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 of
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 - 06/30/04
Item 1 - Report to Stockholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Merrill Lynch
Basic Value
Principal Protected Fund
Annual Report
June 30, 2004
[LOGO] Merrill Lynch Investment Managers
Merrill Lynch Basic Value Principal Protected Fund
Portfolio Information as of June 30, 2004 (unaudited)
Percent of
Ten Largest Equity Holdings Net Assets
================================================================================
Exxon Mobil Corporation ............................................ 4.1%
Citigroup Inc. ..................................................... 3.6
Wells Fargo & Company .............................................. 2.9
Bank One Corporation ............................................... 2.6
Raytheon Company ................................................... 2.2
Kimberly-Clark Corporation ......................................... 1.7
Deere & Company .................................................... 1.6
E.I. du Pont de Nemours and Company ................................ 1.6
American International Group, Inc. ................................. 1.6
Viacom, Inc. (Class B) ............................................. 1.5
2 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
A Letter From the President
Dear Shareholder
As we ended the current period, all eyes were on the Federal Reserve Board (the
Fed). In a much-anticipated move, the Fed raised the Federal Funds rate on June
30 for the first time in four years, bringing the target rate to 1.25%, up from
a 45-year low of 1%. The 25 basis point (.25%) increase was the first, but is
not expected to be the last, this year as the Fed moves to "normalize" interest
rates in the face of increasing inflation. The Fed has reiterated its intention
to take a "measured" approach to interest rate increases in an effort to avoid
upsetting the economy or the financial markets. Still, in its very deliberate
wording, the Fed has stated that it may move more aggressively if inflation and
economic growth indicate the need.
In any case, interest rates are likely to remain low by historical standards for
some time, particularly if the Fed does maintain its commitment to a gradual
tightening. To provide some perspective, the Federal Funds rate was at 6.5%
before the current easing cycle began in 2001 and had reached double-digits in
the late 1970s and early 1980s.
Although rising interest rates generally cause concern for equity investors, the
markets continue to find support in impressive corporate earnings and a strong
economy. Equity markets produced positive results for the most recent six-month
and 12-month reporting periods. As measured by the Standard & Poor's 500 Index,
the U.S. stock market returned +3.44% for the six-month period and +19.11% for
the 12-month period ended June 30, 2004.
June month-end also brought the transfer of power in Iraq. Like the Fed
tightening, this was a pivotal event. However, the outcome and the market
repercussions are less easy to predict. We do know that markets will always
fluctuate and that there are many uncertainties -- including the possibility of
geopolitical events -- that can translate into negative market movements. Still,
the U.S. economy is much stronger today than it was just one year ago. With this
in mind, we encourage you to revisit your portfolio and your asset allocation
strategy to ensure you are well positioned to take advantage of the
opportunities that lie ahead. Importantly, you should consult with your
financial advisor, who can help you assess the market and economic environment
and then develop a strategy most suitable for your circumstances and financial
goals.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Trustee
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
The Fund's equity component performed strongly during the fiscal year,
providing for meaningful capital appreciation from an investment that strives to
balance protection of principal with potential for growth.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended June 30, 2004, Merrill Lynch Basic Value Principal
Protected Fund's Class A, Class B, Class C and Class I Shares had total returns
of +10.44%, +9.58%, +9.54% and +10.64%, respectively. (Fund results shown do not
reflect sales charges and would be lower if sales charges were included.
Complete performance information can be found on pages 6 - 8 of this report to
shareholders.) For the same period, the Fund's all-equity benchmarks, the
Standard & Poor's 500 (S&P 500) Index and the S&P 500 Barra Value Index,
returned +19.11% and +22.25%, respectively. Although Fund results lagged that of
the equity benchmarks for the year, its performance far exceeded the +1.99%
average return of the Lipper Balanced Target Maturity Funds category for the
same period. (Funds in this Lipper category invest to provide a guaranteed
return of investment at maturity. Some of the assets are invested in zero coupon
U.S. Treasury securities, while the remainder is in equity securities for
long-term growth of capital and income.)
Because the Fund incorporates a fixed income component, it will, at times,
outperform or underperform its broad-based market benchmarks, which consist only
of equity securities. The past year was largely characterized by economic growth
and a robust return to equity market strength. In this environment, the Fund's
fixed income component produced a drag on performance relative to its all-equity
benchmarks. Still, the Fund's primary objective is to preserve investor
principal. We were able to achieve that goal while also providing attractive
capital appreciation.
A mathematical formula is used to determine the allocation between the Fund's
equity and fixed income components. During the period, the Fund's equity
component ranged from 42.7% of net assets to 84.1%. The fixed income allocation
ranged from 17.5% of net assets to 55.7%.
What factors contributed to the Fund's performance?
Within the equity portion of the portfolio, we were positioned for an economic
recovery. This involved emphasizing those companies with greater sensitivity to
changes in the overall economy. We started doing that before the Iraq war in
late 2002 and early 2003. Once major combat ended in the spring of 2003, the
economy took off. All of the areas we had overweighted, including materials,
information technology (IT), industrials and consumer discretionary, moved to
the forefront, as confidence grew and investors sought to participate in the
first year of the economic recovery.
