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 811-21162
Name of Fund: Merrill Lynch Fundamental Growth Principal Protected
Fund
Merrill Lynch Principal Protected Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President,
Merrill Lynch Fundamental Growth Principal Protected Fund, 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: 08/31/03
Date of reporting period: 09/01/02 - 08/31/03
Item 1 - Attach shareholder report
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
Merrill Lynch
Fundamental Growth
Principal Protected Fund
Annual Report
August 31, 2003
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 Fundamental Growth
Principal Protected Fund
Box 9011
Princeton, NJ
08543-9011
Merrill Lynch Fundamental Growth Principal Protected Fund
Portfolio Information As of August 31, 2003 (unaudited)
Ten Largest Holdings Percent of
(Equity Investments) Net Assets
Intel Corporation 2.9%
General Electric Company 2.6
Cisco Systems, Inc. 1.9
3M Co. 1.6
Lowe's Companies, Inc. 1.3
Medtronic, Inc. 1.1
Amgen Inc. 1.0
Citigroup Inc. 1.0
United Parcel Service, Inc. (Class B) 1.0
YUM! Brands, Inc. 0.9
Five Largest Industries Percent of
(Equity Investments)* Net Assets
Specialty Retail 5.9%
Industrial Conglomerates 4.2
Semiconductors & Semiconductor Equipment 4.2
Health Care Equipment & Supplies 4.1
Hotels, Restaurants & Leisure 3.2
*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.
Geographic Allocation of Stocks & Percent of
Fixed Income Securities* Net Assets
United States 97.2%
Switzerland 0.8
Canada 0.5
Japan 0.5
*Total may not equal 100%.
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.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
A Letter From the President
Dear Shareholder
Now more than half behind us, 2003 has been a meaningful year in
many respects. After three sub par years for equity markets, we
finally saw hopeful signs for a sustained economic recovery and an
accompanying market upturn.
The most significant development through the end of August was the
conclusion of all-out war in Iraq. As combat gave way to
restructuring, oil prices dropped. At the same time, credit spreads
tightened and the spring brought some of the most promising months
for equities since last October. Many companies began to show
improving earnings, and consumer confidence strengthened. Although
oil prices have since returned to higher levels, economic recovery
remains a high priority for the President, Congress and the Federal
Reserve Board--all of whom have taken steps aimed at reviving the
economy and drawing investors back to the markets.
The events and efforts of the past several months appear to have
made an impression on investors and the markets. The S&P 500 Index,
which was in negative territory for the six-month period ended
February 28, 2003, returned +20.88% in the six months that followed.
Nasdaq posted a modest positive return for the six months ended
February 28, 2003, but returned a meaningful +35.36% in the six
months ended August 31, 2003.
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
fruitful and fruitless 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,
(Terry K. Glenn)
Terry K. Glenn
President and Trustee
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
A Discussion With Your Fund's Portfolio Manager
Although Fund performance lagged that of its equity benchmarks, the
Fund met its objective of preserving investor principal and provided
modest capital appreciation.
How has the Fund performed since its inception in light of the
existing market conditions?
Since its inception on November 13, 2002 through August 31, 2003,
Merrill Lynch Fundamental Growth Principal Protected Fund's Class A,
Class B, Class C and Class I Shares had total returns of +3.90%,
+3.20%, +3.20% and +4.10%, 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 - 8 of this report to shareholders.) The Fund's unmanaged
benchmarks, the Standard & Poor's 500 (S&P 500) Index and the S&P
500/Barra Growth Index, had total returns of +15.87% and +12.17%,
respectively, for the same period.
Because the Fund incorporates a fixed income component, it will, at
times, outperform or underperform its all-equity benchmarks. As of
August 31, 2003, the Fund's allocation was 47.2% in equities and
51.8% in fixed income securities. We use a mathematical formula to
determine the allocation between these two components with the
objective of preserving the principal value of Fund shares. As
stocks rallied this spring, the Fund's returns underperformed those
of its benchmarks as a result of the Fund's overweight fixed income
position. A sharp back-up in interest rates in July also contributed
to the relative underperformance.
What changes were made to the portfolio during the period?
The allocation between the portfolio's equity and bond components
has varied since the Fund's inception, with the equity allocation
ranging from 27% to 50% of portfolio assets and the fixed income
allocation ranging from 50% to 73% as we saw interest rates change
in a somewhat volatile market. During the period, the Fund's fixed
income component was invested in U.S. Treasury zero coupon bonds set
to mature close to the expiration of the Fund, which is seven years
from its commencement of operations (November 13, 2009).
In terms of the Fund's equity portfolio, in late March 2003, we
conducted a forward-looking analysis of the business fundamentals of
many of the largest-capitalization companies in the portfolio. Based
on our analysis, we began to move the portfolio toward companies
with smaller average stock market capitalizations because we believe
these companies could offer greater growth potential. Of course,
we continued to focus on high quality in terms of management,
financials and caliber of products and/or services as well as on
the individual companies' prospects for above-average earnings
growth and investment returns.
