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
Merrill Lynch Basic Value Principal Protected Fund
Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Merrill Lynch
Basic Value 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: 6/30/03
Date of reporting period: 07/01/02 - 12/31/02
Item 1 - Is shareholder report attached? - Y
[LOGO] Merrill Lynch Investment Managers
Semi-Annual Report
December 31, 2002
Merrill Lynch
Basic Value
Principal Protected Fund
www.mlim.ml.com
Merrill Lynch Basic Value Principal Protected Fund
DEAR SHAREHOLDER
We are pleased to provide you with this semi-annual report for Merrill Lynch
Basic Value Principal Protected Fund. During the Guarantee Period, the Fund will
seek capital appreciation and, secondarily, income to the extent permitted by a
strategy that seeks to use investments in U.S. Treasury bonds, including zero
coupon bonds, and other fixed income instruments, to protect the original
principal value of the Fund (less redemptions, cash distributions and dividends
and extraordinary expenses) at the Guarantee Maturity Date. The Guarantee Period
will run from the Fund's commencement of operations (November 13, 2002) through
and including the same date 7 years later (November 13, 2009).
Portfolio Matters
Since inception (November 13, 2002) to December 31, 2002, the Fund's Class A,
Class B, Class C and Class D Shares had total returns of +0.53%, +0.43%, +0.43%
and +0.53%, respectively. At December 31, 2002, the relative weightings of the
Fund's fixed income and equity components were 48.6% and 51.6%, respectively.
We generated positive performance in the equity component of the Fund from
security selection across a number of sectors including: consumer discretionary
(Fox Entertainment Group, Inc. and Tribune Company); consumer staples (Sara Lee
Corporation and The Procter & Gamble Company); energy (Halliburton Company);
financials (Wells Fargo Company and Wachovia Corporation); health care (Boston
Scientific Corporation and Merck & Co., Inc.); industrials (Deere & Company and
Eaton Corporation); information technology (International Business Machines
Corporation, Unisys Corporation and Hewlett-Packard Company); and materials
(E.I. du Pont de Nemours and Company).
Other companies added to the portfolio included Alcan Aluminium Ltd., The Boeing
Company, Global-SantaFe Corporation, Kimberly-Clark Corporation, The Limited,
Inc., Lincoln National Corporation and Raytheon Company.
In the particular case of Kimberly-Clark, a leading personal care products
company, the company has been plagued by a myriad of issues, including
intensified competitive pressures, weak Latin American results, adverse currency
trends and new product launch costs. The good news is that these impediments are
expected to ease as we progress through 2003. Thus, with the shares trading at a
very reasonable 14 times 2003 earnings per share, the risk/reward appears
favorable. Kimberly-Clark holds a commanding share in many attractive
categories, enjoys high profit margins and generates sizeable cash flow.
The Boeing Company's shares were purchased given the historically low valuation
parameters assigned to the shares. At current prices, Boeing shares reflect
continued deterioration of the commercial aircraft business, which, we believe,
is nearing its bottom. Furthermore, geopolitical unease bodes well for the
defense segment of the company, which produces the lion's share of earnings.
Guidant Corporation, a medical devices company, was purchased on news that its
efforts to establish a drug-coated stent had failed. The shares were trading at
a price that valued only Guidant's non-stent business. As the company pursues
yet another avenue to enter the lucrative drug-coated stent market, we believe
that the valuation and earnings should improve, providing ample reward for
shareholders.
What is ahead in 2003? While certainly cognizant of the risks, both geopolitical
and economic, accommodative monetary and fiscal policy, low inflation, rising
productivity, improving profitability for corporate America and reasonable
valuations lead us to conclude that 2003 should be a recovery year for the U.S.
stock market.
