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 Basic Value 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
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: 06/30/03
Date of reporting period: 07/01/02 - 06/30/03
Item 1 - Attach shareholder report
[LOGO] Merrill Lynch Investment Managers
Annual Report
June 30, 2003
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 first annual report to shareholders 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 common stocks, 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 seven years
later (November 13, 2009).
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.
Fiscal Year in Review
Since its inception (November 13, 2002) through June 30, 2003, Merrill Lynch
Basic Value Principal Protected Fund's Class A, Class B, Class C and Class I
Shares had total returns of +5.43%, +4.93%, +4.93% and +5.63%, respectively.
(Results shown do not reflect sales charges and would be lower if sales charges
were included. Complete performance information can be found on pages 3 - 5 of
this report to shareholders.) The Fund's unmanaged benchmarks, the Standard &
Poor's 500 (S&P 500(R)) Barra Value Index and the broader-based S&P 500 Index,
returned +14.88% and +11.69%, 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 June 30, 2003, the
Fund's allocation was 43.3% in equities and 56.1% 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 late in the period, the Fund's returns underperformed those of
its benchmarks as a result of the Fund's overweighted fixed income position.
During the fiscal period, the fixed income component of the portfolio was
invested in U.S. Treasury zero coupon bonds set to mature close to the
expiration of the Fund. Since the Fund's inception, the allocation between the
equity and fixed income components has varied, with the equity weighting ranging
from 25% of net assets to 65%, and the fixed income allocation ranging from 35%
to 75% as we saw interest rates change in a somewhat volatile market.
In the equity portion of the portfolio, we have been and continue to be
positioned for an economic recovery. Throughout the fiscal period, we continued
to focus on economically sensitive names, and started to construct the portfolio
with a cyclical bias rooted in our belief that the economy would eventually turn
upward. As contrarian investors, this is where we saw and continue to see the
greatest long-term value.
Looking at the equity portfolio over the course of the period, performance was
driven more by security selection than asset allocation. In the health care
sector, for example, our positions in Aetna Inc. and Merck & Co., Inc. benefited
performance. In consumer staples, The Gillette Company helped performance. Based
on this, it appears the traditional "safe-haven" areas have done well. However,
a look at our information technology holdings confirms that owning companies
such as Agilent Technologies Inc., Computer Associates International Inc. and
Hewlett-Packard Company impacted the portfolio favorably during the fiscal
period. In the industrial sector, another cyclical area, we saw impressive
performance from Caterpillar Inc. In the materials sector, the Fund benefited
from positions in Massey Energy Company and Phelps Dodge Corp. Despite a
procyclical, prorecovery allocation to our equity portfolio in a market that
largely wanted to avoid those areas, the Fund performed well because,
ultimately, stock selection was most important -- and our stock selection was
favorable.
1
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
Overall, we have not made many major changes to the equity portfolio. We
continued the slow process of eliminating some of the defensive areas and adding
more fundamentally sound, yet offensive holdings to the portfolio.
We have been removing those holdings that performed the best in what was a
miserable three-year period for the stock market. These included traditionally
non-cyclical companies such as The Procter & Gamble Company, Aetna, Lincoln
National Corporation, Guidant Corporation and Tribune Company. We have been
adding more cyclical companies, which we believe will offer greater value in the
period ahead.
Recent additions to the portfolio include automobile maker DaimlerChrysler AG,
GlobalSantaFe Corporation in the oil service sector, and Alcoa Inc. and BHP
Billiton Limited, two materials companies. We added The Boeing Company and
Raytheon Company, both of which came under pressure as the airline sector
suffered, and Sun Microsystems, Inc., a technology name that actually has not
done well in this period, but offers much better value for future returns. Away
from our cyclical bias, we added MetLife, Inc., ChevronTexaco Corporation,
Unilever NV and AOL Time Warner Inc., four high-profile companies with
compelling franchise-restructuring stories. At purchase price, they represented
tremendous value in our view.
At the close of the period, we remained poised for an economic recovery. While
the portfolio's focus has not changed much, what has changed is investors'
appetite for stocks. We continue to be overweight relative to the S&P 500 Barra
Value Index in the cyclical areas of the market. Inside each sector, we tend to
have an economically sensitive bias in favor of revitalization. In general
terms, we are overweight in information technology and materials. We have slight
overweights in consumer staples and health care, primarily because the
benchmark's positions in these areas are so low. As we ended the period, energy
was a large overweight compared to the benchmark. As energy companies begin to
increase their capital expenditures for oil and gas exploration, we believe
stocks in the sector have the potential to provide attractive returns.