Information technology was the biggest positive contributor to the Fund's
relative results. We had excellent performance from companies such as Advance
Micro Devices, Inc., National Semiconductor Corporation, Motorola, Inc., Lucent
Technologies Inc., Agilent Technologies, Inc., 3Com Corporation and Tectronix,
Inc. In the materials sector, Phelps-Dodge Corporation, Massey Energy Company,
Alcoa Inc. and International Paper Company did quite well. In industrials, we
saw great performance from Deere & Company, Thomas & Betts Corporation and The
Boeing Company. In consumer discretionary, DaimlerChrysler Corporation and
Koninklijke Philips Electronics NV performed well.
Surprisingly, in an environment where the Fund was focused on economic
sensitivity, we also saw favorable attribution from consumer staples, a very
defensive sector. This was primarily because of stock selection in a few names,
including Coca-Cola Enterprises Inc., Tyson Foods Inc. and The Gillette Company.
Otherwise, the more defensive areas generally detracted from Fund performance.
Healthcare, especially large cap pharmaceuticals, was one of the biggest
negative contributors. Merck & Co., Inc., Bristol-Myers Squibb Company and
Schering Plough Corporation all performed poorly in the last 12 months. The
media subsector of the consumer discretionary sector also was weak. While
consumer discretionary helped Fund performance overall, our media bias within
that sector hindered relative results during the period. Liberty Media
Corporation, Comcast Corporation and Viacom, Inc. were all negative
contributors.
What changes were made to the portfolio during the period?
We began to think about 2004 as a transition year for the market and started
making changes to the equity portion of the portfolio that reflected this view.
We began to trim some of the economically sensitive stocks that performed so
well in favor of some of the safe-haven names. We started making these kinds of
changes to the equity portfolio in 2003, reducing our weightings in IT,
materials, industrials and consumer
4 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
discretionary while increasing exposure to the defensive areas that
underperformed in 2003 -- staples, energy, utilities and financials. This shift
also involved taking down the beta in the equity portfolio (that is, reducing
risk), increasing large cap exposure and building a more diversified portfolio.
Specific changes included increasing exposure to consumer staples. This involved
purchasing Coca-Cola Enterprises, Inc., Albertsons, Inc., ConAgra Foods, Inc.,
Kraft Foods Inc. and General Mills, Inc. At the same time, we reduced our
weighting in the consumer discretionary sector. We eliminated Fox Entertainment
Group, Inc., DaimlerChrysler Corporation, Delphi Automotive Systems Corporation,
Tribune Company and The Gap, Inc. and reduced our positions in Koninklijke
Philips Electronics NV and McDonald's Corporation.
Our weightings in the remaining sectors looked much the same as they did last
year. We have been taking profits in technology; however, the group was up 40% -
50% on average and has remained a large position due to its substantial
appreciation. We reduced our positions in Lucent Technologies, Motorola, Inc.,
Agilent Technologies, Tectronix, Inc. and Advanced Micro Devices, Inc. and
eliminated National Semiconductor Corporation. Most of the sales were based on
strength.
We were not shaken by the underperformance of the energy sector last year and,
in fact, added to the group toward the end of 2003. Specifically, we initiated
positions in Transocean Inc. and Anadarko Petroleum Corporation and increased
our weighting in GlobalSantaFe Corporation. Our commitment to the sector
benefited performance in the last six months of the period. We continue to
overweight energy based on our belief that oil prices could remain stubbornly
high; supply issues persist and, ultimately, the stock prices will need to fully
reflect this scenario.
Given our expectation for rising interest rates, we remained underweight in
financials. Nevertheless, the Fund benefited from our position in Bank One
Corporation, which was taken over by J.P. Morgan Chase & Co. on July 1, 2004. We
accepted the J.P. Morgan paper and, based on our constructive outlook, will
continue to own it. We also initiated positions in The Bank of New York Company,
Inc. and U.S. Bancorp.
Consistent with its stated investment strategy, the Fund's fixed income
component was invested in fixed income instruments, including U.S. Treasury
zero-coupon bonds, set to mature close to the expiration of the Fund (November
13, 2009). The fixed income weighting reached a high of 55.7% of net assets on
July 17, 2003 and a low of 17.5% on June 10, 2004.
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 June 30,
2004, the Fund was invested 82.7% in equities and 17.9% in fixed income
securities. (The allocation exceeds 100% due to a negative cash balance.) This
compares to 66.3% in equities, 30.7% in fixed income and 3% in cash and cash
equivalents at December 31, 2003.
At the close of the period, the Fund's equity portfolio was overweight versus
the S&P 500 Barra Value Index in energy, materials and information technology.
We had underweights in consumer discretionary, financials and utilities. We were
slightly underweight in industrials, due to profit taking, and maintained a
market weighting in healthcare.
We continue to believe the economy and the markets are in a transition period.
