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
811-9739
Name of Fund: Merrill Lynch Core Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Master Large Cap Core Portfolio of Master Large Cap Series Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Merrill Lynch
Core Principal Protected Fund of Merrill Lynch Principal Protected Trust
and Master Large Cap Core Portfolio of Master Large Cap Series 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: 10/31/04
Date of reporting period: 11/01/03 - 10/31/04
Item 1 - Report to Stockholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Merrill Lynch
Core Principal
Protected Fund
Annual Report
October 31, 2004
[LOGO] Merrill Lynch Investment Managers
Merrill Lynch Core Principal Protected Fund
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
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.
2 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
A Letter From the President
Dear Shareholder
As we ended the current reporting period, the financial markets were facing a
number of uncertainties. At the top of investors' minds were questions about
economic expansion, corporate earnings, interest rates and inflation, politics,
oil prices and terrorism.
After benefiting from aggressive monetary and fiscal policy stimulus, some fear
the U.S. economy has hit a "soft patch." In fact, economic expansion has slowed
somewhat in recent months, but we believe it is easing into a pace of growth
that is sustainable and healthy. The favorable economic environment has served
to benefit American corporations, which have continued to post strong earnings.
Although the most impressive results were seen earlier in the year, solid
productivity, improved revenue growth and cost discipline all point to a vital
corporate sector.
In terms of inflation and interest rates, the Federal Reserve Board (the Fed)
has signaled its confidence in the economic recovery by increasing the Federal
Funds target rate four times in the past several months, from 1% to 2% as of the
November 10 Federal Open Market Committee meeting. Inflation, for its part, has
remained in check. Investors and economists are focused on how quickly monetary
policy will move from here, anxiously absorbing every bit of economic data and
Fed innuendo.
With the presidential election now behind us, any politically provoked market
angst should subside to some extent. The effect of oil prices, however, is more
difficult to predict. At around $50 per barrel, the price of oil is clearly a
concern. However, on an inflation-adjusted basis and considering modern usage
levels, the situation is far from the crisis proportions we saw in the 1980s.
Finally, although terrorism and geopolitical tensions are realities we are
forced to live with today, history has shown us that the financial effects of
any single event tend to be short-lived.
Amid the uncertainty, the Standard & Poor's 500 Index returned +9.42% for the
12-month period and +2.96% for the six-month period ended October 31, 2004. As
always, our investment professionals are closely monitoring the markets, the
economy and the overall environment in an effort to make well-informed decisions
for the portfolios they manage. For the individual investor, the key during
uncertain times is to remain focused on the big picture. While tracking current
events is important, investment success comes not from reacting to short-term
volatility, but from maintaining a long-term perspective and adhering to the
disciplines of asset allocation, diversification and rebalancing. We encourage
you to work with your financial advisor to ensure these time-tested techniques
are incorporated into your investment plan. 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 CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed the Lipper Balanced Target Maturity Funds average
return for the fiscal year while effectively meeting its objective of preserving
investor principal.
What is the Fund's investment objective?
The Fund seeks long-term capital growth while protecting the principal value of
investor shares. This is accomplished through investments in a core equity
component (equity securities of large-capitalization companies) and a protection
component (fixed income investments that have financial characteristics
resembling a portfolio of zero-coupon bonds). A mathematical formula is used to
determine the allocation between these two components. During the period, the
Portfolio's equity allocation ranged from 58.2% of total assets to 73.3%, and
the fixed income allocation ranged from 26.7% to 41.8%.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended October 31, 2004, Merrill Lynch Core Principal
Protected Fund's Class A, Class B, Class C and Class I Shares had total returns
of +4.14%, +3.36%, +3.37% and +4.44%, respectively. (Fund results shown do not
reflect sales charges and would be lower if sales charges were included.
Complete performance information can be found on pages 6 - 8 of this report to
shareholders.) The Russell 1000 Index, a widely used, all-equity benchmark, had
a total return of +9.33% for the same period. Because the Fund incorporates a
fixed income component, which is not reflected in the Russell 1000 Index, it
will at times outperform or underperform that benchmark. The Fund outperformed
its comparable Lipper category of Balanced Target Maturity Funds, which had an
average return of +2.50% for the 12-month 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.)
Notably, for the six-month period ended October 31, 2004, the Fund outperformed
the Russell 1000 Index and the Lipper category average. The Fund's Class A,
Class B, Class C and Class I Shares had total returns of +4.00%, +3.56%, +3.56%
and +4.17%, respectively, for the six months ended October 31, 2004. This
compared to a return of +3.04% for the Russell 1000 and +1.57% for the Lipper
Balanced Target Maturity Funds average.
Because the Fund invests in large-capitalization stocks that represent a
significant part of the U.S. stock market, its portfolio was influenced by the
same economic and market events that affected the broader stock market during
the period. Essentially, the past year could be viewed as two distinct periods.
The stock market performed strongly in the first six months, carrying the
momentum from year-end 2003 into the new year. Specifically, equities gleaned
support from favorable economic news, unprecedented fiscal and monetary policy
stimulus, extraordinary corporate earnings results, strong money flows and
attractive valuations. In the six months that followed, the market was much more
volatile, taking its cues from election-related uncertainty, violence in Iraq,
record-high oil prices, rising interest rates and a series of soft economic
data.
Over the course of the year, we witnessed a "flight to quality," whereby
investor favor shifted from low-quality, low-price and higher-risk securities
early in 2004 to higher-quality, higher-cap and lower-risk stocks as investors
became more cautious. Looking ahead, we believe good stock picking will rely
more on evaluating underlying company fundamentals, with no clear winners in
terms of sector, style or market cap size.
What were the primary factors that influenced Fund performance?
Within the equity portfolio, positive performance came from stock selection in
the utilities, healthcare and consumer discretionary sectors, especially
specialty retailers. This was partially offset by stock selection in information
technology and financials, especially insurance-related stocks.
At the individual stock level, the largest positive contributors to performance
included American Eagle Outfitters, Inc., Urban Outfitters, Inc., Nordstrom,
Inc., Oxford Health Plans, Inc., Norfolk Southern Corporation and Autodesk, Inc.
The largest detractors from performance included Humana Inc., ITT Educational
Services, Inc., Amkor Technology, Inc., SanDisk Corporation and Cypress
Semiconductor Corporation. In addition, an underweight position in Merck & Co.,
Inc. benefited performance, while an underweighting in Exxon Mobil Corporation
negatively affected performance.
4 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
What changes were made to the Portfolio during the year?
In the equity portion of the portfolio, we maintained a procyclical bias for the
majority of the fiscal year, investing in those companies and sectors that we
believed could benefit from a burgeoning U.S. economy. For the most part,
portfolio activity involved fine-tuning our exposures based on our fundamental
research, including the use of both qualitative and quantitative screens.
Although we continue to believe the U.S. economy is on relatively solid footing,
we had moderated our cyclical focus to some extent by period-end as investors
grew somewhat more cautious.
From a sector perspective, we increased our positions relative to the Russell
1000 Index in energy and materials, and ended the period overweight in these
industries. We also increased our exposure to consumer staples, a more defensive
sector, although we remain underweight in this area. We reduced our positions
relative to the benchmark in information technology and consumer discretionary,
but remain overweight in these sectors, and also trimmed our exposure to
industrials.
In terms of individual stocks, we continued to search for companies with what we
viewed as good earnings momentum and compelling valuations. The largest
purchases during the period included Johnson & Johnson, Pfizer, Inc.,
ChevronTexaco Corporation, Anthem, Inc., Hewlett-Packard Company, Countrywide
Credit Industries, Inc. and Lucent Technologies, Inc. The largest sales included
Cisco Systems, Inc., Citigroup Inc., Sprint Corp. (PCS), QUALCOMM Incorporated,
J.P. Morgan Chase & Co. and Apollo Group, Inc.
The fixed income component of the Portfolio was invested in U.S. Treasury
zero-coupon bonds set to mature close to the expiration of the Fund (February
28, 2010).
How would you characterize the Portfolio's position at the close of the period?
At the end of the period, Portfolio assets were invested 69.7% in equities and
30.3% in fixed income securities.
In the equity component, we generally maintained our focus on cyclical stocks in
anticipation of positive economic developments and continued strong earnings
growth. Some observers have come to question the vitality of economic growth in
recent months, citing negligible inflation, slowing consumer spending and
record-high oil prices. However, we continue to believe that the foundations of
the economy are reasonably strong and corporate balance sheets are in good
shape. Corporations continue to post earnings increases well above the
historical average of 7%. At this time, the market has already found some relief
in the conclusion of the presidential election. Investors appear to have viewed
the re-election of President Bush as a positive for American businesses.
Based on our relatively optimistic view, our largest overweights as of October
31, 2004, were in consumer discretionary, energy and materials -- areas we
believe should benefit from strong earnings growth. The largest underweights
were in financials, which tend to underperform in periods of rising interest
rates, and consumer staples.
We remain focused on our search for companies exhibiting good earnings momentum,
earnings surprise and favorable valuation characteristics, and that we believe
are positioned to deliver strong performance over the long term. At the same
time, the Fund remains committed to its goal of protecting investor principal.
