-----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, ErE2tiFyw/XEeggLllJ2iF0YvzZxs6xFpWun4tnhVskuJDocfjWOZ7sTRFGtP+Uv qU77xpOnzf/YRVHaWYLAmg== 0001193805-03-001149.txt : 20031202 0001193805-03-001149.hdr.sgml : 20031202 20031202090248 ACCESSION NUMBER: 0001193805-03-001149 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031202 EFFECTIVENESS DATE: 20031202 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-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02405 FILM NUMBER: 031031303 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: MERRILL LYNCH CAPITAL FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LIONEL D EDIE CAPITAL FUND INC DATE OF NAME CHANGE: 19760810 N-CSR 1 e300789_ncsr-mlbalancedcap.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-2405 Name of Fund: Merrill Lynch Balanced Capital Fund, Inc. Fund Address: P.O. Box 9011 Princeton, NJ 08543-9011 Name and address of agent for service: Terry K. Glenn, President, Merrill Lynch Balanced Capital Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011 Registrant's telephone number, including area code: (609) 282-2800 Date of fiscal year end: 09/30/03 Date of reporting period: 10/01/02 - 09/30/03 Item 1 - Attach shareholder report [LOGO] Merrill Lynch Investment Managers www.mlim.ml.com Merrill Lynch Balanced Capital Fund, Inc. Annual Report September 30, 2003 [LOGO] Merrill Lynch Investment Managers Merrill Lynch Balanced Capital Fund, Inc. Electronic Delivery The Fund is now offering electronic delivery of communications to its shareholders. In order to receive this service, you must register your account and provide us with e-mail information. To sign up for this service, simply access this website http://www.icsdelivery.com/live and follow the instructions. When you visit this site, you will obtain a personal identification number (PIN). You will need this PIN should you wish to update your e-mail address, choose to discontinue this service and/or make any other changes to the service. This service is not available for certain retirement accounts at this time. 2 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 A Letter From the President Dear Shareholder As we enter the final quarter of 2003, it seems appropriate to reflect on what has been a meaningful year in many respects. We saw the beginning and the end of all-out war in Iraq, equity market uncertainty turned to strength, and sub par economic growth of 1.4% in the first quarter of 2003 multiplied to projected growth of more than 4% in the second half of the year. Equity markets rebounded from one of the most dismal three-year periods in history to make a strong showing so far this year. The S&P 500 Index posted year-to-date and 12-month returns of +14.72% and +24.40%, respectively, as of September 30, 2003. Small cap stocks, which tend to perform well during an economic recovery, returned +28.58% year-to-date and +36.50% over the past 12 months as measured by the Russell 2000 Index. Although continued market strength cannot be assured, investors increasingly returned to the markets based on improving corporate earnings reports and economic stimuli. Against this backdrop, our portfolio managers continued to work diligently to deliver on our commitment to provide superior performance within reasonable expectations for risk and return. This included striving to outperform our peers and the market indexes. With that said, remember also that the advice and guidance of a skilled financial advisor often can mean the difference between successful and unsuccessful investing. A financial professional can help you choose those investments that will best serve you as you plan for your financial future. Finally, I am proud to premiere a new look to our shareholder communications. Our portfolio manager commentaries have been trimmed and organized in such a way that you can get the information you need at a glance, in plain language. Today's markets are confusing enough. We want to help you put it all in perspective. The report's new size also allows us certain mailing efficiencies. Any cost savings in production or postage are passed on to the Fund and, ultimately, to Fund shareholders. We thank you for trusting Merrill Lynch Investment Managers with your investment assets, and we look forward to serving you in the months and years ahead. Sincerely, /s/ Terry K. Glenn Terry K. Glenn President and Director MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 3 [LOGO] Merrill Lynch Investment Managers A Discussion With Your Fund's Portfolio Managers Fund performance benefited from a sustained stock market rally in the second half of the fiscal year and a portfolio asset allocation that allowed the Fund to capitalize on the equity market's strength. How did the Fund perform during the fiscal year in light of the existing market conditions? For the 12-month period ended September 30, 2003, Merrill Lynch Balanced Capital Fund, Inc.'s Class A, Class B, Class C and Class I Shares had total returns of +16.11%, +15.19%, +15.15% and +16.35%, 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 6 - 9 of this report to shareholders.) For the same period, the unmanaged benchmark Standard & Poor's 500 (S&P 500) Index returned +24.40% and the unmanaged benchmark Merrill Lynch U.S. Domestic Bond Master Index returned +5.48%. The Fund performed in line with its Lipper Balanced Funds category of mutual funds, which had an average return of +15.87% for the same 12-month period. (Funds in this Lipper category seek to conserve principal by maintaining a balanced portfolio of stocks and bonds.) We would like to note that the Fund changed its reporting schedule from a fiscal year-end of March 31 to a fiscal year-end of September 30. While asset allocation proved positive during the period and bonds performed better than their benchmark, the Fund's equities underperformed the broad market index, largely because of our underweight position in the resurgent technology sector, the strongest-performing group by far in the S&P 500 Index over the 12-month period. Valuation concerns limited our overall technology exposure, which extracted a fairly severe performance penalty despite better than 60% total returns from Fund technology holdings Agere Systems Inc., CommScope, Inc., Agilent Technologies, Inc. and Hewlett Compaq. Stock selection in the industrial sector also was relatively poor as defense-related holdings like Northrop Grumman Corporation, Raytheon Company and ITT Industries, Inc. declined in price as investors sought greater economic exposure. Partially offsetting these two weak categories, our overweight position in the financial sector combined with good stock selection to deliver positive returns. Our positions in J.P. Morgan Chase & Co., Citigroup Inc., Morgan Stanley and FleetBoston Financial Corporation each earned total returns exceeding 50% for the period. In addition, superior performance from consumer staple investments, such as Avon Products, Inc., contributed favorably to results. Finally, our avoidance of the utility sector also proved beneficial. For the six months ended September 30, 2003, stock prices staged a powerful advance, with the benchmark S&P 500 Index earning a +18.45% total return. Value substantially outpaced growth for the six-month period as the S&P 500 Barra Value Index gained 21.86% while the S&P 500 Barra Growth Index rose 15.26%. The fixed income market continued to generate solid returns, with the benchmark Merrill Lynch Domestic Bond Master Index providing a +2.41% total return for the period. For the six-month period ended September 30, 2003, the Fund's Class A, Class B, Class C, Class I and Class R Shares had total returns of +13.16%, +12.73%, +12.72%, +13.31% and +13.31%, respectively. The Fund outperformed the +12.59% average return of its Lipper category for the same period. The Fund's positive six-month performance can be attributed to favorable asset allocation and the outperformance of each individual asset class against its market benchmark. Within the equity portfolio, we enjoyed positive contributions from our underweight positions in the weak health care and telecommunications services sectors. Performance also benefited from good security selection in the consumer discretionary, industrial and financial sectors, with stocks such as McDonald's Corporation, Tyco International Ltd., J.P. Morgan Chase, Dover Corporation and Mellon Financial Corporation providing better than 40% returns for the six-month period. These more than offset the negative effects of our underweight position in the strongly performing technology sector and poor security selection in the consumer staples area, where stocks such as The Gillette Company, Anheuser-Busch Companies, Inc. and General Mills, Inc. detracted from results. What changes were made to the portfolio during the period? We continued to adjust our holdings in response to ongoing price volatility. Within the equity portfolio, we further increased our energy exposure, introducing new positions in three oil service stocks -- GlobalSantaFe Corporation, Weatherford International Ltd. and Schlumberger Limited -- while adding to existing positions in Exxon Mobil Corporation and Royal Dutch Petroleum Company. We believe good value exists in this sector as sustainably high oil and gas prices are expected to support earnings and cash flow growth and an improved level of oil field activity. Aided by strong balance sheets and high dividend yields, we expect this sector to perform well through the seasonally strong fall and winter months. We increased our technology exposure during the period, adding to our position in International Business Machines Corporation and establishing positions in Applied Materials, Inc. and Siebel Systems, Inc. In our view, these companies enjoy strong competitive positions, solid financial characteristics and proven management while selling at attractive valuation levels for the first time in several years. We believe these companies will be significant beneficiaries of the anticipated second-half recovery in corporate technology spending. 4 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 We lowered exposures across the media and entertainment sector, reducing positions in Viacom, Inc., Clear Channel Communications, Inc. and Liberty Media Corporation while eliminating The New York Times Company and Tribune Company from the portfolio. Improved advertising trends, as evidenced in a strong up-front selling season and attractive free cash flow characteristics, resulted in an extended period of superior performance for these companies. As valuations approached historically high levels, we decided to trim our positions. We also reduced our weightings in a number of the Fund's more economically sensitive investments subsequent to substantial stock price gains and valuation expansion. These included E.I. du Pont de Nemours and Company, International Paper Company, Carnival Corporation, Agilent Technologies, Inc. and Weyerhaeuser Company. We eliminated The Gap, Inc. and Starwood Hotels & Resorts Worldwide, Inc. from the Fund as they achieved our target prices. Gap's turnaround strategies proved successful, driving positive same store sales and handsome stock price appreciation. This contrasts with much of the rest of the retail sector, which has suffered from weak sales, poor earning trends, compressed valuations and lower stock prices. Starwood's business began to strengthen with rising hotel occupancy rates improving the prospects for earnings and cash flow acceleration and driving a strong stock price advance. Within the fixed income portfolio, we continued transitioning from a corporate and high yield focus to a more broadly diversified portfolio, substantially reducing our overall risk profile. At the close of the period, the portfolio had fixed income assets consisting of 3.5% Treasury issues, 12.1% collateralized mortgage obligations, 10.9% investment-grade and high yield corporate bonds and 0.1% in preferred securities. We also reduced the duration of the fixed income portfolio by approximately one year -- from 5.5 years as of March 31, 2003 to 4.5 years at the close of the period. With the transition largely complete, we began to focus on spread sectors within the fixed income universe -- those areas of the market with a lower correlation to Treasury issues and less vulnerability to fluctuations in interest rates. We believe this is an effective strategy for avoiding the volatile interest rate environment while also enhancing total returns in the fixed income portion of the portfolio, as the market clearly has been rewarding investors for assuming risk. For example, high yield investments, as measured by the unmanaged Credit Suisse First Boston High Yield Index, returned +28.04% for the 12 months ended September 30, 2003. For the same period, investment-grade corporate bonds, as measured by the unmanaged Merrill Lynch Corporate Master Index, returned +11.04%, and Treasury issues, as measured by the unmanaged Merrill Lynch U.S. Treasury Master Index, returned +3.23%. Our emphasis, specifically, has been on corporate bonds (both investment grade and high yield), agency mortgage collateral and collateralized mortgage obligations (CMOs), non-agency CMOs, asset-backed securities and commercial mortgage-backed securities. By strategically managing these sectors and taking advantage of opportunities available across the markets, we were able to consistently add value to the Fund. We believe investors will continue to be compensated for accepting the modestly higher risk of investing in these higher-beta sectors. How would you characterize the Fund's position at the close of the period? Our portfolio asset allocation at period-end comprised 65.2% of net assets invested in equities, 26.6% in fixed income securities and 8.2% in cash equivalents. This compares to 63.0% in equities, 31.2% in fixed income securities and 5.8% in cash equivalents at the end of March. While the maintenance of a relatively bullish investment posture extracted a short-term performance penalty in the first quarter of 2003, it proved to be the key determinant of our outperformance over the past six months. We continue to anticipate a constructive environment for equities as we move through the remainder of 2003, driven by accelerating economic growth, improved corporate and consumer confidence and rising corporate earnings. Given the magnitude of recent stock market gains and the associated increase in valuations, we expect equity returns to be far more modest going forward, with individual equity security selection playing a more important role in relative performance. For that reason, we remain extremely sensitive to price and valuation considerations, continue to focus on improving the overall risk and reward profile of the portfolio and regularly reassess our equity allocation. Bonds, meanwhile, continue to look relatively expensive in our view, particularly U.S. government securities. We therefore intend to maintain our focus on those fixed income products with a lower correlation to U.S. Treasury issues. This outlook supports our current asset allocation posture and, we believe, has the potential to produce superior returns for our investors in the periods ahead. Kurt Schansinger Vice President and Senior Portfolio Manager Patrick Maldari Fixed Income Portfolio Manager October 14, 2003 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 5 [LOGO] Merrill Lynch Investment Managers Performance Data About Fund Performance Effective April 14, 2003, Class A Shares were redesignated Class I Shares and Class D Shares were redesignated Class A Shares. Investors are able to purchase shares of the Fund through multiple pricing alternatives: o Class A Shares incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). o 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 A 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 I Shares incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution or account maintenance fees. Class I Shares are available only to eligible investors. o Class R Shares do not incur a maximum sales charge (front-end load) or deferred sales charge. These shares are subject to a distribution fee of 0.25% and an account maintenance fee of 0.25%. Class R Shares are available only to certain retirement plans. 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 each of the following tables assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. Recent Performance Results
Ten-Year/ 6-Month 12-Month Since Inception As of September 30, 2003 Total Return Total Return Total Return ====================================================================================================================== ML Balanced Capital Fund, Inc. Class A Shares* +13.16% +16.11% + 91.31% - ---------------------------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class B Shares* +12.73 +15.19 + 84.41 - ---------------------------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class C Shares* +12.72 +15.15 + 78.46 - ---------------------------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class I Shares* +13.31 +16.35 +104.19 - ---------------------------------------------------------------------------------------------------------------------- ML Balanced Capital Fund, Inc. Class R Shares* +13.31 -- + 8.85 - ---------------------------------------------------------------------------------------------------------------------- Standard & Poor's 500 Index** +18.45 +24.40 +160.52/+149.83/+11.07 - ---------------------------------------------------------------------------------------------------------------------- ML U.S. Domestic Bond Master Index*** + 2.41 + 5.48 + 95.92/+103.02/+ 4.62 - ----------------------------------------------------------------------------------------------------------------------
* 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 B & Class I Shares; from 10/21/94 for Class A & Class C Shares and from 1/03/03 for Class R Shares. ** This unmanaged Index covers 500 industrial, utility, transportation and financial companies of the U.S. markets (mostly NYSE issues) representing about 75% of NYSE market capitalization and 30% of NYSE issues. Ten-year/since inception total returns are for ten years, from 10/21/94 and from 1/03/03. *** This unmanaged Index is comprised of the entire universe of domestic investment-grade bonds including U.S. Treasury bonds, corporate bonds and mortgages. Ten-year/since inception total returns are for ten years, from 10/21/94 and from 1/03/03. 6 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Performance Data (continued) Total Return Based on a $10,000 Investment--Class A & Class C Shares A line graph depicting the growth of an investment in the Fund's Class A Shares and Class C 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 September 2003.
