UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
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 of Merrill Lynch Principal
Protected Trust, 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: 06/30/04
Date of reporting period: 07/01/03 - 12/31/03
Item 1 - Report to Shareholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Merrill Lynch
Basic Value
Principal Protected Fund
Semi-Annual Report
December 31, 2003
[LOGO] Merrill Lynch Investment Managers
Merrill Lynch Basic Value Principal Protected Fund
Porfolio Information as of December 31, 2003
Percent of
Ten Largest Equity Holdings Net Assets
================================================================================
Exxon Mobil Corporation ............................................. 2.9%
Citigroup Inc. ...................................................... 2.9
Wells Fargo & Company ............................................... 2.3
Royal Dutch Petroleum Company
(NY Registered Shares) ............................................ 2.0
Bank One Corporation ................................................ 1.8
Unocal Corporation .................................................. 1.7
Time Warner Inc. .................................................... 1.4
Deere & Company ..................................................... 1.4
Raytheon Company .................................................... 1.3
E.I. du Pont de Nemours and Company ................................. 1.3
2 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
A Letter From the President
Dear Shareholder
In my 35 years in the asset management business, 2003 was among the more
memorable. The year, which opened with unrelenting economic uncertainty and a
dismal continuation of a three-year equity market slump, vigorously reversed
course in the months that followed. To be sure, 2003 came in like a lamb and
went out like a lion. Or, some might suggest, the year started as a bear and
ended as a bull.
Most notably, the U.S. stock market exceeded the expectations of even the
optimistic investor, with the Standard & Poor's 500 Index and the Nasdaq posting
respective 12-month returns of +28.68% and +50.01% as of December 31, 2003.
Gross domestic product (GDP) growth, which started the year at 1.4% in the first
quarter, grew a remarkable 8.2% in the third quarter -- the fastest rate of
growth in 20 years. GDP growth is expected to come in above 3% for the year.
Modest inflation and record low interest rates in 2003 also encouraged the
American consumer who, after carrying the economy on its own for some time,
finally was supported by a $350 billion tax cut, Federal spending on the war
effort and long-awaited capital expenditures by businesses. In addition,
corporate earnings for 2003 finished the year up 16.9%. As we begin a new year,
the events and efforts of 2003 leave us with a much stronger economy for 2004.
In closing, I wish to share one final note regarding the look of our shareholder
communications. Our portfolio manager commentaries have been trimmed and
organized in such a way that you can get the information you need at a glance,
in plain language. Today's markets can be confusing. We want to help you put it
all in perspective. The report's new size also allows us certain mailing
efficiencies. Any cost savings in production or postage are passed on to the
Fund and, ultimately, to Fund shareholders.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the New Year and beyond.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Trustee
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
The Fund met its objective of preserving investor principal while also
providing shareholders with meaningful capital appreciation.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended December 31, 2003, Merrill Lynch Basic Value
Principal Protected Fund's Class A, Class B, Class C and Class I Shares had
total returns of +8.53%, +8.05%, +8.11% and +8.62%, respectively. (Fund results
shown do not reflect sales charges and would be lower if sales charges were
included. Complete performance information can be found on pages 6 and 7 of this
report to shareholders.) The Fund's unmanaged equity benchmarks, the Standard &
Poor's 500 (S&P 500) Index and the S&P 500 Barra Value Index, posted respective
returns of +15.14% and +17.36% for the same period.
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).
Because the Fund incorporates a fixed income component, it will, at times,
outperform or underperform its all-equity benchmarks. Importantly, the Fund was
successfully able to preserve investor principal during the period while also
providing attractive capital appreciation. A mathematical formula is used to
determine the allocation between these two components. During the period, the
portfolio's equity allocation ranged from 42.7% of total assets to 66.2%, and
the fixed income allocation ranged from 33.8% to 57.3%.
The Fund's equity component benefited during the period from a bias toward
economically sensitive stocks. We found valuations to be most attractive in
those areas of the market that were most likely to benefit from economic
recovery. Therefore, we were overweight in cyclicals, including industrials,
materials and technology stocks. We also sought opportunities in portions of the
consumer discretionary sector, with an emphasis on media.
During the six-month period, economic growth picked up steam, as was evident in
the astounding 8.2% gross domestic product growth in the third quarter of 2003.