Robert C. Doll, Jr.
Senior Vice President and Senior Portfolio Manager
November 12, 2004
- --------------------------------------------------------------------------------
If you would like a copy, free of charge, of the most recent annual or quarterly
report of Ambac Assurance Corporation, the Guarantor; please contact the Fund at
1-800-MER-FUND.
- --------------------------------------------------------------------------------
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 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 (front-end load) of
5.25% and an account maintenance fee of 0.25% per year (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% per year and an account maintenance
fee of 0.25% per year. 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% per year and an
account maintenance fee of 0.25% per year. 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 performance data current to the
most recent month-end. 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. The Fund's Investment Adviser reimbursed a portion of the
Fund's expenses. Without such waiver, the Fund's performance would have been
lower. 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 October 31, 2004 Total Return Total Return Total Return
==========================================================================================================
ML Core Principal Protected Fund Class A Shares* +4.00% +4.14% +17.89%
- ----------------------------------------------------------------------------------------------------------
ML Core Principal Protected Fund Class B Shares* +3.56 +3.36 +16.39
- ----------------------------------------------------------------------------------------------------------
ML Core Principal Protected Fund Class C Shares* +3.56 +3.37 +16.39
- ----------------------------------------------------------------------------------------------------------
ML Core Principal Protected Fund Class I Shares* +4.17 +4.44 +18.43
- ----------------------------------------------------------------------------------------------------------
Merrill Lynch U.S. Corporate Master Index** +4.94 +6.92 +11.05
- ----------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index*** +4.23 +5.53 + 6.92
- ----------------------------------------------------------------------------------------------------------
Russell 1000(R) Index**** +3.04 +9.33 +39.40
- ----------------------------------------------------------------------------------------------------------
* 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 2/28/03.
** This unmanaged Index is comprised of all investment grade corporate bonds,
rated BBB or higher, of all maturities. Since inception total return is
from 2/28/03.
*** This unmanaged market-weighted Index is comprised of U.S. government and
agency securities, mortgage-backed securities issued by the Government
National Mortgage Association, Freddie Mac or Fannie Mae and investment
grade (rated BBB or better) corporate bonds with at least one year to
maturity. Since inception total return is from 2/28/03.
**** This unmanaged broad-based Index measures the performance of the 1,000
largest companies in the Russell 3000(R) Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index. Since inception total return is from 2/28/03.
Russell 1000 and Russell 3000 are registered trademarks of the Frank
Russell Company.
6 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Performance Data (continued)
Total Return Based on a $10,000 Investment--Class A Shares and Class B Shares
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class B Shares compared to growth of an investment in the Merrill Lynch U.S.
Corporate Master Index, Lehman Brothers Aggregate Bond Index and the Russell
1000 Index. Values are from February 28, 2003 to October 2004.
2/28/03** 10/03 10/04
ML Core Principal Protected Fund+--
Class A Shares* $ 9,475 $10,726 $11,170
ML Core Principal Protected Fund+--
Class B Shares* $10,000 $11,260 $11,239
Merrill Lynch U.S. Corporate Master Index++ $10,000 $10,387 $11,105
Lehman Brothers Aggregate Bond Index+++ $10,000 $10,132 $10,692
Russell 1000 Index++++ $10,000 $12,750 $13,940
* Assuming maximum sales charge, transaction costs and other operating
expenses, including administration fees.
** Commencement of operations.
+ ML Core Principal Protected Fund invests all of its assets in Master Large
Cap Core Portfolio of Master Large Cap Series Trust. The Portfolio invests
primarily in a diversified portfolio of equity securities of large cap
companies located in the United States that the Investment Adviser
believes blends growth and value.
++ This unmanaged Index is comprised of all investment grade corporate bonds,
rated BBB or higher, of all maturities.
+++ This unmanaged market-weighted Index is comprised of U.S. government and
agency securities, mortgage-backed securities issued by the Government
National Mortgage Association, Freddie Mac or Fannie Mae and investment
grade (rated BBB or better) corporate bonds with at least one year to
maturity.
++++ This unmanaged broad-based Index measures the performance of the 1,000
largest companies in the Russell 3000(R) Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
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 10/31/04 + 4.14% - 1.32%
- --------------------------------------------------------------------------------
Inception (2/28/03)
through 10/31/04 +10.35 + 6.85
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 10/31/04 +3.36% - .64%
- --------------------------------------------------------------------------------
Inception (2/28/03)
through 10/31/04 +9.51 +7.24
- --------------------------------------------------------------------------------
* 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 CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 7
[LOGO] Merrill Lynch Investment Managers
Performance Data (concluded)
Total Return Based on a $10,000 Investment--Class B Shares and Class I Shares
A line graph depicting the growth of an investment in the Fund's Class C Shares
and Class I Shares compared to growth of an investment in the Merrill Lynch U.S.
Corporate Master Index, Lehman Brothers Aggregate Bond Index and the Russell
1000 Index. Values are from February 28, 2003 to October 2004.
2/28/03** 10/03 10/04
ML Core Principal Protected Fund+--
Class C Shares* $10,000 $10,260 $11,639
ML Core Principal Protected Fund+--
Class I Shares* $ 9,475 $10,745 $11,222
Merrill Lynch U.S. Corporate Master Index++ $10,000 $10,387 $11,105
Lehman Brothers Aggregate Bond Index+++ $10,000 $10,132 $10,692
Russell 1000 Index++++ $10,000 $12,750 $13,940
* Assuming maximum sales charge, transaction costs and other operating
expenses, including administration fees.
** Commencement of operations.
+ ML Core Principal Protected Fund invests all of its assets in Master Large
Cap Core Portfolio of Master Large Cap Series Trust. The Portfolio invests
primarily in a diversified portfolio of equity securities of large cap
companies located in the United States that the Investment Adviser
believes blends growth and value.
++ This unmanaged Index is comprised of all investment grade corporate bonds,
rated BBB or higher, of all maturities.
+++ This unmanaged market-weighted Index is comprised of U.S. government and
agency securities, mortgage-backed securities issued by the Government
National Mortgage Association, Freddie Mac or Fannie Mae and investment
grade (rated BBB or better) corporate bonds with at least one year to
maturity.
++++ This unmanaged broad-based Index measures the performance of the 1,000
largest companies in the Russell 3000(R) Index, which represents
approximately 92% of the total market capitalization of the Russell 3000
Index.
Past performance is not predictive of future results.
Average Annual Total Return
Return Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 10/31/04 +3.37% +2.37%
- --------------------------------------------------------------------------------
Inception (2/28/03)
through 10/31/04 +9.51 +9.51
- --------------------------------------------------------------------------------
* 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 10/31/04 + 4.44% -1.04%
- --------------------------------------------------------------------------------
Inception (2/28/03)
through 10/31/04 +10.65 +7.14
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
8 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses related
to transactions, including sales charges, redemption fees and exchange fees; and
(b) operating expenses including advisory fees, distribution fees including
12(b)-1 fees, and other Fund expenses. The following example (which is based on
a hypothetical investment of $1,000 invested on May 1, 2004 and held through
October 31, 2004) is intended to assist shareholders both in calculating
expenses based on an investment in the Fund and in comparing these expenses with
similar costs of investing in other mutual funds:
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders ongoing
costs only and do not reflect any transactional expenses, such as sales charges,
redemption fees, or exchange fees. Therefore, the second table is useful in
comparing ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these transactional
expenses were included, shareholder expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value May 1, 2004 to
May 1, 2004 October 31, 2004 October 31, 2004
========================================================================================================
Actual
========================================================================================================
Class A $1,000 $1,040.00 $ 9.03
- --------------------------------------------------------------------------------------------------------
Class B $1,000 $1,035.60 $12.88
- --------------------------------------------------------------------------------------------------------
Class C $1,000 $1,035.60 $12.88
- --------------------------------------------------------------------------------------------------------
Class I $1,000 $1,041.70 $ 7.76
========================================================================================================
Hypothetical (5% annual return before expenses)**
========================================================================================================
Class A $1,000 $1,016.15 $ 8.92
- --------------------------------------------------------------------------------------------------------
Class B $1,000 $1,012.35 $12.73
- --------------------------------------------------------------------------------------------------------
Class C $1,000 $1,012.35 $12.73
- --------------------------------------------------------------------------------------------------------
Class I $1,000 $1,017.40 $ 7.67
- --------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.77% for Class A, 2.53% for Class B, 2.53% for Class
C and 1.52% for Class I), multiplied by the average account value over the
period, multiplied by 182/364 (to reflect the one-half year period shown).
Because the Fund invests significantly in a master fund, the expense table
example reflects the expenses of both the fund and the master fund in
which it invests.
