 0.6 8,000,000 Kennametal Inc., 7.20% due 6/15/2012 8,002,513 8,432,576 0.2 ------------ ------------ ----- 27,709,296 28,195,596 0.8 ==================================================================================================================================== Marine 20,000,000 Transportacion Maritima Mexicana, SA de CV, 10.25% due 11/15/2006 19,508,253 11,400,000 0.3 ==================================================================================================================================== Media 20,000,000 AOL Time Warner Inc., 6.875% due 5/01/2012 19,721,650 18,200,000 0.5 15,000,000 Anderson Exploration Ltd., 6.75% due 3/15/2011 15,213,064 16,486,965 0.5 10,000,000 Comcast Cable Communications, 6.875% due 6/15/2009 9,353,576 9,450,000 0.3 20,000,000 News America Inc., 6.75% due 1/09/2038 19,786,800 19,719,420 0.6 15,000,000 Univision Communication Inc., 7.85% due 7/15/2011 15,146,242 16,222,110 0.4 ------------ ------------ ----- 79,221,332 80,078,495 2.3 ====================================================================================================================================
8 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 SCHEDULE OF INVESTMENTS (continued)
Face Percent of Industries Amount Corporate Bonds Cost Value Net Assets =================================================================================================================================== Oil & Gas US$ 27,500,000 The Coastal Corporation, 6.70% due 2/15/2027 $ 27,225,400 $ 19,800,000 0.6% 10,000,000 Diamond Shamrock, 7.65% due 7/01/2026 9,920,000 11,116,310 0.3 14,000,000 Giant Industries, Inc., 9% due 9/01/2007 13,750,813 11,200,000 0.3 28,500,000 Pecom Energia SA, 8.125% due 7/15/2010 (a) 25,635,402 16,530,000 0.5 19,000,000 Transocean Offshore, 6.625% due 4/15/2011 19,522,440 21,081,241 0.6 10,000,000 Ultramar Diamond Shamrock, 6.75% due 10/15/2037 9,979,800 10,362,900 0.3 15,000,000 United Refining Co., 10.75% due 6/15/2007 15,000,000 11,400,000 0.4 ------------ ------------ ----- 121,033,855 101,490,451 3.0 =================================================================================================================================== Paper & Forest Boise Cascade Corporation: Products 5,000,000 7.35% due 10/11/2004 5,055,981 5,108,745 0.1 20,000,000 7.66% due 5/27/2005 20,000,000 20,625,900 0.6 20,000,000 Champion International Corp., 6.65% due 12/15/2037 19,755,480 22,527,520 0.7 25,000,000 Weyerhaeuser Company, 6.75% due 3/15/2012 (a) 25,424,942 27,145,525 0.8 ------------ ------------ ----- 70,236,403 75,407,690 2.2 =================================================================================================================================== Road & Rail 10,000,000 CSX Corporation, 6.25% due 10/15/2008 9,706,431 11,032,150 0.3 =================================================================================================================================== Wireless 20,000,000 Nextel Communications, Inc., Telecommunication 9.375% due 11/15/2009 19,644,303 15,200,000 0.5 Services 10,000,000 Pacific Telecom, Inc., 6.625% due 10/20/2005 10,000,000 10,478,790 0.3 Sprint Capital Corporation: 10,000,000 6.125% due 11/15/2008 9,070,604 6,637,590 0.2 25,000,000 6.90% due 5/01/2019 23,461,634 14,619,200 0.4 ------------ ------------ ----- 62,176,541 46,935,580 1.4 =================================================================================================================================== Total Corporate Bonds 915,492,286 851,649,739 24.9 =================================================================================================================================== U.S. Government Obligations =================================================================================================================================== 20,000,000 U.S. Treasury Bonds, 6.25% due 8/15/2023 18,025,954 23,850,000 0.7 U.S. Treasury Notes: 115,000,000 4.75% due 11/15/2008 113,035,876 126,297,830 3.7 50,000,000 5.50% due 5/15/2009 54,248,408 57,078,100 1.7 =================================================================================================================================== Total U.S. Government Obligations 185,310,238 207,225,930 6.1 ===================================================================================================================================
9 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 SCHEDULE OF INVESTMENTS (concluded)
Face Percent of Amount Short-Term Investments Cost Value Net Assets ==================================================================================================================================== Commercial US$ 83,103,000 General Motors Acceptance Corp., Paper* 2.10% due 10/01/2002 $ 83,103,000 $ 83,103,000 2.4% ==================================================================================================================================== U.S. Government 50,000,000 Federal Home Loan Bank, 1.69% due 10/16/2002 49,964,792 49,964,792 1.5 Agency Obligations* ==================================================================================================================================== Total Short-Term Investments 133,067,792 133,067,792 3.9 ==================================================================================================================================== Total Investments $3,628,621,254 3,393,065,457 99.4 ============== Other Assets Less Liabilities 21,813,574 0.6 -------------- ------ Net Assets $3,414,879,031 100.0% ============== ====== ====================================================================================================================================