Many stocks that had been beaten down rebounded dramatically. The primary
beneficiaries of this upturn were higher-beta, economically sensitive stocks,
which dominated the equity market rally through year end. Our bias in these
areas benefited performance significantly. Most notably, more than half of our
equity outperformance during the period came from our investments in technology.
Specific technology positions that benefited performance were Advanced Micro
Devices, Inc., National Semiconductor Corporation, 3Com Corporation, Agilent
Technologies, Inc., Motorola, Inc. and LSI Logic Corporation.
Also contributing to performance in the six-month period were stocks in the
materials, industrials and consumer discretionary areas. China has grown
dramatically this year, and as a large importer of materials, that has helped
the sector immensely. Materials stocks that benefited Fund returns in the past
six months were Phelps Dodge Corporation, Alcoa Inc. and Massey Energy Company.
In industrials, Deere & Co., Thomas & Betts Corporation and Caterpillar Inc.
contributed the most to relative returns. In consumer discretionary, Koninklijke
(Royal) Philips Electronics NV and Viacom, Inc. were standouts.
In terms of areas that hurt performance during the period, health care was the
largest culprit, with Merck & Co., Inc., Schering-Plough Corporation and
Bristol-Myers Squibb Company at the top of the list. These represent the large
cap, stable growth stocks that really stumbled this year. Aside from poor
business results from many companies in the sector, the underperformance of
health care was partially due to market dynamics. Investors were clearly moving
assets out of large, defensive areas into those that were benefiting from the
economic recovery. Also detracting from Fund returns was the energy sector.
Despite a favorable fourth quarter, returns in energy were negative for the
six-month period. We believe this was primarily the result of an asset
allocation decision by investors. As money flowed into areas like technology, it
flowed out of defensive groups such as energy. Curiously, this occurred despite
the fact that commodity prices were at all-time highs. Energy stocks that
underperformed included Diamond Offshore Drilling, Inc., Exxon Mobil
4 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Corporation, GlobalSantaFe Corporation and Royal Dutch Petroleum Company.
What changes were made to the portfolio during the period?
In the equity portion of the portfolio, we began reducing our beta somewhat, as
we were finding more value in the defensive areas of the market. Although we
ended the year with a continued bias toward an up-market and economic
sensitivity, that bias was not as strong as it was when we entered 2003. In
keeping with our underlying investment strategy, we buy weakness and sell
strength. It follows then that those economically sensitive stocks that
performed so well would be trimmed from the portfolio as we look for next year's
winners.
Along these lines, we reduced our positions in materials, industrials,
financials and technology based on relative valuations and stocks meeting our
price targets. While selling our strong performers, we began buying stocks in
areas that have yet to outperform. This includes stocks in the energy and
consumer staples areas, where we found a lot of value toward the end of the
year. We also have been nibbling at health care in the last six months.
Equity positions initiated in the portfolio during the period include TransOcean
Inc. in the energy sector, and ConAgra, Inc., Unilever NV, Coca-Cola Enterprises
Inc. and Kraft Foods Inc. in consumer staples. We also added to our positions in
Anadarko Petroleum Corporation (energy), Raytheon Company (aerospace and
defense), Viacom, Inc. (media) and Baxter International Inc. (health care).
On the sell side, we liquidated our positions in Fox Entertainment Group, Inc.,
The Gap, Inc., MetLife, Textron, Inc., Tribune Company and J.P. Morgan Chase &
Co. All of these stocks performed well and reached our price target. Largest
reductions in the equity portion of the portfolio were Phelps Dodge Corporation,
Deere & Company, National Semiconductor Corporation, Wachovia Corporation,
Philips Electronics and American International Group, Inc.
The fixed income component of the portfolio remained invested in U.S. Treasury
zero-coupon bonds set to mature close to the expiration of the Fund (November
13, 2009). The fixed income weighting varied during the period, ranging from
approximately 33% to just more than 57% of portfolio assets.
How would you characterize the portfolio's position at the close of the period?
In seeking to meet its objective of principal protection and potential for
capital growth, the allocation between the Fund's fixed income and equity
components will continue to vary as market conditions change. As of December 31,
2003, the Fund was invested 66.3% as a percent of net assets in equities, 30.7%
in fixed income securities and 3.0% in cash and cash equivalents. This reflects
our confidence in a continuing economic recovery and equity market strength.