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal half-year divided by 364.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 9
[LOGO] Merrill Lynch Investment Managers
Statement of Assets and Liabilities
Merrill Lynch Core Principal Protected Fund
As of October 31, 2004
================================================================================================================================
Assets
- --------------------------------------------------------------------------------------------------------------------------------
Investment in Master Large Cap Core Portfolio (the "Portfolio"),
at value (identified cost--$147,079,447*) ........................... $ 163,261,848
Investment in U.S. Treasury STRIPS, 4.05% due 2/15/2010 (face
amount--$85,205,000; identified cost--$68,900,148*) ................. 71,030,552
Prepaid registration fees ............................................ 16,241
-------------
Total assets ......................................................... 234,308,641
-------------
================================================================================================================================
Liabilities
- --------------------------------------------------------------------------------------------------------------------------------
Payables:
Distributor ....................................................... $ 170,181
Financial warranty fee ............................................ 115,055
Advisory fee ...................................................... 95,249
Other affiliates .................................................. 38,120 418,605
-------------
Accrued expenses ..................................................... 50,258
-------------
Total liabilities .................................................... 468,863
-------------
================================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets ........................................................... $ 233,839,778
=============
================================================================================================================================
Net Assets Consist of
- --------------------------------------------------------------------------------------------------------------------------------
Paid-in capital, unlimited shares of no par value authorized ......... $ 197,498,322
Undistributed realized capital gains--net ............................ $ 18,028,651
Unrealized appreciation--net ......................................... 18,312,805
-------------
Total accumulated earnings--net ...................................... 36,341,456
-------------
Net Assets ........................................................... $ 233,839,778
=============
================================================================================================================================
Net Asset Value
- --------------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $11,534,285 and 1,008,256 shares
of beneficial interest outstanding .................................. $ 11.44
=============
Class B--Based on net assets of $130,014,369 and 11,473,375 shares
of beneficial interest outstanding .................................. $ 11.33
=============
Class C--Based on net assets of $82,397,771 and 7,271,700 shares
of beneficial interest outstanding .................................. $ 11.33
=============
Class I--Based on net assets of $9,893,353 and 862,151 shares
of beneficial interest outstanding .................................. $ 11.48
=============
* The cost and unrealized appreciation of investments as of October 31, 2004
as computed for federal income tax purposes, were as follows:
--------------------------------------------------------------------------
Aggregate cost ................................ $217,940,026
============
Gross unrealized appreciation ................. $ 16,352,374
Gross unrealized depreciation ................. --
------------
Net unrealized appreciation ................... $ 16,352,374
============
See Notes to Financial Statements.
10 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Statement of Operations Merrill Lynch Core Principal Protected Fund
For the Year Ended October 31, 2004
================================================================================================================================
Investment Income
- --------------------------------------------------------------------------------------------------------------------------------
Interest and amortization of premiums and discounts .................. $ 3,262,814
Net investment income allocated from the Portfolio:
Dividends ......................................................... 1,881,429
Securities lending--net ........................................... 22,726
Interest from affiliates .......................................... 5,477
Expenses .......................................................... (920,348)
-------------
Total investment income and net investment income allocated from
the Portfolio--net .................................................. 4,252,098
-------------
================================================================================================================================
Expenses
- --------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ............................................. $ 1,948,544
Financial warranty fees .............................................. 1,623,787
Account maintenance and distribution fees--Class B ................... 1,378,287
Account maintenance and distribution fees--Class C ................... 957,872
Transfer agent fees--Class B ......................................... 110,623
Accounting services .................................................. 81,346
Transfer agent fees--Class C ......................................... 78,776
Printing and shareholder reports ..................................... 51,521
Professional fees .................................................... 46,782
Account maintenance fees--Class A .................................... 36,658
Registration fees .................................................... 36,101
Trustees' fees and expenses .......................................... 24,757
Transfer agent fees--Class A ......................................... 10,197
Custodian fees ....................................................... 9,494
Transfer agent fees--Class I ......................................... 7,977
Pricing fees ......................................................... 1,486
Other ................................................................ 30,644
-------------
Total expenses before waiver ......................................... 6,434,852
Waiver of expenses ................................................... (842,754)
-------------
Total expenses after waiver .......................................... 5,592,098
-------------
Investment loss--net ................................................. (1,340,000)
-------------
================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- --------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net .................................................. (983,734)
Allocations from the Portfolio--net ............................... 23,035,355 22,051,621
-------------
Change in unrealized appreciation/depreciation on:
Investments--net .................................................. 2,712,831
Allocations from the Portfolio--net ............................... (14,123,818) (11,410,987)
-------------------------------
Total realized and unrealized gain--net .............................. 10,640,634
-------------
Net Increase in Net Assets Resulting from Operations ................. $ 9,300,634
=============
See Notes to Financial Statements.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 11
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets
Merrill Lynch Core Principal Protected Fund
For the Period
For the February 28,
Year Ended 2003+
October 31, to October 31,
Increase (Decrease) in Net Assets: 2004 2003
================================================================================================================================
Operations
- --------------------------------------------------------------------------------------------------------------------------------
Investment loss--net ................................................. $ (1,340,000) $ (1,072,981)
Realized gain--net ................................................... 22,051,621 4,991,627
Change in unrealized appreciation/depreciation--net .................. (11,410,987) 29,723,792
-------------------------------
Net increase in net assets resulting from operations ................. 9,300,634 33,642,438
-------------------------------
================================================================================================================================
Distributions to Shareholders
- --------------------------------------------------------------------------------------------------------------------------------
Realized gain:
Class A ............................................................. (534,083) --
Class B ............................................................. (3,774,344) --
Class C ............................................................. (2,827,877) --
Class I ............................................................. (402,757) --
-------------------------------
Net decrease from distributions to shareholders ...................... (7,539,061) --
-------------------------------
================================================================================================================================
Beneficial Interest Transactions
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets derived from beneficial interest
transactions ........................................................ (55,153,321) 253,589,048
-------------------------------
================================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets .............................. (53,391,748) 287,231,486
Beginning of period .................................................. 287,231,526 40
-------------------------------
End of period ........................................................ $ 233,839,778 $ 287,231,526
===============================
+ Commencement of operations.
See Notes to Financial Statements.
12 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Financial Highlights Merrill Lynch Core Principal Protected Fund
Class A
------------------------------
For the Period
The following per share data and ratios have been derived For the February 28,
from information provided in the financial statements. Year Ended 2003+ to
October 31, October 31,
Increase (Decrease) in Net Asset Value: 2004 2003
======================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................... $ 11.32 $ 10.00
------------------------------
Investment income--net .................................. .01 .01
Realized and unrealized gain--net ....................... .44 1.31
------------------------------
Total from investment operations ........................ .45 1.32
------------------------------
Less distributions of realized gain--net ................ (.33) --
------------------------------
Net asset value, end of period .......................... $ 11.44 $ 11.32
==============================
======================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ...................... 4.14% 13.20%@
==============================
======================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver++ ............................... 1.83% 2.00%*
==============================
Expenses++ .............................................. 2.16% 2.26%*
==============================
Investment income--net .................................. .13% .10%*
==============================
======================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ................ $ 11,534 $ 18,674
==============================
Portfolio turnover of the Fund .......................... 167.08% 175.43%
==============================
Portfolio turnover of the Master Large Cap Core Portfolio 135.48% 138.73%
==============================
* Annualized.
** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
++ Includes the Fund's share of the Portfolio's allocated expenses.
@ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 13
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (continued) Merrill Lynch Core Principal Protected Fund
Class B
--------------------------------
For the Period
The following per share data and ratios have been derived For the February 28,
from information provided in the financial statements. Year Ended 2003+ to
October 31, October 31,
Increase (Decrease) in Net Asset Value: 2004 2003
========================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................... $ 11.26 $ 10.00
--------------------------------
Investment loss--net .................................... (.07) (.05)
Realized and unrealized gain--net ....................... .44 1.31
--------------------------------
Total from investment operations ........................ .37 1.26
--------------------------------
Less distributions of realized gain--net ................ (.30) --
--------------------------------
Net asset value, end of period .......................... $ 11.33 $ 11.26
================================
========================================================================================================================
Total Investment Return**
- ------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ...................... 3.36% 12.60%@
================================
========================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver++ ............................... 2.58% 2.76%*
================================
Expenses++ .............................................. 2.91% 3.03%*
================================
Investment loss--net .................................... (.59%) (.68%)*
================================
========================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ................ $ 130,014 $ 145,568
================================
Portfolio turnover of the Fund .......................... 167.08% 175.43%
================================
Portfolio turnover of the Master Large Cap Core Portfolio 135.48% 138.73%
================================
* Annualized.
** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
++ Includes the Fund's share of the Portfolio's allocated expenses.
@ Aggregate total investment return.
See Notes to Financial Statements.