* Commercial Paper and certain U.S. 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. See Notes to Financial Statements. PORTFOLIO INFORMATION As of September 30, 2002 Percent of Ten Largest Stock Holdings Net Assets SPX Corporation................................................ 1.9% Viacom, Inc. (Class B)......................................... 1.9 Wells Fargo Company............................................ 1.8 American International Group, Inc.............................. 1.8 Citigroup Inc. ................................................ 1.8 HCA Inc........................................................ 1.7 Clear Channel Communications, Inc. ............................ 1.7 United Technologies Corporation................................ 1.7 XL Capital Ltd. (Class A)...................................... 1.6 Nestle SA (Registered Shares).................................. 1.6 Percent of Five Largest Industries Net Assets Diversified Financials......................................... 11.9% Media.......................................................... 8.7 Banks.......................................................... 6.2 Oil & Gas...................................................... 5.8 Insurance...................................................... 5.4 Percent of Geographic Allocation Net Assets United States.................................................. 92.4% Bermuda........................................................ 3.4 Switzerland.................................................... 1.6 Chile.......................................................... 0.7 Argentina...................................................... 0.5 Canada......................................................... 0.5 Mexico......................................................... 0.3 10 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 FINANCIAL INFORMATION Statement of Assets and Liabilities as of September 30, 2002 Assets: Investments, at value (including securities loaned of $830,261,044) (identified cost--$3,628,621,254) ................................. $ 3,393,065,457 Investments held as collateral for loaned securities, at value .... 875,334,011 Receivables: Interest ....................................................... $ 20,438,739 Securities sold ................................................ 18,654,542 Dividends ...................................................... 2,539,107 Capital shares sold ............................................ 2,433,192 Loaned securities .............................................. 137,024 44,202,604 -------------- Prepaid registration fees ......................................... 24,268 --------------- Total assets ...................................................... 4,312,626,340 --------------- =============================================================================================================================== Liabilities: Collateral on securities loaned, at value ......................... 875,334,011 Payables: Capital shares redeemed ........................................ 13,431,623 Securities purchased ........................................... 5,680,970 Investment adviser ............................................. 1,252,897 Distributor .................................................... 1,084,009 21,449,499 -------------- Accrued expenses and other liabilities ............................ 963,799 --------------- Total liabilities ................................................. 897,747,309 --------------- =============================================================================================================================== Net Assets: Net assets ........................................................ $ 3,414,879,031 =============== =============================================================================================================================== Net Assets Class A Shares of Common Stock, $.10 par value, 400,000,000 Consist of: shares authorized ................................................. $ 6,835,884 Class B Shares of Common Stock, $.10 par value, 500,000,000 shares authorized ................................................. 3,846,404 Class C Shares of Common Stock, $.10 par value, 200,000,000 shares authorized ................................................. 732,736 Class D Shares of Common Stock, $.10 par value, 200,000,000 shares authorized ................................................. 4,650,450 Paid-in capital in excess of par .................................. 3,663,376,493 Undistributed investment income--net .............................. $ 27,644,944 Accumulated realized capital losses on investments and foreign currency transactions--net ........................................ (56,680,996) Unrealized depreciation on investments and foreign currency transactions--net ........................................ (235,526,884) -------------- Total accumulated losses--net ..................................... (264,562,936) --------------- Net assets ........................................................ $ 3,414,879,031 =============== =============================================================================================================================== Net Asset Value: Class A--Based on net assets of $1,467,794,371 and 68,358,840 shares outstanding ....................................... $ 21.47 =============== Class B--Based on net assets of $801,316,460 and 38,464,042 shares outstanding ....................................... $ 20.83 =============== Class C--Based on net assets of $149,885,983 and 7,327,358 shares outstanding ....................................... $ 20.46 =============== Class D--Based on net assets of $995,882,217 and 46,504,495 shares outstanding ....................................... $ 21.41 =============== ===============================================================================================================================