The hope is for a "Goldilocks economy" -- not too hot, not too cold -- with
decent growth and relatively low interest rates. While it is unclear exactly
what is down the road, the market will almost certainly continue to be rocky
with no obvious leadership in terms of sectors or market-cap size. In this
environment, we believe proper diversification makes sense, and we are
positioning 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
July 7, 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 JUNE 30, 2004 5
[LOGO] Merrill Lynch Investment Managers
Performance Data
About Fund Performance
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
gain distributions, if any, 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 June 30, 2004 Total Return Total Return Total Return
=========================================================================================================
ML Basic Value Principal Protected Fund Class A Shares* +1.77% +10.44% +16.44%
- ---------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class B Shares* +1.42 + 9.58 +14.99
- ---------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class C Shares* +1.33 + 9.54 +14.94
- ---------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class I Shares* +1.86 +10.64 +16.87
- ---------------------------------------------------------------------------------------------------------
S&P 500(R)Index** +3.44 +19.11 +33.03
- ---------------------------------------------------------------------------------------------------------
S&P 500 Barra Value Index*** +4.17 +22.25 +40.44
- ---------------------------------------------------------------------------------------------------------
* 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.
S&P 500 is a registered trademark of the McGraw-Hill Companies.
6 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
Performance Data (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A and
Class B 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 2004:
11/13/02** 6/03 6/04
ML Basic Value Principal
Protected Fund+--
Class A Shares* $ 9,475 $ 9,990 $11,033
ML Basic Value Principal
Protected Fund+--
Class B Shares* $10,000 $10,493 $11,099
11/30/02 6/03 6/04
S&P 500 Index++ $10,000 $11,169 $13,303
S&P/Barra Value Index+++ $10,000 $11,487 $14,044
* 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 Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues) representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
+++ This unmanaged Index is a capitalization 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 and Class B Shares' graph is from 11/30/02.
Past performance is not predictive of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/04 +10.44% +4.65%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/04 + 9.81 +6.23
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/04 +9.58% +5.58%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/04 +8.96 +6.62
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 7
[LOGO] Merrill Lynch Investment Managers
Performance Data (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's 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 2004:
11/13/02** 6/03 6/04
ML Basic Value Principal
Protected Fund+--
Class C Shares* $10,000 $10,493 $11,494
ML Basic Value Principal
Protected Fund+--
Class I Shares* $9,475 $10,009 $11,073
11/30/02 6/03 6/04
S&P 500 Index++ $10,000 $11,169 $13,303
S&P/Barra Value Index+++ $10,000 $11,487 $14,044
* 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 Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues) representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
+++ This unmanaged Index is a capitalization 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 and Class B Shares' graph is from 11/30/02.
Past performance is not predictive of future results.
Average Annual Total Return
Return Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 6/30/04 +9.54% +8.54%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/04 +8.93 +8.93
- --------------------------------------------------------------------------------
* 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*
================================================================================
One Year Ended 6/30/04 +10.64% +4.83%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/04 +10.05 +6.46
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
8 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
Schedule of Investments
Value Percent of
Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
====================================================================================================================================
Above-Average Yield Metals & Mining 113,000 Alcoa Inc. $ 3,732,390 1.3%
Diversified Telecommunication 57,900 BCE Inc. 1,160,316 0.4
Services
Capital Markets 93,100 The Bank of New York Company,
Inc. 2,744,588 1.0
Pharmaceuticals 24,900 Bristol-Myers Squibb Company 610,050 0.2
Oil & Gas 12,700 ChevronTexaco Corporation 1,195,197 0.4
Food Products 121,700 ConAgra Foods, Inc. 3,295,636 1.2
Chemicals 99,800 E.I. du Pont de Nemours and
Company 4,433,116 1.6
Oil & Gas 253,800 Exxon Mobil Corporation 11,271,258 4.1
Industrial Conglomerates 110,000 General Electric Company 3,564,000 1.3
Food Products 24,900 General Mills, Inc. 1,183,497 0.4
Personal Products 78,700 The Gillette Company 3,336,880 1.2
Aerospace & Defense 101,600 Honeywell International Inc. 3,721,608 1.3
Oil & Gas 48,800 Kerr-McGee Corporation 2,623,976 0.9
Capital Markets 61,600 Mellon Financial Corporation 1,806,728 0.7
Oil & Gas 80,200 Royal Dutch Petroleum Company
(NY Registered Shares) 4,143,934 1.5
Diversified Telecommunication 146,700 SBC Communications Inc. 3,557,475 1.3
Services
Food Products 100,600 Sara Lee Corporation 2,312,794 0.8
Commercial Banks 56,400 U.S. Bancorp 1,554,384 0.6
Diversified Telecommunication 86,200 Verizon Communications 3,119,578 1.1
Services
Commercial Banks 65,700 Wachovia Corporation 2,923,650 1.1
--------------------------
62,291,055 22.4
====================================================================================================================================
Below-Average Insurance 63,401 ACE Limited 2,680,594 1.0
Price/Earnings Ratio Insurance 65,200 The Allstate Corporation 3,035,060 1.1