14 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Financial Highlights (continued) Merrill Lynch Core Principal Protected Fund
Class C
-------------------------------
For the Period
The following per share data and ratios have been derived For the February 28,
from information provided in the financial statements. Year Ended 2003+ to
October 31, October 31,
Increase (Decrease) in Net Asset Value: 2004 2003
=======================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................... $ 11.26 $ 10.00
-------------------------------
Investment loss--net .................................... (.07) (.05)
Realized and unrealized gain--net ....................... .44 1.31
-------------------------------
Total from investment operations ........................ .37 1.26
-------------------------------
Less distributions of realized gain--net ................ (.30) --
-------------------------------
Net asset value, end of period .......................... $ 11.33 $ 11.26
===============================
=======================================================================================================================
Total Investment Return**
- -----------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ...................... 3.37% 12.60%@
===============================
=======================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver++ ............................... 2.59% 2.76%*
===============================
Expenses++ .............................................. 2.91% 3.03%*
===============================
Investment loss--net .................................... (.61%) (.68%)*
===============================
=======================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ................ $ 82,398 $ 108,700
===============================
Portfolio turnover of the Fund .......................... 167.08% 175.43%
===============================
Portfolio turnover of the Master Large Cap Core Portfolio 135.48% 138.73%
===============================
* Annualized.
** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
++ Includes the Fund's share of the Portfolio's allocated expenses.
@ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 15
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (concluded) Merrill Lynch Core Principal Protected Fund
Class I
-----------------------------
For the Period
The following per share data and ratios have been derived For the February 28,
from information provided in the financial statements. Year Ended 2003+ to
October 31, October 31,
Increase (Decrease) in Net Asset Value: 2004 2003
=====================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................... $ 11.34 $ 10.00
-----------------------------
Investment income--net .................................. .04 .03
Realized and unrealized gain--net ....................... .45 1.31
-----------------------------
Total from investment operations ........................ .49 1.34
-----------------------------
Less distributions of realized gain--net ................ (.35) --
-----------------------------
Net asset value, end of period .......................... $ 11.48 $ 11.34
=============================
=====================================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ...................... 4.44% 13.40%@
=============================
=====================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver++ ............................... 1.58% 1.75%*
=============================
Expenses++ .............................................. 1.91% 2.01%*
=============================
Investment income--net .................................. .39% .35%*
=============================
=====================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ................ $ 9,893 $ 14,290
=============================
Portfolio turnover of the Fund .......................... 167.08% 175.43%
=============================
Portfolio turnover of the Master Large Cap Core Portfolio 135.48% 138.73%
=============================
* Annualized.
** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
++ Includes the Fund's share of the Portfolio's allocated expenses.
@ Aggregate total investment return.
See Notes to Financial Statements.
16 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Notes to Financial Statements Merrill Lynch Core Principal Protected Fund
1. Significant Accounting Policies:
Merrill Lynch Core 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 invests a portion of its assets
in the Master Large Cap Core Portfolio (the "Portfolio"), which is a portfolio
of Master Large Cap Series Trust. The value of the Fund's investment in the
Portfolio reflects the Fund's proportionate interest in the net assets of the
Portfolio. The performance of the Fund is directly affected by the performance
of the Portfolio. The financial statements of the Portfolio, including the
Schedule of Investments, are included elsewhere in this report and should be
read in conjunction with the Fund's financial statements. 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 percentage of the Portfolio
owned by the Fund at October 31, 2004 was 8.9%. 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 February 28, 2003
through February 28, 2010 (the "Guarantee Maturity Date"), except in connection
with reinvestment of dividends and distributions. The Fund will be offered on a
continuous basis after the Guarantee Maturity Date. 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 (except that Class B
shareholders may vote on material changes to the Class A distribution plan).
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 -- The Fund records its investments in the
Portfolio at fair value. Valuation of securities held by the Portfolio is
discussed in Note 1a of the Portfolio's Notes to Financial Statements, which are
included elsewhere in this report.
Debt securities are traded primarily in the over-the-counter markets and are
valued at the last available bid price in the over-the-counter market or on the
basis of values obtained by a pricing service. Pricing services use valuation
matrixes that incorporate both dealer-supplied valuations and valuation models.
The procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general direction of the Board of Trustees. Such
valuations and procedures will be reviewed periodically by the Board of
Trustees.
Equity securities that are held by the Fund that are traded on stock exchanges
or the Nasdaq National Market are valued at the last sale price or official
close price on the exchange, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for short
positions. In cases where equity securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Trustees of the Fund. Long
positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap or
Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Trustees of the Fund. Short positions traded in the OTC market are valued at the
last available ask price. Portfolio securities that are traded both in the OTC
market and on a stock exchange are valued according to the broadest and most
representative market.
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.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 17
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
Merrill Lynch Core Principal Protected Fund
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Trustees. Such
valuations and procedures will be reviewed periodically by the Board of Trustees
of the Fund.
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 Fund's Board of Trustees
or by the Investment Adviser using a pricing service and/or procedures approved
by the Fund'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 market
value of the option written. When a security is purchased or sold through
an exercise of an option, the related premium paid (or received) is added
to (or deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option expires
(or the Fund enters into a closing transaction), the Fund realizes a gain
or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
18 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Notes to Financial Statements (continued)
Merrill Lynch Core Principal Protected Fund
(c) Security transactions, investment income and expenses -- Security
transactions are recorded on the dates the transactions are entered into (the
trade dates). Investment transactions in the Portfolio are accounted for on a
trade date basis. Realized gains and losses on security transactions are
determined on the identified cost basis. Dividend income is recorded on the
ex-dividend dates. Interest income is recognized on the accrual basis. The Fund
amortizes all premiums and discounts on debt securities. The Fund records daily
its proportionate share of the Portfolio's income, expenses and realized and
unrealized gains and losses. In addition, the Fund accrues its own expenses.
(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.
(e) Prepaid registration fees -- Prepaid registration fees will be amortized
over a 12-month period beginning with the commencement of operations of the
Fund.
(f) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(g) 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, $1,334,357 has been reclassified between undistributed realized capital
gains and accumulated investment loss, and $5,643 has been reclassified between
paid-in-capital and accumulated investment loss as a result of permanent
differences attributable to net operating losses and nondeductible expenses.
These reclassifications have no effect on net assets or net asset values per
share.
2. Investment Advisory Agreements 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 .75% of the Fund's average daily net assets. FAM has
contractually agreed to waive its management fee by the amount of management
fees the Fund pays FAM indirectly through its investment in the Portfolio. For
the year ended October 31, 2004, FAM earned fees of $1,948,544 and waived
$842,754. In addition, 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.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 19
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
Merrill Lynch Core Principal Protected Fund
For the year ended October 31, 2004, MLPF&S received contingent deferred sales
charges of $463,441 and $108 relating to transactions in Class B and Class C
Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $71,809 relating to transactions subject to front-end sales charge
waivers in Class A Shares.
The Trust, on behalf of the Fund, and FAM have entered into a Financial Warranty
Agreement with Ambac Assurance Corporation ("Ambac"). 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 distributions received from the Fund have been
reinvested and no shares have been redeemed (the "Guaranteed Amount"). The Fund
will pay to Ambac, under the Financial Warranty Agreement, an annual fee equal
to .625% 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, Ambac 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.
Financial Data Services, Inc. ("FDS"), an indirect, wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
For the year ended October 31, 2004, the Fund reimbursed FAM $5,423 for certain
accounting services.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, FAMD, FDS, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities and
investments in the Portfolio, for the year ended October 31, 2004 were
$144,475,449 and $153,511,465, respectively.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial interest
transactions was $(55,153,321) and $253,589,048 for the year ended October 31,
2004 and for the period February 28, 2003 to October 31, 2003, respectively.
Transactions in beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended October 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 46,708 $ 510,046
Shares redeemed ................ (688,265) (7,863,927)
-------------------------------------
Net decrease ................... (641,557) $ (7,353,881)
=====================================
20 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Notes to Financial Statements (concluded)
Merrill Lynch Core Principal Protected Fund
- --------------------------------------------------------------------------------
Class A Shares for the
Period February 28, 2003+ Dollar
to October 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................... 1,988,595 $ 19,884,101
Shares redeemed ................ (338,783) (3,607,637)
-------------------------------------
Net increase ................... 1,649,812 $ 16,276,464
=====================================
+ Commencement of operations.
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended October 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 332,947 $ 3,622,465
Shares redeemed ................ (1,786,611) (20,011,967)
-------------------------------------
Net decrease ................... (1,453,664) $ (16,389,502)
=====================================
- --------------------------------------------------------------------------------
Class B Shares for the
Period February 28, 2003+ Dollar
to October 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................... 13,955,061 $ 139,540,569
Shares redeemed ................ (1,028,023) (10,776,646)
-------------------------------------
Net increase ................... 12,927,038 $ 128,763,923
=====================================
+ Commencement of operations.
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended October 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 251,004 $ 2,730,931
Shares redeemed ................ (2,632,406) (29,610,137)
-------------------------------------
Net decrease ................... (2,381,402) $ (26,879,206)
=====================================
- --------------------------------------------------------------------------------
Class C Shares for the
Period February 28, 2003+ Dollar
to October 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................... 10,405,746 $ 104,056,289
Shares redeemed ................ (752,645) (7,953,018)
-------------------------------------
Net increase ................... 9,653,101 $ 96,103,271
=====================================
+ Commencement of operations.