1
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
In Conclusion
We thank you for your support and investment in Merrill Lynch Basic Value
Principal Protected Fund, and we look forward to reviewing our outlook and
strategy with you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Trustee
/s/ Kevin M. Rendino
Kevin M. Rendino
Equity Portfolio Manager
February 5, 2003
2
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing(SM) System, which offers four pricing alternatives:
o Class A Shares incur a maximum initial sales charge (front-end load) of
5.25% and bear no ongoing distribution or account maintenance fees. Class
A Shares are available only to eligible investors.
o 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 D Shares after
approximately eight years. (There is no initial sales charge for automatic
share conversions.)
o Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
o Class D Shares incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of
future performance. Performance results do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption
of fund shares. Figures shown in 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
Since Inception
As of December 31, 2002 Total Return
================================================================================
ML Basic Value Principal Protected Fund Class A Shares* +0.53%
- --------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class B Shares* +0.43
- --------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class C Shares* +0.43
- --------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class D Shares* +0.53
================================================================================
* 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.
3
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
PERFORMANCE DATA (concluded)
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Inception (11/13/02)
through 12/31/02 +0.53% -4.75%
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Inception (11/13/02)
through 12/31/02 +0.43% -3.57%
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
Inception (11/13/02)
through 12/31/02 +0.43% -0.57%
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class D Shares*
================================================================================
Inception (11/13/02)
through 12/31/02 +0.53% -4.75%
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
David O. Beim, Trustee
James T. Flynn, Trustee
Todd Goodwin, Trustee
George W. Holbrook, Jr., Trustee
W. Carl Kester, Trustee
Karen P. Robards, Trustee
Donald C. Burke, Vice President and Treasurer
Phillip S. Gillespie, Secretary
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
4
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
SCHEDULE OF INVESTMENTS
Shares Percent of
Industry* Held Stocks Value Net Assets
====================================================================================================================================
Above-Average Yield
====================================================================================================================================
Diversified 38,960 AT&T Corp. $ 1,017,245 0.3%
Telecommunication Services
Metals & Mining 32,800 Alcan Aluminium Ltd. 968,256 0.3
Pharmaceuticals 82,100 Bristol-Myers Squibb Company 1,900,615 0.6
Chemicals 100,600 E.I. du Pont de Nemours and Company 4,265,440 1.3
Oil & Gas 189,200 Exxon Mobil Corporation 6,610,648 2.0
Personal Products 90,400 The Gillette Company 2,744,544 0.8
Aerospace & Defense 156,300 Honeywell International Inc. 3,751,200 1.1
Diversified Financials 90,300 J.P. Morgan Chase & Co. 2,167,200 0.6
Oil & Gas 51,500 Kerr-McGee Corporation 2,281,450 0.7
Insurance 25,900 Lincoln National Corporation 817,922 0.2
Oil & Gas 128,800 Royal Dutch Petroleum Company (NY Registered Shares) 5,669,776 1.7
Diversified 86,700 SBC Communications Inc. 2,350,437 0.7
Telecommunication Services
Food Products 103,100 Sara Lee Corporation 2,320,781 0.7
Diversified 77,700 Verizon Communications 3,010,875 0.9
Telecommunication Services
Banks 135,200 Wachovia Corporation 4,926,688 1.5
------------ -----
44,803,077 13.4
====================================================================================================================================
Below-Average Price/Earnings Ratio
====================================================================================================================================
Insurance 90,200 ACE Limited 2,646,468 0.8
Insurance 79,400 The Allstate Corporation 2,937,006 0.9
Insurance 36,300 American International Group, Inc. 2,099,955 0.6
Computers & Peripherals 54,400 Apple Computer, Inc. (a) 779,552 0.2
Banks 33,800 Bank of America Corporation 2,351,466 0.7
Banks 128,800 Bank One Corporation 4,707,640 1.4
Machinery 25,700 Caterpillar Inc. 1,175,004 0.4
Diversified Financials 135,100 Citigroup Inc. 4,754,169 1.4
Auto Components 220,000 Delphi Automotive Systems Corporation 1,771,000 0.5
Machinery 23,200 Eaton Corporation 1,812,152 0.6
Automobiles 116,400 Ford Motor Company 1,082,520 0.3
Health Care Equipment & 33,900 Guidant Corporation (a) 1,045,815 0.3