Insurance 61,100 American International Group,
Inc. 4,355,208 1.6
Health Care Providers & Services 22,700 AmerisourceBergen Corporation 1,357,006 0.5
Commercial Banks 50,100 Bank of America Corporation 4,239,462 1.5
Commercial Banks 140,100 Bank One Corporation 7,145,100 2.6
Health Care Equipment & Supplies 69,600 Baxter International Inc. 2,401,896 0.9
Machinery 20,700 Caterpillar Inc. 1,644,408 0.6
Diversified Financial Services 213,000 Citigroup Inc. 9,904,500 3.6
Beverages 72,500 Coca-Cola Enterprises Inc. 2,101,775 0.8
Automobiles 144,100 Ford Motor Company 2,255,165 0.8
Computers & Peripherals 176,100 Hewlett-Packard Company 3,715,710 1.3
Household Durables 84,200 Koninklijke (Royal) Philips
Electronics NV (NY Registered
Shares) 2,290,240 0.8
Food Products 45,900 Kraft Foods Inc. (Class A) 1,454,112 0.5
Hotels, Restaurants & Leisure 83,400 McDonald's Corporation 2,168,400 0.8
Pharmaceuticals 47,599 Merck & Co., Inc. 2,260,953 0.8
Capital Markets 81,200 Morgan Stanley 4,284,924 1.5
Pharmaceuticals 148,100 Schering-Plough Corporation 2,736,888 1.0
Electrical Equipment 61,800 Thomas & Betts Corporation (a) 1,682,814 0.6
Energy Equipment & Service 57,900 Transocean Inc. (a) 1,675,626 0.6
Food Products 30,400 Unilever NV (NY Registered
Shares) 2,082,704 0.7
IT Services 252,600 Unisys Corporation (a) 3,506,088 1.2
Oil & Gas 97,800 Unocal Corporation 3,716,400 1.3
--------------------------
72,695,033 26.1
==============================================================================================================
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued)
Value Percent of
Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
====================================================================================================================================
Low Price-to-Book Communications Equipment 257,500 3Com Corporation (a) $ 1,609,375 0.6%
Value Semiconductors & Semiconductor 197,300 Advanced Micro Devices, Inc. (a) 3,137,070 1.1
Equipment
Electronic Equipment & 67,300 Agilent Technologies, Inc. (a) 1,970,544 0.7
Instruments
Food & Staples Retailing 75,100 Albertson's, Inc. 1,993,154 0.7
Oil & Gas 47,400 Anadarko Petroleum Corporation 2,777,640 0.9
Aerospace & Defense 49,100 The Boeing Company 2,508,519 0.9
Road & Rail 40,600 CSX Corporation 1,330,462 0.5
Media 139,600 Comcast Corporation (Special
Class A) (a) 3,854,356 1.4
Machinery 63,400 Deere & Company 4,446,876 1.6
Energy Equipment & Service 100,400 Diamond Offshore Drilling, Inc. 2,392,532 0.9
Energy Equipment & Service 130,000 GlobalSantaFe Corporation 3,445,000 1.2
Energy Equipment & Service 85,600 Halliburton Company 2,590,256 0.9
Insurance 58,200 The Hartford Financial Services
Group, Inc. 4,000,668 1.4
Paper & Forest Products 90,900 International Paper Company 4,063,230 1.5
Household Products 70,300 Kimberly-Clark Corporation 4,631,364 1.7
Semiconductors & Semiconductor 278,300 LSI Logic Corporation (a) 2,120,646 0.8
Equipment
Media 315,700 Liberty Media Corporation
(Class A) (a) 2,838,143 1.0
Communications Equipment 452,600 Lucent Technologies Inc. (a) 1,710,828 0.6
Semiconductors & Semiconductor 101,900 Micron Technology, Inc. (a) 1,560,089 0.6
Equipment
Communications Equipment 150,100 Motorola, Inc. 2,739,325 1.0
Aerospace & Defense 167,600 Raytheon Company 5,995,052 2.2
Insurance 85,734 The St. Paul Companies, Inc. 3,475,656 1.2
Computers & Peripherals 479,500 Sun Microsystems, Inc. (a) 2,081,030 0.7
Media 237,900 Time Warner Inc. (a) 4,182,282 1.5
Road & Rail 7,800 Union Pacific Corporation 463,710 0.2
Media 120,400 Viacom, Inc. (Class B) 4,300,688 1.5
Media 109,500 The Walt Disney Company 2,791,155 1.0
Commercial Banks 140,700 Wells Fargo & Company 8,052,261 2.9
Paper & Forest Products 38,300 Weyerhaeuser Company 2,417,496 0.9
--------------------------
89,479,407 32.1
====================================================================================================================================
Special Situations Software 74,700 Computer Associates
International, Inc. 2,096,082 0.8
Computers & Peripherals 40,000 International Business Machines
Corporation 3,526,000 1.3
--------------------------
5,622,082 2.1
--------------------------------------------------------------------------------------------------------------
Total Common Stocks
(Cost--$190,443,360) 230,087,577 82.7
==============================================================================================================
10 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
Schedule of Investments (concluded)
Value Percent of
Face Amount U.S. Government Obligations (in U.S. dollars) Net Assets
====================================================================================================================================
U.S. Treasury STRIPS (b)(c):
$ 23,377,000 3.59% due 8/15/2009 $ 19,103,848 6.9%
37,790,000 3.74% due 11/15/2009 30,579,479 11.0
--------------------------------------------------------------------------------------------------------------
Total U.S. Government
Obligations (Cost--$50,461,588) 49,683,327 17.9
==============================================================================================================
Total Investment
(Cost--$240,904,948) 279,770,904 100.6
==============================================================================================================
Options
Number of
Contracts Call Options Written
====================================================================================================================================
260 The Walt Disney Company,
expiring January 2005 at
USD 30, Broker UBS Warburg (14,300) 0.0
--------------------------------------------------------------------------------------------------------------
Total Options Written
(Premiums Received--$43,418) (14,300) 0.0
==============================================================================================================
Total Investments, Net of Options Written (Cost--$240,861,530) 279,756,604 100.6
Liabilities in Excess of Other Assets (1,531,198) (0.6)
---------------------------
Net Assets $278,225,406 100.0%
===========================
* 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) Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase at June 30, 2004.