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended October 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 7,138 $ 78,014
Shares redeemed ................ (405,379) (4,608,746)
-------------------------------------
Net decrease ................... (398,241) $ (4,530,732)
=====================================
- --------------------------------------------------------------------------------
Class I Shares for the
Period February 28, 2003+ Dollar
to October 31, 2003 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................... 1,541,170 $ 15,411,352
Shares redeemed ................ (280,779) (2,965,962)
-------------------------------------
Net increase ................... 1,260,391 $ 12,445,390
=====================================
+ Commencement of operations.
5. Distributions to Shareholders:
The tax character of distributions paid during the fiscal year ended October 31,
2004 and for the period Februrary 28, 2003 through October 31, 2003 was as
follows:
- --------------------------------------------------------------------------------
2/28/2003*
10/31/2004 to 10/31/2003
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income .............. $ 2,894,514 $ --
Net long-term capital gains .. 4,644,547 --
-------------------------------------
Total taxable distributions .... $ 7,539,061 $ --
=====================================
* Commencement of operations.
As of October 31, 2004, the components of accumulated earnings on a tax basis
were as follows:
- --------------------------------------------------------------------------------
Undistributed ordinary income--net ........................ $ 3,732,576
Undistributed long-term capital gains--net ................ 16,256,506
-----------
Total undistributed earnings--net ......................... 19,989,082
Capital loss carryforward ................................. --
Unrealized gains--net ..................................... 16,352,374*
-----------
Total accumulated earnings--net ........................... $36,341,456
===========
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 21
[LOGO] Merrill Lynch Investment Managers
Report of Independent Registered Public Accounting Firm
Merrill Lynch Core Principal Protected Fund
To the Shareholders and Board of Trustees of
Merrill Lynch Principal Protected Trust:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Core Principal Protected Fund, one of the series constituting Merrill
Lynch Principal Protected Trust (the "Trust"), as of October 31, 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 February 28, 2003 (commencement of operations) through October
31, 2003. These financial statements and financial highlights are the
responsibility of the Trust'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 October 31, 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 Core Principal Protected Fund of Merrill Lynch Principal Protected
Trust as of October 31, 2004, the results of its operations for the year then
ended, and the changes in its net assets and its financial highlights for the
year then ended and for the period February 28, 2003 through October 31, 2003,
in conformity with U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 14, 2004
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distribution paid by Merrill Lynch Core Principal Protected Fund of Merrill
Lynch Principal Protected Trust to shareholders of record on December 12, 2003:
- --------------------------------------------------------------------------------
Qualified Dividend Income for Individuals ....................... 27.88%
Dividends Qualifying for the Dividends Received
Deduction for Corporations .................................... 28.56%
Federal Obligation Interest ..................................... 42.85%
- --------------------------------------------------------------------------------
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.
Additionally, the Fund distributed long-term capital gains of $.185595 per share
to shareholders of record on December 12, 2003.
Please retain this information for your records.
22 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Officers and Trustees of the Trust (unaudited)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held Time Overseen by Held by
Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 2003 to President of the Merrill Lynch Investment Managers, 124 Funds None
Glenn* Princeton, NJ and present L.P. ("MLIM")/Fund Asset Management, L.P. 157 Portfolios
08543-9011 Trustee ("FAM")-advised funds since 1999; Chairman
Age: 64 (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 2003 to Professor of Finance and Economics at the Columbia 14 Funds None
Beim Princeton, NJ present University Graduate School of Business since 1991; 17 Portfolios
08543-9095 Chairman of Outward Bound U.S.A. from 1997 to
Age: 64 2002; Chairman of Wave Hill, Inc. since 1990.
- ------------------------------------------------------------------------------------------------------------------------------------
James T. P.O. Box 9095 Trustee 2003 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 in 17 Portfolios
08543-9095 various capacities from 1967 to 1995.
Age: 65
- ------------------------------------------------------------------------------------------------------------------------------------
W. Carl P.O. Box 9095 Trustee 2003 to Mizuho Financial Group Professor of Finance; Senior 14 Funds None
Kester Princeton, NJ present Associate Dean and Chairman of the MBA Program 17 Portfolios
08543-9095 of Harvard University Graduate School of Business
Age: 52 Administration since 1999; James R. Williston
Professor of Business Administration of Harvard
University Graduate School of Business from 1997
to 1999; MBA Class of 1977, Professor of Business
Administration of Harvard University Graduate School
of Business Administration from 1981 to 1997;
Independent Consultant since 1978.
- ------------------------------------------------------------------------------------------------------------------------------------
Karen P. P.O. Box 9095 Trustee 2003 to President of Robards & Company, a financial 14 Funds None
Robards Princeton, NJ present advisory, since 1987; formerly an investment banker 17 Portfolios
08543-9095 with Morgan Stanley for more than ten years; Director
Age: 54 of 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.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 23
[LOGO] Merrill Lynch Investment Managers
Officers and Trustees of the Trust (unaudited) (concluded)
Position(s) Length of
Held Time
Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2003 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 and Director
08543-9011 and since 2004; Vice President of FAMD since 1999; Vice President of MLIM and FAM from
Age: 44 Treasurer 1990 to 1997; Director of MLIM Taxation since 1990.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 Senior 2003 to President of MLIM and member of the Executive Management Committee of ML & Co.,
Doll, Jr. Princeton, NJ Vice present Inc. since 2001; Global Chief Investment Officer and Senior Portfolio Manager of
08543-9011 President MLIM since 1999; Chief Investment Officer of Equities at Oppenheimer Funds, Inc.
Age: 50 from 1990 to 1999 and Chief Investment Officer thereof from 1998 to 1999; Executive
Vice President of Oppenheimer Funds, Inc. from 1991 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM since 2004; Global Director of Compliance at
08543-9011 Officer Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Age: 53 Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance Officer
at Prudential Financial from 1995 to 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997.
08543-9011
Age: 44
------------------------------------------------------------------------------------------------------------------------
* 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
24 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Portfolio Information as of October 31, 2004 (unaudited)
Master Large Cap Core Portfolio
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
Pfizer, Inc. .............................................. 2.9%
Johnson & Johnson ......................................... 2.6
General Electric .......................................... 2.2
Chevron Texaco Corporation ................................ 2.0
Exxon Mobil Corporation ................................... 1.9
Conoco Phillips ........................................... 1.5
Motorola .................................................. 1.3
Microsoft Corporation ..................................... 1.3
Prudential Financial, Inc. ................................ 1.3
Costco Wholesale Corporation .............................. 1.2
- --------------------------------------------------------------------------------
Percent of
Sector Representation* Total Investments
- --------------------------------------------------------------------------------
Consumer Discretionary .................................... 18.1%
Information Technology .................................... 16.9
Health Care ............................................... 14.2
Energy .................................................... 12.2
Financials ................................................ 10.8
Industrials ............................................... 6.5
Materials ................................................. 6.4
Consumer Staples .......................................... 4.5
Utilities ................................................. 3.4
Other** ................................................... 7.0
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries* Net Assets
- --------------------------------------------------------------------------------
Oil & Gas ................................................. 13.1%
Specialty Retail .......................................... 8.2
Insurance ................................................. 8.0
Software .................................................. 5.5
Pharmaceuticals ........................................... 5.4
- --------------------------------------------------------------------------------
* For Portfolio compliance purposes, "Sector" and "Industries" mean any one
or more of the sector and industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Portfolio management. This definition may not apply for
purposes of this report, which may combine such sector and industry
sub-classifications for reporting ease.