Supplies
Computers & Peripherals 135,900 Hewlett-Packard Company 2,359,224 0.7
Household Durables 154,800 Koninklijke (Royal) Philips Electronics NV (NY Registered Shares) 2,736,864 0.8
Hotels, Restaurants & 136,700 McDonald's Corporation 2,198,136 0.7
Leisure
Pharmaceuticals 45,500 Merck & Co., Inc. 2,575,755 0.8
Diversified Financials 36,000 Morgan Stanley 1,437,120 0.4
Semiconductor Equipment & 98,000 National Semiconductor Corporation (a) 1,470,980 0.4
Products
Household Products 25,900 The Procter & Gamble Company 2,225,846 0.7
Pharmaceuticals 95,600 Schering-Plough Corporation 2,122,320 0.6
Electrical Equipment 85,700 Thomas & Betts Corporation (a) 1,448,330 0.4
Insurance 159,600 Travelers Property Casualty Corp. (Class A) (a) 2,338,140 0.7
IT Consulting & Services 296,100 Unisys Corporation (a) 2,931,390 0.9
Oil & Gas 180,300 Unocal Corporation 5,513,574 1.7
------------ -----
56,520,426 16.9
- ------------------------------------------------------------------------------------------------------------------------------------
5
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
SCHEDULE OF INVESTMENTS (continued)
Shares Percent of
Industry* Held Stocks Value Net Assets
====================================================================================================================================
Low Price-to-Book Value
====================================================================================================================================
Communications Equipment 225,300 3Com Corporation (a) $ 1,043,139 0.3%
Semiconductor Equipment & 180,400 Advanced Micro Devices, Inc. (a) 1,165,384 0.4
Products
Health Care Providers & 41,400 Aetna Inc. (New Shares) 1,702,368 0.5
Services
Electronic Equipment & 109,200 Agilent Technologies, Inc. (a) 1,961,232 0.6
Instruments
Aerospace & Defense 26,100 The Boeing Company 861,039 0.3
Media 62,903 Comcast Corporation (Class A) (a) 1,482,624 0.4
Automobiles 35,700 DaimlerChrysler AG 1,094,205 0.3
Machinery 108,400 Deere & Company 4,970,140 1.5
Energy Equipment & Service 125,900 Diamond Offshore Drilling, Inc. 2,750,915 0.8
Media 85,300 Fox Entertainment Group, Inc. (Class A) (a) 2,211,829 0.7
Energy Equipment & Service 38,300 GlobalSantaFe Corporation 931,456 0.3
Energy Equipment & Service 113,500 Halliburton Company 2,123,585 0.6
Insurance 72,200 The Hartford Financial Services Group, Inc. 3,280,046 1.0
Paper & Forest Products 69,600 International Paper Company 2,433,912 0.7
Household Products 53,400 Kimberly-Clark Corporation 2,534,898 0.8
Semiconductor Equipment & 192,100 LSI Logic Corporation (a) 1,108,417 0.3
Products
Media 349,100 Liberty Media Corporation (Class A) (a) 3,120,954 0.9
Communications Equipment 626,700 Lucent Technologies Inc. (a) 789,642 0.2
Metals & Mining 132,100 Massey Energy Company 1,284,012 0.4
Semiconductor Equipment & 57,600 Micron Technology, Inc. (a) 561,024 0.2
Products
Communications Equipment 309,300 Motorola, Inc. 2,675,445 0.8
Metals & Mining 88,700 Phelps Dodge Corporation (a) 2,807,355 0.8
Aerospace & Defense 33,600 Raytheon Company 1,033,200 0.3
Electronic Equipment & 53,600 Tektronix, Inc. (a) 974,984 0.3
Instruments
Industrial Conglomerates 50,000 Textron, Inc. 2,149,500 0.6
Specialty Retail 83,000 Toys `R' Us, Inc. (a) 830,000 0.3
Media 31,900 Tribune Company 1,450,174 0.4
Media 15,600 Viacom, Inc. (Class B) (a) 635,856 0.2
Media 116,400 The Walt Disney Company 1,898,484 0.6
Banks 83,700 Wells Fargo Company 3,923,019 1.2
------------ -----
55,788,838 16.7
====================================================================================================================================
Special Situations
====================================================================================================================================
Software 90,500 Computer Associates International, Inc. 1,221,750 0.4
Specialty Retail 113,300 The Gap, Inc. 1,758,416 0.5
Computers & Peripherals 28,100 International Business Machines Corporation 2,177,750 0.6
Specialty Retail 25,900 The Limited, Inc. 360,787 0.1
------------ -----
5,518,703 1.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stocks (Cost--$159,698,562) 162,631,044 48.6
- ------------------------------------------------------------------------------------------------------------------------------------
6
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
SCHEDULE OF INVESTMENTS (concluded)
Face Percent of
Amount Issue Value Net Assets
====================================================================================================================================
U.S. Government Obligations
====================================================================================================================================
U.S. Treasury STRIPS (b)(d):
$ 27,850,000 3.585% due 8/15/2009 $ 22,204,944 6.7%
190,077,000 3.593% due 11/15/2009 150,157,409 44.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Obligations (Cost--$170,850,552) 172,362,353 51.6
- ------------------------------------------------------------------------------------------------------------------------------------