At the close of the period, the Fund's equity portfolio was overweight versus
the S&P 500 Barra Value Index in consumer staples, energy, health care,
information technology and materials. We had underweights in consumer
discretionary, financials, industrials, telecommunication services and
utilities. Our largest overweight remained in technology, where we still see
some appreciation potential. Technology, in our opinion, remains a growth
cyclical, and we think information technology budgets will increase in 2004. Our
next-largest overweight was in energy. In our view, the underlying gas and oil
supply problems in the United States and elsewhere have been masked by lack of
demand due to soft economies. As economies continue to recover, so will
industrial production; and as industrial production recovers, so will demand for
energy. Energy prices remain high, and we have a collection of companies in the
portfolio that are not priced for $30 per barrel for oil and $7 per thousand
cubic feet for gas, where we are currently. These make the stock's valuations
incredibly appealing to us. Consumers continue to wait for oil prices to go
down, yet the stocks have not reflected the high commodity prices. We believe at
some point they will, and have positioned the equity portfolio with that view in
mind.
As always, we will continue our search for 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.
Kevin M. Rendino
Equity Portfolio Manager
January 8, 2004
- --------------------------------------------------------------------------------
If you would like a copy, free of charge, of the most recent annual or quarterly
report of Main Place Funding, LLC, the Warranty Provider, or its parent
corporation, Bank of America Corporation, please contact the Fund at
1-800-MER-FUND.
- --------------------------------------------------------------------------------
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 5
[LOGO] Merrill Lynch Investment Managers
Performance Data
About Fund Performance
Effective April 14, 2003, Class A Shares were redesignated Class I Shares and
Class D Shares were redesignated Class A Shares. Investors are able to purchase
shares of the Fund through multiple pricing alternatives:
o Class A Shares incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
o Class B Shares are subject to a maximum contingent deferred sales charge
of 4% declining to 0% after six years. 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. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain more current information.
Performance results do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares. Figures shown
in each of the following tables assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Dividends paid to
each class of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to each class,
which are deducted from the income available to be paid to shareholders.
Recent Performance Results
6-Month 12-Month Since Inception
As of December 31, 2003 Total Return Total Return Total Return
===================================================================================================================
ML Basic Value Principal Protected Fund Class A Shares* + 8.53% +13.82% +14.42%
- -------------------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class B Shares* + 8.05 +12.90 +13.38
- -------------------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class C Shares* + 8.11 +12.96 +13.44
- -------------------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class I Shares* + 8.62 +14.14 +14.74
- -------------------------------------------------------------------------------------------------------------------
S&P 500 Index** +15.14 +28.68 +28.60
- -------------------------------------------------------------------------------------------------------------------
S&P 500 Barra Value Index*** +17.36 +31.79 +34.82
- -------------------------------------------------------------------------------------------------------------------
* 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 11/13/02.
6 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Performance Data (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 12/31/03 +13.82% +7.85%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/03 +12.65 +7.40
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 12/31/03 +12.90% +8.90%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/03 +11.74 +8.25
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
- --------------------------------------------------------------------------------
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 12/31/03 +12.96% +11.96%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/03 +11.79 +11.79
- --------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 12/31/03 +14.14% +8.15%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/03 +12.92 +7.67
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments
Value Percent of
Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
====================================================================================================================================
Above-Average Yield Metals & Mining 106,200 Alcoa Inc. $ 4,035,600 1.3%
Metals & Mining 177,100 BHP Billiton Limited 1,626,585 0.5
Pharmaceuticals 87,100 Bristol-Myers Squibb Company 2,491,060 0.8
Oil & Gas 24,800 ChevronTexaco Corporation 2,142,472 0.7
Food Products 107,500 ConAgra, Inc. 2,836,925 0.9
Chemicals 88,100 E.I. du Pont de Nemours and Company 4,042,909 1.3
Oil & Gas 224,100 Exxon Mobil Corporation 9,188,100 2.9
Personal Products 79,400 The Gillette Company 2,916,362 0.9
Aerospace & Defense 103,700 Honeywell International Inc. 3,466,691 1.1
Oil & Gas 59,400 Kerr-McGee Corporation 2,761,506 0.9