The Fund has a modest underweight in the consumer discretionary sector. And,
while financials represent our largest sector, at 25% of the equity portfolio,
our allocation is underweight relative to the benchmark's excessive position of
36%. We believe allocating such a large portion of the portfolio's assets to any
one sector would expose the Fund to undue risk. Our weighting in the industrials
sector is neutral relative to the benchmark, and our positions in utilities and
telecommunication services represent modest underweights.
Overall, we are looking to identify what we believe are very good companies that
are temporarily underpriced as a result of negative investor sentiment or
short-term circumstances, and that we believe have the potential to offer
shareholders significant value over a three-year time horizon. In our view, the
market volatility we are experiencing has nothing to do with most companies'
long-term prospects. In fact, we believe it can create attractive opportunities
for value investors.
Investment Environment
The event that had the greatest impact on the markets was the resolution of the
Iraq conflict. While the period also was marked by uneasiness over economic
growth, interest rate levels, severe acute respiratory syndrome (SARS) and
lingering concerns about accounting irregularities and corporate governance
issues, the predominant influence, in our opinion, centered around activities
related to Iraq. For a period of four or five months beginning in late fall
2002, Iraq was on the minds of many corporate executives, management teams and
investors. What initially began as the potential for a war became a debate
within the United Nations on how the war was going to be fought and who was
going to be involved. In the first three months of 2003, the U.S. equity market
and the economy in general stalled as investors waited for a resolution.
We believe the intense focus on Iraq, leading up to and including the war, was
the primary factor holding back a sustained economic recovery. The tremendous
uncertainty it created for investors hurt the markets for much of this period.
However, by the time the war started in March 2003, the markets began a slow
rally. When the fighting came to an end faster than most expected, war fears
lifted and the markets rallied more strongly in anticipation of a long-awaited
economic recovery. Today, the question is, will the recovery happen? We believe
there is a better chance for a sustainable economic revival now than there was
before the war started.
2
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
In Conclusion
We thank you for your investment in Merrill Lynch Basic Value Principal
Protected Fund, and we look forward to serving your investment needs in the
months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Trustee
/s/ Kevin M. Rendino
Kevin M. Rendino
Equity Portfolio Manager
July 16, 2003
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
PERFORMANCE DATA
About Fund Performance
Effective April 14, 2003, Class A Shares were redesignated Class I Shares and
Class D Shares were redesignated Class A Shares. Investors are able to purchase
shares of the Fund through multiple pricing alternatives:
o Class A Shares incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
o Class B Shares are subject to a maximum contingent deferred sales charge
of 4% declining to 0% after six years. In addition, Class B Shares are
subject to a distribution fee of 0.75% and an account maintenance fee of
0.25%. These shares automatically convert to Class A Shares after
approximately eight years. (There is no initial sales charge for automatic
share conversions.)
o Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
o Class I Shares incur a maximum initial sales charge (front-end load) of
5.25% and bear no ongoing distribution or account maintenance fees. Class
I Shares are available only to eligible investors.
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.
3
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
PERFORMANCE DATA (continued)
Total Return Based on a $10,000 Investment--Class A, B, C and I Shares
A line graph depicting the growth of an investment in the Fund's Class A, Class
B, Class C & Class I Shares compared to growth of an investment in the S&P 500
Index and the S&P/Barra Value Index. Values are from November 13 2002 through
June 2003:
11/13/02** 6/03
ML Basic Value Principal
Protected Fund+--
Class A Shares* $ 9,475 $ 9,990
ML Basic Value Principal
Protected Fund+--
Class B Shares* $10,000 $10,093
ML Basic Value Principal
Protected Fund+--
Class C Shares* $10,000 $10,393
ML Basic Value Principal
Protected Fund+--
Class I Shares* $ 9,475 $10,008
11/30/02 6/03
S&P 500 Index++ $10,000 $11,169
S&P/Barra Value Index+++ $10,000 $11,488
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ The Fund invests primarily in common stocks and in U.S. Treasury bonds,
including zero coupon bonds.
++ This unmanaged broad-based Index is comprised of common stocks.
+++ This unmanaged Index is a capitalization Index of those stocks in the S&P
500 Index that have lower price-to-book ratios. The starting date for the
Index in the Class A, Class B, Class C & Class I Shares' graph is from
11/30/02.
Past performance is not predictive of future performance.
4
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
PERFORMANCE DATA (concluded)
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Inception (11/13/02)
through 6/30/03 +5.43% - 0.10%
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Inception (11/13/02)
through 6/30/03 +4.93% +0.93%
- --------------------------------------------------------------------------------
* 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 6/30/03 +4.93% +3.93%
- --------------------------------------------------------------------------------
* 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 6/30/03 +5.63% +0.09%
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Recent Performance Results
6-Month Since Inception
As of June 30, 2003 Total Return Total Return
========================================================================================
ML Basic Value Principal Protected Fund Class A Shares* + 4.88% + 5.43%
- ----------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class B Shares* + 4.49 + 4.93
- ----------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class C Shares* + 4.49 + 4.93
- ----------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class I Shares* + 5.08 + 5.63
- ----------------------------------------------------------------------------------------
S&P 500 Index** +11.76 +11.69
- ----------------------------------------------------------------------------------------
S&P 500 Barra Value Index*** +12.29 +14.88
========================================================================================
* 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 those stocks in
the S&P 500 Index that have lower price-to-book ratios. Since inception
total return is from 11/30/02.