In implementing this shift in strategy, we added several new stocks
to the portfolio. These included: International Game Technology,
InterActiveCorp, eBay Inc., Ross Stores Inc., Tiffany & Co.,
PETsMART, Inc., Coach, Inc., Nike, Inc., SUPERVALU Inc., Devon
Energy Corporation, Citigroup Inc., Gilead Sciences, Inc., DENTSPLY
International Inc., Anthem Inc., UnitedHealth Group Incorporated,
Wellpoint Health Networks Inc., Forest Laboratories, Inc., Hewitt
Associates, Inc., General Electric Company, ITT Industries, Inc.,
Affiliated Computer Associates, Inc., Altera Corporation, Xilinx,
Inc., Citrix Systems Inc., Mercury Interactive Corporation and
Nortel Networks Corporation.
The equity portfolio's average weighted market capitalization on
August 31, 2003 was approximately $50 billion, down from almost
$80 billion at the Fund's inception. Since their addition to the
portfolio, many of the new stocks have contributed positively to
absolute and relative performance.
How would you characterize the portfolio's position at the close of
the period?
Our goal is to seek to protect the original principal value of
shares, while also offering some capital appreciation potential. To
this end, the allocation between the Fund's fixed income and equity
components will continue to vary as market conditions change. At the
close of the period, the Fund's allocation favored fixed income by a
modest margin.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
At August 31, 2003, the Fund's equity portfolio was structured to
benefit from an anticipated improvement in the real rate of growth
in consumer spending and expectations of more robust growth in
corporate and small business capital spending. We believe that
increased Federal spending, which is geared toward homeland security
and Defense Department supplies, could continue at elevated levels
as the post-war rebuilding effort in Iraq requires more U.S.
involvement than initially anticipated.
The portfolio is most overweight relative to its equity benchmarks
in the consumer discretionary sector, where we are focused on stocks
in specialty retailing, restaurants, media and Internet retailers.
Lawrence R. Fuller
Vice President and Equity Portfolio Manager
September 11, 2003
Effective April 14, 2003, the share class names for the Merrill
Lynch family of mutual funds were changed to be consistent with the
standard share classes of most other mutual fund families. As of
that date, all Class A Shares were redesignated Class I Shares. At
the same time, Class D Shares were redesignated Class A Shares.
There are no changes to the Class B or Class C share class labels.
Trading symbols have not changed nor have current eligibility rules
or pricing structures. This redesignation of share classes does not
impact your investment in any way.
If you would like a copy, free of charge, of the most recent annual
or quarterly report of Main Place Funding, LLC, the Warranty
Provider, or its parent corporation, Bank of America Corporation,
please contact the Fund at 1-800-MER-FUND.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
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:
* Class A Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% declining to 0% after six years. 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.)
* 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.
* 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.
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
6-Month Since Inception
As of August 31, 2003 Total Return Total Return
ML Fundamental Growth Principal Protected Fund Class A Shares* + 5.17% + 3.90%
ML Fundamental Growth Principal Protected Fund Class B Shares* + 4.67 + 3.20
ML Fundamental Growth Principal Protected Fund Class C Shares* + 4.67 + 3.20
ML Fundamental Growth Principal Protected Fund Class I Shares* + 5.26 + 4.10
Standard & Poor's 500 Index** +20.88 +15.87
Standard & Poor's 500/Barra Growth Index*** +17.96 +12.17
*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 inception date is 11/13/02.
**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. Since inception total return is from
11/13/02.
***This unmanaged Index is a capitalization-weighted index of all
stocks in the Standard & Poor's 500 Index that have higher price-to-
book ratios. Since inception total return is from 11/13/02.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Performance Data (continued)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph illustrating the growth of a $10,000 investment in
ML Fundamental Growth Principal Protected Fund++ Class A and Class B
Shares* compared to a similar investment in Standard & Poor's 500
Index++++ and Standard & Poor's 500/Barra Growth Index++++++. Values
illustrated are as follows:
ML Fundamental Growth Principal Protected Fund++
Class A Shares*
Date Value
11/13/2002** $ 9,475.00
August 1993 $ 9,845.00
ML Fundamental Growth Principal Protected Fund++
Class B Shares*
Date Value
11/13/2002** $10,000.00
August 1993 $ 9,920.00
Standard & Poor's 500 Index++++
Date Value
11/13/2002** $10,000.00
August 1993 $11,587.00
Standard & Poor's 500/Barra Growth Index++++++
Date Value
11/13/2002** $10,000.00
August 1993 $11,217.00
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++ML Fundamental Growth Principal Protected Fund consists primarily
of common stocks and U.S. Treasury bonds, including zero coupon
bonds.
++++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 a capitalization-weighted index of all
stocks in the Standard & Poor's 500 Index that have higher price-to-
book ratios.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (11/13/02)
through 8/31/03 +3.90% -1.55%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (11/13/02)
through 8/31/03 +3.20% -0.80%
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after six years.
**Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Performance Data (concluded)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph illustrating the growth of a $10,000 investment in
ML Fundamental Growth Principal Protected Fund++ Class C and Class I
Shares* compared to a similar investment in Standard & Poor's 500
Index++++ and Standard & Poor's 500/Barra Growth Index++++++. Values
illustrated are as follows:
ML Fundamental Growth Principal Protected Fund++
Class C Shares*
Date Value
11/13/2002** $10,000.00
August 1993 $10,220.00
ML Fundamental Growth Principal Protected Fund++
Class I Shares*
Date Value
11/13/2002** $ 9,475.00
August 1993 $ 9,864.00
Standard & Poor's 500 Index++++
Date Value
11/13/2002** $10,000.00
August 1993 $11,587.00
Standard & Poor's 500/Barra Growth Index++++++
Date Value
11/13/2002** $10,000.00
August 1993 $11,217.00
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++ML Fundamental Growth Principal Protected Fund consists primarily
of common stocks and U.S. Treasury bonds, including zero coupon
bonds.
++++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 a capitalization-weighted index of all
stocks in the Standard & Poor's 500 Index that have higher price-to-
book ratios.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (11/13/02)
through 8/31/03 +3.20% +2.20%
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after one year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class I Shares*
Inception (11/13/02)
through 8/31/03 +4.10% -1.36%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Schedule of Investments
Percent of
Industry* Shares Held Common Stocks Value Net Assets
Aerospace & Defense 23,800 General Dynamics Corporation $ 2,049,418 0.8%
Air Freight & Logistics 38,600 United Parcel Service, Inc. (Class B) 2,422,536 1.0
Beverages 22,800 Anheuser-Busch Companies, Inc. 1,175,112 0.5
Biotechnology 39,500 ++Amgen Inc. 2,603,050 1.0
29,200 ++Gilead Sciences, Inc. 1,947,640 0.8
-------------- ------
4,550,690 1.8
Capital Markets 28,600 Northern Trust Corporation 1,208,064 0.5
34,300 State Street Corporation 1,507,485 0.6
49,300 T. Rowe Price Group Inc. 2,095,250 0.8
-------------- ------
4,810,799 1.9
Chemicals 66,800 Ecolab Inc. 1,722,772 0.7
Commercial Services 23,400 ++Apollo Group, Inc. (Class A) 1,499,238 0.6
& Supplies 32,000 ++Career Education Corporation 1,444,160 0.6
13,900 ++Hewitt Associates, Inc. (Class A) 346,805 0.1
-------------- ------
3,290,203 1.3
Communications 251,700 ++Cisco Systems, Inc. 4,820,055 1.9
Equipment 399,600 ++Nortel Networks Corporation 1,298,700 0.5
-------------- ------
6,118,755 2.4
Computers & Peripherals 52,900 Hewlett-Packard Company 1,053,768 0.4
26,700 ++SanDisk Corporation 1,614,282 0.6
-------------- ------
2,668,050 1.0
Containers & Packaging 22,800 Ball Corporation 1,203,840 0.5
Diversified Financial 57,100 Citigroup Inc. 2,475,285 1.0
Services
Energy Equipment 31,800 ++BJ Services Company 1,188,366 0.5
& Service 41,400 Baker Hughes Incorporated 1,385,244 0.5
-------------- ------
2,573,610 1.0
Food Products 71,000 Archer-Daniels-Midland Company 984,770 0.4
Food & Staples 59,800 SUPERVALU Inc. 1,441,180 0.6
Retailing 39,800 SYSCO Corporation 1,252,108 0.5
-------------- ------
2,693,288 1.1
Health Care Equipment 39,800 Alcon, Inc. 2,079,550 0.8
& Supplies 33,900 ++Boston Scientific Corporation 2,037,390 0.8
25,900 DENTSPLY International Inc. 1,133,125 0.5
57,200 Medtronic, Inc. 2,835,976 1.1
14,800 Stryker Corporation 1,121,840 0.4
20,800 ++Varian Medical Systems, Inc. 1,161,680 0.5
-------------- ------
10,369,561 4.1
Health Care Providers 17,800 ++Anthem, Inc. 1,302,960 0.5
& Services 30,000 UnitedHealth Group Incorporated 1,482,900 0.6
18,400 ++WellPoint Health Networks Inc. 1,435,200 0.6
-------------- ------
4,221,060 1.7
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Schedule of Investments (continued)
Percent of
Industry* Shares Held Common Stocks Value Net Assets
Hotels, Restaurants 34,100 ++Brinker International, Inc. $ 1,166,220 0.5%
& Leisure 66,600 International Game Technology 1,720,944 0.7
28,800 ++Krispy Kreme Doughnuts, Inc. 1,270,944 0.5
53,800 ++Starbucks Corporation 1,530,072 0.6
79,400 ++YUM! Brands, Inc. 2,354,210 0.9
-------------- ------
8,042,390 3.2
IT Services 27,600 ++Affiliated Computer Services, Inc. (Class A) 1,369,236 0.5
32,000 First Data Corporation 1,228,800 0.5
11,700 Paychex, Inc. 421,200 0.2
-------------- ------
3,019,236 1.2
Industrial Conglomerates 29,500 3M Co. 4,202,865 1.6
220,100 General Electric Company 6,508,357 2.6
-------------- ------
10,711,222 4.2
Internet & Catalog 34,800 ++eBay Inc. 1,932,444 0.8
Retail 34,000 ++InterActiveCorp 1,258,340 0.5
-------------- ------
3,190,784 1.3
Machinery 20,200 ITT Industries, Inc. 1,314,616 0.5
Media 52,300 ++Fox Entertainment Group, Inc. (Class A) 1,651,634 0.7
Office Electronics 25,000 Canon, Inc. 1,202,005 0.5
Oil & Gas 22,800 Devon Energy Corporation 1,179,900 0.5
Pharmaceuticals 22,100 ++Forest Laboratories, Inc. 1,038,700 0.4
Semiconductors 77,700 ++Altera Corporation 1,743,588 0.7
& Semiconductor 257,400 Intel Corporation 7,366,788 2.9
Equipment 43,900 ++Xilinx, Inc. 1,353,876 0.6
-------------- ------
10,464,252 4.2
Software 60,500 ++Citrix Systems, Inc. 1,245,695 0.5
14,400 ++Electronic Arts Inc. 1,292,400 0.5