Capital Markets 60,700 Mellon Financial Corporation 1,949,077 0.6
Oil & Gas 120,500 Royal Dutch Petroleum Company
(NY Registered Shares) 6,312,995 2.0
Diversified Telecommunication 129,500 SBC Communications Inc. 3,376,065 1.1
Services
Food Products 101,400 Sara Lee Corporation 2,201,394 0.7
Diversified Telecommunication 76,200 Verizon Communications 2,673,096 0.8
Services
Commercial Banks 58,000 Wachovia Corporation 2,702,220 0.9
---------------------
54,723,057 17.4
====================================================================================================================================
Below-Average Insurance 56,001 ACE Limited 2,319,561 0.7
Price/Earnings Ratio Insurance 57,600 The Allstate Corporation 2,477,952 0.8
Insurance 54,000 American International Group, Inc. 3,579,120 1.1
Commercial Banks 37,600 Bank of America Corporation 3,024,168 1.0
Commercial Banks 123,700 Bank One Corporation 5,639,483 1.8
Health Care Equipment & Supplies 56,600 Baxter International Inc. 1,727,432 0.6
Machinery 18,200 Caterpillar Inc. 1,510,964 0.5
Diversified Financial Services 188,100 Citigroup Inc. 9,130,374 2.9
Beverages 75,400 Coca-Cola Enterprises Inc. 1,648,998 0.5
Auto Components 122,500 Delphi Automotive Systems Corporation 1,250,725 0.4
Automobiles 104,500 Ford Motor Company 1,672,000 0.5
Computers & Peripherals 127,800 Hewlett-Packard Company 2,935,566 0.9
Household Durables 71,500 Koninklijke (Royal) Philips
Electronics NV (NY Registered Shares) 2,079,935 0.7
Food Products 53,100 Kraft Foods Inc. (Class A) 1,710,882 0.6
Hotels, Restaurants & Leisure 114,300 McDonald's Corporation 2,838,069 0.9
Pharmaceuticals 42,000 Merck & Co., Inc. 1,940,400 0.6
Capital Markets 55,600 Morgan Stanley 3,217,572 1.0
Semiconductors & Semiconductor 8,000 National Semiconductor Corporation (a) 315,280 0.1
Equipment
Pharmaceuticals 152,900 Schering-Plough Corporation 2,658,931 0.8
Electrical Equipment 77,600 Thomas & Betts Corporation (a) 1,776,264 0.6
Media 252,900 Time Warner Inc. (a) 4,549,671 1.4
Energy Equipment & Service 112,600 Transocean Inc. (a) 2,703,526 0.9
Insurance 174,700 Travelers Property Casualty Corp.
(Class A) 2,931,466 0.9
Food Products 52,200 Unilever NV (NY Registered Shares) 3,387,780 1.1
IT Services 259,400 Unisys Corporation (a) 3,852,090 1.2
Oil & Gas 142,600 Unocal Corporation 5,251,958 1.7
---------------------
76,130,167 24.2
====================================================================================================================================
8 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Schedule of Investments (continued)
Value Percent of
Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
====================================================================================================================================
Low Price-to-Book Communications Equipment 226,000 3Com Corporation (a) $ 1,846,420 0.6%
Value Semiconductors & Semiconductor 154,700 Advanced Micro Devices, Inc. (a) 2,305,030 0.7
Equipment
Electronic Equipment & 77,800 Agilent Technologies, Inc. (a) 2,274,872 0.7
Instruments
Oil & Gas 48,000 Anadarko Petroleum Corporation 2,448,480 0.8
Aerospace & Defense 52,800 The Boeing Company 2,224,992 0.7
Media 34,500 Comcast Corporation (Special
Class A) (a) 1,079,160 0.3
Automobiles 47,100 DaimlerChrysler AG 2,176,962 0.7
Machinery 66,200 Deere & Company 4,306,310 1.4
Energy Equipment & Service 122,000 Diamond Offshore Drilling, Inc. 2,502,220 0.8
Energy Equipment & Service 120,000 GlobalSantaFe Corporation 2,979,600 0.9
Energy Equipment & Service 84,800 Halliburton Company 2,204,800 0.7
Insurance 59,300 The Hartford Financial Services
Group, Inc. 3,500,479 1.1
Paper & Forest Products 80,000 International Paper Company 3,448,800 1.1
Household Products 62,200 Kimberly-Clark Corporation 3,675,398 1.2
Semiconductors & Semiconductor 291,100 LSI Logic Corporation (a) 2,582,057 0.8
Equipment
Media 264,200 Liberty Media Corporation
(Class A) (a) 3,141,338 1.0
Communications Equipment 404,600 Lucent Technologies Inc. (a) 1,149,064 0.4
Metals & Mining 82,300 Massey Energy Company 1,711,840 0.5
Semiconductors & Semiconductor 109,200 Micron Technology, Inc. (a) 1,470,924 0.5
Equipment
Communications Equipment 225,000 Motorola, Inc. 3,165,750 1.0
Metals & Mining 18,400 Phelps Dodge Corporation (a) 1,400,056 0.4
Aerospace & Defense 139,900 Raytheon Company 4,202,596 1.3
Electronic Equipment & 39,700 Tektronix, Inc. 1,254,520 0.4
Instruments
Specialty Retail 66,200 Toys 'R' Us, Inc. (a) 836,768 0.3
Media 77,000 Viacom, Inc. (Class B) 3,417,260 1.1
Media 114,200 The Walt Disney Company 2,664,286 0.9
Commercial Banks 124,200 Wells Fargo & Company 7,314,138 2.3
---------------------
71,284,120 22.6
====================================================================================================================================
Special Situations Software 65,600 Computer Associates International,
Inc. 1,793,504 0.6
Computers & Peripherals 32,700 International Business Machines
Corporation 3,030,636 0.9
Computers & Peripherals 423,300 Sun Microsystems, Inc. (a) 1,900,617 0.6
---------------------
6,724,757 2.1
====================================================================================================================================
Total Common Stocks
(Cost--$167,848,708) 208,862,101 66.3
====================================================================================================================================
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded)
Value Percent of
Face Amount U.S. Government Obligations (in U.S. dollars) Net Assets
====================================================================================================================================
U.S. Treasury STRIPS (b)(d):
$37,535,000 3.57% due 8/15/2009 $ 30,797,580 9.8%