(c) Separately Traded Registered Interest and Principal of Securities
(STRIPS).
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:
--------------------------------------------------------------------------
Interest/
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $(3,291,833) $72,200
Merrill Lynch Liquidity Series, LLC
Money Market Series -- $ 432
Merrill Lynch Premier Institutional Fund -- $ 4,794
--------------------------------------------------------------------------
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 11
[LOGO] Merrill Lynch Investment Managers
Statement of Assets and Liabilities
As of June 30, 2004
=======================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------
Investments, at value (identified cost--$240,904,948) ....... $ 279,770,904
Foreign cash (cost--$25,373) ................................ 24,166
Receivables:
Dividends ................................................ $ 271,212
Securities sold .......................................... 201,832
Interest from affiliates ................................. 4,329
Securities lending--net .................................. 1,569 478,942
-------------------------------
Total assets ................................................ 280,274,012
-------------
=======================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$43,418) ...... 14,300
Payables:
Custodian bank ........................................... 809,276
Beneficial interest redeemed ............................. 691,400
Distributor .............................................. 228,155
Financial warranty fee ................................... 185,525
Other affiliates ......................................... 50,250
Investment adviser ....................................... 24,626 1,989,232
-------------
Accrued expenses and other liabilities ...................... 45,074
-------------
Total liabilities ........................................... 2,048,606
-------------
=======================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Net assets .................................................. $ 278,225,406
=============
=======================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------
Paid-in capital, unlimited shares of no par value
authorized ................................................. $ 233,670,468
Undistributed realized capital gains on investments and
foreign currency transactions--net ......................... $ 5,661,071
Unrealized appreciation on investments and foreign
currency transactions--net ................................. 38,893,867
-------------
Total accumulated earnings--net ............................. 44,554,938
-------------
Net Assets .................................................. $ 278,225,406
=============
=======================================================================================================================
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $13,022,162 and 1,130,874
shares of beneficial interest outstanding .................. $ 11.52
=============
Class B--Based on net assets of $144,787,095 and 12,649,707
shares of beneficial interest outstanding .................. $ 11.45
=============
Class C--Based on net assets of $104,840,288 and 9,156,358
shares of beneficial interest outstanding .................. $ 11.45
=============
Class I--Based on net assets of $15,575,861 and 1,350,925
shares of beneficial interest outstanding .................. $ 11.53
=============
See Notes to Financial Statements.
12 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
Statement of Operations
For the Year Ended June 30, 2004
=======================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------
Dividends (net of $54,261 foreign withholding tax) .......... $ 4,037,847
Interest (including $72,200 from affiliates) ................ 3,584,174
Securities lending--net ..................................... 5,226
-------------
Total income ................................................ 7,627,247
-------------
=======================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------
Financial warranty fee ...................................... $ 2,502,630
Investment advisory fees .................................... 2,000,052
Account maintenance and distribution fees--Class B .......... 1,531,229
Account maintenance and distribution fees--Class C .......... 1,189,620
Offering costs .............................................. 260,094
Transfer agent fees--Class B ................................ 161,152
Accounting services ......................................... 134,567
Transfer agent fees--Class C ................................ 128,323
Professional fees ........................................... 67,569
Custodian fees .............................................. 52,911
Account maintenance fees--Class A ........................... 43,549
Printing and shareholder reports ............................ 37,977
Directors' fees and expenses ................................ 30,246
Transfer agent fees--Class I ................................ 16,384
Transfer agent fees--Class A ................................ 15,679
Pricing fees ................................................ 6,347
Registration fees ........................................... 564
Other ....................................................... 21,952
-------------
Total expenses .............................................. 8,200,845
-------------
Investment loss--net ........................................ (573,598)
-------------
=======================================================================================================================
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net
- -----------------------------------------------------------------------------------------------------------------------
Realized gain (loss) from:
Investments--net ......................................... 13,066,777
Foreign currency transactions--net ....................... (20,081) 13,046,696
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ......................................... 16,359,329
Foreign currency transactions--net ....................... 234 16,359,563
-------------------------------
Total realized and unrealized gain on investments and
foreign currency transactions--net ......................... 29,406,259
-------------
Net Increase in Net Assets Resulting from Operations ........ $ 28,832,661
=============
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 13
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets
For the For the Period
Year Ended November 13,
June 30, 2002+ to
Increase (Decrease) in Net Assets: 2004 June 30, 2003
=======================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------
Investment income (loss)--net ............................... $ (573,598) $ 399,035
Realized gain (loss) on investments and foreign currency
transactions--net .......................................... 13,046,696 (6,825,235)
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net ..................... 16,359,563 22,534,304
-------------------------------
Net increase in net assets resulting from operations ........ 28,832,661 16,108,104
=======================================================================================================================
Dividends to Shareholders
- -----------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A .................................................. (161,901) (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 ............................................... (1,156,010) (420,053)
-------------------------------
=======================================================================================================================
Beneficial Interest Transactions
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets derived from beneficial
interest transactions ...................................... (81,866,798) 316,627,502
-------------------------------
=======================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ..................... (54,190,147) 332,315,553
Beginning of period ......................................... 332,415,553 100,000
-------------------------------
End of period* .............................................. $ 278,225,406 $ 332,415,553
===============================
* Undistributed investment income--net ................... $ -- $ 906,020
===============================
+ Commencement of operations.