29,000 ++Mercury Interactive Corporation 1,272,810 0.5
26,500 ++Symantec Corporation 1,521,895 0.6
-------------- ------
5,332,800 2.1
Specialty Retail 16,600 ++AutoZone, Inc. 1,523,880 0.6
38,000 ++Bed, Bath & Beyond Inc. 1,635,140 0.6
62,100 Lowe's Companies, Inc. 3,406,806 1.3
83,900 PETsMART, Inc. 2,006,888 0.8
16,200 ++Rent A Center Inc. 1,301,994 0.5
29,000 Ross Stores, Inc. 1,461,020 0.6
64,300 The TJX Companies, Inc. 1,392,738 0.6
56,900 Tiffany & Co. 2,214,548 0.9
-------------- ------
14,943,014 5.9
Textiles, Apparel 35,300 ++Coach, Inc. 2,048,812 0.8
& Luxury Goods 24,000 Nike, Inc. (Class B) 1,367,520 0.5
-------------- ------
3,416,332 1.3
Total Common Stocks
(Cost--$104,349,074) 118,836,634 47.2
Face
Amount U.S. Government Obligations
U.S. Treasury STRIPS (a)(b):
$ 11,398,000 2.993% due 8/15/2009 9,092,926 3.6
153,111,000 3.677% due 11/15/2009 121,288,716 48.2
Total U.S. Government Obligations
(Cost--$131,703,887) 130,381,642 51.8
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Schedule of Investments (concluded)
Percent of
Beneficial Interest Short-Term Securities Value Net Assets
$2,409,876 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (c) $ 2,409,876 1.0%
Total Short-Term Securities
(Cost--$2,409,876) 2,409,876 1.0
Total Investments (Cost--$238,462,837) 251,628,152 100.0
Other Assets Less Liabilities 80,292 0.0
-------------- ------
Net Assets $ 251,708,444 100.0%
============== ======
*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 industry classifications
are unaudited.
++Non-income producing security.
(a)Separately Traded Registered Interest and Principal of Securities
(STRIPS).
(b)Represents a zero coupon bond; the interest rate shown reflects
the discount rate paid at the time of purchase by the Fund.
(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 $2,409,876 $70,487
Merrill Lynch Liquidity Series,
LLC Money Market Series -- $ 7,667
Merrill Lynch Premier
Institutional Fund -- $ 5,981
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Statement of Assets and Liabilities
As of August 31, 2003
Assets
Investments, at value (identified cost--$238,462,837) $ 251,628,152
Receivables:
Securities sold $ 2,457,542
Dividends 60,843
Interest 3,918 2,522,303
--------------
Prepaid registration fees and other assets 107,785
--------------
Total assets 254,258,240
--------------
Liabilities
Payables:
Securities purchased 1,644,969
Capital shares redeemed 363,823
Distributor 174,448
Financial warranty fee 160,410
Investment adviser 117,984
Other affiliates 41,445 2,503,079
--------------
Accrued expenses and other liabilities 46,717
--------------
Total liabilities 2,549,796
--------------
Net Assets
Net assets $ 251,708,444
==============
Net Assets Consist of
Paid-in capital, unlimited number of shares authorized $ 242,750,705
Undistributed investment income--net $ 188,905
Accumulated realized capital losses on investments--net (4,391,154)
Unrealized appreciation on investments and foreign currency
transactions--net 13,159,988
--------------
Total accumulated earnings--net 8,957,739
--------------
Net assets $ 251,708,444
==============
Net Asset Value
Class A--Based on net assets of $15,668,472 and 1,510,154 shares
outstanding $ 10.38
==============
Class B--Based on net assets of $117,426,289 and 11,386,863 shares
outstanding $ 10.31
==============
Class C--Based on net assets of $101,110,531 and 9,804,936 shares
outstanding $ 10.31
==============
Class I--Based on net assets of $17,503,152 and 1,683,690 shares
outstanding $ 10.40
==============
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Statement of Operations
For the Period November 13, 2002++ to August 31, 2003
Investment Income
Interest $ 4,476,436
Dividends (net of $1,482 foreign withholding tax) 672,682
Securities lending--net 13,648
--------------
Total income 5,162,766
--------------
Expenses
Financial warranty fee $ 1,660,476
Investment advisory fees 1,330,655
Account maintenance and distribution fees--Class B 936,115
Account maintenance and distribution fees--Class C 816,047
Offering costs 390,275
Transfer agent fees--Class B 114,287
Transfer agent fees--Class C 101,850
Accounting services 101,455
Account maintenance fees--Class A 33,127
Trustees' fees and expenses 27,873
Custodian fees 26,083
Professional fees 22,629
Transfer agent fees--Class I 17,166
Transfer agent fees--Class A 14,029
Registration fees 13,716
Printing and shareholder reports 11,099
Pricing fees 982
Other 13,811
--------------
Total expenses before waiver 5,631,675
Waiver of expenses (8,321)
--------------
Total expenses after waiver 5,623,354
--------------
Investment loss--net (460,588)
--------------
Realized & Unrealized Gain (Loss) on Investments--Net
Realized losson investments--net (4,391,154)
Unrealized appreciation/depreciation on:
Investments--net 13,165,315
Foreign currency transactions--net (5,327) 13,159,988
-------------- --------------
Total realized and unrealized gain on investments and foreign currency
transactions--net 8,768,834
--------------
Net Increase in Net Assets Resulting from Operations $ 8,308,246
==============
++Commencement of operations.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Statement of Changes in Net Assets
For the Period
November 13,
2002++ to
August 31,
Increase (Decrease) in Net Assets: 2003
Operations