81,197,000 3.648% due 11/15/2009 66,000,738 20.9
=============================================================================================================
Total U.S. Government Obligations
(Cost--$96,437,661) 96,798,318 30.7
Beneficial
Interest Short-Term Securities
====================================================================================================================================
$10,007,138 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (c) 10,007,138 3.2
=============================================================================================================
Total Short-Term Securities
(Cost--$10,007,138) 10,007,138 3.2
====================================================================================================================================
Total Investments (Cost--$274,293,507) 315,667,557 100.2
Liabilities in Excess of Other Assets (531,981) (0.2)
----------------------
Net Assets $315,135,576 100.0%
======================
* For Fund compliances 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.
(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 $6,715,305 $40,038
--------------------------------------------------------------------------
(d) Represents a zero coupon bond; the interest rate shown reflects the rate
in effect at December 31, 2003.
See Notes to Financial Statements.
10 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Statement of Assets and Liabilities
As of December 31, 2003
====================================================================================================================
Assets
- --------------------------------------------------------------------------------------------------------------------
Investments, at value (identified cost--$274,293,507) ........ $ 315,667,557
Foreign cash (cost--$15,522) ................................. 15,852
Receivables:
Dividends ................................................. $ 316,260
Securities sold ........................................... 227,049
Interest .................................................. 8,634 551,943
----------
Prepaid registration fees .................................... 162,847
-------------
Total assets ................................................. 316,398,199
-------------
====================================================================================================================
Liabilities
- --------------------------------------------------------------------------------------------------------------------
Payables:
Capital shares redeemed ................................... 643,332
Distributor ............................................... 252,040
Financial warranty fee .................................... 214,173
Other affiliates .......................................... 86,203
Investment adviser ........................................ 27,896 1,223,644
----------
Accrued expenses and other liabilities ....................... 38,979
-------------
Total liabilities ............................................ 1,262,623
-------------
====================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------
Net assets ................................................... $ 315,135,576
=============
====================================================================================================================
Net Assets Consist of
- --------------------------------------------------------------------------------------------------------------------
Paid-in capital, unlimited shares of no par value authorized . $ 275,298,365
Accumulated distributions in excess of investment income--net $ (172,489)
Accumulated realized capital losses on investments and foreign
currency transactions--net ................................. (1,364,680)
Unrealized appreciation on investments and foreign currency
transactions--net .......................................... 41,374,380
----------
Total accumulated earnings--net .............................. 39,837,211
-------------
Net Assets ................................................... $ 315,135,576
=============
====================================================================================================================
Net Asset Value
- --------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $17,348,789 and
1,532,819 shares outstanding ............................... $ 11.32
=============
Class B--Based on net assets of $157,507,486 and
13,946,728 shares outstanding .............................. $ 11.29
=============
Class C--Based on net assets of $121,893,950 and
10,789,197 shares outstanding .............................. $ 11.30
=============
Class I--Based on net assets of $18,385,351 and
1,624,290 shares outstanding ............................... $ 11.32
=============
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 11
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Six Months Ended December 31, 2003
=======================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------
Interest ..................................................... $ 2,483,102
Dividends (net of $20,191 foreign withholding tax) ........... 1,865,786
-------------
Total income ................................................. 4,348,888
-------------
=======================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------
Financial warranty fee ....................................... $ 1,307,596
Investment advisory fees ..................................... 1,045,005
Account maintenance and distribution fees--Class B ........... 778,521
Account maintenance and distribution fees--Class C ........... 629,408
Offering costs ............................................... 137,295
Transfer agent fees--Class B ................................. 87,192