See Notes to Financial Statements.
14 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
Financial Highlights
Class A Class B
----------------------------- -------------------------
For the For the
The following per share data and ratios have been derived For the Period For the Period
from information provided in the financial statements. Year Ended November 13, Year Ended November 13,
June 30, 2002+ to June 30, 2002+ to
Increase (Decrease) in Net Asset Value: 2004 June 30, 2003++ 2004 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 ............. .06** .05 (.03)** --+++
Realized and unrealized gain on investments
and foreign currency transactions--net ... 1.03 .49 1.03 .49
---------------------------------------------------------
Total from investment operations .......... 1.09 .54 1.00 .49
---------------------------------------------------------
Less dividends from investment income--net (.10) (.01) (.03) (.01)
---------------------------------------------------------
Net asset value, end of period ............ $ 11.52 $ 10.53 $ 11.45 $ 10.48
=========================================================
==============================================================================================================================
Total Investment Return***
- ------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ........ 10.44% 5.43%@ 9.58% 4.93%@
=========================================================
==============================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Expenses .................................. 2.00% 2.05%* 2.76% 2.82%*
=========================================================
Investment income (loss)--net ............. .51% .83%* (.30%) .07%*
=========================================================
==============================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) .. $ 13,022 $ 22,090 $144,787 $159,057
=========================================================
Portfolio turnover ........................ 87.57% 107.66% 87.57% 107.66%
=========================================================
* Annualized.
** Based on average shares outstanding.
*** Total investment returns exclude the effect 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.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 15
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (concluded)
Class C Class I
---------------------------- ---------------------------
For the For the
The following per share data and ratios have been derived For the Period For the Period
from information provided in the financial statements. Year Ended November 13, Year Ended November 13,
June 30, 2002+ to June 30, 2002+ to
Increase (Decrease) in Net Asset Value: 2004 June 30, 2003 2004 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 ............. (.03)** --@@ .08** .08
Realized and unrealized gain on investments
and foreign currency transactions--net ... 1.03 .49 1.03 .48
-----------------------------------------------------------
Total from investment operations .......... 1.00 .49 1.11 .56
-----------------------------------------------------------
Less dividends from investment income--net (.03) (.01) (.13) (.01)
-----------------------------------------------------------
Net asset value, end of period ............ $ 11.45 $ 10.48 $ 11.53 $ 10.55
===========================================================
================================================================================================================================
Total Investment Return***
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ........ 9.54% 4.93%@ 10.64% 5.63%@
===========================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses .................................. 2.76% 2.82%* 1.75% 1.80%*
===========================================================
Investment income (loss)--net ............. (.29%) .06%* .73% 1.08%*
===========================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) .. $104,840 $129,392 $ 15,576 $ 21,877
===========================================================
Portfolio turnover ........................ 87.57% 107.66% 87.57% 107.66%
===========================================================
* Annualized.
** Based on average shares outstanding.
*** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
++ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
@ Aggregate total investment return.
@@ Amount is less than $.01 per share.
See Notes to Financial Statements.
16 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
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 U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. 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 Trust.
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
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 17
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
in the OTC market and on a stock exchange are valued according to the broadest
and most representative market.
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 Trust
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 Trust, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are reviewed
by the officers of the Trust 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
18 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
Notes to Financial Statements (continued)
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 were 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.
(i) Custodian bank -- The Fund recorded an amount payable to the custodian bank
reflecting an overnight overdraft, which resulted from management estimates of
available cash.
(j) Reclassifications -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $260,094 has been reclassified between paid-in capital and accumulated
distributions in excess of net investment income and $563,494 has been
reclassified between undistributed net capital gains and accumulated
distributions in excess of net investment income as a result of permanent
differences attributable to nondeductible expenses and foreign currency
transaction gains/losses. These reclassifications have no effect on net assets
or net asset values per share.
(k) Offering costs -- Prepaid offering costs were amortized over a 12-month
period beginning with the commencement of operations of the Fund.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 19
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
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 year ended June 30, 2004, MLPF&S received contingent deferred sales
charges of $744,605 and $42,730 relating to transactions in Class B and Class C
Shares, respectively.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S or its
affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by FAM
or its affiliates. For the year ended June 30, 2004, MLIM, LLC received $2,240
in security lending agent fees.
In addition, MLPF&S received $24,677 in commissions on the execution of
portfolio security transactions for the Fund for the year ended June 30, 2004.
For the year ended June 30, 2004, the Fund reimbursed FAM $6,324 for certain
accounting services.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, FDS, PSI, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 2004 were $265,576,458 and $349,253,485, respectively.