Partnership
Interest
====================================================================================================================================
Short-Term Securities
====================================================================================================================================
$ 3,064,486 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (c) 3,064,486 0.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$3,064,486) 3,064,486 0.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost--$333,613,600) 338,057,883 101.1
Liabilities in Excess of Other Assets (3,714,327) (1.1)
------------ -----
Net Assets $334,343,556 100.0%
============ ======
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Separately Traded Registered Interest and Principal of Securities
(STRIPS).
(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:
--------------------------------------------------------------------------
Net Net Interest
Affiliate Activity Cost Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series,
LLC Cash Sweep Series I $3,064,486 $3,064,486 $16,420
--------------------------------------------------------------------------
(d) Represents a zero coupon bond; the interest rate shown reflects the
discount rate paid at the time of purchase by the Fund.
* 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.
See Notes to Financial Statements.
PORTFOLIO INFORMATION
As of December 31, 2002
Percent of
Ten Largest Equity Holdings Net Assets
Exxon Mobil Corporation ............................................. 2.0%
Royal Dutch Petroleum Company
(NY Registered Shares) ............................................ 1.7
Unocal Corporation .................................................. 1.7
Deere & Company ..................................................... 1.5
Wachovia Corporation ................................................ 1.5
Citigroup Inc. ...................................................... 1.4
Bank One Corporation ................................................ 1.4
E.I. du Pont de Nemours and Company ................................. 1.3
Wells Fargo Company ................................................. 1.2
Honeywell International Inc. ........................................ 1.1
7
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
FINANCIAL INFORMATION
=======================================================================================================================
Statement of Assets and Liabilities as of December 31, 2002
=======================================================================================================================
Assets: Investments, at value (identified cost--$333,613,600) ............ $338,057,883
Cash ............................................................. 25,998,793
Receivables:
Dividends ..................................................... $ 314,832
Interest ...................................................... 8,874 323,706
------------
Prepaid registration fees and other assets ....................... 127,649
------------
Total assets ..................................................... 364,508,031
------------
- -----------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased .......................................... 29,256,068
Distributor ................................................... 257,549
Financial warrant fee ......................................... 232,102
Investment adviser ............................................ 192,161
Capital shares redeemed ....................................... 165,186 30,103,066
------------
Accrued expenses and other liabilities ........................... 61,409
------------
Total liabilities ................................................ 30,164,475
------------
- -----------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets ....................................................... $334,343,556
============
- -----------------------------------------------------------------------------------------------------------------------
Net Assets Paid-in capital .................................................. $333,383,386
Consist of: Accumulated distributions in excess of investment income--net .... $ (421,866)
Accumulated realized capital losses on investments--net .......... (3,062,247)
Unrealized appreciation on investments--net ...................... 4,444,283
------------
Total accumulated earnings--net .................................. 960,170
------------
Net assets ....................................................... $334,343,556
============
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $26,257,599 and 2,615,348 shares
outstanding ............................................. $ 10.04
============
Class B--Based on net assets of $156,686,718 and 15,627,556 shares
outstanding ............................................. $ 10.03
============
Class C--Based on net assets of $129,030,758 and 12,869,212 shares
outstanding ............................................. $ 10.03
============
Class D--Based on net assets of $22,368,481 and 2,228,734 shares