IMPORTANT TAX INFORMATION (unaudited)
All of the ordinary income distribution paid by Merrill Lynch Basic Value
Principal Protected Fund to the shareholders of record on December 20, 2002
qualifies for the dividends received deduction for corporations.
Please retain this information for your records.
5
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
SCHEDULE OF INVESTMENTS
Shares Percent of
Industry* Held Common Stocks Value Net Assets
====================================================================================================================================
Above-Average Yield
====================================================================================================================================
Metals & Mining 83,000 Alcoa Inc. $ 2,116,500 0.6%
Metals & Mining 152,100 BHP Billiton Limited 881,331 0.3
Pharmaceuticals 67,800 Bristol-Myers Squibb Company 1,840,770 0.5
Oil & Gas 18,000 ChevronTexaco Corporation 1,299,600 0.4
Chemicals 88,200 E.I. du Pont de Nemours and Company 3,672,648 1.1
Oil & Gas 173,500 Exxon Mobil Corporation 6,230,385 1.9
Personal Products 58,300 The Gillette Company 1,857,438 0.5
Aerospace & Defense 108,700 Honeywell International Inc. 2,918,595 0.9
Capital Markets 57,300 J.P. Morgan Chase & Co. 1,958,514 0.6
Oil & Gas 41,000 Kerr-McGee Corporation 1,836,800 0.5
Capital Markets 41,200 Mellon Financial Corporation 1,143,300 0.4
Oil & Gas 107,000 Royal Dutch Petroleum Company (NY Registered Shares) 4,988,340 1.5
Diversified 72,600 SBC Communications Inc. 1,854,930 0.6
Telecommunication Services
Food Products 83,700 Sara Lee Corporation 1,574,397 0.5
Diversified 66,900 Verizon Communications 2,639,205 0.8
Telecommunication Services
Commercial Banks 61,300 Wachovia Corporation 2,449,548 0.7
----------- ----
39,262,301 11.8
====================================================================================================================================
Below-Average Price/Earnings Ratio
====================================================================================================================================
Insurance 52,701 ACE Limited 1,807,117 0.6
Insurance 58,100 The Allstate Corporation 2,071,265 0.6
Insurance 35,400 American International Group, Inc. 1,953,372 0.6
Computers & Peripherals 35,800 Apple Computer, Inc. (a) 684,496 0.2
Commercial Banks 33,100 Bank of America Corporation 2,615,893 0.8
Commercial Banks 102,700 Bank One Corporation 3,818,386 1.2
Machinery 29,000 Caterpillar Inc. 1,614,140 0.5
Diversified 123,500 Citigroup Inc. 5,285,800 1.6
Financial Services
Auto Components 168,600 Delphi Automotive Systems Corporation 1,455,018 0.4
Automobiles 70,400 Ford Motor Company 773,696 0.2
Computers & Peripherals 106,800 Hewlett-Packard Company 2,274,840 0.7
Household Durables 108,100 Koninklijke (Royal) Philips Electronics NV (NY Registered Shares) 2,065,791 0.6
Hotels, 125,300 McDonald's Corporation 2,764,118 0.8
Restaurants & Leisure
Pharmaceuticals 30,900 Merck & Co., Inc. 1,870,995 0.6
Capital Markets 40,900 Morgan Stanley 1,748,475 0.5
Semiconductors & 63,500 National Semiconductor Corporation (a) 1,252,220 0.4
Semiconductor Equipment
Pharmaceuticals 90,500 Schering-Plough Corporation 1,683,300 0.5
Electrical Equipment 38,500 Thomas & Betts Corporation (a) 556,325 0.2
Insurance 129,000 Travelers Property Casualty Corp. (Class A) 2,051,100 0.6
IT Services 173,500 Unisys Corporation (a) 2,130,580 0.6
Oil & Gas 144,000 Unocal Corporation 4,131,360 1.2
----------- ----
44,608,287 13.4
====================================================================================================================================
6
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
SCHEDULE OF INVESTMENTS (continued)
Shares Percent of
Industry* Held Common Stocks Value Net Assets
====================================================================================================================================
Low Price-to-Book Value
====================================================================================================================================
Communications Equipment 146,400 3Com Corporation (a) $ 685,152 0.2%
Media 297,100 AOL Time Warner Inc. (a) 4,780,339 1.4
Semiconductors & 171,500 Advanced Micro Devices, Inc. (a) 1,099,315 0.3
Semiconductor Equipment
Electronic 74,700 Agilent Technologies, Inc. (a) 1,460,385 0.4
Equipment & Instruments
Aerospace & Defense 37,100 The Boeing Company 1,273,272 0.4
Automobiles 49,300 DaimlerChrysler AG 1,711,696 0.5
Machinery 81,000 Deere & Company 3,701,700 1.1
Energy Equipment & Service 68,500 Diamond Offshore Drilling, Inc. 1,437,815 0.4
Media 43,900 Fox Entertainment Group, Inc. (Class A) (a) 1,263,442 0.4