Investment loss--net $ (460,588)
Realized loss on investments--net (4,391,154)
Unrealized appreciation/depreciation on investments and foreign currency transactions--net 13,159,988
--------------
Net increase in net assets resulting from operations 8,308,246
--------------
Dividends to Shareholders
Investment income--net:
Class A (16,518)
Class B (112,921)
Class C (99,164)
Class I (21,410)
--------------
Net decrease in net assets resulting from dividends to shareholders (250,013)
--------------
Capital Share Transactions
Net increase in net assets derived from capital share transactions 243,550,211
--------------
Net Assets
Total increase in net assets 251,608,444
Beginning of period 100,000
--------------
End of period* $ 251,708,444
==============
*Undistributed investment income--net $ 188,905
==============
++Commencement of operations.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Financial Highlights
The following per share data and ratios have been derived For the Period November 13, 2002++
from information provided in the financial statements. to August 31, 2003
Increase (Decrease) in Net Asset Value: Class A++++ Class B Class C Class I++++++
Per Share Operating Performance
Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
---------- ---------- ---------- ----------
Investment income (loss)--net .04 (.03) (.03) .06
Realized and unrealized gain on investments and foreign
currency transactions--net .35 .35 .35 .35
---------- ---------- ---------- ----------
Total from investment operations .39 .32 .32 .41
---------- ---------- ---------- ----------
Less dividends from investment income--net (.01) (.01) (.01) (.01)
---------- ---------- ---------- ----------
Net asset value, end of period $ 10.38 $ 10.31 $ 10.31 $ 10.40
========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 3.90%+++ 3.20%+++ 3.20%+++ 4.10%+++
========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, net of waiver 2.11%* 2.88%* 2.88%* 1.86%*
========== ========== ========== ==========
Expenses 2.11%* 2.88%* 2.88%* 1.86%*
========== ========== ========== ==========
Investment income (loss)--net .41%* (.36%)* (.36%)* .67%*
========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 15,668 $ 117,426 $ 101,111 $ 17,503
========== ========== ========== ==========
Portfolio turnover 106.91% 106.91% 106.91% 106.91%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Effective April 14, 2003, Class D Shares were redesignated Class
A Shares.
++++++Effective April 14, 2003, Class A Shares were redesignated
Class I Shares.
+++Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Fundamental Growth Principal Protected Fund (the
"Fund") is part of Merrill Lynch Principal Protected Trust (the
"Trust"). Under the Investment Company Act of 1940, as amended, the
Fund is diversified and the Trust is registered as an 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. Shares of the Fund were offered
during the initial offering period but will not be offered during
the Guarantee Period from November 13, 2002 through November 13,
2009 (the "Guarantee Maturity Date"), except in connection with
reinvestment of dividends and distributions. The Fund will be
offered on a continuous basis after the Guarantee Maturity Date
without the principal protection feature. The Fund offers multiple
classes of shares. Effective April 14, 2003, Class A Shares were
redesignated Class I Shares and Class D Shares were redesignated
Class A Shares. The Fund's financial statements and financial
highlights contained within this report reflect the new share class
redesignation. 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. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class A, Class B and Class C
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. Income, expenses
(other than expenses attributable to a specific class) and realized
and unrealized gains and losses on investments and foreign currency
transactions are allocated daily to each class based on its relative
net assets. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded
on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official closing price on the exchange on which
such securities are traded, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last
available bid price 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 last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Trustees as the
primary market. Securities that are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written or
purchased are valued at the last sale price in the case of exchange-
traded options. In the case of options traded in the over-the-
counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). Short-term securities are
valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market value
quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's
Board of Trustees. 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 Trustees or by the investment
adviser using a pricing service and/or procedures approved by the
Board of Trustees of the Fund.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Notes to Financial Statements (continued)
(b) Derivative financial instruments--The Fund may engage in various
portfolio 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.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts.
Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
* Options--The Fund is authorized to write and purchase call and put
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 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 and purchased options are non-income producing investments.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into U.S. dollars. Realized and unrealized gains or
losses from investments include the effects of foreign exchange
rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend
date. Interest income is recognized on the accrual basis.
(f) Prepaid registration fees--Prepaid registration fees will be
amortized over a 12-month period beginning with the commencement of
operations of the Fund.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Notes to Financial Statements (continued)
(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 difference of $899,506 has been reclassified
between paid-in capital in excess of par and undistributed net
investment income. This reclassification has no effect on net assets
or net asset values per share.
(j) Offering costs--Prepaid offering costs will be amortized over a
12-month period beginning with the commencement of operations of the
Fund.
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 at the annual rate of .65% of
the Fund's average daily net assets. MLIM has entered into a
contractual arrangement with the Fund under which the expenses
incurred by each class of shares of the Fund (excluding distribution
and/or account maintenance fees) will not exceed 1.99%. This
arrangement has a one-year term and is renewable. For the period
November 13, 2002 to August 31, 2003, MLIM earned fees of
$1,330,655, of which $8,321 was waived.
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
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
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 and Class C shareholders.
The ongoing distribution fee compensates the Distributor and MLPF&S
for providing shareholder and distribution-related services to Class
B and Class C shareholders.
The Trust, on behalf of the Fund, has entered into a Financial
Warranty Agreement with Main Place Funding, LLC (the "Warranty
Provider"). The Financial Warranty Agreement is intended to make
sure that on the Guarantee Maturity Date, each shareholder of the
Fund will be entitled to redeem his or her shares for an amount no
less than the initial value of that shareholder's account (less
expenses and sales charges not covered by the Financial Warranty
Agreement), provided that all dividends and distributions received
from the Fund have been reinvested and no shares have been redeemed
(the "Guaranteed Amount"). The Fund will pay to the Warranty
Provider, under the Financial Warranty Agreement, an annual fee
equal to .80% of the Fund's average daily net assets during the
Guarantee Period. If the value of the Fund's assets on the Guarantee
Maturity Date is insufficient to result in the value of each
shareholder's account being at least equal to the shareholder's
Guaranteed Amount, the Warranty Provider will pay the Fund an amount
sufficient to make sure that each shareholder's account can be
redeemed for an amount equal to his or her Guaranteed Amount.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Notes to Financial Statements (continued)
For the period November 13, 2002 to August 31, 2003, FAMD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of the Fund's Class A Shares as follows:
FAMD MLPF&S
Class A $34,131 $669,665
For the period November 13, 2002 to August 31, 2003, MLPF&S received
contingent deferred sales charges of $146,627 and $59,756 relating
to transactions in Class B and Class C Shares, respectively.
The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
MLPF&S or its affiliates. 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 November 13, 2002
to August 31, 2003, MLIM, LLC received $5,849 in securities lending
agent fees.
In addition, MLPF&S received $69,608 in commissions on the execution
of portfolio security transactions for the Fund for the period
November 13, 2002 to August 31, 2003.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
For the period November 13, 2002 to August 31, 2003, the Fund
reimbursed MLIM $4,872 for certain accounting services.
Certain officers and/or Trustees of the Fund are officers and/or
directors of MLIM, FDS, PSI, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period November 13, 2002 to August 31, 2003 were
$508,112,355 and $272,043,504, respectively.
Net realized losses for the period November 13, 2002 to August 31,
2003 and net unrealized gains (losses) as of August 31, 2003 were as
follows:
Realized Unrealized
Losses Gains (Losses)
Long-term investments $ (4,391,154) $ 13,165,315
Foreign currency transactions -- (5,327)
--------------- ---------------
Total $ (4,391,154) $ 13,159,988
=============== ==============
As of August 31, 2003, net unrealized appreciation for Federal
income tax purposes aggregated $10,904,094, of which $13,832,475
related to appreciated securities and $2,928,381 related to
depreciated securities. At August 31, 2003, the aggregate cost of
investments for Federal income tax purposes was $240,724,058.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $243,550,211 for the period November 13, 2002 to August 31,
2003.
Transactions in capital shares for each class were as follows:
Class A Shares for the Period
November 13, 2002++ to Dollar
August 31, 2003++++ Shares Amount
Shares sold 1,728,903 $ 17,289,025
Shares issued to shareholders
in reinvestment of dividends 1,644 16,277
--------------- ---------------
Total issued 1,730,547 17,305,302
Shares redeemed (222,893) (2,261,216)
--------------- ---------------
Net increase 1,507,654 $ 15,044,086
=============== ===============
++Prior to November 13, 2002 (commencement of operations), the Fund
issued 2,500 shares to FAM for $25,000.