outstanding ............................................. $ 10.04
============
- -----------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
8
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
FINANCIAL INFORMATION (continued)
=======================================================================================================
Statement of Operations for the Period November 13, 2002+ to December 31, 2002
=======================================================================================================
Investment Interest ............................................. $ 744,282
Income: Dividends (net of $950 foreign withholding tax) ...... 461,866
------------
Total income ......................................... 1,206,148
------------
- -------------------------------------------------------------------------------------------------------
Expenses: Financial warrant fee ................................ $368,270
Investment advisory fees ............................. 295,120
Account maintenance and distribution fees--Class B ... 212,897
Account maintenance and distribution fees--Class C ... 175,016
Offering costs ....................................... 45,425
Transfer agent fees--Class B ......................... 25,259
Transfer agent fees--Class C ......................... 21,030
Accounting services .................................. 20,395
Account maintenance fees--Class D .................... 7,588
Registration fees .................................... 7,218
Professional fees .................................... 6,106
Printing and shareholder reports ..................... 5,356
Custodian fees ....................................... 4,199
Transfer agent fees--Class A ......................... 3,922
Directors' fees and expenses ......................... 3,904
Transfer agent fees--Class D ......................... 3,328
Pricing fees ......................................... 632
Other ................................................ 2,296
--------
Total expenses ....................................... 1,207,961
------------
Investment loss--net ................................. (1,813)
------------
- -------------------------------------------------------------------------------------------------------
Realized & Realized loss on investments--net .................... (3,062,247)
Unrealized Gain Unrealized appreciation on investments--net .......... 4,444,283
(Loss) on ------------
Investments -- Net: Total realized and unrealized gain on investments--net 1,382,036
------------
Net Increase in Net Assets Resulting from Operations . $ 1,380,223
============
- -------------------------------------------------------------------------------------------------------
+ Commencement of operations.
See Notes to Financial Statements.
9
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
FINANCIAL INFORMATION (continued)
=========================================================================================================
Statement of Changes in Net Assets
=========================================================================================================
For the
Period
November 13,
2002+ to
December 31,
Increase (Decrease) in Net Assets: 2002
- ---------------------------------------------------------------------------------------------------------
Operations: Investment loss--net .............................................. $ (1,813)
Realized loss on investments--net ................................. (3,062,247)
Unrealized appreciation on investments--net ....................... 4,444,283
-------------
Net increase in net assets resulting from operations .............. 1,380,223
-------------
- ---------------------------------------------------------------------------------------------------------
Dividends to Investment income--net:
Shareholders: Class A ........................................................ (33,264)
Class B ........................................................ (196,773)
Class C ........................................................ (161,700)
Class D ........................................................ (28,316)
-------------
Net decrease in net assets resulting from dividends to shareholders (420,053)
-------------
- ---------------------------------------------------------------------------------------------------------
Capital Share Net increase in net assets derived from capital share transactions 333,283,386
Transactions: -------------
- ---------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets ...................................... 334,243,556
Beginning of period ............................................... 100,000
-------------
End of period* .................................................... $ 334,343,556
=============
- ---------------------------------------------------------------------------------------------------------
*Accumulated distributions in excess of investment income--net ..... $ (421,866)
=============
- ---------------------------------------------------------------------------------------------------------
+ Commencement of operations.