Energy Equipment & Service 77,100 GlobalSantaFe Corporation 1,799,514 0.5
Energy Equipment & Service 82,700 Halliburton Company 1,902,100 0.6
Insurance 57,700 The Hartford Financial Services Group, Inc. 2,905,772 0.9
Paper & Forest Products 63,800 International Paper Company 2,279,574 0.7
Household Products 41,000 Kimberly-Clark Corporation 2,137,740 0.6
Semiconductors & 214,800 LSI Logic Corporation (a) 1,520,784 0.5
Semiconductor Equipment
Media 220,100 Liberty Media Corporation (Class A) (a) 2,544,356 0.8
Specialty Retail 41,400 The Limited, Inc. 641,700 0.2
Communications Equipment 608,600 Lucent Technologies Inc. (a) 1,235,458 0.4
Metals & Mining 90,100 Massey Energy Company 1,184,815 0.3
Semiconductors & 75,800 Micron Technology, Inc. (a) 881,554 0.3
Semiconductor Equipment
Communications Equipment 203,200 Motorola, Inc. 1,916,176 0.6
Metals & Mining 70,900 Phelps Dodge Corporation (a) 2,718,306 0.8
Aerospace & Defense 53,100 Raytheon Company 1,743,804 0.5
Computers & Peripherals 155,100 Sun Microsystems, Inc. (a) 713,460 0.2
Electronic Equipment & 52,200 Tektronix, Inc. (a) 1,127,520 0.3
Instruments
Industrial Conglomerates 29,300 Textron, Inc. 1,143,286 0.4
Specialty Retail 73,200 Toys 'R' Us, Inc. (a) 887,184 0.3
Media 11,700 Tribune Company 565,110 0.2
Media 16,200 Viacom, Inc. (Class B) (a) 707,292 0.2
Media 113,400 The Walt Disney Company 2,239,650 0.7
Commercial Banks 81,500 Wells Fargo & Co. 4,107,600 1.2
----------- ----
54,315,871 16.3
====================================================================================================================================
Special Situations
====================================================================================================================================
Software 80,900 Computer Associates International, Inc. 1,802,452 0.6
Specialty Retail 85,700 The Gap, Inc. 1,607,732 0.5
Computers & Peripherals 27,300 International Business Machines Corporation 2,252,250 0.7
----------- ----
5,662,434 1.8
====================================================================================================================================
Total Common Stocks (Cost--$128,509,999) 143,848,893 43.3
====================================================================================================================================
7
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
SCHEDULE OF INVESTMENTS (concluded)
Face Percent of
Amount Issue Value Net Assets
====================================================================================================================================
U.S. Government Obligations
====================================================================================================================================
U.S. Treasury STRIPS (b)(d):
$122,150,000 3.429% due 8/15/2009 $102,533,321 30.8%
100,977,000 3.629% due 11/15/2009 84,156,756 25.3
====================================================================================================================================
Total U.S. Government Obligations (Cost--$179,493,225) 186,690,077 56.1
====================================================================================================================================
Beneficial
Interest
====================================================================================================================================
Short-Term Securities
====================================================================================================================================
$ 3,291,833 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (c) 3,291,833 1.0
====================================================================================================================================
Total Short-Term Securities (Cost--$3,291,833) 3,291,833 1.0
====================================================================================================================================
Total Investments (Cost--$311,295,057) 333,830,803 100.4
Liabilities in Excess of Other Assets (1,415,250) (0.4)
------------ -----
Net Assets $332,415,553 100.0%
============ =====
====================================================================================================================================
* 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.
(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 Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series,
LLC Cash Sweep Series I $3,291,833 $ 34,539
--------------------------------------------------------------------------
(d) Represents a zero coupon bond; the interest rate shown reflects the yield
in effect at June 30, 2003.
See Notes to Financial Statements.