Accounting services .......................................... 72,762
Transfer agent fees--Class C ................................. 72,101
Professional fees ............................................ 33,150
Account maintenance fees--Class A ............................ 25,355
Printing and shareholder reports ............................. 19,496
Directors' fees and expenses ................................. 18,914
Custodian fees ............................................... 17,142
Transfer agent fees--Class A ................................. 9,789
Transfer agent fees--Class I ................................. 9,493
Pricing fees ................................................. 3,373
Registration fees ............................................ 166
Other ........................................................ 4,630
------------
Total expenses ............................................... 4,271,388
-------------
Investment income--net ....................................... 77,500
-------------
=======================================================================================================================
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net
- -----------------------------------------------------------------------------------------------------------------------
Realized gain (loss) from:
Investments--net .......................................... 5,466,512
Foreign currency transactions--net ........................ (9,061) 5,457,451
------------
Change in unrealized appreciation/depreciation on:
Investments--net .......................................... 18,838,304
Foreign currency transactions--net ........................ 1,772 18,840,076
------------------------------
Total realized and unrealized gain on investments and foreign
currency transactions--net ................................. 24,297,527
-------------
Net Increase in Net Assets Resulting from Operations ......... $ 24,375,027
=============
See Notes to Financial Statements.
12 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Statements of Changes in Net Assets
For the Six For the Period
Months Ended November 13,
December 31, 2002+ to
Increase (Decrease) in Net Assets: 2003 June 30, 2003
==================================================================================================================
Operations
- ------------------------------------------------------------------------------------------------------------------
Investment income--net ................................. $ 77,500 $ 399,035
Realized gain (loss) on investments and foreign currency
transactions--net .................................... 5,457,451 (6,825,235)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net ... 18,840,076 22,534,304
-------------------------------
Net increase in net assets resulting from operations ... 24,375,027 16,108,104
-------------------------------
==================================================================================================================
Dividends to Shareholders
- ------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ............................................. (161,900) (28,316)
Class B ............................................. (461,281) (196,773)
Class C ............................................. (312,300) (161,700)
Class I ............................................. (220,528) (33,264)
-------------------------------
Net decrease in net assets resulting from dividends to
shareholders ......................................... (1,156,009) (420,053)
-------------------------------
==================================================================================================================
Capital Share Transactions
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets derived from
capital share transactions ........................... (40,498,995) 316,627,502
-------------------------------
==================================================================================================================
Net Assets
- ------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ................ (17,279,977) 332,315,553
Beginning of period .................................... 332,415,553 100,000
-------------------------------
End of period* ......................................... $ 315,135,576 $ 332,415,553
===============================
* Undistributed (accumulated distributions in excess
of) investment income--net ...................... $ (172,489) $ 906,020
===============================
+ Commencement of operations.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 13
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
Class A Class B
----------------------------- ----------------------------
For the For the For the For the
The following per share data and ratios have been derived Six Months Period Six Months Period
from information provided in the financial statements. Ended November 13, Ended November 13,
December 31, 2002+ to December 31, 2002+ to
Increase (Decrease) in Net Asset Value: 2003 June 30, 2003++ 2003 June 30, 2003
====================================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .......... $ 10.53 $ 10.00 $ 10.48 $ 10.00
-------------------------------------------------------
Investment income (loss)--net ................. .04** .05 --+++** --@@
Realized and unrealized gain on investments and
foreign currency transactions--net .......... .85 .49 .84 .49
-------------------------------------------------------
Total from investment operations .............. .89 .54 .84 .49
-------------------------------------------------------
Less dividends from investment income--net .... (.10) (.01) (.03) (.01)
-------------------------------------------------------