** Includes portfolio holdings in short-term investments.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 25
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments Master Large Cap Core Portfolio
Value
Sector++ Industry++ Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
Consumer Auto Components--0.6% 710,000 Dana Corporation $ 10,586,100
Discretionary--19.5% --------------------------------------------------------------------------------------------------------------
Automobiles--0.5% 160,000 Harley-Davidson, Inc. 9,211,200
--------------------------------------------------------------------------------------------------------------
Hotels, Restaurants & Leisure--1.4% 690,000 McDonald's Corporation 20,113,500
110,000 Starwood Hotels & Resorts Worldwide, Inc. 5,250,300
---------------
25,363,800
--------------------------------------------------------------------------------------------------------------
Household Durables--4.4% 70,000 The Black & Decker Corporation (c) 5,619,600
180,000 Harman International Industries,
Incorporated 21,632,400
210,000 M.D.C. Holdings, Inc. 16,117,500
30,000 +NVR, Inc. 18,810,000
400,000 The Stanley Works 17,808,000
---------------
79,987,500
--------------------------------------------------------------------------------------------------------------
Leisure Equipment & Products--1.0% 610,000 Eastman Kodak Company 18,470,800
--------------------------------------------------------------------------------------------------------------
Media--0.7% 170,000 +Getty Images, Inc. 10,052,100
60,000 +Lamar Advertising Company 2,485,200
---------------
12,537,300
--------------------------------------------------------------------------------------------------------------
Multiline Retail--2.7% 670,000 Dillard's, Inc. (Class A) 13,728,300
560,000 J.C. Penney Company, Inc. 19,370,400
390,000 Nordstrom, Inc. 16,840,200
---------------
49,938,900
--------------------------------------------------------------------------------------------------------------
Specialty Retail--8.2% 500,000 Abercrombie & Fitch Co. (Class A) 19,590,000
450,000 American Eagle Outfitters, Inc. (c) 18,396,000
270,000 +Barnes & Noble, Inc. 8,982,900
440,000 Claire's Stores, Inc. 11,448,800
880,000 The Gap, Inc. 17,582,400
620,000 Michael's Stores, Inc. 18,042,000
550,000 PETsMART, Inc. 17,589,000
680,000 Staples, Inc. 20,223,200
450,000 +Urban Outfitters, Inc. 18,450,000
---------------
150,304,300
--------------------------------------------------------------------------------------------------------------
Total Consumer Discretionary 356,399,900
====================================================================================================================================
Consumer Beverages--0.8% 530,000 The Pepsi Bottling Group, Inc. (c) 14,861,200
Staples--4.8% --------------------------------------------------------------------------------------------------------------
Food & Staples Retailing--1.5% 460,000 Costco Wholesale Corporation 22,052,400
90,000 Wal-Mart Stores, Inc. 4,852,800
---------------
26,905,200
--------------------------------------------------------------------------------------------------------------
Food Products--1.9% 1,080,000 Archer-Daniels-Midland Company 20,919,600
1,040,000 Tyson Foods, Inc. (Class A) 15,080,000
---------------
35,999,600
--------------------------------------------------------------------------------------------------------------
Household Products--0.2% 60,000 The Procter & Gamble Company 3,070,800
--------------------------------------------------------------------------------------------------------------
Personal Products--0.4% 130,000 Avon Products, Inc. 5,141,500
50,000 The Gillette Company 2,074,000
---------------
7,215,500
--------------------------------------------------------------------------------------------------------------
Total Consumer Staples 88,052,300
==============================================================================================================
26 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Schedule of Investments (continued) Master Large Cap Core Portfolio
Value
Sector++ Industry++ Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
Energy--13.1% Oil & Gas--13.1% 240,000 Amerada Hess Corporation (c) $ 19,370,400
160,000 Anadarko Petroleum Corporation 10,792,000
240,000 Ashland Inc. 13,828,800
520,000 Burlington Resources Inc. 21,580,000
700,000 ChevronTexaco Corporation 37,142,000
330,000 ConocoPhillips 27,822,300
60,000 Devon Energy Corporation 4,438,200
710,000 Exxon Mobil Corporation 34,946,200
300,000 +Newfield Exploration Company 17,460,000
230,000 Occidental Petroleum Corporation 12,840,900
260,000 Sunoco, Inc. 19,333,600
470,000 Valero Energy Corporation 20,195,900
--------------------------------------------------------------------------------------------------------------
Total Energy 239,750,300
====================================================================================================================================
Financials--11.6% Capital Markets--0.5% 90,000 The Bear Stearns Companies Inc. 8,527,500
--------------------------------------------------------------------------------------------------------------
Commercial Banks--0.6% 260,000 Bank of America Corporation 11,645,400
--------------------------------------------------------------------------------------------------------------
Diversified Financial 470,000 Citigroup Inc. 20,853,900
Services--1.4% 120,000 J.P. Morgan Chase & Co. 4,632,000
---------------
25,485,900
--------------------------------------------------------------------------------------------------------------
Insurance--8.0% 430,000 The Allstate Corporation 20,678,700
80,000 American International Group, Inc. 4,856,800
900,000 Aon Corporation 18,369,000
150,000 Berkley (W.R.) Corporation 6,411,000
180,000 The Chubb Corporation 12,983,400
440,000 Lincoln National Corporation 19,272,000
300,000 Loews Corporation 17,970,000
60,000 MetLife, Inc. 2,301,000
500,000 Prudential Financial, Inc. 23,235,000
430,000 SAFECO Corporation 19,883,200
---------------
145,960,100
--------------------------------------------------------------------------------------------------------------
Thrifts & Mortgage Finance--1.1% 660,000 Countrywide Financial Corporation 21,073,800
--------------------------------------------------------------------------------------------------------------
Total Financials 212,692,700
====================================================================================================================================
Health Care--15.3% Biotechnology - 2.0% 320,000 +Celgene Corporation 9,478,400
210,000 +Cephalon, Inc. (c) 10,010,700
370,000 +Charles River Laboratories International,
Inc. (c) 17,312,300
---------------
36,801,400
--------------------------------------------------------------------------------------------------------------
Health Care Equipment 260,000 Bausch & Lomb Incorporated (c) 15,849,600
& Supplies--2.9% 390,000 Becton, Dickinson and Company 20,475,000
100,000 C.R. Bard, Inc. 5,680,000
210,000 +Respironics, Inc. 10,728,900
---------------
52,733,500
--------------------------------------------------------------------------------------------------------------
Health Care Providers 270,000 +Anthem, Inc. 21,708,000
& Services--5.0% 280,000 CIGNA Corporation 17,768,800
760,000 +Humana Inc. 14,554,000
440,000 +Laboratory Corporation of America Holdings 20,152,000
480,000 +PacifiCare Health Systems, Inc. 17,097,600
---------------
91,280,400
--------------------------------------------------------------------------------------------------------------
Pharmaceuticals--5.4% 800,000 Johnson & Johnson 46,704,000
1,810,000 Pfizer, Inc. 52,399,500
---------------
99,103,500
--------------------------------------------------------------------------------------------------------------
Total Health Care 279,918,800
==============================================================================================================
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 27
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) Master Large Cap Core Portfolio
Value
Sector++ Industry++ Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
Industrials--7.0% Aerospace & Defense--0.3% 170,000 Goodrich Corporation $ 5,241,100
--------------------------------------------------------------------------------------------------------------
Air Freight & Logistics--1.1% 50,000 CNF Transportation Inc. 2,189,000
60,000 FedEx Corp. 5,467,200
240,000 Ryder System, Inc. 12,024,000
---------------
19,680,200
--------------------------------------------------------------------------------------------------------------
Electrical Equipment--1.1% 480,000 Rockwell Automation, Inc. 20,011,200
--------------------------------------------------------------------------------------------------------------
Industrial Conglomerates--2.2% 1,190,000 General Electric Company 40,602,800
--------------------------------------------------------------------------------------------------------------
Machinery--1.2% 270,000 Cummins Inc. 18,921,600
100,000 Graco Inc. 3,440,000
---------------
22,361,600
--------------------------------------------------------------------------------------------------------------
Road & Rail--1.1% 610,000 Norfolk Southern Corporation 20,709,500
--------------------------------------------------------------------------------------------------------------
Total Industrials 128,606,400
====================================================================================================================================
Information Communications Equipment--4.7% 1,360,000 +Avaya Inc. (c) 19,584,000
Technology--18.2% 150,000 +Cisco Systems, Inc. 2,881,500
5,630,000 +Lucent Technologies Inc. (c) 19,986,500
1,430,000 Motorola, Inc. 24,681,800
2,330,000 +Tellabs, Inc. 18,640,000
---------------
85,773,800
--------------------------------------------------------------------------------------------------------------
Computers & Peripherals--2.5% 220,000 Hewlett-Packard Company 4,105,200
70,000 International Business Machines
Corporation 6,282,500
200,000 +Lexmark International, Inc. (Class A) 16,622,000
340,000 +NCR Corporation 19,159,000
---------------
46,168,700
--------------------------------------------------------------------------------------------------------------
Electronic Equipment & 610,000 +Avnet, Inc. (c) 10,345,600
Instruments--1.0% 190,000 +Tech Data Corporation 7,674,100
---------------
18,019,700
--------------------------------------------------------------------------------------------------------------
IT Services--1.7% 530,000 +CheckFree Corp. (c) 16,430,000
640,000 Sabre Holdings Corporation (Class A) 13,766,400
---------------
30,196,400
--------------------------------------------------------------------------------------------------------------
Office Electronics--1.1% 1,400,000 +Xerox Corporation (c) 20,678,000
--------------------------------------------------------------------------------------------------------------
Semiconductors & Semiconductor 220,000 +Cree, Inc. (c) 7,592,200
Equipment--1.7% 240,000 Intel Corporation 5,342,400
630,000 Microchip Technology 19,057,500
---------------
31,992,100
--------------------------------------------------------------------------------------------------------------
Software--5.5% 370,000 Adobe Systems Incorporated 20,731,100
400,000 Autodesk, Inc. 21,100,000
770,000 +BMC Software, Inc. 14,568,400
860,000 Microsoft Corporation 24,071,400
340,000 +Symantec Corporation 19,359,600
---------------
99,830,500
--------------------------------------------------------------------------------------------------------------
Total Information Technology 332,659,200
==============================================================================================================
28 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Schedule of Investments (concluded) Master Large Cap Core Portfolio
Value
Sector++ Industry++ Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
Materials--6.9% Chemicals--1.0% 390,000 Eastman Chemical Company $ 18,513,300
--------------------------------------------------------------------------------------------------------------
Containers & Packaging--1.0% 380,000 Ball Corporation 15,143,000
190,000 +Owens-Illinois, Inc. 3,520,700
---------------
18,663,700
--------------------------------------------------------------------------------------------------------------
Metals & Mining--3.1% 440,000 Nucor Corporation 18,581,200
230,000 Phelps Dodge Corporation 20,134,200
500,000 United States Steel Corporation 18,360,000
---------------
57,075,400
--------------------------------------------------------------------------------------------------------------
Paper & Forest Products--1.8% 590,000 Georgia-Pacific Corporation 20,408,100
360,000 MeadWestvaco Corporation 11,350,800
---------------
31,758,900
--------------------------------------------------------------------------------------------------------------
Total Materials 126,011,300
====================================================================================================================================
Utilities--3.6% Electric Utilities--2.6% 640,000 Edison International 19,520,000
360,000 Northeast Utilities 6,958,800
340,000 TXU Corporation 20,814,800
---------------
47,293,600
--------------------------------------------------------------------------------------------------------------
Multi-Utilities & 3,380,000 +Dynegy Inc. (Class A) (c) 16,663,400
Unregulated Power--1.0% 190,000 +Reliant Resources, Inc. 1,953,200
---------------
18,616,600
--------------------------------------------------------------------------------------------------------------
Total Utilities 65,910,200
==============================================================================================================
Total Common Stocks
(Cost--$1,629,732,180)--100.0% 1,830,001,100
==============================================================================================================
Beneficial Interest Short-Term Securities
====================================================================================================================================
$ 2,355,168 Merrill Lynch Liquidity Series, LLC Cash
Sweep Series I (a) 2,355,168
135,577,300 Merrill Lynch Liquidity Series, LLC Money
Market Series (a)(b) 135,577,300
--------------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$137,932,468)--7.5% 137,932,468
====================================================================================================================================
Total Investments (Cost--$1,767,664,648+++)--107.5% 1,967,933,568
Liabilities in Excess of Other Assets--(7.5%) (136,633,271)
---------------
Net Assets--100.0% $1,831,300,297
===============
+ Non-income producing security.