PORTFOLIO INFORMATION (unaudited)
As of June 30, 2003
Percent of
Ten Largest Equity Holdings Net Assets
Exxon Mobil Corporation ................................................ 1.9%
Citigroup Inc. ......................................................... 1.6
Royal Dutch Petroleum Company
(NY Registered Shares) .............................................. 1.5
AOL Time Warner Inc. ................................................... 1.4
Unocal Corporation ..................................................... 1.2
Wells Fargo & Co. ...................................................... 1.2
Bank One Corporation ................................................... 1.2
Deere & Company ........................................................ 1.1
E.I. du Pont de Nemours and Company .................................... 1.1
Honeywell International Inc. ........................................... 0.9
8
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of June 30, 2003
Assets: Investments, at value (identified cost--$311,295,057) ............ $333,830,803
Receivables:
Dividends ..................................................... $ 178,097
Interest ...................................................... 4,623 182,720
-----------
Prepaid registration fees and other assets ....................... 162,848
------------
Total assets ..................................................... 334,176,371
------------
======================================================================================================================
Liabilities: Payables:
Capital shares redeemed ....................................... 516,414
Distributor ................................................... 253,504
Securities purchased .......................................... 244,823
Financial warranty fee ........................................ 225,431
Investment adviser ............................................ 186,628
Other affiliates .............................................. 69,316 1,496,116
-----------
Accrued expenses and other liabilities ........................... 264,702
------------
Total liabilities ................................................ 1,760,818
------------
======================================================================================================================
Net Assets: Net assets ....................................................... $332,415,553
============
======================================================================================================================
Net Assets Paid-in capital, unlimited number of shares authorized ........... $315,797,360
Consist of: Undistributed investment income--net ............................. $ 906,020
Accumulated realized capital losses on investments and
foreign currency transactions--net ............................... (6,822,131)
Unrealized appreciation on investments
and foreign currency transactions--net ........................... 22,534,304
-----------
Total accumulated earnings--net .................................. 16,618,193
------------
Net assets ....................................................... $332,415,553
============
======================================================================================================================
Net Asset Value: Class A--Based on net assets of $22,089,756 and 2,097,408 shares
outstanding ............................................. $ 10.53
============
Class B--Based on net assets of $159,056,386 and 15,175,072 shares
outstanding ............................................. $ 10.48
============
Class C--Based on net assets of $129,392,239 and 12,345,051 shares
outstanding ............................................. $ 10.48
============
Class I--Based on net assets of $21,877,172 and 2,073,922 shares
outstanding ............................................. $ 10.55
============
======================================================================================================================
See Notes to Financial Statements.
9
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
FINANCIAL INFORMATION (continued)
Statement of Operations for the Period November 13, 2002+ to June 30, 2003
Investment Interest ............................................................. $ 4,152,560
Income: Dividends (net of $31,099 foreign withholding tax) ................... 1,809,272
Securities lending--net .............................................. 31,973
-------------
Total income ......................................................... 5,993,805
-------------
=============================================================================================================================
Expenses: Financial warranty fee ............................................... $ 1,686,232
Investment advisory fees ............................................. 1,351,296
Account maintenance and distribution fees--Class B ................... 980,736
Account maintenance and distribution fees--Class C ................... 802,775
Offering costs ....................................................... 271,412
Transfer agent fees--Class B ......................................... 116,992
Transfer agent fees--Class C ......................................... 97,740
Accounting services .................................................. 93,650
Account maintenance fees--Class A .................................... 34,716
Custodian fees ....................................................... 33,624
Directors' fees and expenses ......................................... 26,001
Registration fees .................................................... 25,623
Transfer agent fees--Class I ......................................... 16,398
Professional fees .................................................... 16,211
Transfer agent fees--Class A ......................................... 14,553
Printing and shareholder reports ..................................... 11,201
Pricing fees ......................................................... 736
Other ................................................................ 14,874
------------
Total expenses ....................................................... 5,594,770
-------------
Investment income--net ............................................... 399,035
-------------
=============================================================================================================================
Realized & Realized loss from:
Unrealized Gain Investments--net .................................................. (6,822,131)
(Loss) on Foreign currency transactions--net ................................ (3,104) (6,825,235)
Investments & ------------
Foreign Currency Unrealized appreciation (depreciation) on:
Transactions- Net: Investments--net .................................................. 22,535,746
Foreign currency transactions--net ................................ (1,442) 22,534,304
------------ -------------
Total realized and unrealized gain on investments and foreign currency
transactions--net .................................................... 15,709,069
-------------
Net Increase in Net Assets Resulting from Operations ................. $ 16,108,104
=============
=============================================================================================================================
+ Commencement of operations.
See Notes to Financial Statements.