10/21/94** 9/95 9/96 9/97 9/98 9/99 ML Balanced Capital Fund, Inc.+--Class A Shares* $ 9,475 $11,603 $13,084 $16,638 $16,092 $17,966 ML Balanced Capital Fund, Inc.+--Class C Shares* $10,000 $12,157 $13,600 $17,163 $16,471 $18,249 S&P 500 Index++ $10,000 $12,901 $15,524 $21,802 $23,775 $30,385 ML U.S. Domestic Bond Master Index+++ $10,000 $11,452 $12,010 $13,183 $14,713 $14,656 9/00 9/01 9/02 9/03 ML Balanced Capital Fund, Inc.+--Class A Shares* $19,640 $17,490 $15,611 $18,126 ML Balanced Capital Fund, Inc.+--Class C Shares* $19,792 $17,496 $15,498 $17,846 S&P 500 Index++ $34,421 $25,258 $20,084 $24,983 ML U.S. Domestic Bond Master Index+++ $15,673 $17,718 $19,248 $20,302
* 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 Index covers 500 industrial, utility, transportation and financial companies of the U.S. markets (mostly NYSE issues) representing about 75% of NYSE market capitalization and 30% of NYSE issues. +++ This unmanaged Index is comprised of the entire universe of domestic investment-grade bonds including U.S. Treasury bonds, corporate bonds and mortgages. Past performance is not indicative of future results. Average Annual Total Return % Return Without % Return With Sales Charge Sales Charge** ================================================================================ Class A Shares* ================================================================================ One Year Ended 9/30/03 +16.11% +10.01% - -------------------------------------------------------------------------------- Five Years Ended 9/30/03 + 2.41 + 1.31 - -------------------------------------------------------------------------------- Inception (10/21/94) through 9/30/03 + 7.52 + 6.88 - -------------------------------------------------------------------------------- * Maximum sales charge is 5.25%. ** Assuming maximum sales charge. % Return % Return Without CDSC With CDSC** ================================================================================ Class C Shares* ================================================================================ One Year Ended 9/30/03 +15.15% +14.15% - -------------------------------------------------------------------------------- Five Years Ended 9/30/03 + 1.62 + 1.62 - -------------------------------------------------------------------------------- Inception (10/21/94) through 9/30/03 + 6.69 + 6.69 - -------------------------------------------------------------------------------- * Maximum contingent deferred sales charge is 1% and is reduced to 0% after one year. ** Assuming payment of applicable contingent deferred sales charge. MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 7 [LOGO] Merrill Lynch Investment Managers Performance Data (continued) Total Return Based on a $10,000 Investment--Class B & Class I Shares A line graph depicting the growth of an investment in the Fund's Class B Shares and Class I 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 September 1993 to September 2003.
9/93 9/94 9/95 9/96 9/97 ML Balanced Capital Fund, Inc.+--Class B Shares* $10,000 $10,391 $12,557 $14,049 $17,732 ML Balanced Capital Fund, Inc.+--Class I Shares* $ 9,475 $ 9,949 $12,143 $13,723 $17,501 S&P 500 Index++ $10,000 $10,369 $13,453 $16,188 $22,735 ML U.S. Domestic Bond Master Index+++ $10,000 $ 9,684 $11,051 $11,589 $12,722 9/98 9/99 9/00 9/01 9/02 9/03 ML Balanced Capital Fund, Inc.+--Class B Shares* $17,015 $18,856 $20,454 $18,076 $16,009 $18,441 ML Balanced Capital Fund, Inc.+--Class I Shares* $16,968 $18,991 $20,811 $18,581 $16,628 $19,347 S&P 500 Index++ $24,792 $31,685 $35,895 $26,339 $20,943 $26,052 ML U.S. Domestic Bond Master Index+++ $14,198 $14,143 $15,124 $17,098 $18,574 $19,592
* Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. + ML Balanced Capital Fund, Inc., through a fully managed investment policy, utilizes equity, debt and convertible securities. ++ This unmanaged Index covers 500 industrial, utility, transportation and financial companies of the U.S. markets (mostly NYSE issues) representing about 75% of NYSE market capitalization and 30% of NYSE issues. +++ This unmanaged Index is comprised of the entire universe of domestic investment-grade bonds including U.S. Treasury bonds, corporate bonds and mortgages. Past performance is not indicative of future results. Average Annual Total Return % Return % Return Without CDSC With CDSC** =============================================================================== Class B Shares* =============================================================================== One Year Ended 9/30/03 +15.19% +11.19% - ------------------------------------------------------------------------------- Five Years Ended 9/30/03 + 1.62 + 1.34 - ------------------------------------------------------------------------------- Ten Years Ended 9/30/03 + 6.31 + 6.31 - ------------------------------------------------------------------------------- * Maximum contingent deferred sales charge is 4% and is reduced to 0% after six years. ** Assuming payment of applicable contingent deferred sales charge. % Return Without % Return With Sales Charge Sales Charge** =============================================================================== Class I Shares* =============================================================================== One Year Ended 9/30/03 +16.35% +10.25% - ------------------------------------------------------------------------------- Five Years Ended 9/30/03 + 2.66 + 1.56 - ------------------------------------------------------------------------------- Ten Years Ended 9/30/03 + 7.40 + 6.82 - ------------------------------------------------------------------------------- * 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. 8 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Performance Data (concluded) Total Return Based on a $10,000 Investment--Class R Shares A line graph depicting the growth of an investment in the Fund's Class R 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 January 3, 3003 to September 2003. 1/03/03** 9/03 ML Balanced Capital Fund, Inc.+--Class R Shares* $10,000 $10,885 S&P 500 Index++ $10,000 $11,107 ML U.S. Domestic Bond Master Index+++ $10,000 $10,462 * 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 Index covers 500 industrial, utility, transportation and financial companies of the U.S. markets (mostly NYSE issues) representing about 75% of NYSE market capitalization and 30% of NYSE issues. +++ This unmanaged Index is comprised of the entire universe of domestic investment-grade bonds including U.S. Treasury bonds, corporate bonds and mortgages. Past performance is not indicative of future results. Aggregate Total Return % Return Without Sales Charge ================================================================================ Class R Shares ================================================================================ Inception (1/03/03) through 9/30/03 +8.85% - -------------------------------------------------------------------------------- MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 9 [LOGO] Merrill Lynch Investment Managers Portfolio Information (unaudited) As of September 30, 2003 Ten Largest Common Percent of Stock Holdings Net Assets - -------------------------------------------------------------------------------- United Technologies Corporation ...................................... 1.6% Citigroup Inc. ....................................................... 1.5 Wells Fargo & Company ................................................ 1.5 Microsoft Corporation ................................................ 1.5 Avon Products, Inc. .................................................. 1.4 ITT Industries, Inc. ................................................. 1.4 International Business Machines Corporation ............................................... 1.4 Murphy Oil Corporation ............................................... 1.4 E.I. du Pont de Nemours and Company ........................................................ 1.3 Wyeth ................................................................ 1.3 - -------------------------------------------------------------------------------- Percent of Five Largest Industries+ Net Assets - -------------------------------------------------------------------------------- Oil & Gas ............................................................ 5.5% Insurance ............................................................ 5.0 Media ................................................................ 4.6 Diversified Financial Services ....................................... 4.3 Aerospace & Defense .................................................. 4.3 - -------------------------------------------------------------------------------- + For Fund compliance purposes, "Industries" means any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease. These classifications are unaudited. Percent of Geographic Allocation Net Assets - -------------------------------------------------------------------------------- United States ........................................................ 84.6% Bermuda .............................................................. 3.0 Netherlands .......................................................... 1.5 Switzerland .......................................................... 1.2 Canada ............................................................... 0.6 France ............................................................... 0.3 Chile ................................................................ 0.2 United Kingdom ....................................................... 0.1 Mexico ............................................................... 0.1 Brazil ............................................................... 0.1 - -------------------------------------------------------------------------------- 10 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Schedule of Investments
Percent of Industry@ Shares Held Common Stocks Value Net Assets =========================================================================================================================== Aerospace & Defense 1,250,000 Honeywell International Inc. $ 32,937,500 1.0% 300,000 Northrop Grumman Corporation 25,866,000 0.8 600,000 Raytheon Company 16,800,000 0.5 650,000 United Technologies Corporation 50,232,000 1.6 --------------------------- 125,835,500 3.9 =========================================================================================================================== Beverages 800,000 Anheuser-Busch Companies, Inc. 39,472,000 1.2 =========================================================================================================================== Building Products 1,200,000 Masco Corporation 29,376,000 0.9 =========================================================================================================================== Capital Markets 800,000 J.P. Morgan Chase & Co. 27,464,000 0.9 1,000,000 Janus Capital Group Inc. 13,970,000 0.4 1,250,000 Mellon Financial Corporation 37,675,000 1.2 800,000 Morgan Stanley 40,368,000 1.2 --------------------------- 119,477,000 3.7 =========================================================================================================================== Chemicals 1,100,000 E.I. du Pont de Nemours and Company 44,011,000 1.3 =========================================================================================================================== Commercial Banks 900,000 FleetBoston Financial Corporation 27,135,000 0.9 500,000 PNC Bank Corp. 23,790,000 0.7 950,000 Wells Fargo & Company 48,925,000 1.5 --------------------------- 99,850,000 3.1 =========================================================================================================================== Communications Equipment 2,000,000 + CommScope, Inc. 24,120,000 0.7 =========================================================================================================================== Computers & Peripherals 1,000,000 Hewlett-Packard Company 19,360,000 0.6 500,000 International Business Machines Corporation 44,165,000 1.4 --------------------------- 63,525,000 2.0 =========================================================================================================================== Diversified Financial Services 1,100,000 Citigroup Inc. 50,061,000 1.5 =========================================================================================================================== Diversified Telecommunication 1,100,000 Verizon Communications 35,684,000 1.1 Services =========================================================================================================================== Electronic Equipment & Instruments 1,250,000 + Agilent Technologies, Inc. 27,637,500 0.8 =========================================================================================================================== Energy Equipment & Service 600,000 GlobalSantaFe Corporation 14,370,000 0.4 400,000 Schlumberger Limited 19,360,000 0.6 400,000 + Weatherford International Ltd. 15,112,000 0.5 --------------------------- 48,842,000 1.5 =========================================================================================================================== Food Products 500,000 General Mills, Inc. 23,535,000 0.7 175,000 Nestle SA (Registered Shares) 40,350,977 1.2 200,000 Unilever NV (NY Registered Shares) 11,836,000 0.4 --------------------------- 75,721,977 2.3 =========================================================================================================================== Health Care Equipment & Supplies 1,000,000 Baxter International Inc. 29,060,000 0.9 =========================================================================================================================== Health Care 500,000 Aetna Inc. (New Shares) 30,515,000 1.0 Providers & Services 300,000 CIGNA Corporation 13,395,000 0.4 900,000 HCA Inc. 33,174,000 1.0 --------------------------- 77,084,000 2.4 =========================================================================================================================== Hotels, Restaurants & Leisure 750,000 Carnival Corporation 24,667,500 0.8 1,250,000 McDonald's Corporation 29,425,000 0.9 --------------------------- 54,092,500 1.7 =========================================================================================================================== Household Products 800,000 Kimberly-Clark Corporation 41,056,000 1.3 =========================================================================================================================== IT Services 750,000 + Accenture Ltd. 'A' 16,755,000 0.5 200,000 + Computer Sciences Corporation 7,514,000 0.2 --------------------------- 24,269,000 0.7 =========================================================================================================================== Industrial Conglomerates 1,150,000 General Electric Company 34,281,500 1.0 1,700,000 Tyco International Ltd. 34,731,000 1.1 --------------------------- 69,012,500 2.1 ===========================================================================================================================
MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 11 [LOGO] Merrill Lynch Investment Managers Schedule of Investments (continued)
Percent of Industry@ Shares Held Common Stocks Value Net Assets =========================================================================================================================== Insurance 1,250,000 ACE Limited $ 41,350,000 1.3% 600,000 American International Group, Inc. 34,620,000 1.1 1,000,000 Prudential Financial, Inc. 37,360,000 1.1 500,000 XL Capital Ltd. (Class A) 38,720,000 1.2 --------------------------- 152,050,000 4.7 =========================================================================================================================== Machinery 1,100,000 Dover Corporation 38,907,000 1.2 750,000 ITT Industries, Inc. 44,880,000 1.4 800,000 + SPX Corporation 36,224,000 1.1 --------------------------- 120,011,000 3.7 =========================================================================================================================== Media 1,000,000 Clear Channel Communications, Inc. 38,300,000 1.2 1,250,000 + Liberty Media Corporation (Class A) 12,462,500 0.4 750,000 The Interpublic Group of Companies, Inc. 10,590,000 0.3 1,000,000 Viacom, Inc. (Class B) 38,300,000 1.2 750,000 The Walt Disney Company 15,127,500 0.4 --------------------------- 114,780,000 3.5 =========================================================================================================================== Metals & Mining 750,000 Alcoa Inc. 19,620,000 0.6 800,000 Nucor Corporation 36,704,000 1.1 1,000,000 United States Steel Corporation 18,380,000 0.6 --------------------------- 74,704,000 2.3 =========================================================================================================================== Oil & Gas 200,000 Anadarko Petroleum Corporation 8,352,000 0.2 800,000 Devon Energy Corporation 38,552,000 1.2 400,000 EnCana Corp. 14,552,000 0.4 700,000 Exxon Mobil Corporation 25,620,000 0.8 750,000 Murphy Oil Corporation 44,062,500 1.4 700,000 Royal Dutch Petroleum Company (NY Registered Shares) 30,940,000 1.0 --------------------------- 162,078,500 5.0 =========================================================================================================================== Paper & Forest Products 1,000,000 International Paper Company 39,020,000 1.2 700,000 Weyerhaeuser Company 40,915,000 1.3 --------------------------- 79,935,000 2.5 =========================================================================================================================== Personal Products 700,000 Avon Products, Inc. 45,192,000 1.4 300,000 The Gillette Company 9,594,000 0.3 --------------------------- 54,786,000 1.7 =========================================================================================================================== Pharmaceuticals 1,250,000 Pfizer Inc. 37,975,000 1.2 1,100,000 Schering-Plough Corporation 16,764,000 0.5 900,000 Wyeth 41,490,000 1.3 --------------------------- 96,229,000 3.0 =========================================================================================================================== Road & Rail 600,000 CSX Corporation 17,550,000 0.5 =========================================================================================================================== Semiconductors & 2,000,000 + Agere Systems Inc. (Class A) 6,140,000 0.2 Semiconductor Equipment 800,000 + Applied Materials, Inc. 14,512,000 0.4 600,000 + Micron Technology, Inc. 8,052,000 0.2 500,000 Texas Instruments Incorporated 11,400,000 0.4 --------------------------- 40,104,000 1.2 =========================================================================================================================== Software 1,750,000 Microsoft Corporation 48,632,500 1.5 750,000 + Siebel Systems, Inc. 7,290,000 0.2 --------------------------- 55,922,500 1.7 ===========================================================================================================================