++++Effective April 14, 2003, Class D Shares were redesignated Class
A Shares.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Notes to Financial Statements (concluded)
Class B Shares for the Period
November 13, 2002++ to Dollar
August 31, 2003 Shares Amount
Shares sold 12,121,294 $ 121,213,321
Shares issued to shareholders
in reinvestment of dividends 11,179 110,673
--------------- ---------------
Total issued 12,132,473 121,323,994
Shares redeemed (748,110) (7,526,686)
--------------- ---------------
Net increase 11,384,363 $ 113,797,308
=============== ===============
++Prior to November 13, 2002 (commencement of operations), the Fund
issued 2,500 shares to FAM for $25,000.
Class C Shares for the Period
November 13, 2002++ to Dollar
August 31, 2003 Shares Amount
Shares sold 10,623,580 $ 106,236,510
Shares issued to shareholders
in reinvestment of dividends 9,891 97,927
--------------- ---------------
Total issued 10,633,471 106,334,437
Shares redeemed (831,035) (8,359,445)
--------------- ---------------
Net increase 9,802,436 $ 97,974,992
=============== ===============
++Prior to November 13, 2002 (commencement of operations), the Fund
issued 2,500 shares to FAM for $25,000.
Class I Shares for the Period
November 13, 2002++ to Dollar
August 31, 2003++++ Shares Amount
Shares sold 2,268,099 $ 22,681,653
Shares issued to shareholders
in reinvestment of dividends 2,138 21,183
--------------- ---------------
Total issued 2,270,237 22,702,836
Shares redeemed (589,047) (5,969,011)
--------------- ---------------
Net increase 1,681,190 $ 16,733,825
=============== ===============
++Prior to November 13, 2002 (commencement of operations), the Fund
issued 2,500 shares to FAM for $25,000.
++++Effective April 14, 2003, Class A Shares were redesignated Class
I Shares.
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 November
13, 2002 to August 31, 2003.
6. Distributions to Shareholders:
The tax character of distributions paid during the period November
13, 2002 to August 31, 2003 was as follows:
8/31/2003
Distributions paid from ordinary income $ 250,013
---------------
Total taxable distributions $ 250,013
===============
As of August 31, 2003, the components of accumulated earnings on a
tax basis were as follows:
Undistributed ordinary income--net $ 188,905
Undistributed long-term capital gains--net --
---------------
Total undistributed earnings--net 188,905
Capital loss carryforward --
Unrealized gains--net 8,768,834*
---------------
Total accumulated earnings--net $ 8,957,739
===============
*The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on
wash sales and the deferral of post-October capital losses for tax
purposes.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Independent Auditors' Report
To the Shareholders and Board of Trustees,
Merrill Lynch Fundamental Growth Principal Protected Fund
We have audited the accompanying statement of assets and liabilities
of Merrill Lynch Fundamental Growth Principal Protected Fund,
including the schedule of investments, as of August 31, 2003, and
the related statement of operations, the statement of changes in net
assets and the financial highlights for the period November 13, 2002
(commencement of operations) through August 31, 2003. 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 audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States. 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 and financial highlights. Our procedures
included confirmation of securities owned as of August 31, 2003 by
correspondence with the custodian. 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 audit provides 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 Fundamental Growth Principal
Protected Fund at August 31, 2003, the results of its operations,
the changes in its net assets and the financial highlights for the
period November 13, 2002 through August 31, 2003 in conformity with
accounting principles generally accepted in the United States.
(Ernst & Young LLP)
MetroPark, New Jersey
October 22, 2003
Important Tax Information (unaudited)
All of the ordinary income distributions paid by Merrill Lynch
Fundamental Growth Principal Protected Fund to the shareholders of
record on December 20, 2002 qualifies for the dividends received
deduction for corporations. Additionally, 85% of such ordinary
income distributions was attributable to Federal obligations.
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 advisor to
determine if any portion of the dividends you received is exempt
from state income taxes.
Please retain this information for your records.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Officers and Trustees (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 Trustee Trustee
Interested Trustee
Terry K. Glenn* President 2002 to President and Chairman of Merrill Lynch 122 Funds None
P.O. Box 9011 and present Investment Managers, L.P. ("MLIM")/Fund 163 Portfolios
Princeton, Trustee Asset Management, L.P. ("FAM")--Advised
NJ 08543-9011 Funds since 1999; Chairman (Americas Region)
Age: 62 of MLIM from 2000 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 MLIM or FAM 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 Trustee's term is unlimited.
Trustees 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 Trustees.
Independent Trustees*
David O. Beim Trustee 2002 to Professor of Finance and Economics at the 10 Funds None
P.O. Box 9095 present Columbia University Graduate School of 17 Portfolios
Princeton, Business since 1991; Chairman of Wave
NJ 08543-9095 Hill, Inc. since 1990; Chairman of Outward
Age: 63 Bound U.S.A. from 1997 to 2002; Trustee of
Phillips Exeter Academy.
James T. Flynn Trustee 2002 to Chief Financial Officer of J.P. Morgan & 10 Funds None
P.O. Box 9095 present Co., Inc. from 1990 to 1995. 17 Portfolios
Princeton,
NJ 08543-9095
Age: 63
Todd Goodwin Trustee 2002 to General Partner of Gibbons, Goodwin, 9 Funds None
P.O. Box 9095 present van Amerongen (investment banking firm) 16 Portfolios
Princeton, since 1984.