10
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
FINANCIAL INFORMATION (continued)
Statement of Changes in Net Assets
For the Period
Nov. 13, 2002+
to June 30,
Increase (Decrease) in Net Assets: 2003
===================================================================================================================
Operations: Investment income--net ...................................................... $ 399,035
Realized loss on investments and foreign currency transactions--net ......... (6,825,235)
Unrealized appreciation on investments and foreign currency transactions--net 22,534,304
-------------
Net increase in net assets resulting from operations ........................ 16,108,104
-------------
===================================================================================================================
Dividends to Investment income--net:
Shareholders: Class A .................................................................. (28,316)
Class B .................................................................. (196,773)
Class C .................................................................. (161,700)
Class I .................................................................. (33,264)
-------------
Net decrease in net assets resulting from dividends to shareholders ......... (420,053)
-------------
===================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions .......... 316,627,502
Transactions: -------------
===================================================================================================================
Net Assets: Total increase in net assets ................................................ 332,315,553
Beginning of period ......................................................... 100,000
-------------
End of period* .............................................................. $ 332,415,553
=============
===================================================================================================================
* Undistributed investment income--net ........................................ $ 906,020
=============
===================================================================================================================
+ Commencement of operations.
See Notes to Financial Statements.
11
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
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. June 30, 2003
--------------------------------------------------
Increase (Decrease) in Net Asset Value: Class A++ Class B Class C Class I++
==================================================================================================================================
Per Share Net asset value, beginning of period .................. $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating --------- --------- --------- ---------
Performance: Investment income--net ................................ .05 --@@ --@@ .08
Realized and unrealized gain on investments and foreign
currency transactions--net ............................ .49 .49 .49 .48
--------- --------- --------- ---------
Total from investment operations ...................... .54 .49 .49 .56
--------- --------- --------- ---------
Less dividends from investment income--net ............ (.01) (.01) (.01) (.01)
--------- --------- --------- ---------
Net asset value, end of period ........................ $ 10.53 $ 10.48 $ 10.48 $ 10.55
--------- --------- --------- ---------
==================================================================================================================================
Total Investment Based on net asset value per share .................... 5.43%@ 4.93%@ 4.93%@ 5.63%@
Return:** ========= ========= ========= =========
==================================================================================================================================
Ratios to Average Expenses .............................................. 2.05%* 2.82%* 2.82%* 1.80%*
Net Assets: ========= ========= ========= =========
Investment income--net ................................ .83%* .07%* .06%* 1.08%*
========= ========= ========= =========
==================================================================================================================================
Supplemental Net assets, end of period (in thousands) .............. $ 22,090 $ 159,057 $ 129,392 $ 21,877
Data: ========= ========= ========= =========
Portfolio turnover .................................... 107.66% 107.66% 107.66% 107.66%
========= ========= ========= =========
==================================================================================================================================
* Annualized.
** Total investment returns exclude the effects of sales charges.
+ Commencement of operations.
++ Effective April 14, 2003, Class A Shares were redesignated Class I Shares
and Class D Shares were redesignated Class A Shares.
@ Aggregate total investment return.
@@ Amount is less than $.01 per share.
See Notes to Financial Statements.
12
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
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, 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. 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 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. During the Guarantee Period, the
Fund will seek long-term growth of capital to the extent permitted by a strategy
that seeks to use investments in common stocks, 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 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.
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 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 quotations are not available are valued at fair value as determined in
good faith by or under the direction
13
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
NOTES TO FINANCIAL STATEMENTS (continued)
of the Trust'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 Trust's Board of Trustees or by the investment adviser using a
pricing service and/or procedures approved by the Board of Trustees of the
Trust.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movement and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o 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.
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) 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 are charged to
expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(h) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities
14
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
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 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 period's permanent book/tax differences of $930,142 have been
reclassified between paid-in capital in excess of par and undistributed net
investment income and $3,104 has been reclassified between undistributed net
investment income and accumulated net realized capital losses. These
reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with 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 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.
For the period November 13, 2002 to June 30, 2003, FAMD earned underwriting
discounts and MLPF&S
15
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
NOTES TO FINANCIAL STATEMENTS (concluded)
earned dealer concessions on sales of the Fund's Class A Shares as follows:
- --------------------------------------------------------------------------------
FAMD MLPF&S
- --------------------------------------------------------------------------------
Class A ............................ $ 44,464 $848,864
- --------------------------------------------------------------------------------
For the period November 13, 2002 to June 30, 2003, MLPF&S received contingent
deferred sales charges of $135,964 and $46,621 relating to transactions in Class
B and Class C Shares, respectively.
In addition, MLPF&S received $18,585 in commissions on the execution of
portfolio security transactions for the Fund for the period November 13, 2002 to
June 30, 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 June 30, 2003, the Fund reimbursed FAM
$4,877 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 June 30, 2003 were $661,299,123 and $350,552,583,
respectively.