12 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Schedule of Investments (continued)
Percent of Industry@ Shares Held Common Stocks Value Net Assets =========================================================================================================================== Specialty Retail 2,000,000 The Limited, Inc. $ 30,160,000 0.9% 500,000 The TJX Companies, Inc. 9,710,000 0.3 ------------------------------ 39,870,000 1.2 =========================================================================================================================== Thrifts & Mortgage Finance 500,000 Fannie Mae 35,100,000 1.1 =========================================================================================================================== Total Common Stocks (Cost--$1,916,791,572) 2,121,306,977 65.2 =========================================================================================================================== Face Amount Corporate Bonds =========================================================================================================================== Aerospace & Defense US$ 1,365,000 Lockheed Martin Corporation, 8.20% due 12/01/2009 1,689,929 0.1 Raytheon Company: 6,995,000 6.15% due 11/01/2008 7,762,981 0.2 2,225,000 8.30% due 3/01/2010 2,722,979 0.1 ------------------------------ 12,175,889 0.4 =========================================================================================================================== Airlines 1,215,000 American Airlines, 3.857% due 7/09/2010 1,214,757 0.0 =========================================================================================================================== Automobiles DaimlerChrysler NA Holdings: 2,425,000 6.40% due 5/15/2006 2,630,179 0.1 1,785,000 7.75% due 1/18/2011 2,040,407 0.1 1,495,000 General Motors Corporation, 7.20% due 1/15/2011 1,575,337 0.0 ------------------------------ 6,245,923 0.2 =========================================================================================================================== Beverages 3,190,000 Brown-Forman Corporation, 3% due 3/15/2008 3,154,562 0.1 2,460,000 Cia Brasileira de Bebida, 8.75% due 9/15/2013 (a) 2,484,600 0.1 1,465,000 Coca-Cola HBC Finance BV, 5.125% due 9/17/2013 (a) 1,506,974 0.0 2,575,000 Miller Brewing Company, 5.50% due 8/15/2013 (a) 2,690,458 0.1 ------------------------------ 9,836,594 0.3 =========================================================================================================================== Building Products 2,090,000 Celulosa Arauco y Constitucion S.A., 5.125% due 7/09/2013 (a) 2,059,091 0.1 1,095,000 Hanson Australia Funding, 5.25% due 3/15/2013 1,112,087 0.0 ------------------------------ 3,171,178 0.1 =========================================================================================================================== Capital Markets Mellon Funding Corporation: 885,000 4.875% due 6/15/2007 950,312 0.0 625,000 5% due 12/01/2014 638,548 0.0 ------------------------------ 1,588,860 0.0 =========================================================================================================================== Chemicals 800,000 Potash Corporation of Saskatchewan, 4.875% due 3/01/2013 796,089 0.0 ===========================================================================================================================
MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 13 [LOGO] Merrill Lynch Investment Managers Schedule of Investments (continued)
Percent of Industry@ Face Amount Corporate Bonds Value Net Assets ============================================================================================================================ Commercial Banks US$ 925,000 BB&T Corporation, 4.75% due 10/01/2012 $ 935,104 0.0% 665,000 BSCH Issuances Ltd., 7.625% due 9/14/2010 811,994 0.0 1,880,000 Banc One Corp., 8% due 4/29/2027 2,380,285 0.1 752,000 Bank of America Corporation, 4.875% due 1/15/2013 765,519 0.0 1,585,000 BankAmerica Corp., 5.875% due 2/15/2009 1,764,119 0.1 1,455,000 Capital One Bank, 4.875% due 5/15/2008 1,507,125 0.0 1,610,000 Certegy Inc., 4.75% due 9/15/2008 (a) 1,674,978 0.1 3,405,000 Comerica Inc., 4.80% due 5/01/2015 3,350,670 0.1 1,590,000 Corporacion Andina de Fomento, 6.875% due 3/15/2012 1,765,601 0.1 1,400,000 Firstbank Puerto Rico, 7.625% due 12/20/2005 1,464,975 0.0 155,000 FleetBoston Financial Corporation, 6.375% due 5/15/2008 174,515 0.0 380,000 Golden West Financial Corporation, 4.75% due 10/01/2012 388,083 0.0 555,000 Hudson United Bancorp Inc., 8.20% due 9/15/2006 619,534 0.0 1,160,000 Korea Development Bank, 4.25% due 11/13/2007 1,189,876 0.0 2,650,000 PNC Funding Corp., 6.125% due 2/15/2009 2,990,975 0.1 3,490,000 Provident Bank, 6.375% due 1/15/2004 3,546,712 0.1 410,000 Regions Financial Corporation, 6.375% due 5/15/2012 460,338 0.0 965,000 Suntrust Bank, 5.45% due 12/01/2017 1,029,326 0.0 180,000 Synovus Financial, 4.875% due 2/15/2013 180,864 0.0 2,340,000 US Bancorp, 1.29% due 9/16/2005 (b) 2,341,423 0.1 1,520,000 Washington Mutual Bank, 5.50% due 1/15/2013 1,588,064 0.1 2,885,000 Wells Fargo & Co., 5.125% due 2/15/2007 3,098,530 0.1 --------------------------- 34,028,610 1.0 ============================================================================================================================ Commercial Services & Supplies 525,000 Aramark Services Inc., 6.75% due 8/01/2004 544,860 0.0 Cendant Corporation: 1,700,000 6.875% due 8/15/2006 1,884,222 0.1 1,050,000 6.25% due 1/15/2008 1,153,259 0.0 1,080,000 International Lease Finance Corporation, 2.95% due 5/23/2006 1,092,425 0.0 1,515,000 PHH Corporation, 6% due 3/01/2008 1,636,230 0.1 Waste Management Inc.: 900,000 7.375% due 8/01/2010 1,052,068 0.0 1,945,000 6.375% due 11/15/2012 2,150,765 0.1 --------------------------- 9,513,829 0.3 ============================================================================================================================ Communications Equipment 1,950,000 GTE Corporation, 6.84% due 4/15/2018 2,211,202 0.1 2,365,000 Harris Corporation, 6.35% due 2/01/2028 2,507,716 0.1 --------------------------- 4,718,918 0.2 ============================================================================================================================ Containers & Packaging Sealed Air Corporation: 1,590,000 5.375% due 4/15/2008 1,658,367 0.1 1,180,000 6.95% due 5/15/2009 (a) 1,319,002 0.0 --------------------------- 2,977,369 0.1 ============================================================================================================================
14 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Schedule of Investments (continued)
Percent of Industry@ Face Amount Corporate Bonds Value Net Assets ============================================================================================================================ Diversified Financial Services US$ 1,940,000 AGL Capital Corporation, 4.45% due 4/15/2013 $ 1,882,101 0.1% 3,430,000 Bear Stearns Company Inc., 5.70% due 11/15/2014 3,658,239 0.1 835,000 Brascan Corporation, 5.75% due 3/01/2010 884,429 0.0 Citigroup Inc.: 1,150,000 5.75% due 5/10/2006 1,251,364 0.0 2,920,000 7.25% due 10/01/2010 3,458,679 0.1 2,085,000 6.50% due 1/18/2011 2,382,459 0.1 2,190,000 4.875% due 5/07/2015 2,177,824 0.1 1,480,000 6.625% due 6/15/2032 1,634,009 0.1 1,355,000 Codelco Inc., 6.375% due 11/30/2012 (a) 1,467,671 0.0 7,300,000 Core Investment Grade Trust, 4.727% due 11/30/2007 7,617,915 0.2 1,770,000 Countrywide Home Loan, 5.625% due 7/15/2009 1,923,103 0.1 Deutsche Telekom International Finance: 395,000 8.50% due 6/15/2010 483,173 0.0 1,510,000 5.25% due 7/22/2013 1,526,024 0.1 930,000 8.75% due 6/15/2030 1,179,708 0.0 Ford Motor Credit Company: 1,110,000 6.50% due 1/25/2007 1,173,057 0.0 685,000 7.20% due 6/15/2007 738,280 0.0 7,080,000 7% due 10/01/2013 7,124,958 0.2 8,940,000 General Electric Capital Corporation, 6% due 6/15/2012 9,797,480 0.3 General Motors Acceptance Corp.: 2,430,000 6.875% due 8/28/2012 2,514,119 0.1 2,150,000 8% due 11/01/2031 2,208,437 0.1 Goldman Sachs Group, Inc.: 8,300,000 6.875% due 1/15/2011 9,543,713 0.3 1,555,000 5.25% due 4/01/2013 1,606,626 0.1 Household Finance Corp.: 535,000 4.625% due 1/15/2008 562,413 0.0 1,945,000 6.50% due 11/15/2008 2,207,982 0.1 3,000,000 6.75% due 5/15/2011 3,421,521 0.1 1,080,000 IOS Capital LLC, 7.25% due 6/30/2008 1,047,600 0.0 1,967,429 Kern River Funding Corporation, 4.893% due 4/30/2018 (a) 1,976,951 0.1 Lehman Brothers Holdings, Inc.: 1,400,000 6.625% due 4/01/2004 1,437,464 0.0 125,000 4% due 1/22/2008 128,691 0.0 3,000,000 3.50% due 8/07/2008 3,006,039 0.1 860,000 MBNA America Bank NA, 7.125% due 11/15/2012 986,410 0.0 1,245,000 Morgan Stanley Dean Witter, 6.75% due 4/15/2011 1,422,434 0.0 1,510,000 Nisource Finance Corporation, 5.40% due 7/15/2014 1,532,413 0.1 Principal Life Global (a): 735,000 3.625% due 4/30/2008 743,283 0.0 1,095,000 6.25% due 2/15/2012 1,216,197 0.0 3,340,000 Textron Financial Corporation, 2.75% due 6/01/2006 3,343,043 0.1 1,370,000 UFJ Finance Aruba A.E.C., 6.75% due 7/15/2013 1,435,294 0.0 1,740,000 Vectren Utility Holdings, 5.25% due 8/01/2013 1,768,010 0.1 --------------------------- 92,469,113 2.8 ============================================================================================================================
MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 15 [LOGO] Merrill Lynch Investment Managers Schedule of Investments (continued)
Percent of Industry@ Face Amount Corporate Bonds Value Net Assets ============================================================================================================================ Diversified Telecommunication US$ 3,825,000 British Telecom PLC, 8.375% due 12/15/2010 $ 4,706,372 0.1% Services 685,000 CenturyTel Inc., 7.875% due 8/15/2012 837,821 0.0 France Telecom: 5,530,000 9% due 3/01/2011 6,754,989 0.2 990,000 9.75% due 3/01/2031 1,321,786 0.0 1,325,000 Koninklijke (KPN) NV, 8% due 10/01/2010 1,601,527 0.1 Verizon Global Funding Corporation: 3,990,000 4% due 1/15/2008 4,108,280 0.1 1,420,000 6.875% due 6/15/2012 1,619,824 0.1 ---------------------------- 20,950,599 0.6 ============================================================================================================================ Electric Utilities 1,459,000 AEP Texas Central Company, 6.65% due 2/15/2033 (a) 1,528,332 0.1 815,000 Australian Gas Light Company, 5.30% due 9/25/2015 (a) 835,346 0.0 CenterPoint Energy, Inc. (a): 920,000 7.25% due 9/01/2010 963,198 0.0 765,000 7.875% due 4/01/2013 859,425 0.0 2,305,000 5.60% due 7/01/2023 2,196,162 0.1 2,535,000 Cincinnati Gas & Electric Company, 5.70% due 9/15/2012 2,693,805 0.1 850,000 Consolidated Edison Company of New York Inc., 3.625% due 8/01/2008 858,414 0.0 Consumers Energy (a): 620,000 4.25% due 4/15/2008 628,416 0.0 2,970,000 4% due 5/15/2010 2,862,768 0.1 Dominion Resources Inc.: 1,080,000 7.625% due 7/15/2005 1,185,378 0.0 3,480,000 5.25% due 8/01/2033 3,482,773 0.1 Duke Energy Corporation: 990,000 3.75% due 3/05/2008 1,002,758 0.0 2,925,000 6.25% due 1/15/2012 3,182,637 0.1 3,370,000 Entergy Gulf States, Inc., 5.25% due 8/01/2015 (a) 3,268,088 0.1 520,000 Exelon Corporation, 6.75% due 5/01/2011 588,339 0.0 2,950,000 FPL Group Capital Inc., 1.44% due 3/30/2005 2,949,360 0.1 1,285,000 PSE&G Power, 6.95% due 6/01/2012 1,450,612 0.1 1,115,000 Pepco Holdings Inc., 4% due 5/15/2010 1,076,515 0.0 1,815,000 Southern Power Company, 6.25% due 7/15/2012 1,991,819 0.1 ---------------------------- 33,604,145 1.0 ============================================================================================================================ Electrical Equipment 325,000 Emerson Electric Company, 6% due 8/15/2032 341,553 0.0 ============================================================================================================================ Electronic Equipment & Instruments 1,415,000 Jabil Circuit Inc., 5.875% due 7/15/2010 1,469,625 0.0 ============================================================================================================================ Food & Staples Retailing 3,250,000 Kroger Company, 6.80% due 4/01/2011 3,715,302 0.1 ============================================================================================================================ Food Products 398,000 Archer-Daniels-Midland, 5.935% due 10/01/2032 408,328 0.0 2,220,000 Cadbury Schweppes US Finance LLC, 5.125% due 10/01/2013 (a) 2,252,066 0.1 ---------------------------- 2,660,394 0.1 ============================================================================================================================ Foreign Government Obligations 860,000 Republic of Chile, 5.50% due 1/15/2013 894,400 0.0 United Mexican States: 2,535,000 9.875% due 2/01/2010 3,232,125 0.1 1,030,000 6.375% due 1/16/2013 1,086,650 0.1 ---------------------------- 5,213,175 0.2 ============================================================================================================================ Gas Utilities 1,845,000 Texas Gas Transmission, 4.60% due 6/01/2015 (a) 1,781,842 0.1 ============================================================================================================================ Health Care Providers & Services 1,615,000 HCA Inc., 6.30% due 10/01/2012 1,646,047 0.1 655,000 Manor Care Inc., 6.25% due 5/01/2013 671,375 0.0 3,260,000 Security Benefit Life, 7.45% due 10/01/2033 (a) 3,252,632 0.1 ---------------------------- 5,570,054 0.2 ============================================================================================================================
16 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Schedule of Investments (continued)
Percent of Industry@ Face Amount Corporate Bonds Value Net Assets ============================================================================================================================ Hotels, Restaurants & Leisure US$ 4,755,000 MGM Mirage Inc., 6% due 10/01/2009 $ 4,778,775 0.2% ============================================================================================================================ Industrial Conglomerates 25,000 Eli Lilly & Company, 7.125% due 6/01/2025 30,320 0.0 25,000 General Electric Company, 5% due 2/01/2013 25,628 0.0 --------------------------- 55,948 0.0 ============================================================================================================================ Insurance 1,485,000 Berkley (WR) Corporation, 5.125% due 9/30/2010 1,523,000 0.1 3,465,000 NLV Financial Corporation, 7.50% due 8/15/2033 (a) 3,617,401 0.1 3,000,000 New York Life Insurance, 5.875% due 5/15/2033 (a) 3,001,350 0.1 580,000 Progressive Corporation, 6.25% due 12/01/2032 617,300 0.0 935,000 Travelers Property Casualty, 6.375% due 3/15/2033 993,931 0.0 --------------------------- 9,752,982 0.3 ============================================================================================================================ Media 9,160,000 AOL Time Warner Inc., 6.875% due 5/01/2012 10,277,776 0.3 Clear Channel Communications, Inc.: 520,000 7.875% due 6/15/2005 571,028 0.0 875,000 4.40% due 5/15/2011 862,166 0.0 3,000,000 Comcast Cable Communications, 6.375% due 1/30/2006 3,259,512 0.1 Comcast Corporation: 1,935,000 5.85% due 1/15/2010 2,092,493 0.1 935,000 7.05% due 3/15/2033 1,024,735 0.0 145,000 Cox Communications Inc., 7.125% due 10/01/2012 167,443 0.0 2,375,000 Echostar DBS Corporation, 5.75% due 10/01/2008 (a) 2,377,969 0.1 390,000 Lenfest Communications, Inc., 10.50% due 6/15/2006 463,424 0.0 Liberty Media Corporation: 850,000 7.875% due 7/15/2009 983,096 0.0 2,140,000 5.70% due 5/15/2013 2,136,713 0.1 720,000 News America Holdings, 9.25% due 2/01/2013 941,985 0.0 3,185,000 News America Inc., 6.75% due 1/09/2038 3,452,893 0.1 2,165,000 Rogers Cable Inc., 6.25% due 6/15/2013 2,162,294 0.1 1,570,000 Tele-Communications Inc., 9.80% due 2/01/2012 2,072,097 0.1 975,000 USA Interactive, 7% due 1/15/2013 1,099,770 0.0 2,135,000 Univision Communication Inc., 7.85% due 7/15/2011 2,533,735 0.1 --------------------------- 36,479,129 1.1 ============================================================================================================================ Metals & Mining 1,460,000 Inco Limited, 7.75% due 5/15/2012 1,728,066 0.0 1,762,000 Kinder Morgan Energy, 6.75% due 3/15/2011 2,022,617 0.1 385,000 Placer Dome Inc., 6.375% due 3/01/2033 394,722 0.0 --------------------------- 4,145,405 0.1 ============================================================================================================================ Multi-Utilities & Unregulated Power 985,000 New York State Electric & Gas, 5.75% due 5/01/2023 936,605 0.0 1,480,000 Public Service Company of New Mexico, 4.40% due 9/15/2008 1,516,347 0.1 975,000 TGT Pipeline LLC, 5.20% due 6/01/2018 (a) 946,699 0.0 --------------------------- 3,399,651 0.1 ============================================================================================================================ Oil & Gas Anadarko Finance Company: 712,000 6.75% due 5/01/2011 822,836 0.0 414,000 7.50% due 5/01/2031 500,410 0.0 1,180,000 Colonial Pipeline, 7.63% due 4/15/2032 (a) 1,481,301 0.1 810,000 EnCana Corp., 4.75% due 10/15/2013 814,479 0.0 1,645,000 Enterprise Products Operating L.P., 6.875% due 3/01/2033 1,773,113 0.1 870,000 Motiva Enterprises LLC, 5.20% due 9/15/2012 (a) 895,768 0.0 Pemex Project Funding Master Trust: 1,485,000 9.125% due 10/13/2010 1,778,288 0.1 1,170,000 7.375% due 12/15/2014 1,257,750 0.0 3,235,000 Ultramar Diamond Shamrock, 6.75% due 10/15/2037 3,561,104 0.1 --------------------------- 12,885,049 0.4 ============================================================================================================================
MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 17 [LOGO] Merrill Lynch Investment Managers Schedule of Investments (continued)
Percent of Industry@ Face Amount Corporate Bonds Value Net Assets ============================================================================================================================ Paper & Forest Products US$ 254,000 Abitibi Consolidated Inc., 8.55% due 8/01/2010 $ 277,341 0.0% 3,835,000 Boise Cascade Corporation, 7.66% due 5/27/2005 4,060,030 0.1 3,470,000 Champion International Corp., 6.65% due 12/15/2037 3,975,520 0.1 1,080,000 Inversiones CMPC SA, 4.875% due 6/18/2013 (a) 1,042,253 0.1 1,025,000 Norske Skog Industrier ASA, 6.125% due 10/15/2015 (a) 1,054,428 0.1 785,000 Rock-Tenn Company, 5.625% due 3/15/2013 792,706 0.0 655,000 UPM-Kymmene Corporation, 5.625% due 12/01/2014 (a) 679,984 0.0 --------------------------- 11,882,262 0.4 ============================================================================================================================ Real Estate 1,410,000 Centerpoint Properties, 4.75% due 8/01/2010 1,441,009 0.1 665,000 Developers Divers Realty, 6.625% due 1/15/2008 728,053 0.0 1,325,000 Health Care Properties Investors Inc., 6.45% due 6/25/2012 1,431,506 0.0 1,545,000 Highwoods Realty LP, 7% due 12/01/2006 1,657,644 0.1 1,730,000 Shurgard Storage Centers, 5.875% due 3/15/2013 1,812,428 0.1 1,140,000 United Dominion Realty Trust, Inc., 6.50% due 6/15/2009 1,266,108 0.0 --------------------------- 8,336,748 0.3 ============================================================================================================================ Road & Rail 770,000 Burlington Northern Santa Fe Corporation, 7.95% due 8/15/2030 964,182 0.1 2,495,000 Norfolk Southern Corporation, 7.25% due 2/15/2031 2,887,643 0.1 Union Pacific Corporation: 825,000 7.25% due 11/01/2008 959,546 0.0 475,000 4.698% due 1/02/2024 464,170 0.0 --------------------------- 5,275,541 0.2 ============================================================================================================================ Wireless Telecommunication 530,000 AT&T Wireless Services Inc., 8.75% due 3/01/2031 655,525 0.0 Services Sprint Capital Corporation: 3,895,000 6.90% due 5/01/2019 3,993,240 0.1 180,000 8.75% due 3/15/2032 213,882 0.0 --------------------------- 4,862,647 0.1 ============================================================================================================================ Total Corporate Bonds (Cost--$343,410,137) 355,897,955 10.9 ============================================================================================================================ Collateralized Mortgage Obligations* ============================================================================================================================ 9,800,000 CIT Group Home Equity Loan Trust, Series 2003-1, Class A2, 2.35% due 4/20/2027 9,856,937 0.3 Fannie Mae: 7,020,000 6.375% due 6/15/2009 8,084,085 0.2 4,890,000 6% due 5/15/2011 5,525,392 0.2 6,647,370 5% due 7/01/2018 6,817,190 0.2 8,090,000 7.125% due 1/15/2030 9,935,111 0.3 1,231,392 7.50% due 1/01/2031 1,314,138 0.0 602,313 7.50% due 7/01/2031 642,776 0.0 1,168,644 7.50% due 8/01/2031 1,247,153 0.0 643,342 7.50% due 11/01/2031 686,572 0.0 2,000,826 7.50% due 4/01/2032 2,135,151 0.0 10,331,849 7.50% due 9/01/2032 11,025,936 0.3 1,079,603 7.50% due 2/01/2033 1,152,149 0.0 9,170,000 Freddie Mac, 6.625% due 9/15/2009 10,678,327 0.3
18 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Schedule of Investments (continued)
Percent of Face Amount Collateralized Mortgage Obligations* Value Net Assets =================================================================================================================================== Freddie Mac Gold: US$ 223,502 6% due 4/01/2016 $ 232,740 0.0% 1,616,173 6.50% due 6/01/2017 1,700,591 0.1 3,145,428 5.50% due 7/01/2017 3,255,518 0.1 2,557,141 6.50% due 7/01/2017 2,690,710 0.1 949,552 6.50% due 8/01/2017 999,150 0.0 10,933,533 5.50% due 9/01/2017 11,316,208 0.3 2,002,543 6% due 10/01/2017 2,084,827 0.1 2,500,945 5.50% due 11/01/2017 2,588,479 0.1 7,112,612 5.50% due 12/01/2017 7,361,554 0.2 186,650 5.50% due 1/01/2018 193,183 0.0 2,444,073 6% due 2/01/2018 2,544,573 0.1 2,556,970 6% due 5/01/2018 2,662,036 0.1 7,351,372 5% due 10/15/2018 7,525,967 0.2 8,000,000 6% due 11/15/2018 8,310,000 0.3 2,853,454 6.50% due 1/01/2030 2,982,811 0.1 15,819,070 7% due 2/01/2031 16,705,387 0.5 449,583 7% due 7/01/2031 474,749 0.0 4,287,801 6.50% due 11/01/2031 4,476,960 0.1 3,373,918 6.50% due 12/01/2031 3,522,760 0.1 2,031,753 6.50% due 6/01/2032 2,121,385 0.1 4,069,424 6.50% due 7/01/2032 4,249,312 0.1 9,557,489 7% due 7/01/2032 10,092,980 0.3 8,768,920 6.50% due 8/01/2032 9,155,764 0.3 4,639,096 6.50% due 4/01/2033 4,843,751 0.2 21,067,800 5% due 8/01/2033 21,077,677 0.7 40,700,000 5.50% due 10/15/2033 41,501,302 1.3 62,843,900 6% due 10/15/2033 64,925,604 2.0 18,000,000 5.50% due 11/15/2033 18,292,500 0.6 8,500,000 6% due 11/15/2033 8,757,652 0.3 17,500,000 6.50% due 11/15/2033 18,238,290 0.6 Government National Mortgage Association: 5,000,000 5% due 12/15/2018 5,129,690 0.2 715,271 7.50% due 11/15/2030 765,704 0.0 761,491 7.50% due 4/15/2031 815,073 0.0 4,496,316 7.50% due 3/15/2032 4,813,492 0.2 460,310 7.50% due 1/15/2033 492,666 0.0 6,000,000 Greenwich Capital Commercial Funding Corporation, Series 2002-C1, Class A4, 4.948% due 1/11/2035 6,175,555 0.2 4,900,000 LB-UBS Commercial Mortgage Trust, Series 2002-C1, Class A3, 6.226% due 3/15/2026 5,475,923 0.2 10,850,000 MBNA Credit Card Master Note Trust, Series 2001-C3, Class C3, 6.55% due 12/15/2008 11,723,500 0.4 4,000,000 Nationslink Funding Corporation, Series 1999-2, Class A3, 7.181% due 6/20/2031 4,448,172 0.1 526,372 Washington Mutual, Series 2002-S2, Class 1A2, 6.50% due 3/25/2032 532,278 0.0 =================================================================================================================================== Total Collateralized Mortgage Obligations (Cost--$389,755,877) 394,357,390 12.1 ===================================================================================================================================
MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 19 [LOGO] Merrill Lynch Investment Managers Schedule of Investments (continued)
Percent of Industry@ Face Amount U.S. Government Obligations Value Net Assets =========================================================================================================================== U.S. Treasury Bonds: US$ 5,650,000 7.50% due 11/15/2016 $ 7,375,459 0.2% 3,450,000 8.125% due 8/15/2019 4,781,486 0.1 12,000,000 7.25% due 8/15/2022 15,542,340 0.5 2,490,000 6.25% due 8/15/2023 2,910,867 0.1 2,490,000 6.625% due 2/15/2027 3,056,281 0.1 3,505,000 5.375% due 2/15/2031 3,761,303 0.1 U.S. Treasury Notes: 32,800,000 7% due 7/15/2006 (g) 37,366,383 1.1 12,465,000 3.125% due 9/15/2008 12,638,338 0.4 5,750,000 4.75% due 11/15/2008 6,263,233 0.2 3,460,000 6.50% due 2/15/2010 4,105,913 0.1 4,960,000 5% due 2/15/2011 5,438,948 0.2 11,305,000 4.25% due 8/15/2013 11,588,948 0.4 =========================================================================================================================== Total U.S. Government Obligations (Cost--$111,418,301) 114,829,499 3.5 =========================================================================================================================== =========================================================================================================================== Shares Held Preferred Securities =========================================================================================================================== Oil & Gas 40,000 Unocal Capital Trust, 3.125% (Convertible) 2,033,339 0.1 =========================================================================================================================== Paper & Forest Products 28,000 International Paper Capital Trust, 2.625% (Convertible) 1,368,674 0.0 =========================================================================================================================== Road & Rail 10,685 Union Pacific Capital Trust, 6.25% (Convertible) 540,565 0.0 =========================================================================================================================== Total Preferred Securities (Cost--$3,925,139) 3,942,578 0.1 =========================================================================================================================== =========================================================================================================================== Beneficial Interest/ Shares Held Short-Term Investments =========================================================================================================================== $450,119,397 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (c) 450,119,397 13.8 $248,406,805 Merrill Lynch Liquidity Series, LLC Money Market Series (c)(d) 248,406,805 7.6 186,812,510 Merrill Lynch Premier Institutional Fund (c)(d) 186,812,510 5.8 =========================================================================================================================== Total Short-Term Investments (Cost--$885,338,712) 885,338,712 27.2 =========================================================================================================================== Number of Options Purchased Contracts Issue =========================================================================================================================== Call Options Purchased 194 Eurodollar Future, expiring December 2003 at US$ 97.7, Broker Greenwich Capital 196,425 0.0 =========================================================================================================================== Total Options Purchased (Premiums Paid--$122,123) 196,425 0.0 =========================================================================================================================== Total Investments (Cost--$3,650,761,861) 3,875,869,536 119.0 ===========================================================================================================================
20 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Schedule of Investments (continued)
Number of Percent of Options Written Contracts Issue Value Net Assets ============================================================================================================================ Call Options Written 194 Eurodollar Future, expiring December 2003 at US$ 98.5, Broker Greenwich Capital $(26,675) 0.0% ============================================================================================================================ Put Options Written 194 Eurodollar Future, expiring December 2003 at US$ 98, Broker Greenwich Capital (124,888) 0.0 - ---------------------------------------------------------------------------------------------------------------------------- Total Options Written (Premiums Received--$163,154) (151,563) 0.0 ============================================================================================================================ Total Investments, Net of Options Written (Cost--$3,650,598,707) 3,875,717,973 119.0 Variation Margin on Financial Futures Contracts (f) (371,188) (0.0) Unrealized Appreciation on Interest Rate Swaps (e) 91,496 0.0 Liabilities in Excess of Other Assets (619,477,788) (19.0) ------------------------------ Net Assets $3,255,960,493 100.0% ==============================
* Subject to principal paydowns. + Non-income producing security. @ For Fund compliance purposes, "Industry" means any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease. These classifications are unaudited. (a) The security may be offered and sold to "qualified institutional buyers" under Rule 144A of the Securities Act of 1933. (b) Floating rate note. (c) Investments in companies considered to be an affiliate of the Fund (such companies are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940) are as follows:
------------------------------------------------------------------------------------------------------------------------ Dividend/ Net Interest Affiliate Activity Income ------------------------------------------------------------------------------------------------------------------------ Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $ 60,652,309 $2,061,746 Merrill Lynch Liquidity Series, LLC Money Market Series $(218,705,315) $ 165,059 Merrill Lynch Premier Institutional Fund (124,595,570) $ 135,698 ------------------------------------------------------------------------------------------------------------------------
(d) Security was purchased with the cash proceeds from securities loans. (e) Swap contracts entered into as of September 30, 2003 were as follows:
------------------------------------------------------------------------------------------------------------------------ Unrealized Notional Appreciation Amount (Depreciation) ------------------------------------------------------------------------------------------------------------------------ Receive a price return equal to CMBS Investment Grade Total Return and pay floating rate based on 1-month USD LIBOR, minus .40% Broker, Deutsche Bank AG. Expires October 2003 41,000,000 -- Receive a price return equal to Lehman Brothers High Yield Index Total Return and pay floating rate based on 1-month USD LIBOR, plus .15% Broker, Credit Suisse First Boston. Expires March 2004 10,200,000 -- Receive a price return equal to JP Morgan Mortgage Backed Securities Index and pay floating rate based on 1-month USD LIBOR, minus .22% Broker, JP Morgan Chase Bank. Expires January 2004 19,725,000 -- Receive a price return equal to JP Morgan Mortgage Backed Securities Index and pay floating rate based on 1-month USD LIBOR, minus .30% Broker, JP Morgan Chase Bank. Expires April 2004 10,300,000 -- Receive a price return equal to Lehman Brothers Treasury Index Total Return and pay floating rate based on 1-month USD LIBOR, minus .20% Broker, Lehman Brothers Special Finance. Expires December 2003 50,950,000 --
MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 21 [LOGO] Merrill Lynch Investment Managers Schedule of Investments (concluded)
--------------------------------------------------------------------------------------------------------------------------- Unrealized Notional Appreciation Amount (Depreciation) --------------------------------------------------------------------------------------------------------------------------- Receive a price return equal to Lehman Brothers High Yield Index Total Return and pay floating rate based on 1-month USD LIBOR, plus .10% Broker, Credit Suisse First Boston. Expires December 2003 3,450,000 -- Receive a price return equal to Lehman Brothers High Yield Index Total Return and pay floating rate based on 1-month USD LIBOR, plus .10% Broker, Lehman Brothers Special Finance. Expires December 2003 2,300,000 -- Receive a price return equal to JP Morgan Mortgage Backed Securities Index and pay floating rate based on 1-month USD LIBOR, minus .25% Broker, JP Morgan Chase Bank. Expires January 2004 35,000,000 -- Receive a price return equal to JP Morgan Mortgage Backed Securities Index and pay floating rate based on 1-month USD LIBOR, minus .30% Broker, JP Morgan Chase Bank. Expires November 2003 12,000,000 -- TRAC-X HYDIS 100 Index and receive 4.50%, Broker, JP Morgan Chase Bank. Expires June 2008 11,286,000 $(84,645) TRAC-X HYDIS 100 Index and receive 4.50%, Broker, Morgan Stanley Capital Services Inc. Expires June 2008 2,075,000 86,891 TRAC-X HYDIS 100 Index and receive 4.50%, Broker, Bear Stearns Credit Products Inc. Expires June 2008 2,100,000 89,250 --------------------------------------------------------------------------------------------------------------------------- Total $ 91,496 ========
(f) Financial futures contracts purchased as of September 30, 2003 were as follows:
-------------------------------------------------------------------------------------------------------------------------- Number of Expiration Face Unrealized Contracts Issue Date Value Losses -------------------------------------------------------------------------------------------------------------------------- 193 Eurodollar December 2004 $192,035,869 $ (5,693) -------------------------------------------------------------------------------------------------------------------------- Total Unrealized Losses--Net $ (5,693) ========
Financial futures contracts sold as of September 30, 2003 were as follows:
-------------------------------------------------------------------------------------------------------------------------- Number of Expiration Face Unrealized Contracts Issue Date Value Losses -------------------------------------------------------------------------------------------------------------------------- 405 Ten-Year U.S. Treasury Note Futures December 2003 $45,019,731 $(1,403,394) -------------------------------------------------------------------------------------------------------------------------- Total Unrealized Losses--Net $(1,403,394) ===========
(g) All or a portion of security held as collateral in connection with open financial futures contracts. See Notes to Financial Statements. 22 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Statement of Assets and Liabilities As of September 30, 2003 ======================================================================================================================== Assets - ------------------------------------------------------------------------------------------------------------------------ Investments, at value (including securities loaned of $421,958,984) (identified cost--$3,650,639,738) .............................. $3,875,673,111 Options purchased, at value (premiums paid--$122,123) ............ 196,425 Cash ............................................................. 7,997,053 Unrealized appreciation on swaps ................................. 91,496 Receivables: Securities sold ............................................... $ 35,335,476 Interest ...................................................... 8,369,351 Swaps ......................................................... 4,586,797 Swaptions closed .............................................. 2,685,420 Dividends ..................................................... 2,571,643 Capital shares sold ........................................... 1,479,480 Securities lending--net ....................................... 36,114 55,064,281 ------------- Prepaid registration fees ........................................ 13,091 -------------- Total assets ..................................................... 3,939,035,457 -------------- ======================================================================================================================== Liabilities - ------------------------------------------------------------------------------------------------------------------------ Collateral on securities loaned, at value ........................ 435,219,315 Options written, at value (premiums received--$163,154) .......... 151,563 Payables: Securities purchased .......................................... 225,788,639 Capital shares redeemed ....................................... 14,812,405 Swaptions closed .............................................. 4,880,000 Distributor ................................................... 940,091 Other affiliates .............................................. 436,457 Variation margin .............................................. 371,188 Investment adviser ............................................ 164,544 247,393,324 ------------- Accrued expenses and other liabilities ........................... 310,762 -------------- Total liabilities ................................................ 683,074,964 -------------- ======================================================================================================================== Net Assets - ------------------------------------------------------------------------------------------------------------------------ Net assets ....................................................... $3,255,960,493 ============== ======================================================================================================================== Net Assets Consist of - ------------------------------------------------------------------------------------------------------------------------ Class A Shares of Common Stock, $.10 par value, 200,000,000 shares authorized .................................. $ 4,222,532 Class B Shares of Common Stock, $.10 par value, 500,000,000 shares authorized .................................. 2,681,968 Class C Shares of Common Stock, $.10 par value, 200,000,000 shares authorized .................................. 620,137 Class I Shares of Common Stock, $.10 par value, 400,000,000 shares authorized .................................. 5,988,069 Class R Shares of Common Stock, $.10 par value, 500,000,000 shares authorized .................................. -- Paid-in capital in excess of par ................................. 3,089,917,037 Undistributed investment income--net ............................. $ 15,560,322 Accumulated realized capital losses on investments and foreign currency transactions--net ......................... (86,903,721) Unrealized appreciation on investments and foreign currency transactions--net ..................................... 223,874,149 ------------- Total accumulated earnings--net .................................. 152,530,750 -------------- Net Assets ....................................................... $3,255,960,493 ============== ======================================================================================================================== Net Asset Value - ------------------------------------------------------------------------------------------------------------------------ Class A--Based on net assets of $1,023,861,207 and 42,225,315 shares outstanding .................................. $ 24.25 ============== Class B--Based on net assets of $632,673,274 and 26,819,676 shares outstanding .................................. $ 23.59 ============== Class C--Based on net assets of $143,481,627 and 6,201,372 shares outstanding ................................... $ 23.14 ============== Class I--Based on net assets of $1,455,944,275 and 59,880,692 shares outstanding .................................. $ 24.31 ============== Class R--Based on net assets of $110.27 and 4.651 shares outstanding ....................................... $ 23.71 ==============
See Notes to Financial Statements. MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 23 [LOGO] Merrill Lynch Investment Managers Statements of Operations
For the Period For the April 1, 2003 to Year Ended September 30, March 31, 2003 2003 ======================================================================================================================== Investment Income - ------------------------------------------------------------------------------------------------------------------------ Interest ......................................................... $ 23,474,593 $ 85,603,565 Dividends (net of $376,810 and $173,808 foreign withholding tax, respectively) ................................. 19,104,851 38,650,794 Securities lending--net .......................................... 300,757 1,078,985 Other ............................................................ 5,975 4,745 ------------------------------- Total income ..................................................... 42,886,176 125,338,089 ------------------------------- ======================================================================================================================== Expenses - ------------------------------------------------------------------------------------------------------------------------ Investment advisory fees ......................................... 6,836,516 15,440,751 Account maintenance and distribution fees--Class B ............... 3,413,779 9,004,127 Account maintenance fees--Class A ................................ 1,282,812 2,745,058 Transfer agent fees--Class I ..................................... 1,184,355 2,571,326 Transfer agent fees--Class A ..................................... 825,573 1,742,613 Account maintenance and distribution fees--Class C ............... 732,798 1,655,309 Transfer agent fees--Class B ..................................... 616,536 1,666,527 Transfer agent fees--Class C ..................................... 141,674 320,423 Printing and shareholder reports ................................. 108,678 170,969 Custodian fees ................................................... 94,805 195,957 Professional fees ................................................ 69,524 226,347 Pricing fees ..................................................... 58,660 67,237 Directors' fees and expenses ..................................... 48,825 78,042 Registration fees ................................................ 42,696 83,769 Other ............................................................ 60,233 130,310 ------------------------------- Total expenses ................................................... 15,517,464 36,098,765 ------------------------------- Investment income--net ........................................... 27,368,712 89,239,324 ------------------------------- ======================================================================================================================== Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net - ------------------------------------------------------------------------------------------------------------------------ Realized gain (loss) on: Investments--net .............................................. 36,077,317 (104,313,265) Foreign currency transactions--net ............................ (47,766) 2,648 Change in unrealized appreciation/depreciation on: Investments--net .............................................. 343,788,716 (806,757,320) Foreign currency transactions--net ............................ 20,079 68,711 ------------------------------- Total realized and unrealized gain (loss) on investments and foreign currency transactions--net ......................... 379,838,346 (910,999,226) ------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations .. $ 407,207,058 $(821,759,902) ===============================
See Notes to Financial Statements 24 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Statements of Changes in Net Assets
For the Period April 1, 2003 to For the Year Ended March 31, September 30, ----------------------------------- Increase (Decrease) in Net Assets: 2003 2003 2002 =================================================================================================================================== Operations - ----------------------------------------------------------------------------------------------------------------------------------- Investment income--net .......................... $ 27,368,712 $ 89,239,324 $ 108,678,599 Realized gain (loss) on investments and foreign currency transactions--net .................... 36,029,551 (104,310,617) 67,096,713 Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net ............................. 343,808,795 (806,688,609) 38,561,025 ------------------------------------------------------- Net increase (decrease) in net assets resulting from operations ............................... 407,207,058 (821,759,902) 214,336,337 ------------------------------------------------------- =================================================================================================================================== Dividends & Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Investment income--net: Class A ...................................... (11,915,568) (28,917,383) (32,663,244) Class B ...................................... (5,200,628) (16,023,503) (24,279,414) Class C ...................................... (1,221,185) (3,191,848) (3,747,630) Class I ...................................... (18,889,212) (46,356,926) (55,115,369) Class R ...................................... (1) -- Realized gain on investments--net: Class A ...................................... -- (10,004,802) (66,197,251) Class B ...................................... -- (8,770,756) (76,419,829) Class C ...................................... -- (1,606,636) (10,936,875) Class I ...................................... -- (14,651,440) (102,586,999) ------------------------------------------------------- Net decrease in net assets resulting from dividends and distributions to shareholders ... (37,226,594) (129,523,294) (371,946,611) ------------------------------------------------------- =================================================================================================================================== Capital Share Transactions - ----------------------------------------------------------------------------------------------------------------------------------- Net decrease in net assets derived from capital share transactions .................... (269,090,692) (585,515,127) (476,749,756) ------------------------------------------------------- =================================================================================================================================== Net Assets - ----------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets ......... 100,889,772 (1,536,798,323) (634,360,030) Beginning of period ............................. 3,155,070,721 4,691,869,044 5,326,229,074 ------------------------------------------------------- End of period* .................................. $ 3,255,960,493 $ 3,155,070,721 $ 4,691,869,044 ======================================================= * Undistributed investment income--net ......... $ 15,560,322 $ 23,121,939 $ 29,918,751 =======================================================
See Notes to Financial Statements. MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 25 [LOGO] Merrill Lynch Investment Managers Financial Highlights
Class A+++ --------------------------------------------------------------------------------- The following per share data and ratios have For the been derived from information provided in the Period financial statements. April 1, 2003 For the Year Ended March 31, to Sept. 30, ------------------------------------------------------------------ Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001 2000 1999 ================================================================================================================================== Per Share Operating Performance - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period ... $ 21.68 $ 27.50 $ 28.31 $ 32.58 $ 34.97 $ 37.49 --------------------------------------------------------------------------------- Investment income--net++ ............... .21 .59 .64 .82 .86 .91 Realized and unrealized gain (loss) on investments and foreign currency transactions--net .................... 2.64 (5.57) .65 (1.17) .60 (1.28) --------------------------------------------------------------------------------- Total from investment operations ....... 2.85 (4.98) 1.29 (.35) 1.46 (.37) --------------------------------------------------------------------------------- Less dividends and distributions: Investment income--net .............. (.28) (.63) (.69) (.93) (.86) (.98) Realized gain on investments--net ... -- (.21) (1.41) (2.99) (2.99) (1.17) --------------------------------------------------------------------------------- Total dividends and distributions ...... (.28) (.84) (2.10) (3.92) (3.85) (2.15) --------------------------------------------------------------------------------- Net asset value, end of period ......... $ 24.25 $ 21.68 $ 27.50 $ 28.31 $ 32.58 $ 34.97 ================================================================================= ================================================================================================================================== Total Investment Return** - ---------------------------------------------------------------------------------------------------------------------------------- Based on net asset value per share ..... 13.16%+ (18.26%) 4.78% (1.35%) 4.29% (.92%) ================================================================================= ================================================================================================================================== Ratios to Average Net Assets - ---------------------------------------------------------------------------------------------------------------------------------- Expenses ............................... .85%* .84% .82% .84% .81% .82% ================================================================================= Investment income--net ................. 1.71%* 2.47% 2.35% 2.64% 2.50% 2.60% ================================================================================= ================================================================================================================================== Supplemental Data - ---------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $1,023,861 $ 939,989 $1,311,739 $1,311,854 $1,428,120 $1,513,406 ================================================================================= Portfolio turnover ..................... 47% 52% 31% 46% 33% 33% =================================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. + Aggregate total investment return. ++ Based on average shares outstanding. +++ Effective April 14, 2003, Class D Shares were redesignated Class A Shares. See Notes to Financial Statements. 26 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Financial Highlights (continued)