NJ 08543-9095
Age: 72
George W. Holbrook Trustee 2002 to Managing Partner of Bradley Resources 9 Funds Thoratec
P.O. Box 9095 present Company (private investment company) and 16 Portfolios Laboratories
Princeton, associated with that Firm and its Corporation
NJ 08543-9095 predecessors since 1953; Director of
Age: 72 Thoratec Laboratories Corporation
(medical device manufacturers).
W. Carl Kester Trustee 2002 to Mizuho Financial Group Professor of Finance, 10 Funds None
P.O. Box 9095 present Senior Associate Dean and Chairman of 17 Portfolios
Princeton, the MBA Program of Harvard University
NJ 08543-9095 Graduate School of Business Administration
Age: 51 since 1999; Serves on the Board of Advisors
of Security Leasing Partners.
Karen P. Robards Trustee 2002 to President of Robards & Company, a financial 10 Funds None
P.O. Box 9095 present advisory firm providing services to 17 Portfolios
Princeton, companies in the health care industry;
NJ 08543-9095 Director of Enable Medical Corporation
Age: 53 since 1996; Director of Atricure, Inc.
since 2000; Founder and President of The
Cooke Center for Learning and Development,
a non profit educational organization since
1987.
*The Trustee's term is unlimited. Trustees serve until their
resignation, removal or death, or until December 31 of the year in
which they turn 72.
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
Officers and Trustees (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. Burke Vice 2002 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof
P.O. Box 9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services
Princeton, and since 1999; Vice President of FAMD since 1999; Director of MLIM Taxation
NJ 08543-9011 Treasurer since 1990.
Age: 43
Robert C. Doll, Jr. Senior 2002 to President of MLIM and member of the Executive Management Committee of ML&Co.,
P.O. Box 9011 Vice present Inc. since 2001; Global Chief Investment Officer and Senior Portfolio Manager
Princeton, President of MLIM since 1999; Chief Investment Officer of Equities at Oppenheimer Funds,
NJ 08543-9011 Inc. from 1990 to 1999 and Chief Investment Officer thereof from 1998 to 1999;
Age: 49 Executive Vice President of Oppenheimer Funds, Inc. from 1991 to 1999.
Phillip S. Gillespie Secretary 2003 to First Vice President of MLIM since 2001; Director (Legal Advisory) of MLIM
P.O. Box 9011 present from 2000 to 2001; Vice President of MLIM from 1999 to 2000 and Attorney
Princeton, thereof since 1998; Assistant General Counsel of Chancellor LGT Asset
NJ 08543-9011 Management, Inc. from 1997 to 1998.
Age: 39
*Officers of the Fund serve at the pleasure of the Board of
Trustees.
Further information about the Fund's Officers and Trustees is
available in the Fund's Statement of Additional Information, which
can be obtained without charge by calling 1-800-MER-FUND.
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
MERRILL LYNCH FUNDAMENTAL GROWTH PRINCIPAL PROTECTED FUND
AUGUST 31, 2003
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) David O. Beim, (2) W. Carl
Kester, (3) James T. Flynn and (4) Karen P. Robards.
The Board of Directors/Trustees of the Mercury/Boston Cluster
Merrill Lynch Funds determined that David O. Beim, W. Carl Kester
and Karen P. Robards qualify as financial experts pursuant to Item
3(c)(4) of Form N-CSR.
Mr. Beim has a thorough understanding of generally accepted
accounting principles, financial statements and internal control
over financial reporting as well as audit committee functions. For
25 years, Mr. Beim was an investment banker actively engaged in
financial analysis for securities transactions and mergers. These
transactions presented a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the Registrant's financial statements. Mr. Beim has also been a
professor of finance and economics at the Columbia University
Graduate School of Business for the past 11 years.
Prof. Kester has a thorough understanding of generally accepted
accounting principles, financial statements and internal control
over financial reporting as well as audit committee functions.
Prof. Kester has been involved in providing valuation and other
financial consulting services to corporate clients since 1978.
Prof. Kester's financial consulting services present a breadth and
level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the Registrant's financial
statements.
Ms. Robards has a thorough understanding of generally accepted
accounting principles, financial statements and internal control
over financial reporting as well as audit committee functions. Ms.
Robards has been President of Robards & Company, a financial
advisory firm, since 1987. Ms. Robards was formerly an investment
banker for more than 10 years where she was responsible for
evaluating and assessing the performance of companies based on their
financial results. Ms. Robards has over 30 years of experience
analyzing financial statements. She also is the member of the Audit
Committees of two privately held companies and a non-profit
organization.
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 Fundamental Growth Principal Protected Fund
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
Merrill Lynch Fundamental Growth Principal Protected Fund
Date: October 24, 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 Fundamental Growth Principal Protected Fund
Date: October 24, 2003
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Fundamental Growth Principal Protected Fund
Date: October 24, 2003
Attached hereto as a furnished exhibit are the certifications
pursuant to Section 906 of the Sarbanes-Oxley Act.