See Notes to Financial Statements. 11 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 FINANCIAL INFORMATION (continued) Statement of Operations for the Six Months Ended September 30, 2002 Investment Interest ..................................................... $ 47,227,557 Income: Dividends (net of $173,808 foreign withholding tax) .......... 20,453,172 Securities lending--net ...................................... 619,346 ------------- Total income ................................................. 68,300,075 ------------- =========================================================================================================================== Expenses: Investment advisory fees ..................................... $ 8,544,746 Account maintenance and distribution fees--Class B ........... 5,211,156 Account maintenance fees--Class D ............................ 1,498,868 Transfer agent fees--Class A ................................. 1,375,158 Transfer agent fees--Class B ................................. 938,220 Transfer agent fees--Class D ................................. 931,030 Account maintenance and distribution fees--Class C ........... 914,823 Transfer agent fees--Class C ................................. 172,259 Custodian fees ............................................... 118,889 Printing and shareholder reports ............................. 115,170 Professional fees ............................................ 91,678 Directors' fees and expenses ................................. 39,057 Pricing fees ................................................. 34,950 Registration fees ............................................ 33,948 Other ........................................................ 64,334 ------------- Total expenses ............................................... 20,084,286 ------------- Investment income--net ....................................... 48,215,789 ------------- =========================================================================================================================== Realized & Realized gain (loss) on: Unrealized Gain Investments--net .......................................... (38,795,702) (Loss) on Foreign currency transactions--net ........................ 2,648 (38,793,054) Investments & ------------- Foreign Currency Change in unrealized appreciation/depreciation on: Transactions -- Net: Investments--net .......................................... (922,326,077) Foreign currency transactions--net ........................ 45,229 (922,280,848) ------------- ------------- Total realized and unrealized loss on investments and foreign currency transactions--net ........................... (961,073,902) ------------- Net Decrease in Net Assets Resulting from Operations ......... $(912,858,113) ============= ===========================================================================================================================
See Notes to Financial Statements. 12 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 FINANCIAL INFORMATION (continued) Statements of Changes in Net Assets
For the Six For the Months Ended Year Ended September 30, March 31, Increase (Decrease) in Net Assets: 2002 2002 =============================================================================================================================== Operations: Investment income--net ............................................. $ 48,215,789 $ 108,678,599 Realized gain (loss) on investments and foreign currency transactions--net .................................................. (38,793,054) 67,096,713 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net ................................. (922,280,848) 38,561,025 --------------- --------------- Net increase (decrease) in net assets resulting from operations .... (912,858,113) 214,336,337 --------------- --------------- =============================================================================================================================== Dividends & Investment income--net: Distributions to Class A ......................................................... (24,676,541) (55,115,369) Shareholders: Class B ......................................................... (8,810,956) (24,279,414) Class C ......................................................... (1,717,566) (3,747,630) Class D ......................................................... (15,284,533) (32,663,244) Realized gain on investments--net: Class A ......................................................... (14,651,439) (102,586,999) Class B ......................................................... (8,770,755) (76,419,829) Class C ......................................................... (1,606,636) (10,936,875) Class D ......................................................... (10,004,802) (66,197,251) --------------- --------------- Net decrease in net assets resulting from dividends and distributions to shareholders ...................................... (85,523,228) (371,946,611) --------------- --------------- =============================================================================================================================== Capital Share Net decrease in net assets derived from capital Transactions: share transactions ................................................. (278,608,672) (476,749,756) --------------- --------------- =============================================================================================================================== Net Assets: Total decrease in net assets ....................................... (1,276,990,013) (634,360,030) Beginning of period ................................................ 4,691,869,044 5,326,229,074 --------------- --------------- End of period* ..................................................... $ 3,414,879,031 $ 4,691,869,044 =============== =============== =============================================================================================================================== *Undistributed investment income--net ............................... $ 27,644,944 $ 29,918,751 =============== =============== ===============================================================================================================================
See Notes to Financial Statements. 13 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 FINANCIAL INFORMATION (continued) Financial Highlights
Class A --------------------------------------------------------------------- The following per share data and ratios have been derived For the Six from information provided in the financial statements. Months Ended For the Year Ended March 31, September 30, ---------------------------------------------------- Increase (Decrease) in Net Asset Value: 2002 2002 2001 2000 1999 ================================================================================================================================== Per Share Net asset value, beginning of period ... $ 27.58 $ 28.38 $ 32.66 $ 35.03 $ 37.56 Operating ---------- ---------- ---------- ---------- ---------- Performance: Investment income--net+ ................ .34 .71 .90 .94 1.00 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ...................... (5.88) 66 (1.18) .62 (1.28) ---------- ---------- ---------- ---------- ---------- Total from investment operations ....... (5.54) 1.37 (.28) 1.56 (.28) ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net .............. (.36) (.76) (1.01) (.94) (1.08) Realized gain on investments--net ... (.21) (1.41) (2.99) (2.99) (1.17) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions ...... (.57) (2.17) (4.00) (3.93) (2.25) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period ......... $ 21.47 $ 27.58 $ 28.38 $ 32.66 $ 35.03 ========== ========== ========== ========== ========== ================================================================================================================================== Total Based on net asset value per share ..... (20.24%)++ 5.07% (1.12%) 4.58% (.68%) Investment ========== ========== ========== ========== ========== Return:** ================================================================================================================================== Ratios to Expenses ............................... .59%* .57% .59% .56% .57% Average ========== ========== ========== ========== ========== Net Assets: Investment income--net ................. 2.67%* 2.60% 2.89% 2.74% 2.86% ========== ========== ========== ========== ========== ================================================================================================================================== Supplemental Net assets, end of period (in thousands) $1,467,794 $1,957,869 $2,142,945 $2,721,503 $3,631,440 Data: ========== ========== ========== ========== ========== Portfolio turnover ..................... 19% 31% 46% 33% 33% ========== ========== ========== ========== ========== ==================================================================================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. ++ Aggregate total investment return. See Notes to Financial Statements. 14 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class B ------------------------------------------------------------------- The following per share data and ratios have been derived For the Six from information provided in the financial statements. Months Ended For the Year Ended March 31, September 30, --------------------------------------------------- Increase (Decrease) in Net Asset Value: 2002 2002 2001 2000 1999 =================================================================================================================================== Per Share Net asset value, beginning of period ..... $ 26.75 $ 27.56 $ 31.77 $ 34.25 $ 36.68 Operating --------- ---------- ---------- ---------- ---------- Performance: Investment income--net+ .................. .20 .42 .56 .57 .63 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ........................ (5.69) 64 (1.13) .60 (1.25) --------- ---------- ---------- ---------- ---------- Total from investment operations ......... (5.49) 1.06 (.57) 1.17 (.62) --------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net ................ (.22) (.46) (.65) (.66) (.64) Realized gain on investments--net ..... (.21) (1.41) (2.99) (2.99) (1.17) --------- ---------- ---------- ---------- ---------- Total dividends and distributions ........ (.43) (1.87) (3.64) (3.65) (1.81) --------- ---------- ---------- ---------- ---------- Net asset value, end of period ........... $ 20.83 $ 26.75 $ 27.56 $ 31.77 $ 34.25 ========= ========== ========== ========== ========== =================================================================================================================================== Total Investment Based on net asset value per share ....... (20.66%)++ 4.01% (2.11%) 3.48% (1.65%) Return:** ========= ========== ========== ========== ========== =================================================================================================================================== Ratios to Expenses ................................. 1.61%* 1.59% 1.61% 1.58% 1.59% Average ========= ========== ========== ========== ========== Net Assets: Investment income--net ................... 1.65%* 1.58% 1.87% 1.71% 1.85% ========= ========== ========== ========== ========== =================================================================================================================================== Supplemental Net assets, end of period (in thousands) . $ 801,317 $1,222,487 $1,659,152 $2,853,699 $4,866,564 Data: ========= ========== ========== ========== ========== Portfolio turnover ....................... 19% 31% 46% 33% 33% ========= ========== ========== ========== ========== ===================================================================================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. ++ Aggregate total investment return. See Notes to Financial Statements. 15 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 FINANCIAL INFORMATION (continued) Financial Highlights (continued)
Class C ------------------------------------------------------------------ The following per share data and ratios have been derived For the Six from information provided in the financial statements. Months Ended For the Year Ended March 31, September 30, ------------------------------------------------- Increase (Decrease) in Net Asset Value: 2002 2002 2001 2000 1999 ================================================================================================================================== Per Share Net asset value, beginning of period ..... $ 26.29 $ 27.14 $ 31.36 $ 33.82 $ 36.31 Operating --------- --------- --------- --------- --------- Performance: Investment income--net+ .................. .20 .41 .55 .57 .62 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ........................ (5.59) 63 (1.12) .59 (1.25) --------- --------- --------- --------- --------- Total from investment operations ......... (5.39) 1.04 (.57) 1.16 (.63) --------- --------- --------- --------- --------- Less dividends and distributions: Investment income--net ................ (.23) (.48) (.66) (.63) (.69) Realized gain on investments--net ..... (.21) (1.41) (2.99) (2.99) (1.17) --------- --------- --------- --------- --------- Total dividends and distributions ........ (.44) (1.89) (3.65) (3.62) (1.86) --------- --------- --------- --------- --------- Net asset value, end of period ........... $ 20.46 $ 26.29 $ 27.14 $ 31.36 $ 33.82 ========= ========= ========= ========= ========= ================================================================================================================================== Total Investment Based on net asset value per share ....... (20.63%)++ 4.01% (2.13%) 3.50% (1.70%) Return:** ========= ========= ========= ========= ========= ================================================================================================================================== Ratios to Expenses ................................. 1.62%* 1.61% 1.62% 1.59% 1.59% Average ========= ========= ========= ========= ========= Net Assets: Investment income--net ................... 1.64%* 1.59% 1.86% 1.70% 1.83% ========= ========= ========= ========= ========= ================================================================================================================================== Supplemental Net assets, end of period (in thousands).. $ 149,886 $ 199,774 $ 212,278 $ 308,150 $ 491,234 Data: ========= ========= ========= ========= ========= Portfolio turnover ....................... 19% 31% 46% 33% 33% ========= ========= ========= ========= ========= ==================================================================================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. ++ Aggregate total investment return. See Notes to Financial Statements. 16 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 FINANCIAL INFORMATION (concluded) Financial Highlights (concluded)