Class B ---------------------------------------------------------------------------------- The following per share data and ratios have For the been derived from information provided in the Period financial statements. April 1, 2003 For the Year Ended March 31, to Sept. 30, ------------------------------------------------------------------ Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001 2000 1999 ================================================================================================================================== Per Share Operating Performance - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period ... $ 21.09 $ 26.75 $ 27.56 $ 31.77 $ 34.25 $ 36.68 --------------------------------------------------------------------------------- Investment income--net++ ............... .11 .39 .42 .56 .57 .63 Realized and unrealized gain (loss) on investments and foreign currency transactions--net .................... 2.57 (5.42) .64 (1.13) .60 (1.25) --------------------------------------------------------------------------------- Total from investment operations ....... 2.68 (5.03) 1.06 (.57) 1.17 (.62) --------------------------------------------------------------------------------- Less dividends and distributions: Investment income--net .............. (.18) (.42) (.46) (.65) (.66) (.64) Realized gain on investments--net ... -- (.21) (1.41) (2.99) (2.99) (1.17) --------------------------------------------------------------------------------- Total dividends and distributions ...... (.18) (.63) (1.87) (3.64) (3.65) (1.81) --------------------------------------------------------------------------------- Net asset value, end of period ......... $ 23.59 $ 21.09 $ 26.75 $ 27.56 $ 31.77 $ 34.25 ================================================================================= ================================================================================================================================== Total Investment Return** - ---------------------------------------------------------------------------------------------------------------------------------- Based on net asset value per share ..... 12.73%+ (18.93%) 4.01% (2.11%) 3.48% (1.65%) ================================================================================= ================================================================================================================================== Ratios to Average Net Assets - ---------------------------------------------------------------------------------------------------------------------------------- Expenses ............................... 1.62%* 1.62% 1.59% 1.61% 1.58% 1.59% ================================================================================= Investment income--net ................. .95%* 1.69% 1.58% 1.87% 1.71% 1.85% ================================================================================= ================================================================================================================================== Supplemental Data - ---------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 632,673 $ 680,419 $1,222,487 $1,659,152 $2,853,699 $4,866,564 ================================================================================= Portfolio turnover ..................... 47% 52% 31% 46% 33% 33% =================================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. + Aggregate total investment return. ++ Based on average shares outstanding. See Notes to Financial Statements. MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 27 [LOGO] Merrill Lynch Investment Managers Financial Highlights (continued)
Class C ---------------------------------------------------------------------------------- The following per share data and ratios have For the been derived from information provided in the Period financial statements. April 1, 2003 For the Year Ended March 31, to Sept. 30, ------------------------------------------------------------------ Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001 2000 1999 ================================================================================================================================== Per Share Operating Performance - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period ... $ 20.70 $ 26.29 $ 27.14 $ 31.36 $ 33.82 $ 36.31 --------------------------------------------------------------------------------- Investment income--net++ ............... .11 .38 .41 .55 .57 .62 Realized and unrealized gain (loss) on investments and foreign currency transactions--net .................... 2.52 (5.32) .63 (1.12) .59 (1.25) --------------------------------------------------------------------------------- Total from investment operations ....... 2.63 (4.94) 1.04 (.57) 1.16 (.63) --------------------------------------------------------------------------------- Less dividends and distributions: Investment income--net .............. (.19) (.44) (.48) (.66) (.63) (.69) Realized gain on investments--net ... -- (.21) (1.41) (2.99) (2.99) (1.17) --------------------------------------------------------------------------------- Total dividends and distributions ...... (.19) (.65) (1.89) (3.65) (3.62) (1.86) --------------------------------------------------------------------------------- Net asset value, end of period ......... $ 23.14 $ 20.70 $ 26.29 $ 27.14 $ 31.36 $ 33.82 ================================================================================= ================================================================================================================================== Total Investment Return** - ---------------------------------------------------------------------------------------------------------------------------------- Based on net asset value per share ..... 12.72%+ (18.92%) 4.01% (2.13%) 3.50% (1.70%) ================================================================================= ================================================================================================================================== Ratios to Average Net Assets - ---------------------------------------------------------------------------------------------------------------------------------- Expenses ............................... 1.63%* 1.63% 1.61% 1.62% 1.59% 1.59% ================================================================================= Investment income--net ................. .93%* 1.69% 1.59% 1.86% 1.70% 1.83% ================================================================================= ================================================================================================================================== Supplemental Data - ---------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 143,482 $ 137,674 $ 199,774 $ 212,278 $ 308,150 $ 491,234 ================================================================================= Portfolio turnover ..................... 47% 52% 31% 46% 33% 33% =================================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. + Aggregate total investment return. ++ Based on average shares outstanding. See Notes to Financial Statements. 28 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Financial Highlights (continued)
Class I+++ ---------------------------------------------------------------------------------- The following per share data and ratios have For the been derived from information provided in the Period financial statements. April 1, 2003 For the Year Ended March 31, to Sept. 30, ------------------------------------------------------------------ Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001 2000 1999 ================================================================================================================================== Per Share Operating Performance - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period ... $ 21.73 $ 27.58 $ 28.38 $ 32.66 $ 35.03 $ 37.56 --------------------------------------------------------------------------------- Investment income--net++ ............... .24 .65 .71 .90 .94 1.00 Realized and unrealized gain (loss) on investments and foreign currency transactions--net .................... 2.65 (5.60) .66 (1.18) .62 (1.28) --------------------------------------------------------------------------------- Total from investment operations ....... 2.89 (4.95) 1.37 (.28) 1.56 (.28) --------------------------------------------------------------------------------- Less dividends and distributions: Investment income--net .............. (.31) (.69) (.76) (1.01) (.94) (1.08) Realized gain on investments--net ... -- (.21) (1.41) (2.99) (2.99) (1.17) --------------------------------------------------------------------------------- Total dividends and distributions ...... (.31) (.90) (2.17) (4.00) (3.93) (2.25) --------------------------------------------------------------------------------- Net asset value, end of period ......... $ 24.31 $ 21.73 $ 27.58 $ 28.38 $ 32.66 $ 35.03 ================================================================================= ================================================================================================================================== Total Investment Return** - ---------------------------------------------------------------------------------------------------------------------------------- Based on net asset value per share ..... 13.31%+ (18.09%) 5.07% (1.12%) 4.58% (.68%) ================================================================================= ================================================================================================================================== Ratios to Average Net Assets - ---------------------------------------------------------------------------------------------------------------------------------- Expenses ............................... .60%* .59% .57% .59% .56% .57% ================================================================================= Investment income--net ................. 1.97%* 2.72% 2.60% 2.89% 2.74% 2.86% ================================================================================= ================================================================================================================================== Supplemental Data - ---------------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $1,455,944 $1,396,989 $1,957,869 $2,142,945 $2,721,503 $3,631,440 ================================================================================= Portfolio turnover ..................... 47% 52% 31% 46% 33% 33% =================================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. + Aggregate total investment return. ++ Based on average shares outstanding. +++ Effective April 14, 2003, Class A Shares were redesignated Class I Shares. See Notes to Financial Statements. MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 29 [LOGO] Merrill Lynch Investment Managers Financial Highlights (concluded)
Class R ----------------------------------- The following per share data and ratios have been derived For the Period For the Period from information provided in the financial statements. April 1, 2003 to January 3, September 30, 2003++ Increase (Decrease) in Net Asset Value: 2003 to March 31, 2003 ================================================================================================== Per Share Operating Performance - -------------------------------------------------------------------------------------------------- Net asset value, beginning of period ............. $21.20 $22.07 ----------------------------------- Investment income--net+ .......................... .24 .20 Realized and unrealized gain (loss) on investments and foreign currency transactions--net ......... 2.27 (1.07) ----------------------------------- Total from investment operations ................. 2.51 (.87) Less dividends on investment income--net ......... --@@ -- ----------------------------------- Net asset value, end of period ................... $23.71 $21.20 =================================== ================================================================================================== Total Investment Return** - -------------------------------------------------------------------------------------------------- Based on net asset value per share ............... 13.31%+++ (3.94%)+++ =================================== ================================================================================================== Ratios to Average Net Assets - -------------------------------------------------------------------------------------------------- Expenses ......................................... 1.10%* 1.09%* =================================== Investment income--net ........................... 2.07%* 2.76%* =================================== ================================================================================================== Supplemental Data - -------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) ......... --@ --@ =================================== Portfolio turnover ............................... 47% 52% ===================================
* Annualized. ** Total investment returns exclude the effects of sales charges. + Based on average shares outstanding. ++ Commencement of operations. +++ Aggregate total investment return. @ Amount is less than $1,000. @@ Amount is less than $(.01) per share. See Notes to Financial Statements. 30 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 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 amended, 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 multiple classes of shares. Effective September 30, 2003, the Fund changed its year end to September 30, 2003. Effective April 14, 2003, Class A Shares were redesignated Class I Shares and Class D Shares were redesignated Class A Shares. Shares of Class A and Class I are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. Class R Shares are sold only to certain retirement plans. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class A, Class B, Class C and Class R Shares bear certain expenses related to the account maintenance of such shares, and Class B, Class C and Class R 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 or the Nasdaq National Market are valued at the last sale price or official closing price as of the close of business on the day the securities are being valued, or lacking any sales, at the closing bid price for long positions, and at the last available ask price for short positions. Securities traded in the over-the-counter market are valued at the most recent bid prices as obtained from one or more dealers that make markets in the securities. Portfolio 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, and it is expected that for debt securities this ordinarily will be the over-the-counter market. Short-term securities are valued at amortized cost, which approximates market value. 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). Financial futures contracts and options thereon, which are traded on exchanges, are valued at their closing price at the close of such exchanges. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by a pricing service retained by the Fund which may use a matrix system for valuations. Occasionally, events affecting the values of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the market on which such securities trade) and the close of business on the NYSE. If events (for example, company announcement, natural disasters, market volatility) occur during such periods that are expected to materially affect the value for such securities, those securities may be valued at their fair market value as determined in good faith by the Fund's Board of Directors or by the investment adviser using a pricing service and/or procedures approved by the Board of Directors of the Fund. (b) Derivative financial instruments -- The Fund may engage in various portfolio investment strategies both to increase the return of the Fund and to hedge, or protect, its exposure to interest rate movement and movements in the securities markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. o Options -- The Fund is authorized to write covered call options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written options are non-income producing investments. MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 31 [LOGO] Merrill Lynch Investment Managers Notes to Financial Statements (continued) o Swaps -- The Fund may enter into swap agreements, which are over-the-counter contracts in which the Fund and a counterparty agree to make periodic net payments on a specified notional amount. The net payments can be made for a set period of time or may be triggered by a pre-determined credit event. The net periodic payments may be based on a fixed or variable interest rate; the change in market value of a specified security, basket of securities, or index; or the return generated by a security. (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 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. The Fund amortizes all premiums and discounts on debt securities. (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. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. 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. (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 $15,076 have been reclassified between paid-in capital in excess of par and undistributed net investment income and $2,281,189 has been reclassified between accumulated net realized capital losses and undistributed net investment income. These reclassifications have no effect on net assets or net asset values per share. 32 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Notes to Financial Statements (continued) 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. MLIM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM, pursuant to which MLAM U.K. provides investment advisory services to MLIM with respect to the Fund. There is no increase in the aggregate fees paid by the Fund for these services. 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 A .............................. .25% -- Class B .............................. .25% .75% Class C .............................. .25% .75% Class R .............................. .25% .