See Notes to Financial Statements.
10
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
FINANCIAL INFORMATION (concluded)
================================================================================================================================
Financial Highlights
================================================================================================================================
The following per share data and ratios have been derived For the Period November 13, 2002+ to
from information provided in the financial statements. December 31, 2002
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
- --------------------------------------------------------------------------------------------------------------------------------
Per Share Net asset value, beginning of period ........... $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating --------- --------- --------- ---------
Performance: Investment income (loss)--net .................. .01 --++ --++ .01
Realized and unrealized gain on investments--net .04 .04 .04 .04
--------- --------- --------- ---------
Total from investment operations ............... .05 .04 .04 .05
--------- --------- --------- ---------
Less dividends from investment income--net ..... (.01) (.01) (.01) (.01)
--------- --------- --------- ---------
Net asset value, end of period ................. $ 10.04 $ 10.03 $ 10.03 $ 10.04
--------- --------- --------- ---------
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ............. .53%++ .43%++ .43%++ .53%++
Return:** ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses ....................................... 1.78%* 2.79%* 2.79%* 2.03%*
Net Assets: ========= ========= ========= =========
Investment income (loss)--net .................. .88%* (.13%)* (.14%)* .63%*
========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ....... $ 26,258 $ 156,687 $ 129,031 $ 22,368
Data: ========= ========= ========= =========
Portfolio turnover ............................. 55.04% 55.04% 55.04% 55.04%
========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude the effects of sales charges.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
11
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Basic Value Principal Protected Fund (the "Fund") is part of
Merrill Lynch Principal Protected Trust (the "Trust"). Under the Investment
Company Act of 1940, 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. The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. 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 this date. Shares of Class A and Class D are
sold with a front-end sales charge. Shares of Class B and Class C may be subject
to a contingent deferred sales charge. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. Income, expenses
(other than expenses attributable to a specific class) and realized and
unrealized gains and losses on investments are allocated daily to each class
based on its relative net assets. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities that are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market. Securities
that are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. Options written
or purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the over-the-counter market, valuation
is the last asked price (options written) or the last bid price (options
purchased). Short-term securities are valued at amortized cost, which
approximates market value. Other investments 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 Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
o Options -- The Fund is authorized to write 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) 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
12
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
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.
(d) 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.
(e) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(f) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM 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.
FAM 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. FAM 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.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class B ................................ .25% .75%
Class C ................................ .25% .75%
Class D ................................ .25% --
- --------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
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.
13
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
NOTES TO FINANCIAL STATEMENTS (concluded)
For the period November 13, 2002 to December 31, 2002, FAMD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the Fund's Class D
Shares as follows:
- --------------------------------------------------------------------------------
FAMD MLPF&S
- --------------------------------------------------------------------------------
Class D ............................ $ 44,464 $848,864
- --------------------------------------------------------------------------------
For the period November 13, 2002 to December 31, 2002, MLPF&S received
contingent deferred sales charges of $11,008 and $2,012 relating to transactions
in Class B and Class C Shares, respectively.
In addition, MLPF&S received $4,091 in commissions on the execution of portfolio
security transactions for the Fund for the period November 13, 2002 to December
31, 2002.
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 December 31, 2002, the Fund reimbursed FAM
$1,107 for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, 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 December 31, 2002 were $452,280,833 and
$119,364,091, respectively.