Class D -------------------------------------------------------------------- The following per share data and ratios have been derived For the Six from information provided in the financial statements. Months Ended For the Year Ended March 31, September 30, ---------------------------------------------------- Increase (Decrease) in Net Asset Value: 2002 2002 2001 2000 1999 =================================================================================================================================== Per Share Net asset value, beginning of period ..... $ 27.50 $ 28.31 $ 32.58 $ 34.97 $ 37.49 Operating --------- ---------- ---------- ---------- ---------- Performance: Investment income--net+ .................. .31 .64 .82 .86 .91 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ........................ (5.86) 65 (1.17) .60 (1.28) --------- ---------- ---------- ---------- ---------- Total from investment operations ......... (5.55) 1.29 (.35) 1.46 (.37) --------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net ................ (.33) (.69) (.93) (.86) (.98) Realized gain on investments--net ..... (.21) (1.41) (2.99) (2.99) (1.17) --------- ---------- ---------- ---------- ---------- Total dividends and distributions ........ (.54) (2.10) (3.92) (3.85) (2.15) --------- ---------- ---------- ---------- ---------- Net asset value, end of period ........... $ 21.41 $ 27.50 $ 28.31 $ 32.58 $ 34.97 ========= ========== ========== ========== ========== =================================================================================================================================== Total Investment Based on net asset value per share ....... (20.34%)++ 4.78% (1.35%) 4.29% (.92%) Return:** ========= ========== ========== ========== ========== =================================================================================================================================== Ratios to Expenses ................................. .84%* .82% .84% .81% .82% Average ========= ========== ========== ========== ========== Net Assets: Investment income--net ................... 2.42%* 2.35% 2.64% 2.50% 2.60% ========= ========== ========== ========== ========== =================================================================================================================================== Supplemental Net assets, end of period (in thousands) . $ 995,882 $1,311,739 $1,311,854 $1,428,120 $1,513,406 Data: ========= ========== ========== ========== ========== Portfolio turnover ....................... 19% 31% 46% 33% 33% ========= ========== ========== ========== ========== ===================================================================================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. ++ Aggregate total investment return. See Notes to Financial Statements. 17 Merrill Lynch Balanced Capital Fund, Inc. September 30, 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. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal, recurring nature. The Fund offers four classes of shares under the Merrill Lynch Select Pricing(SM) System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. 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 U.S. 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 18 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (e) Security transactions and investment income -- Security transactions are recorded on the dates the transactions are entered into (the trade dates). 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. (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 U.S. 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 securities as collateral for the loaned securities, it collects a fee from 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 cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. 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. 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. 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. 19 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 NOTES TO FINANCIAL STATEMENTS (continued) For the six months ended September 30, 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........................................... $3,132 $25,626 Class D........................................... $6,342 $72,309 - -------------------------------------------------------------------------------- For the six months ended September 30, 2002, MLPF&S received contingent deferred sales charges of $313,704 and $22,823 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $665 and $222 relating to transactions subject to front-end sales charge waivers in Class A and Class D Shares, respectively. The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to MLPF&S or its affiliates. As of September 30, 2002, the Fund lent securities with a value of $174,837,911 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 September 30, 2002, cash collateral of $393,900,306 was invested in the Money Market Series of the Merrill Lynch Liquidity Series, LLC and $481,433,705 was invested in the Merrill Lynch Premier Institutional Fund. For the six months ended September 30, 2002, QA Advisors received $255,795 in securities lending agent fees. In addition, MLPF&S received $198,235 in commissions on the execution of portfolio security transactions for the six months ended September 30, 2002. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. For the six months ended September 30, 2002, Merrill Lynch Security Pricing System, an affiliate of MLPF&S, earned $632 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 six months ended September 30, 2002 were $745,634,705 and $1,101,505,949, respectively. Net realized gains (losses) for the six months ended September 30, 2002 and net unrealized gains (losses) as of September 30, 2002 were as follows: - -------------------------------------------------------------------------------- Realized Unrealized Gains (Losses) Gains (Losses) - ------------------------------------------------------------------------------- Long-term investments ............. $(38,795,702) $(235,555,797) Foreign currency transactions ...................... 