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 A, Class B, Class C, and Class R shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B, Class C and Class R shareholders. For the period ended September 30, 2003, FAMD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class I Shares as follows: - -------------------------------------------------------------------------------- FAMD MLPF&S - -------------------------------------------------------------------------------- Class A ............................ $ 3,350 $34,235 Class I ............................ $ 1,070 $14,927 - -------------------------------------------------------------------------------- For the period ended September 30, 2003, MLPF&S received contingent deferred sales charges of $172,232 and $7,575 relating to transactions in Class B and Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales charges of $505 relating to transactions subject to front-end sales charge waivers in Class I Shares. 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, 2003, the Fund lent securities with a value of $61,358,442 to MLPF&S or its affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, as the securities lending agent for a fee based on a share of the returns on investment of cash collateral. MLIM, LLC 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 MLIM, LLC or in registered money market funds advised by MLIM or its affiliates. For the period ended September 30, 2003, MLIM, LLC received $142,361 in securities lending agent fees. MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 33 [LOGO] Merrill Lynch Investment Managers Notes to Financial Statements (continued) In addition, MLPF&S received $99,497 in commissions on the execution of portfolio security transactions for the period ended September 30, 2003. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. 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 period ended September 30, 2003 were $1,442,487,407 and $1,822,290,779, respectively. Net realized gains (losses) for the period ended September 30, 2003 and net unrealized gains (losses) as of September 30, 2003 were as follows: - -------------------------------------------------------------------------------- Realized Unrealized Gains (Losses) Gains (Losses) - -------------------------------------------------------------------------------- Long-term investments .................. $ 24,295,255 $ 225,033,373 Options purchased ...................... 255,420 74,302 Options written ........................ (206,530) 11,591 Interest rate swaps .................... 3,073,812 91,496 Financial futures contracts ............ 8,659,360 (1,409,087) Foreign currency transactions .......... (47,766) 72,474 --------------------------------- Total .................................. $ 36,029,551 $ 223,874,149 ================================= As of September 30, 2003, net unrealized appreciation for Federal income tax purposes aggregated $213,613,755, of which $407,951,245 related to appreciated securities and $194,337,490 related to depreciated securities. At September 30, 2003, the aggregate cost of investments, net of options written for Federal income tax purposes was $3,662,104,218. Transactions in options written for the period September 30, 2003 were as follows: - ------------------------------------------------------------------------------- Number of Premiums Call Options Written Contracts Received - ------------------------------------------------------------------------------- Outstanding call options written, beginning of period .................. -- -- Options written ........................ 110,234 $ 2,209,137 Options closed ......................... (40) (2,105,460) Options expired ........................ (110,000) (80,300) --------------------------------- Outstanding call options written, end of period ........................ 194 $ 23,377 ================================= - ------------------------------------------------------------------------------- Number of Premiums Put Options Written Contracts Received - ------------------------------------------------------------------------------- Outstanding put options written, beginning of period .................. -- -- Options written ........................ 340,234 $ 2,627,487 Options closed ......................... (40) (2,105,460) Options expired ........................ (340,000) (382,250) --------------------------------- Outstanding put options written, end of period ........................ 194 $ 139,777 ================================= 4. Capital Share Transactions: Net decrease in net assets derived from capital share transactions was $269,090,692 and $585,515,127 for the periods ended September 30, 2003 and March 31, 2003 respectively. Transactions in capital shares for each class were as follows: - ------------------------------------------------------------------------------- Class A Shares for the Period April 1, 2003 to Dollar September 30, 2003+ Shares Amount - ------------------------------------------------------------------------------- Shares sold ............................ 808,429 $ 19,332,932 Automatic conversion of shares ......... 2,721,763 64,825,838 Shares issued to shareholders in reinvestment of dividends and distributions ...................... 437,379 10,466,489 --------------------------------- Total issued ........................... 3,967,571 94,625,259 Shares redeemed ........................ (5,105,484) (122,127,362) --------------------------------- Net decrease ........................... (1,137,913) $ (27,502,103) ================================= + Effective April 14, 2003, Class D Shares were redesignated Class A Shares. 34 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Notes to Financial Statements (continued) - ------------------------------------------------------------------------------- Class A Shares for the Year Dollar Ended March 31, 2003+ Shares Amount - ------------------------------------------------------------------------------- Shares sold ............................ 2,772,584 $ 64,891,927 Automatic conversion of shares ......... 5,057,547 120,961,341 Shares issued to shareholders in reinvestment of dividends and distributions .................... 1,499,220 34,459,904 --------------------------------- Total issued ........................... 9,329,351 220,313,172 Shares redeemed ........................ (13,659,024) (318,369,448) --------------------------------- Net decrease ........................... (4,329,673) $ (98,056,276) ================================= + Effective April 14, 2003, Class D Shares were redesignated Class A Shares. - ------------------------------------------------------------------------------- Class B Shares for the Period April 1, 2003 to Dollar September 30, 2003 Shares Amount - ------------------------------------------------------------------------------- Shares sold ............................ 1,010,579 $ 23,416,635 Shares issued to shareholders in reinvestment of dividends and distributions .................... 189,878 4,428,039 --------------------------------- Total issued ........................... 1,200,457 27,844,674 Automatic conversion of shares ......... (2,799,169) (64,825,838) Shares redeemed ........................ (3,843,746) (89,236,146) --------------------------------- Net decrease ........................... (5,442,458) $(126,217,310) ================================= - ------------------------------------------------------------------------------- Class B Shares for the Year Dollar Ended March 31, 2003 Shares Amount - ------------------------------------------------------------------------------- Shares sold ............................ 3,010,838 $ 69,266,062 Shares issued to shareholders in reinvestment of dividends and distributions .................... 942,855 21,172,984 --------------------------------- Total issued ........................... 3,953,693 90,439,046 Automatic conversion of shares ......... (5,200,349) (120,961,341) Shares redeemed ........................ (12,192,972) (278,379,536) --------------------------------- Net decrease ........................... (13,439,628) $(308,901,831) ================================= - ------------------------------------------------------------------------------- Class C Shares for the Period April 1, 2003 to Dollar September 30, 2003 Shares Amount - ------------------------------------------------------------------------------- Shares sold ............................ 208,182 $ 4,723,072 Shares issued to shareholders in reinvestment of dividends and distributions .................... 44,500 1,017,711 --------------------------------- Total issued ........................... 252,682 5,740,783 Shares redeemed ........................ (702,828) (15,972,232) --------------------------------- Net decrease ........................... (450,146) $ (10,231,449) ================================= - ------------------------------------------------------------------------------- Class C Shares for the Year Dollar Ended March 31, 2003 Shares Amount - ------------------------------------------------------------------------------- Shares sold ............................ 912,070 $ 21,236,720 Shares issued to shareholders in reinvestment of dividends and distributions .................... 183,735 4,048,797 --------------------------------- Total issued ........................... 1,095,805 25,285,517 Shares redeemed ........................ (2,042,911) (45,403,525) --------------------------------- Net decrease ........................... (947,106) $ (20,118,008) ================================= - ------------------------------------------------------------------------------- Class I Shares for the Period April 1, 2003 to Dollar September 30, 2003+ Shares Amount - ------------------------------------------------------------------------------- Shares sold ............................ 2,264,096 $ 53,837,908 Shares issued to shareholders in reinvestment of dividends and distributions .................... 712,349 17,082,259 --------------------------------- Total issued ........................... 2,976,445 70,920,167 Shares redeemed ........................ (7,371,277) (176,060,000) --------------------------------- Net decrease ........................... (4,394,832) $(105,139,833) ================================= + Effective April 14, 2003, Class A Shares were redesignated Class I Shares. - ------------------------------------------------------------------------------- Class I Shares for the Year Dollar Ended March 31, 2003+ Shares Amount - ------------------------------------------------------------------------------- Shares sold ............................ 6,206,891 $ 144,980,836 Shares issued to shareholders in reinvestment of dividends and distributions .................... 2,397,651 55,211,158 --------------------------------- Total issued ........................... 8,604,542 200,191,994 Shares redeemed ........................ (15,319,242) (358,631,106) --------------------------------- Net decrease ........................... (6,714,700) $(158,439,112) ================================= + Effective April 14, 2003, Class A Shares were redesignated Class I Shares. - ------------------------------------------------------------------------------- Class R Shares for the Period April 1, 2003 to Dollar September 30, 2003 Shares Amount - ------------------------------------------------------------------------------- Shares reinvested ...................... -- $ 3 --------------------------------- Net increase ........................... -- $ 3 ================================= - ------------------------------------------------------------------------------- Class R Shares for the Period January 3, 2003+ Dollar to March 31, 2003 Shares Amount - ------------------------------------------------------------------------------- Shares sold ............................ 5 $ 100 --------------------------------- Net increase ........................... 5 $ 100 ================================= + Commencement of operations. MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 35 [LOGO] Merrill Lynch Investment Managers Notes to Financial Statements (concluded) 5. Short-Term Borrowings: The Fund, along with certain other funds managed by MLIM and its affiliates, is a party to a $500,000,000 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 29, 2002, the credit agreement was renewed for one year under the same terms, except that the total commitment was reduced from $1,000,000,000 to $500,000,000. The Fund did not borrow under the credit agreement during the period ended September 30, 2003. 6. Distributions to Shareholders: The tax character of distributions paid during the fiscal periods ended September 30, 2003 and March 31, 2003 was as follows: - ------------------------------------------------------------------------------- 9/30/2003 3/31/2003 - ------------------------------------------------------------------------------- Distributions paid from: Ordinary income ...................... $ 37,226,594 $ 96,579,704 Net long-term capital gains .......... -- 32,943,590 --------------------------------- Total taxable distributions ............ $ 37,226,594 $ 129,523,294 ================================= As of September 30, 2003, the components of accumulated losses on a tax basis were as follows: - ----------------------------------------------------------------------------- Undistributed ordinary income--net ..................... $ 15,133,011 Undistributed long-term capital gains--net ............. -- ------------- Total undistributed earnings--net ...................... 15,133,011 Capital loss carryforward .............................. (76,294,093)* Unrealized gains--net .................................. 213,691,832** ------------- Total accumulated earnings--net ........................ $ 152,530,750 ============= * On September 30, 2003, the Fund had a net capital loss carryforward of $76,294,093, of which $4,243,197 expires in 2007, $3,272,987 expires in 2008, $63,648,326 expires in 2010 and $5,129,583 expires in 2011. 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 realization for tax purposes of unrealized gains (losses) on certain futures and option contracts and the difference between book and tax amortization methods for premiums and discounts on fixed income securities. 7. Subsequent Event: Effective October 1, 2003, the Fund intends to invest the fixed income portion of its investments in the Master Core Bond Portfolio of Master Bond Trust, a mutual fund that has the same objectives and strategies as the fixed income portion of the Fund. At September 30, 2003, the Fund held its fixed income assets directly. 36 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Independent Auditors' Report To the Shareholders and Board of Directors of 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 September 30, 2003, and the related statements of operations for the period April 1, 2003 to September 30, 2003 and for the year ended March 31, 2003, the statements of changes in net assets for the period April 1, 2003 to September 30, 2003 and for each of the two years in the period ended March 31, 2003, and the financial highlights for each of the respective periods then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and 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 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 as of September 30, 2003, 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, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Merrill Lynch Balanced Capital Fund, Inc. as of September 30, 2003, the results of its operations for the period April 1, 2003 to September 30, 2003 and for the year ended March 31, 2003, the changes in its net assets for the period April 1, 2003 to September 30, 2003 and for each of the two years in the period ended March 31, 2003, and its financial highlights for each of the respective periods then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Princeton, New Jersey November 24, 2003 Important Tax Information (unaudited) The following information is provided with respect to the ordinary income distribution paid by Merrill Lynch Balanced Capital Fund, Inc. to shareholders of record on July 16, 2003: - -------------------------------------------------------------------------------- Qualified Dividend Income for Individuals 43.55% - -------------------------------------------------------------------------------- Dividends Qualifying for the Dividends Received Deduction for Corporations 42.80% - -------------------------------------------------------------------------------- Federal Obligation Interest 8.26% - -------------------------------------------------------------------------------- The law varies in each state as to whether and what percentage of dividend income attributable to Federal obligations is exempt from state income tax. We recommend that you consult your tax adviser to determine if any portion of the dividends you received is exempt from state income tax. Please retain this information for your records. MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 37 [LOGO] Merrill Lynch Investment Managers Officers and Directors (unaudited)