Net realized gains/losses for the year ended June 30, 2004 and net unrealized
appreciation/depreciation as of June 30, 2004 were as follows:
- --------------------------------------------------------------------------------
Unrealized
Realized Appreciation/
Gains/Losses Depreciation
- --------------------------------------------------------------------------------
Long-term investments .................. $ 13,066,777 $ 38,865,956
Options written ........................ -- 29,118
Foreign currency transactions .......... (20,081) (1,207)
--------------------------------
Total .................................. $ 13,046,696 $ 38,893,867
================================
As of June 30, 2004, net unrealized appreciation for federal income tax purposes
aggregated $33,182,830, of which $36,336,222 related to appreciated securities
and $3,153,392 related to depreciated securities. At June 30, 2004, the
aggregate cost of investments, net of options written, for federal income tax
purposes was $246,573,774.
20 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
Notes to Financial Statements (continued)
Transactions in call options written for the year ended June 30, 2004 were as
follows:
- --------------------------------------------------------------------------------
Number of Premiums
Contracts Received
- --------------------------------------------------------------------------------
Outstanding call options written,
beginning of year ........................... -- --
Options written ................................ 260 $43,418
------------------------
Outstanding call options written,
end of year ................................. 260 $43,418
========================
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions were $(81,866,798) and $316,627,502 for the year ended June 30,
2004 and for the period November 13, 2002 to June 30, 2003, respectively.
Transactions in beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended June 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends ........... 14,175 $ 155,083
Shares redeemed ........................ (980,709) (10,857,965)
------------------------------
Net decrease ........................... (966,534) $ (10,702,882)
==============================
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended June 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends ........... 40,836 $ 445,926
Shares redeemed ........................ (2,566,201) (28,347,849)
------------------------------
Net decrease ........................... (2,525,365) $ (27,901,923)
==============================
- --------------------------------------------------------------------------------
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 Year Dollar
Ended June 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends ........... 27,752 $ 303,329
Shares redeemed ........................ (3,216,445) (35,643,436)
------------------------------
Net decrease ........................... (3,188,693) $ (35,340,107)
==============================
- --------------------------------------------------------------------------------
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 Year Dollar
Ended June 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends ........... 18,993 $ 207,785
Shares redeemed ........................ (741,990) (8,129,671)
------------------------------
Net decrease ........................... (722,997) $ (7,921,886)
==============================
- --------------------------------------------------------------------------------
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.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 21
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
5. Distributions to Shareholders:
The tax character of distributions paid during the fiscal year ended June 30,
2004 and for the period November 13, 2002 to June 30, 2003 was as follows:
- --------------------------------------------------------------------------------
For the Period
11/13/2002+ to
6/30/2004 6/30/2003
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ..................... $ 1,156,010 $ 420,053
---------------------------------
Total taxable distributions ............ $ 1,156,010 $ 420,053
=================================
+ Commencement of operations.
As of June 30, 2004, the components of accumulated earnings on a tax basis were
as follows:
- --------------------------------------------------------------------------------
Undistributed ordinary income--net ........................ $ 5,279,069
Undistributed long-term capital gains--net ................ 6,094,246
-----------
Total undistributed earnings--net ......................... 11,373,315
Capital loss carryforward ................................. --
Unrealized gains--net ..................................... 33,181,623*
-----------
Total accumulated earnings--net ........................... $44,554,938
===========
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales.
22 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
Report of Independent Registered Public Accounting Firm
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, 2004, and the related statement of operations for the year
then ended and the statements of changes in net assets and the financial
highlights for the year then ended and 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of June 30, 2004, by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Basic Value Principal Protected Fund as of June 30, 2004, the
results of its operations for the year then ended, the changes in its net assets
and its financial highlights for the year then ended and for the period November
13, 2002 through June 30, 2003, in conformity with U.S. generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 23, 2004
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 23
[LOGO] Merrill Lynch Investment Managers
Officers and Trustees (unaudited)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 2002 to President of the Merrill Lynch Investment Managers, 125 Funds None
Glenn* Princeton, NJ and present L.P. ("MLIM")/Fund Asset Management, L.P. 160 Portfolios
08543-9011 Trustee ("FAM")--Advised Funds since 1999; Chairman
Age: 63 (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. since 1985.
------------------------------------------------------------------------------------------------------------------------
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which MLIM
or FAM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of
the Fund based on his present and former positions with MLIM, FAM, FAMD, Princeton Services and Princeton
Administrators, L.P. The Trustee's term is unlimited. Trustees serve until their resignation, removal or death, or
until December 31 of the year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board
of Trustees.
====================================================================================================================================
Independent Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
David O. P.O. Box 9095 Trustee 2002 to Professor of Finance and Economics at the Columbia 14 Funds None
Beim Princeton, NJ present University Graduate School of Business since 1991; 19 Portfolios
08543-9095 Chairman of Outward Bound U.S.A. since 1997;
Age: 64 Chairman of Wave Hill, Inc. since 1980.
- ------------------------------------------------------------------------------------------------------------------------------------
James T. P.O. Box 9095 Trustee 2002 to Chief Financial Officer of J.P. Morgan & Co., Inc. 14 Funds None
Flynn Princeton, NJ present from 1990 to 1995 and an employee of J.P. Morgan 19 Portfolios
08543-9095 in various capacities from 1967 to 1995.