2,648 28,913 ------------ ------------- Total ............................. $(38,793,054) $(235,526,884) ============ ============= - ------------------------------------------------------------------------------- As of September 30, 2002, net unrealized depreciation for Federal income tax purposes aggregated $241,461,833, of which $436,766,248 related to appreciated securities and $678,228,081 related to depreciated securities. At September 30, 2002, the aggregate cost of investments for Federal income tax purposes was $3,634,527,290. 4. Capital Share Transactions: Net decrease in net assets derived from capital share transactions was $278,608,672 and $476,749,756 for the six months ended September 30, 2002 and for the year ended March 31, 2002, respectively. Transactions in capital shares for each class were as follows: - ------------------------------------------------------------------------------- Class A Shares for the Six Months Dollar Ended September 30, 2002 Shares Amount - ------------------------------------------------------------------------------- Shares sold ....................... 2,715,045 $ 68,032,130 Shares issued to shareholders in reinvestment of dividends and distributions ................. 1,525,540 35,606,106 ---------- ------------- Total issued ...................... 4,240,585 103,638,236 Shares redeemed ................... (6,871,969) (171,372,349) ---------- ------------- Net decrease ...................... (2,631,384) $ (67,734,113) ========== ============= - ------------------------------------------------------------------------------- 20 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 - ------------------------------------------------------------------------------- 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 B Shares for the Six Months Dollar Ended September 30, 2002 Shares Amount - ------------------------------------------------------------------------------- Shares sold ....................... 1,602,855 $ 38,918,645 Shares issued to shareholders in reinvestment of dividends and distributions ................. 662,575 15,040,464 ----------- ------------- Total issued ...................... 2,265,430 53,959,109 Automatic conversion of shares ......................... (3,037,855) (74,747,703) Shares redeemed ................... (6,465,295) (155,321,881) ----------- ------------- Net decrease ...................... (7,237,720) $(176,110,475) =========== ============= - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 C Shares for the Six Months Dollar Ended September 30, 2002 Shares Amount - ------------------------------------------------------------------------------- Shares sold ....................... 619,925 $ 15,046,951 Shares issued to shareholders in reinvestment of dividends and distributions ................. 126,129 2,811,412 ----------- ------------- Total issued ...................... 746,054 17,858,363 Shares redeemed ................... (1,017,319) (23,804,038) ----------- ------------- Net decrease ...................... (271,265) $ (5,945,675) =========== ============= - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 ...................... 1,843,162 48,167,712 Shares redeemed ................... (2,065,570) (53,647,779) ----------- ------------- Net decrease ...................... (222,408) $ (5,480,067) =========== ============= - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Class D Shares for the Six Months Dollar Ended September 30, 2002 Shares Amount - ------------------------------------------------------------------------------- Shares sold ....................... 1,355,864 $ 33,738,296 Automatic conversion of shares ......................... 2,953,275 74,747,703 Shares issued to shareholders in reinvestment of dividends and distributions ................. 961,665 22,397,168 ----------- ------------- Total issued ...................... 5,270,804 130,883,167 Shares redeemed ................... (6,459,210) (159,701,576) ----------- ------------- Net decrease ...................... (1,188,406) $ (28,818,409) =========== ============= - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 =========== ============= - ------------------------------------------------------------------------------- 5. Short-Term Borrowings: The Fund, along with certain other funds managed by MLIM and its affiliates, is a party to 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 21 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 NOTES TO FINANCIAL STATEMENTS (concluded) 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 six months ended September 30, 2002. 6. Capital Loss Carryforward: 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. 22 Merrill Lynch Balanced Capital Fund, Inc. September 30, 2002 OFFICERS AND DIRECTORS Terry K. Glenn, President and Director Donald W. Burton, Director M. Colyer Crum, Director Laurie Simon Hodrick, Director J. Thomas Touchton, Director Fred G. Weiss, Director Robert C. Doll, Jr., Senior Vice President Kurt Schansinger, Senior Vice President and Portfolio Manager Walter Cuje, Vice President Donald C. Burke, Vice President and Treasurer Susan B. Baker, Secretary Custodian The Bank of New York 90 Washington Street, 12th Floor New York, NY 10286 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 800-637-3863 23 [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--9/02 -----END PRIVACY-ENHANCED MESSAGE-----