++ For Portfolio compliance purposes, "Sector" and "Industry" mean any one or
more of the sector and industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Portfolio management. This definition may not apply for
purposes of this report, which may combine such sector and industry
sub-classifications for reporting ease. These sector and industry
classifications are unaudited.
+++ The cost and unrealized appreciation/depreciation of investments as of
October 31, 2004 as computed for federal income tax purposes, were as
follows:
--------------------------------------------------------------------------
Aggregate cost ............................. $ 1,785,544,938
===============
Gross unrealized appreciation .............. $ 216,002,892
Gross unrealized depreciation .............. (33,614,262)
---------------
Net unrealized appreciation ................ $ 182,388,630
===============
(a) Investments in companies considered to be an affiliate of the Portfolio
(such companies are defined as "Affiliated Companies" in Section 2(a)(3)
of the Investment Company Act of 1940) were as follows:
--------------------------------------------------------------------------
Interest/
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $ 641,540 $ 45,837
Merrill Lynch Liquidity Series, LLC
Money Market Series $(128,735,673) $ 171,484
Merrill Lynch Premier
Institutional Fund (88,104,324) $ 30,527
--------------------------------------------------------------------------
(b) Security was purchased with the cash proceeds from securities loans.
(c) Security, or portion of security, is on loan.
See Notes to Financial Statements.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 29
[LOGO] Merrill Lynch Investment Managers
Statement of Assets and Liabilities Master Large Cap Core Portfolio
As of October 31, 2004
==========================================================================================================================
Assets
- --------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (including
securities loaned of $127,667,235)(identified
cost--$1,629,732,180) ..................................... $ 1,830,001,100
Investments in affiliated securities, at value (identified
cost--$137,932,468) ....................................... 137,932,468
Receivables:
Securities sold ......................................... $ 16,319,329
Contributions ........................................... 4,178,405
Dividends ............................................... 1,182,805
Securities lending--net ................................. 16,825
Interest from affiliates ................................ 7,167 21,704,531
---------------
Prepaid expenses ........................................... 21,122
---------------
Total assets ............................................... 1,989,659,221
---------------
==========================================================================================================================
Liabilities
- --------------------------------------------------------------------------------------------------------------------------
Collateral on securities loaned, at value .................. 135,577,300
Payables:
Securities purchased .................................... 18,993,649
Withdrawals ............................................. 2,855,664
Investment adviser ...................................... 813,813
Other affiliates ........................................ 11,852 22,674,978
---------------
Accrued expenses ........................................... 106,646
---------------
Total liabilities .......................................... 158,358,924
---------------
==========================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Net assets ................................................. $ 1,831,300,297
===============
==========================================================================================================================
Net Assets Consist of
- --------------------------------------------------------------------------------------------------------------------------
Investors' capital ......................................... $ 1,631,031,377
Unrealized appreciation--net ............................... 200,268,920
---------------
Net Assets ................................................. $ 1,831,300,297
===============
See Notes to Financial Statements.
30 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Statement of Operations Master Large Cap Core Portfolio
For the Year Ended October 31, 2004
==========================================================================================================================
Investment Income
- --------------------------------------------------------------------------------------------------------------------------
Dividends .................................................. $ 17,511,645
Securities lending--net .................................... 202,011
Interest from affiliates ................................... 45,837
---------------
Total income ............................................... 17,759,493
---------------
==========================================================================================================================
Expenses
- --------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ................................... $ 7,783,195
Accounting services ........................................ 415,625
Custodian fees ............................................. 154,606
Professional fees .......................................... 61,765
Trustees' fees and expenses ................................ 50,746
Printing and shareholder reports ........................... 2,663
Pricing fees ............................................... 1,318
Other ...................................................... 33,375
---------------
Total expenses ............................................. 8,503,293
---------------
Investment income--net ..................................... 9,256,200
---------------
==========================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- --------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net .......................... 199,493,500
Change in unrealized appreciation on investments--net ...... (68,627,985)
---------------
Total realized and unrealized gain--net .................... 130,865,515
---------------
Net Increase in Net Assets Resulting from Operations ....... $ 140,121,715
===============
See Notes to Financial Statements.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 31
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets Master Large Cap Core Portfolio
For the Year Ended
October 31,
-----------------------------------
Increase (Decrease) in Net Assets: 2004 2003
==========================================================================================================================
Operations
- --------------------------------------------------------------------------------------------------------------------------
Investment income--net ..................................... $ 9,256,200 $ 5,286,197
Realized gain--net ......................................... 199,493,500 7,803,027
Change in unrealized appreciation/depreciation--net ........ (68,627,985) 269,979,638
-----------------------------------
Net increase in net assets resulting from operations ....... 140,121,715 283,068,862
-----------------------------------
==========================================================================================================================
Capital Transactions
- --------------------------------------------------------------------------------------------------------------------------
Proceeds from contributions ................................ 751,429,058 689,136,997
Fair value of withdrawals .................................. 514,359,352 (391,800,931)
-----------------------------------
Net increase in net assets derived from capital transactions 237,069,706 297,336,066
-----------------------------------
==========================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ............................... 377,191,421 580,404,928
Beginning of year .......................................... 1,454,108,876 873,703,948
-----------------------------------
End of year ................................................ $ 1,831,300,297 $ 1,454,108,876
===================================
See Notes to Financial Statements.
Financial Highlights Master Large Cap Core Portfolio
For the Year Ended For the Period
October 31, Dec. 22, 1999+
The following ratios have been derived from information ------------------------------------------------------- to October 31,
provided in the financial statements. 2004 2003 2002 2001 2000
=================================================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment return ...... 9.61% 25.11% (8.13%) -- --
========================================================================
=================================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement .52% .54% .57% .67% 1.09%*
========================================================================
Expenses ..................... .52% .54% .57% .67% 1.17%*
========================================================================
Investment income (loss)--net .57% .48% .83% .59% (.20%)*
========================================================================
=================================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) .............. $1,831,300 $1,454,109 $ 873,704 $ 412,836 $ 186,265
========================================================================
Portfolio turnover ........... 135.48% 138.73% 150.18% 162.28% 79.18%
========================================================================
* Annualized.
** Total investment return is required to be disclosed for fiscal years
beginning after December 15, 2000.
+ Commencement of operations.
See Notes to Financial Statements.
32 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Notes to Financial Statements Master Large Cap Core Portfolio
1. Significant Accounting Policies:
Master Large Cap Core Portfolio (the "Portfolio") is part of Master Large Cap
Series Trust (the "Trust"). The Trust is registered under the Investment Company
Act of 1940, as amended, and is organized as a Delaware statutory trust. The
Declaration of Trust permits the Trustees to issue nontransferable interests in
the Portfolio, subject to certain limitations. The Portfolio'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 following is a summary of
significant accounting policies followed by the Portfolio.
(a) Valuation of investments -- Equity securities that are held by the Portfolio
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. 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. Short positions traded in the OTC market are valued at the last
available ask price. Portfolio securities that are traded both in the OTC market
and on a stock exchange are valued according to the broadest and most
representative market.
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 Portfolio
employs pricing services to provide certain securities prices for the Portfolio.
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, including valuations furnished by the pricing services
retained by the Portfolio, 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 Board of Trustees. Such
valuations and procedures will be reviewed periodically by the Board of
Trustees.
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 assets of the Portfolio
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 Portfolio's net assets.