Net realized losses for the period November 13, 2002 to June 30, 2003 and net
unrealized gains (losses) as of June 30, 2003 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments .............. $ (6,822,131) $ 22,535,746
Foreign currency
transactions ....................... (3,104) (1,442)
------------ ------------
Total .............................. $ (6,825,235) $ 22,534,304
============ ============
- --------------------------------------------------------------------------------
As of June 30, 2003, net unrealized appreciation for Federal income tax purposes
aggregated $17,335,282, of which $19,211,878 related to appreciated securities
and $1,876,596 related to depreciated securities. At June 30, 2003, the
aggregate cost of investments for Federal income tax purposes was $316,495,521.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$316,627,502 for the period November 13, 2002 to June 30, 2003.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the
Period November 13, 2002+ Dollar
to June 30, 2003++ Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 2,250,232 $ 22,503,393
Shares issued to shareholders
in reinvestment of dividends ........... 2,688 27,097
------------ ------------
Total issued ........................... 2,252,920 22,530,490
Shares redeemed ........................ (158,012) (1,597,601)
------------ ------------
Net increase ........................... 2,094,908 $ 20,932,889
============ ============
- --------------------------------------------------------------------------------
+ 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.
- --------------------------------------------------------------------------------
Class B Shares for the
Period November 13, 2002+ Dollar
to June 30, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 15,832,326 $ 158,337,115
Shares issued to shareholders
in reinvestment of dividends ......... 19,175 193,094
------------- -------------
Total issued ......................... 15,851,501 158,530,209
Shares redeemed ...................... (678,929) (6,844,278)
------------- -------------
Net increase ......................... 15,172,572 $ 151,685,931
============= =============
- --------------------------------------------------------------------------------
+ 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 June 30, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 13,024,366 $ 130,257,844
Shares issued to shareholders
in reinvestment of dividends ......... 15,828 159,387
------------- -------------
Total issued ......................... 13,040,194 130,417,231
Shares redeemed ...................... (697,643) (7,025,302)
------------- -------------
Net increase ......................... 12,342,551 $ 123,391,929
============= =============
- --------------------------------------------------------------------------------
+ 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+ Dollar
to June 30, 2003++ 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 ........................ (594,913) (6,048,023)
------------ ------------
Net increase ........................... 2,071,422 $ 20,616,753
============ ============
- --------------------------------------------------------------------------------
+ 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.
16
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
5. Distributions to Shareholders:
The tax character of distributions paid during the period ended November 13,
2002 to June 30, 2003 was as follows:
- --------------------------------------------------------------------------------
For the Period
11/13/2002+ to
6/30/2003
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ........................................ $420,053
--------
Total taxable distributions .............................. $420,053
========
- --------------------------------------------------------------------------------
+ Commencement of operations.
As of June 30, 2003, the components of accumulated earnings on a tax basis were
as follows:
- --------------------------------------------------------------------------------
Undistributed ordinary income--net .................... $ 906,021
Undistributed long-term capital
gains--net ............................................ --
------------
Total undistributed earnings--net ..................... 906,021
Capital loss carryforward ............................. (1,621,667)*
Unrealized gains--net ................................. 17,333,839**
------------
Total accumulated earnings--net ....................... $ 16,618,193
============
- --------------------------------------------------------------------------------
* On June 30, 2003, the Fund had a net capital loss carryforward of
$1,621,667, all of which expires in 2011. This amount will be available to
offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of
Merrill Lynch Basic Value Principal Protected Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Basic Value Principal Protected
Fund as of June 30, 2003, and the related statements of operations and changes
in net assets, and the financial highlights for the period November 13, 2002
(commencement of operations) through June 30, 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 of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of June 30, 2003, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our 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 Basic Value Principal Protected Fund as of June 30, 2003, the
results of its operations, the changes in its net assets, and its financial
highlights for the period November 13, 2002 through June 30, 2003, in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
August 8, 2003
17
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
OFFICERS AND TRUSTEES
Number of Other
Portfolios in Public
Fund Director-
Position(s) Length Complex ships
Held of Time Overseen by Held by
Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
====================================================================================================================================
Terry K. Glenn* President 2002 to President and Chairman of Merrill Lynch 114 Funds None
P.O. Box 9011 and present Investment Managers, L.P. ("MLIM")/Fund 159 Portfolios
Princeton, NJ 08543-9011 Trustee Asset Management, L.P. ("FAM")--Advised
Age: 62 Funds since 1999; Chairman (Americas Region)
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. from 1985 to 2002.
====================================================================================================================================
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLIM
acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of the Fund based
on his former positions with MLIM, FAM, FAMD, Princeton Services and Princeton Administrators, L.P. The 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.