Net asset value, end of period ................ $ 11.32 $ 10.53 $ 11.29 $ 10.48
=======================================================
====================================================================================================================================
Total Investment Return***
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ............ 8.53%@ 5.43%@ 8.05%@ 4.93%@
=======================================================
====================================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses ...................................... 2.00%* 2.05%* 2.76%* 2.82%*
=======================================================
Investment income (loss)--net ................. .71%* .83%* (.06%)* .07%*
=======================================================
====================================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ...... $ 17,349 $ 22,090 $157,507 $159,057
=======================================================
Portfolio turnover ............................ 41.32% 107.66% 41.32% 107.66%
=======================================================
* Annualized.
** Based on average shares outstanding.
*** Total investment returns exclude the effects of sales charges.
+ Commencement of operations.
++ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
+++ Amount is less than $(.01) per share.
@ Aggregate total investment return.
@@ Amount is less than $.01 per share. See Notes to Financial Statements.
14 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Financial Highlights (concluded)
Class C Class I
---------------------------- -----------------------------
For the For the For the For the
The following per share data and ratios have been derived Six Months Period Six Months Period
from information provided in the financial statements. Ended November 13, Ended November 13,
December 31, 2002+ to December 31, 2002+ to
Increase (Decrease) in Net Asset Value: 2003 June 30, 2003 2003 June 30, 2003++
====================================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .......... $ 10.48 $ 10.00 $ 10.55 $ 10.00
-------------------------------------------------------
Investment income (loss)--net ................. --+++** --@@ .05** .08
Realized and unrealized gain on investments and
foreign currency transactions--net .......... .85 .49 .85 .48
-------------------------------------------------------
Total from investment operations .............. .85 .49 .90 .56
-------------------------------------------------------
Less dividends from investment income--net .... (.03) (.01) (.13) (.01)
-------------------------------------------------------
Net asset value, end of period ................ $ 11.30 $ 10.48 $ 11.32 $ 10.55
=======================================================
====================================================================================================================================
Total Investment Return***
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ............ 8.11%@ 4.93%@ 8.62%@ 5.63%@
=======================================================
====================================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses ...................................... 2.76%* 2.82%* 1.75%* 1.80%*
=======================================================
Investment income (loss)--net ................. (.06%)* .06%* .95%* 1.08%*
=======================================================
====================================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ...... $121,894 $129,392 $ 18,385 $ 21,877
=======================================================
Portfolio turnover ............................ 41.32% 107.66% 41.32% 107.66%
=======================================================
* Annualized.
** Based on average shares outstanding.
*** Total investment returns exclude the effects of sales charges.
+ Commencement of operations.
++ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
+++ Amount is less than $(.01) per share.
@ Aggregate total investment return.
@@ Amount is less than $.01 per share.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 15
[LOGO] Merrill Lynch Investment Managers
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. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal, recurring nature. The Fund offers multiple classes of shares.
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 -- Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, 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. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Trustees of the Fund.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Trustees of the Trust. Short positions traded in the OTC market are valued at
the last available ask price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
16 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Notes to Financial Statements (continued)
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last ask price.
Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees of the Trust, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Trust's Board of Trustees. Such
valuations and procedures will be reviewed periodically by the Board of Trustees
of the Trust.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the New York Stock Exchange ("NYSE").
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
also are generally determined prior to the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and the close of
business on the NYSE that may not be reflected in the computation of the Fund's
net asset value. If events (for example, a company announcement, market
volatility or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair 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 Trust's Board of Trustees.