Age: 64
- ------------------------------------------------------------------------------------------------------------------------------------
W. Carl P.O. Box 9095 Trustee 2002 to Industrial Bank of Japan Professor of Finance, 14 Funds None
Kester Princeton, NJ present Senior Associate Dean and Chairman of the MBA 19 Portfolios
08543-9095 Program of Harvard University Graduate School of
Age: 52 Business Administration since 1999; James R.
Williston Professor of Business Administration of
Harvard University Graduate School of Business
from 1997 to 1999; MBA Class of 1958 Professor
of Business Administration of Harvard University
Graduate School of Business Administration from
1981 to 1997; Independent Consultant since 1978.
- ------------------------------------------------------------------------------------------------------------------------------------
24 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
Officers and Trustees (unaudited) (concluded)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees* (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
Karen P. P.O. Box 9095 Trustee 2002 to President of Robards & Company, a financial advisory 14 Funds None
Robards Princeton, NJ present firm, since 1987; formerly an investment banker with 19 Portfolios
08543-9095 Morgan Stanley for more than 10 years; Director of
Age: 53 Enable Medical Corp. since 1996; Director of AtriCure,
Inc. since 2000; Director of CineMuse Inc. from 1996
to 2000; Director of the Cooke Center for Learning and
Development, a not-for-profit 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 of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2002 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999; Vice
08543-9011 and President of FAMD since 1999; Director of MLIM Taxation since 1990.
Age: 44 Treasurer
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 Senior Vice 2002 to President of MLIM and member of the Executive Management Committee of ML & Co.,
Doll, Jr. Princeton, NJ President present Inc. since 2001; Global Chief Investment Officer and Senior Portfolio Manager of
08543-9011 MLIM since 1999; Chief Investment Officer of Equities at Oppenheimer Funds, Inc.
Age: 49 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. P.O. Box 9011 Secretary 2002 to First Vice President of MLIM since 2001; Director (Legal Advisory) of MLIM from
Gillespie Princeton, NJ present 2000 to 2001; Vice President of MLIM from 1999 to 2000 and Attorney associated with
08543-9011 MLIM since 1998.
Age: 40
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Trustees.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Fund's Officers and Trustees is available in the Fund's Statement of Additional
Information, which can be obtained without charge by calling 1-800-MER-FUND.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004 25
[LOGO] Merrill Lynch Investment Managers
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distribution paid by Merrill Lynch Basic Value Principal Protected Fund of
Merrill Lynch Principal Protected Trust to shareholders of record on December
12, 2003:
- --------------------------------------------------------------------------------
Qualified Dividend Income for Individuals 100.00%
- --------------------------------------------------------------------------------
Dividends Qualifying for the Dividends
Received Deduction for Corporations 92.51%
- --------------------------------------------------------------------------------
Federal Obligation Interest 65.25%
- --------------------------------------------------------------------------------
The law varies in each state as to whether and what percentage of dividend
income attributable to federal obligations is exempt from state income tax. We
recommend that you consult your tax adviser to determine if any portion of the
dividends you received is exempt from state income tax.
Please retain this information for your records.
26 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2004
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 Web
site 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 JUNE 30, 2004 27
[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)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Basic Value Principal Protected Fund
Box 9011
Princeton, NJ
08543-9011
#BVPP -- 6/04
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) David O.
Beim, (2) W. Carl Kester, (3) James T. Flynn and (4) Karen P. Robards.
The registrant's board of directors has determined that David O. Beim,
W. Carl Kester and Karen P. Robards qualify as financial experts
pursuant to Item 3(c)(4) of Form N-CSR.
Mr. Beim has a thorough understanding of generally accepted accounting
principles, financial statements and internal control over financial
reporting as well as audit committee functions. For 25 years, Mr. Beim
was an investment banker actively engaged in financial analysis for
securities transactions and mergers. These transactions presented a
breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can reasonably
be expected to be raised by the Registrant's financial statements. Mr.
Beim has also been a professor of finance and economics at the Columbia
University Graduate School of Business for the past 11 years.
Prof. Kester has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Prof. Kester
has been involved in providing valuation and other financial consulting
services to corporate clients since 1978. Prof. Kester's financial
consulting services present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the Registrant's financial statements.
Ms. Robards has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Ms. Robards
has been President of Robards & Company, a financial advisory firm,
since 1987. Ms. Robards was formerly an investment banker for more than
10 years where she was responsible for evaluating and assessing the
performance of companies based on their financial results. Ms. Robards
has over 30 years of experience analyzing financial statements. She
also is the member of the Audit Committees of two privately held
companies and a non-profit organization.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending June 30, 2004 - $48,000
Fiscal Year Ending June 30, 2003 - $47,500
(b) Audit-Related Fees - Fiscal Year Ending June 30, 2004 - $0
Fiscal Year Ending June 30, 2003 - $0
(c) Tax Fees - Fiscal Year Ending June 30, 2004 - $8,000
Fiscal Year Ending June 30, 2003 - $7,500
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending June 30, 2004 - $0
Fiscal Year Ending June 30, 2003 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending June 30, 2004 - $16,114,216
Fiscal Year Ending June 30, 2003 - $17,689,695
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's 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.
Regulation S-X Rule 2-01(c)(7)(ii) - $541,640, 0%
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 10 - Controls and Procedures
10(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.
10(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - See Item 2
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(b) - Certifications - 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: August 13, 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: August 13, 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: August 13, 2004