====================================================================================================================================
Number of Other
Portfolios in Public
Fund Director-
Position(s) Length Complex ships
Held of Time Overseen by Held by
Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees
====================================================================================================================================
David O. Beim Trustee 2002 to Professor of Finance and Economics at the 8 Funds None
P.O. Box 9095 present Columbia University Graduate School of Business 15 Portfolios
Princeton, NJ 08543-9095 since 1991; Trustee of Phillips Exeter Academy;
Age: 63 Chairman of Wave Hill, Inc. since 1990; Chairman
of Outward Bound from 1997 to 2002.
====================================================================================================================================
James T. Flynn Trustee 2002 to Chief Financial Officer of J.P. Morgan & Co., Inc. 8 Funds None
P.O. Box 9095 present from 1990 to 1995. 15 Portfolios
Princeton, NJ 08543-9095
Age: 63
====================================================================================================================================
Todd Goodwin Trustee 2002 to General Partner of Gibbons, Goodwin, van 8 Funds None
P.O. Box 9095 present Amerongen (investment banking firm) since 1984. 15 Portfolios
Princeton, NJ 08543-9095
Age: 71
====================================================================================================================================
George W. Holbrook Trustee 2002 to Managing Partner of Bradley Resources Company 8 Funds Thoratec
P.O. Box 9095 present (private investment company) and associated 15 Portfolios Laboratories
Princeton, NJ 08543-9095 with that Firm and its predecessors since 1953; Corporation
Age: 72 Director of Thoratec Laboratories Corporation
(medical device manufacturers).
====================================================================================================================================
18
Merrill Lynch Basic Value Principal Protected Fund June 30, 2003
OFFICERS AND TRUSTEES (concluded)
Number of Other
Portfolios in Public
Fund Director-
Position(s) Length Complex ships
Held of Time Overseen by Held by
Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees (concluded)
====================================================================================================================================
W. Carl Kester Trustee 2002 to Mizuho Financial Group Professor of Finance, 8 Funds None
P.O. Box 9095 present Senior Associate Dean and Chairman of the MBA 15 Portfolios
Princeton, NJ 08543-9095 Program of Harvard University Graduate School
Age: 51 of Business Administration since 1999; Serves on
the Board of Advisors of Security Leasing Partners.
Karen P. Robards Trustee 2002 to President of Robards & Company, a financial advi- 8 Funds None
P.O. Box 9095 present sory firm providing services to companies in the 15 Portfolios
Princeton, NJ 08543-9095 health care industry; Director of Enable Medical
Age: 53 Corporation 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.
====================================================================================================================================
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 FAM and MLIM since 1997 and Treasurer thereof
P.O. Box 9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services
Princeton, NJ 08543-9011 and since 1999; Vice President of FAMD since 1999; Director of MLIM
Age: 42 Treasurer Taxation since 1990.
====================================================================================================================================
Robert C. Doll, Jr. Senior 2002 to President of MLIM and member of the Executive Management Committee
P.O. Box 9011 Vice present of ML & Co., Inc. since 2001; Global Chief Investment Officer and Senior
Princeton, NJ 08543-9011 President Portfolio Manager of MLIM since 1999; Chief Investment Officer of Equities
Age: 48 at Oppenheimer Funds, Inc. from 1990 to 1999 and Chief Investment
Officer thereof from 1998 to 1999; Executive Vice President of
Oppenheimer Funds, Inc. from 1991 to 1999.
====================================================================================================================================
Phillip S. Gillespie Secretary 2002 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, NJ 08543-9011 associated with MLIM since 1998; Assistant General Counsel of Chancellor
Age: 39 LGT Asset Management, Inc. from 1997 to 1998.
====================================================================================================================================
* 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
19
[LOGO] Merrill Lynch Investment Managers
This report is for shareholders of Merrill Lynch Basic Value Principal Protected
Fund. 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 Basic Value Principal Protected Fund
Box 9011
Princeton, NJ
08543-9011
[RECYCLED LOGO] Printed on post-consumer recycled paper #BVPP--6/03
Item 2 - Did registrant adopt a code of ethics, as of the end of the period
covered by this report, that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party? If not, why not? Briefly describe any amendments or
waivers that occurred during the period. State here if code of
ethics/amendments/waivers are on website and give website address-.
State here if fund will send code of ethics to shareholders without
charge upon request-- N/A (annual requirement only and not required to
be answered until the registrant's fiscal year-end on or after July 15,
2003)
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 (annual requirement only
and not required to be answered until the registrant's fiscal year-end
on or after July 15, 2003)
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 Basic Value Principal Protected Fund
By: /s/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Merrill Lynch Basic Value Principal Protected Fund
Date: August 21, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Merrill Lynch Basic Value Principal Protected Fund
Date: August 21, 2003
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Basic Value Principal Protected Fund
Date: August 21, 2003
Attached hereto as a furnished exhibit are the certifications pursuant
to Section 906 of the Sarbanes-Oxley Act.