Number of Portfolios in Other Public Position(s) Length Fund Complex Directorships 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. P.O. Box 9011 President 1999 to President and Chairman of Merrill Lynch Investment 122 Funds None Glenn* Princeton, NJ and present Managers, L.P. ("MLIM")/Fund Asset Management, 163 Portfolios 08543-9011 Director and L.P. ("FAM")--Advised Funds since 1999; Age: 63 1997 to Chairman (Americas Region) of MLIM from 2000 present to 2002; Executive Vice President of MLIM and FAM (which terms as used herein include their corporate predecessors) from 1983 to 2002; President of FAM Distributors, Inc. ("FAMD") from 1986 to 2002 and Director thereof from 1991 to 2002; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") from 1993 to 2002; President of Princeton Administrators, L.P. from 1989 to 2002; 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 acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of the Fund based on his former positions with MLIM, FAM, FAMD, Princeton Services and Princeton Administrators, L.P. The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors. ==================================================================================================================================== Independent Directors* - ------------------------------------------------------------------------------------------------------------------------------------ Donald W. P.O. Box 9095 Director 2002 to Manager of The Burton Partnership, Limited 23 Funds ITC DeltaCom, Burton Princeton, NJ present Partnership since 1979; Managing General Partner 37 Portfolios Inc., ITC 08543-9095 of the South Atlantic Venture Funds, Limited Holding Age: 59 Partnerships and Chairman of South Atlantic Company, Inc., Private Equity Fund IV, Limited Partnership since Knology, Inc., 1983; Member of the Investment Advisory Council MainBancorp, of the Florida State Board of Administration N.A., PriCare, since 2001. Inc., Symbion, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ M. Colyer P.O. Box 9095 Director 1981 to James R. Williston Professor of Investment 24 Funds Cambridge Crum Princeton, NJ present Management Emeritus, Harvard Business 38 Portfolios Bancorp 08543-9095 School since 1996; Chairman and Director, Age: 71 Phaeton International, Ltd. from 1985 to present; Director, Cambridge Bancorp since 1969. - ------------------------------------------------------------------------------------------------------------------------------------ Laurie P.O. Box 9095 Director 1999 to Professor of Finance and Economics, Graduate 23 Funds None Simon Princeton, NJ present School of Business, Columbia University since 37 Portfolios Hodrick 08543-9095 1998; Associate Professor of Finance and Age: 41 Economics, Graduate School of Business, Columbia University from 1996 to 1998. - ------------------------------------------------------------------------------------------------------------------------------------ David H. P.O. Box 9095 Director 2003 to Consultant with Putnam Investments since 1993 23 Funds None Walsh Princeton, NJ present and employed in various capacities therewith from 37 Portfolios 08543-9095 1971 to 1992; Director, the National Audubon Age: 61 Society since 1980; Director, the American Museum of Fly Fishing since 1998. - ------------------------------------------------------------------------------------------------------------------------------------ Fred G. P.O. Box 9095 Director 1998 to Managing Director of FGW Associates since 1997; 23 Funds Watson Weiss Princeton, NJ present Vice President, Planning, Investment and Devel- 37 Portfolios Pharmaceuti- 08543-9095 opment of Warner Lambert Co. from 1979 to 1997; cals, Inc. Age: 62 Director, BTG International, PLC since 2001; Director, Watson Pharmaceuticals, Inc. since 2000. ------------------------------------------------------------------------------------------------------------------------ * The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. - ------------------------------------------------------------------------------------------------------------------------------------
38 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 Officers and Directors (unaudited) (concluded)
Position(s) Length Held of Time Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years ==================================================================================================================================== Fund Officers - ------------------------------------------------------------------------------------------------------------------------------------ Donald C. P.O. Box 9011 Vice 1993 to First Vice President of FAM and MLIM since 1997 and Treasurer thereof since 1999; Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999; Vice 08543-9011 and 1999 to President of FAMD since 1999; Director of MLIM Taxation since 1990. Age: 43 Treasurer present - ------------------------------------------------------------------------------------------------------------------------------------ Robert C. P.O. Box 9011 Senior Vice 1999 to President and Global Chief Investment Officer of MLIM and member of the Executive Doll, Jr. Princeton, NJ President present Management Committee of ML & Co., Inc. since 2001; Chief Investment Officer, Senior 08543-9011 Vice President and Co-Head of MLIM Americas from 1999 to 2001; Chief Investment Age: 48 Officer of Oppenheimer Funds, Inc. from 1987 to 1999 and Executive Vice President from 1991 to 1999. - ------------------------------------------------------------------------------------------------------------------------------------ Kurt P.O. Box 9011 Vice 1996 to Managing Director of MLIM since 2000; Director (Equities) of MLIM from 1997 to Schansinger Princeton, NJ President present 2000. 08543-9011 Age: 42 - ------------------------------------------------------------------------------------------------------------------------------------ Phillip S. P.O. Box 9011 Secretary 2003 to First Vice President of MLIM since 2001; Director (Legal Advisory) of MLIM from Gillespie Princeton, NJ present 2000 to 2001; Vice President of MLIM from 1999 to 2000 and Attorney associated with 08543-9011 MLIM since 1998; Assistant General Counsel of Chancellor LGT Asset Management, Inc. Age: 39 from 1997 to 1998. ------------------------------------------------------------------------------------------------------------------------ * 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 The Bank of New York 100 Church Street New York, NY 10286 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 800-637-3863 MERRILL LYNCH BALANCED CAPITAL FUND, INC. SEPTEMBER 30, 2003 39 [LOGO] Merrill Lynch Investment Managers www.mlim.ml.com 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. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2) on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's website at http://www.sec.gov. Merrill Lynch Balanced Capital Fund, Inc. Box 9011 Princeton, NJ 08543-9011 #10252 -- 9/03 Item 2 - Did registrant adopt a code of ethics, as of the end of the period covered by this report, that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party? If not, why not? Briefly describe any amendments or waivers that occurred during the period. State here if code of ethics/amendments/waivers are on website and give website address-. State here if fund will send code of ethics to shareholders without charge upon request-- The registrant has adopted a code of ethics, as of the end of the period covered by this report, that applies to the registrant's principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. A copy of the code of ethics is available without charge upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863). Item 3 - Did the registrant's board of directors determine that the registrant either: (i) has at least one audit committee financial expert serving on its audit committee; or (ii) does not have an audit committee financial expert serving on its audit committee? If yes, disclose name of financial expert and whether he/she is "independent," (fund may, but is not required, to disclose name/independence of more than one financial expert) If no, explain why not. - The registrant's board of directors has determined that (i) the registrant has the following audit committee financial experts serving on its audit committee and (ii) each audit committee financial expert is independent: (1) Donald W. Burton, (2) M. Colyer Crum, (3) Laurie Simon Hodrick, (4) David H. Walsh and (5) Fred G. Weiss. The Board of Directors/Trustees of the Cluster A Merrill Lynch Funds determined that Laurie Simon Hodrick and M. Colyer Crum qualify as financial experts pursuant to Item 3(c)(4) of Form N-CSR. Ms. Hodrick has a thorough understanding of generally accepted accounting principals, financial statements, and internal controls and procedures for financial reporting. Ms. Hodrick earned a Ph.D. in economics and has taught courses in finance for over 15 years. Her M.B.A.-level course centers around the evaluation and analysis of firms' corporate financial statements. She has also taught in financial analysts' training programs. Ms. Hodrick has also worked with several prominent corporations in connection with the analysis of financial forecasts and projections and analysis of the financial statements of those companies, serving on the Financial Advisory Council of one of these major corporations. She has also served as the Treasurer and Finance Chair of a 501(c)(3) organization. Ms. Hodrick has published a number of articles in leading economic and financial journals and is the associate editor of two leading finance journals. M. Colyer Crum also possesses a thorough understanding of generally accepted accounting principals, financial statements, and internal controls and procedures for financial reporting through a combination of education and experience. Professor Crum was a professor of investment management at the Harvard Business School for 25 years. The courses taught by Professor Crum place a heavy emphasis on the analysis of underlying company financial statements with respect to stock selection and the analysis of credit risk in making loans. Professor Crum has also served on a number of boards of directors and has served on the audit committees, and in some cases chaired the audit committee, for several major corporations and financial institutions. For two such organizations, Professor Crum has performed extensive investment analysis of financial statements in connection with investment management decisions. From these experiences, he has gained significant experience with the establishment of reserves and accounting policies, differences between U.S. GAAP and Canadian GAAP and executive compensation issues. Item 4 - Disclose annually only (not answered until December 15, 2003) (a) Audit Fees - Disclose aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. N/A. (b) Audit-Related Fees - Disclose aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (c) Tax Fees - Disclose aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (d) All Other Fees - Disclose aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category. N/A. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A. (e)(2) Disclose the percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. N/A. (f) If greater than 50%, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. N/A. (g) Disclose the aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant. N/A. (h) Disclose whether the registrant's audit committee has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any subadviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. N/A. Item 5 - If the registrant is a listed issuer as defined in Rule 10A-3 under the Exchange Act, state whether or not the registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. If the registrant has such a committee, however designated, identify each committee member. If the entire board of directors is acting as the registrant's audit committee in Section 3(a)(58)(B) of the Exchange Act, so state. If applicable, provide the disclosure required by Rule 10A-3(d) under the Exchange Act regarding an exemption from the listing standards for audit committees. N/A (Listed issuers must be in compliance with the new listing rules by the earlier of their first annual shareholders meeting after January 2004, or October 31, 2004 (annual requirement)) Item 6 - Reserved Item 7 - For closed-end funds that contain voting securities in their portfolio, describe the policies and procedures that it uses to determine how to vote proxies relating to those portfolio securities. N/A Item 8 -- Reserved Item 9(a) - The registrant's certifying officers have reasonably designed such disclosure controls and procedures to ensure material information relating to the registrant is made known to us by others particularly during the period in which this report is being prepared. The registrant's certifying officers have determined that the registrant's disclosure controls and procedures are effective based on our evaluation of these controls and procedures as of a date within 90 days prior to the filing date of this report. Item 9(b) -- There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 10 - Exhibits 10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or amendments/waivers is on website or offered to shareholders upon request without charge. N/A. 10(b) - Attach certifications pursuant to Section 302 of the Sarbanes-Oxley Act. Attached hereto. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Merrill Lynch Balanced Capital Fund, Inc. By: /s/ Terry K. Glenn -------------------------------- Terry K. Glenn, President of Merrill Lynch Balanced Capital Fund, Inc. Date: November 21, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Terry K. Glenn -------------------------------- Terry K. Glenn, President of Merrill Lynch Balanced Capital Fund, Inc. Date: November 21, 2003 By: /s/ Donald C. Burke -------------------------------- Donald C. Burke, Chief Financial Officer of Merrill Lynch Balanced Capital Fund, Inc. Date: November 21, 2003 Attached hereto as a furnished exhibit are the certifications pursuant to Section 906 of the Sarbanes-Oxley Act. EX-99.CERT 3 e300789_ex99-cert.txt CERTIFICATION PURSUANT TO SECTION 302 EX-99. CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - -------------------------------------------------------------------------------- I, Terry K. Glenn, President of Merrill Lynch Balanced Capital Fund, Inc., certify that: 1. I have reviewed this report on Form N-CSR of Merrill Lynch Balanced Capital Fund, Inc. (the "Fund"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Fund as of, and for, the periods presented in this report; 4. The Fund's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the Fund and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Fund, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the Fund's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and c) disclosed in this report any change in the Fund's internal control over financial reporting that occurred during the Fund's most recent fiscal half-year (the Fund's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Fund's internal control over financial reporting; and 5. The Fund's other certifying officer(s) and I have disclosed, based on our most recent evaluation, to the Fund's auditors and the audit committee of the Fund's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Fund's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Fund's internal control over financial reporting. Date: November 21, 2003 /s/ Terry K. Glenn ------------------ Terry K. Glenn, President of Merrill Lynch Balanced Capital Fund, Inc. EX-99. CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - -------------------------------------------------------------------------------- I, Donald C. Burke, Chief Financial Officer of Merrill Lynch Balanced Capital Fund, Inc., certify that: 1. I have reviewed this report on Form N-CSR of Merrill Lynch Balanced Capital Fund, Inc. (the "Fund"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Fund as of, and for, the periods presented in this report; 4. The Fund's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the Fund and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Fund, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the Fund's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and c) disclosed in this report any change in the Fund's internal control over financial reporting that occurred during the Fund's most recent fiscal half-year (the Fund's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Fund's internal control over financial reporting; and 5. The Fund's other certifying officer(s) and I have disclosed, based on our most recent evaluation, to the Fund's auditors and the audit committee of the Fund's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Fund's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Fund's internal control over financial reporting. Date: November 21, 2003 /s/ Donald C. Burke ------------------- Donald C. Burke, Chief Financial Officer of Merrill Lynch Balanced Capital Fund, Inc. EX-99.1350 CERT 4 e300789_ex99-1350cert.txt CERTIFICATION PURSUANT TO SECTION 906 Exhibit 99.1350CERT Certification Pursuant to Section 906 of the Sarbanes Oxley Act I, Terry K. Glenn, President of Merrill Lynch Balanced Capital Fund, Inc. (the "Fund"), certify that: 1. The N-CSR of the Fund (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. Dated: November 21, 2003 /s/ Terry K. Glenn ------------------ Terry K. Glenn, President of Merrill Lynch Balanced Capital Fund, Inc. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Merrill Lynch Balanced Capital Fund, Inc. and will be retained by Merrill Lynch Balanced Capital Fund, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 99.1350CERT Certification Pursuant to Section 906 of the Sarbanes Oxley Act I, Donald C. Burke, Chief Financial Officer of Merrill Lynch Balanced Capital Fund, Inc. (the "Fund"), certify that: 1. The N-CSR of the Fund (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. Dated: November 21, 2003 /s/ Donald C. Burke ------------------- Donald C. Burke, Chief Financial Officer of Merrill Lynch Balanced Capital Fund, Inc. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Merrill Lynch Balanced Capital Fund, Inc. and will be retained by Merrill Lynch Balanced Capital Fund, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----