Net realized losses for the period November 13, 2002 to December 31, 2002 and
net unrealized gains as of December 31, 2002 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Gains
- --------------------------------------------------------------------------------
Long-term investments ............... $(3,062,247) $ 4,444,283
----------- -----------
Total ............................... $(3,062,247) $ 4,444,283
=========== ===========
- --------------------------------------------------------------------------------
As of December 31, 2002, net unrealized appreciation for Federal income tax
purposes aggregated $4,444,283, of which $7,005,671 related to appreciated
securities and $2,561,388 related to depreciated securities. At December 31,
2002, the aggregate cost of investments for Federal income tax purposes was
$333,613,600.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$333,283,386 for the period November 13, 2002 to December 31, 2002.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the
Period November 13, 2002+ Dollar
to December 31, 2002 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 2,663,069 $ 26,631,855
Shares issued to shareholders
in reinvestment of dividends ........... 3,266 32,921
---------- -------------
Total issued ........................... 2,666,335 26,664,776
Shares redeemed ........................ (53,487) (540,943)
---------- -------------
Net increase ........................... 2,612,848 $ 26,123,833
========== =============
- --------------------------------------------------------------------------------
+ Prior to November 13, 2002 (commencement of operations), the Fund issued
2,500 shares to FAM for $25,000.
- --------------------------------------------------------------------------------
Class B Shares for the
Period November 13, 2002+ Dollar
to December 31, 2002 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 15,830,788 $ 158,322,001
Shares issued to shareholders
in reinvestment of dividends ......... 19,175 193,094
---------- -------------
Total issued ......................... 15,849,963 158,515,095
Shares redeemed ...................... (224,907) (2,274,743)
---------- -------------
Net increase ......................... 15,625,056 $ 156,240,352
========== =============
- --------------------------------------------------------------------------------
+ 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+ Dollar
to December 31, 2002 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 13,021,963 $ 130,234,217
Shares issued to shareholders
in reinvestment of dividends ......... 15,828 159,387
---------- -------------
Total issued ......................... 13,037,791 130,393,604
Shares redeemed ...................... (171,079) (1,735,763)
---------- -------------
Net increase ......................... 12,866,712 $ 128,657,841
========== =============
- --------------------------------------------------------------------------------
+ Prior to November 13, 2002 (commencement of operations), the Fund issued
2,500 shares to FAM for $25,000.
14
Merrill Lynch Basic Value Principal Protected Fund December 31, 2002
- --------------------------------------------------------------------------------
Class D Shares for the
Period November 13, 2002+ Dollar
to December 31, 2002 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 2,250,232 $ 22,503,394
Shares issued to shareholders
in reinvestment of dividends ........... 2,688 27,098
---------- -------------
Total issued ........................... 2,252,920 22,530,492
Shares redeemed ........................ (26,686) (269,132)
---------- -------------
Net increase ........................... 2,226,234 $ 22,261,360
========== =============
- --------------------------------------------------------------------------------
+ Prior to November 13, 2002 (commencement of operations), the Fund issued
2,500 shares to FAM for $25,000.
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by FAM 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 December 31, 2002.
15
[LOGO] Merrill Lynch Investment Managers
[GRAPHICS OMITTED]
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch Basic Value Principal Protected Fund
Box 9011
Princeton, NJ
08543-9011
[RECYCLED LOGO] Printed on post-consumer recycled paper #BVPP--12/02
- --------------------------------------------------------------------------------
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-- N/A (not answered until July 15, 2003 and only
annually for funds)
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. -N/A (not answered until July
15, 2003 and only annually for funds)
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.
Items 5-6 - 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) - Disclose the conclusions of the registrant's principal executive
officer or officers and principal financial officer or officers, or
persons performing similar functions, about the effectiveness of the
registrant's disclosure controls and procedures (as defined in Rule
30a-2(c) under the Act (17 CFR 270.30a-2(c))) based on their
evaluation of these controls and procedures as of a date within 90
days of the filing date of the report that includes the disclosure
required by this paragraph. N/A.
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 (4 in total pursuant to Sections 302 and 906 for
CEO/CFO). 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 Basic Value Principal Protected Fund
By: /s/ Terry K. Glenn
-----------------------------
Terry K. Glenn,
President of
Merrill Lynch Basic Value Principal Protected Fund
Date: February 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 Basic Value Principal Protected Fund
Date: February 24, 2003
By: /s/ Donald C. Burke
-----------------------------
Donald C. Burke
Chief Financial Officer of
Merrill Lynch Basic Value Principal Protected Fund
Date: February 24, 2003