(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 movements 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 may 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.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 17
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
(d) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
(f) Prepaid registration fees -- Prepaid registration fees will be amortized
over a 12-month period beginning with the commencement of operations of the
Fund.
(g) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(h) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
loaned securities but does not receive the income on the collateral. Where the
Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with 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.
18 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Notes to Financial Statements (continued)
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 six months ended December 31, 2003, MLPF&S received contingent deferred
sales charges of $413,116 and $37,020 relating to transactions in Class B and
Class C Shares, respectively.
In addition, MLPF&S received $13,674 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended December
31, 2003.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
For the six months ended December 31, 2003, the Fund reimbursed FAM $3,687 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 six
months ended December 31, 2003 were $130,014,543 and $181,641,326, respectively.
Net realized gains (losses) for the six months ended December 31, 2003 and net
unrealized gains as of December 31, 2003 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments ................ $ 5,466,512 $ 41,374,050
Foreign currency transactions ........ (9,061) 330
----------------------------------
Total ................................ $ 5,457,451 $ 41,374,380
==================================
As of December 31, 2003, net unrealized appreciation for Federal income tax
purposes aggregated $36,173,586, of which $37,845,002 related to appreciated
securities and $1,671,416 related to depreciated securities. At December 31,
2003, the aggregate cost of investments for Federal income tax purposes was
$279,493,971.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 19
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share transactions
were $(40,498,995) and $316,627,502 for the six months ended December 31, 2003
and for the period November 13, 2002 to June 30, 2003, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended December 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends .......... 14,176 $ 155,083
Shares redeemed ...................... (578,765) (6,202,765)
-------------------------------
Net decrease ......................... (564,589) $ (6,047,682)
===============================
- --------------------------------------------------------------------------------
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 Six Months Dollar
Ended December 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 5,546 $ 59,740
Shares issued to shareholders in
reinvestment of dividends .......... 40,836 445,926
-------------------------------
Total issued ......................... 46,382 505,666
Shares redeemed ...................... (1,274,726) (13,557,829)
-------------------------------
Net decrease ......................... (1,228,344) $(13,052,163)
===============================
- --------------------------------------------------------------------------------
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 Six Months Dollar
Ended December 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .......................... 3,005 $ 32,834
Shares issued to shareholders in
reinvestment of dividends .......... 27,751 303,329
-------------------------------
Total issued ......................... 30,756 336,163
Shares redeemed ...................... (1,586,610) (16,959,229)
-------------------------------
Net decrease ......................... (1,555,854) $(16,623,066)
===============================
20 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Notes to Financial Statements (concluded)
- --------------------------------------------------------------------------------
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 Six Months Dollar
Ended December 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends .......... 18,993 $ 207,785
Shares redeemed ...................... (468,625) (4,983,869)
-------------------------------
Net decrease ......................... (449,632) $ (4,776,084)
===============================
- --------------------------------------------------------------------------------
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.
5. Capital Loss Carryforward:
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.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 21
[LOGO] Merrill Lynch Investment Managers
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
Robert C. Doll, Jr., Senior Vice President
Donald C. Burke, Vice President and Treasurer
Phillip S. Gillespie, Secretary
- --------------------------------------------------------------------------------
Effective January 1, 2004, Todd Goodwin and George W. Holbrook, Trustees of
Merrill Lynch Basic Value Principal Protected Fund, retired. The Fund's Board of
Trustees wishes Messrs. Goodwin and Holbrook well in their retirements.
- --------------------------------------------------------------------------------
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
22 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this website
http://www.icsdelivery.com/live and follow the instructions. When you visit this
site, you will obtain a personal identification number (PIN). You will need this
PIN should you wish to update your e-mail address, choose to discontinue this
service and/or make any other changes to the service. This service is not
available for certain retirement accounts at this time.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2003 23
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
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
#BVPP -- 12/03
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Reserved
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Reserved
Item 9 - Controls and Procedures
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.
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 attached hereto
10(a) - Not Applicable
10(b) - 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 of Merrill Lynch
Principal Protected Trust
By: /s/ Terry K. Glenn
---------------------------------
Terry K. Glenn,
President of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: February 23, 2004
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 of Merrill Lynch
Principal Protected Trust
Date: February 23, 2004
By: /s/ Donald C. Burke
---------------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: February 23, 2004