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 Board of Trustees or by the Investment Adviser
using a pricing service and/or procedures approved by the Board of Trustees.
(b) Derivative financial instruments -- The Portfolio may engage in various
portfolio investment strategies both to increase the return of the Portfolio 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 Portfolio 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 Portfolio deposits and maintains as collateral such initial
margin as required by the exchange on which the
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 33
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued) Master Large Cap Core Portfolio
transaction is effected. Pursuant to the contract, the Portfolio 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 Portfolio as unrealized gains
or losses. When the contract is closed, the Portfolio 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 Portfolio may purchase and write call and put options. When
the Portfolio writes an option, an amount equal to the premium received by
the Portfolio is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the
current market 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 Portfolio enters into a closing
transaction), the Portfolio realizes a gain or loss on the option to the
extent of the premiums received or paid (or a gain or loss to the extent
that the cost of the closing transaction exceeds the premium paid or
received).
Written and purchased options are non-income producing investments.
o Forward foreign exchange contracts -- The Portfolio may enter into forward
foreign exchange contracts as a hedge against either specific transactions
or portfolio positions. The contract is marked-to-market daily and the
change in market value is recorded by the Portfolio as an unrealized gain
or loss. When the contract is closed, the Portfolio records a realized
gain or loss equal to the difference between the value at the time it was
opened and the value at the time it was closed.
o Foreign currency options and futures -- The Portfolio may also purchase or
sell listed or over-the-counter foreign currency options, foreign currency
futures and related options on foreign currency futures as a short or long
hedge against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-U.S. dollar
denominated securities owned by the Portfolio, sold by the Portfolio but
not yet delivered, or committed or anticipated to be purchased by the
Portfolio.
(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 -- The Portfolio is classified as a partnership for federal
income tax purposes. As such, each investor in the Portfolio is treated as owner
of its proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Portfolio. 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. It is
intended that the Portfolio's assets will be managed so an investor in the
Portfolio can satisfy the requirements of subchapter M of the Internal Revenue
Code.
(e) Security transactions and investment income -- Security transactions are
accounted for on the date the securities are purchased or sold (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 Portfolio has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
(f) Securities lending -- The Portfolio 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 Portfolio and any additional required collateral is delivered to the
Portfolio on the next business day. Where the Portfolio receives securities as
collateral for the loaned securities, it collects a fee from the borrower. The
Portfolio typically receives the income on the loaned securities but does not
receive the income on the collateral. Where the Portfolio 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
34 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Notes to Financial Statements (concluded) Master Large Cap Core Portfolio
days. The Portfolio 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 Portfolio could experience delays and costs in
gaining access to the collateral. The Portfolio also could suffer a loss where
the value of the collateral falls below the market value of the borrowed
securities, in the event of borrower default or in the event of losses on
investments made with cash collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust 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.
FAM is responsible for the management of the Portfolio's investments and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Portfolio. For such services, the
Portfolio pays a monthly fee at an annual rate of .50% of the average daily
value of the Portfolio's net assets not exceeding $1 billion and .45% of average
daily net assets in excess of $1 billion. FAM has entered into a Sub-Advisory
Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an
affiliate of FAM, pursuant to which MLAM U.K. provides investment advisory
services to FAM with respect to the Portfolio. There is no increase in the
aggregate fees paid by the Portfolio for these services.
The Portfolio has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., or its
affiliates. Pursuant to that order, the Portfolio 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 Portfolio, invest cash
collateral received by the Portfolio 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 October 31, 2004,
MLIM, LLC received $87,678 in securities lending agent fees.
In addition, MLPF&S received $5,400 in commissions on the execution of portfolio
security transactions for the Portfolio for the year ended October 31, 2004.
For the year ended October 31, 2004, the Portfolio reimbursed FAM $33,710 for
certain accounting services.
Certain officers and/or trustees of the Trust are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 2004 were $2,457,789,310 and $2,212,078,496,
respectively.
4. Short-Term Borrowings:
The Portfolio, along with certain other funds managed by FAM and its affiliates,
is a party to a $500,000,000 credit agreement with a group of other lenders. The
Portfolio may borrow under the credit agreement to fund shareholder redemptions
and for other lawful purposes other than for leverage. The Portfolio may borrow
up to the maximum amount allowable under the Portfolio's current prospectus and
statement of additional information, subject to various other legal, regulatory
or contractual limits. The Portfolio pays a commitment fee of .09% per annum
based on the Portfolio's pro rata share of the unused portion of the credit
agreement. Amounts borrowed under the credit agreement bear interest at a rate
equal to, at each portfolio's election, the Federal Funds rate plus .50% or a
base rate as defined in the credit agreement. The Portfolio did not borrow under
the credit agreement during the year ended October 31, 2004. On November 26,
2004, the credit agreement was renewed for one year under substantially the same
terms.
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 35
[LOGO] Merrill Lynch Investment Managers
Report of Independent Registered Public Accounting Firm
Master Large Cap Core Portfolio
To the Investors and Board of Trustees of
Master Large Cap Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments of Master Large Cap Core Portfolio, one of the
portfolios constituting Master Large Cap Series Trust (the "Trust"), as of
October 31, 2004, the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the respective periods then
ended. These financial statements and financial highlights are the
responsibility of the Trust'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 from 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 October 31, 2004, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our 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 Master
Large Cap Core Portfolio of Master Large Cap Series Trust, as of October 31,
2004 the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and its financial
highlights for each of the respective periods then ended, in conformity with
U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 14, 2004
36 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Officers and Trustees of Master Large Cap Series Trust (unaudited)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held Time Overseen by Held by
Name Address & Age with Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to President of the Merrill Lynch Investment Managers, 124 Funds None
Glenn* Princeton, NJ and present L.P. ("MLIM")/Fund Asset Management, L.P. 157 Portfolios
08543-9011 Trustee ("FAM")-advised funds since 1999; Chairman
Age: 64 (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 Trust President, Mr. Glenn serves at the pleasure of the Board
of Trustees.
====================================================================================================================================
Independent Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9095 Trustee 1999 to Director, The China Business Group, Inc. since 1996 38 Funds None
Bodurtha Princeton, NJ present and Executive Vice President thereof from 1996 to 55 Portfolios
08543-9095 2003; Chairman of the Board, Berkshire Holding
Age: 60 Corporation since 1980; Partner, Squire, Sanders &
Dempsey from 1980 to 1993.
- ------------------------------------------------------------------------------------------------------------------------------------
Joe Grills P.O. Box 9095 Trustee 2002 to Member of the Committee of Investment of Employee 38 Funds Kimco Realty
Princeton, NJ present Benefit Assets of the Association of Financial 55 Portfolios Corporation
08543-9095 Professionals ("CIEBA") since 1986; Member of
Age: 69 CIEBA's Executive Committee since 1988 and its
Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Corporation ("IBM")
and Chief Investment Officer of IBM Retirement Funds
from 1986 to 1993; Member of the Investment
Advisory Committee of the State of New York
Common Retirement Fund since 1989; Member of
the Investment Advisory Committee of the Howard
Hughes Medical Institute from 1997 to 2000; Director,
Duke University Management Company from 1992 to
2004, Vice Chairman thereof from1998 to 2004 and
Director Emeritus thereof since 2004; Director, LaSalle
Street Fund from 1995 to 2001; Director, Kimco Realty
Corporation since 1997; Member of the Investment
Advisory Committee of the Virginia Retirement System
since 1998 and Vice Chairman thereof since 2002;
Director, Montpelier Foundation since 1998 and its
Vice Chairman since 2000; Member of the Investment
Committee of the Woodberry Forest School since 2000;
Member of the Investment Committee of the National
Trust for Historic Preservation since 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 37
[LOGO] Merrill Lynch Investment Managers
Officers and Trustees of Master Large Cap Series Trust (unaudited) (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held Time Overseen by Held by
Name Address & Age with Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees* (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Trustee 1999 to John M. Olin Professor of Humanities, New York 38 Funds None
London Princeton, NJ present University since 1993 and Professor thereof since 55 Portfolios
08543-9095 1980; President, Hudson Institute since 1997 and
Age: 65 Trustee thereof since 1980; Dean, Gallatin Division
of New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corp.
from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993.
- ------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Trustee 1999 to Shareholder, Modrall, Sperling, Roehl, Harris & 38 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; President, American Bar 55 Portfolios
Ramo 08543-9095 Association from 1995 to 1996 and Member of
Age: 62 the Board of Governors thereof from 1994 to 1997;
Shareholder, Poole, Kelly & Ramo, Attorneys at Law,
P.C. from 1977 to 1993; Director of ECMC Group
(service provider to students, schools and lenders)
since 2001; Director, United New Mexico Bank
(now Wells Fargo) from 1983 to 1988; Director,
First National Bank of New Mexico (now Wells Fargo)
from 1975 to 1976; Vice President, American Law
Institute since 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Trustee 2002 to Principal of STI Management (investment adviser) 38 Funds None
Salomon, Princeton, NJ present since 1994; Chairman and CEO of Salomon Brothers 55 Portfolios
Jr. 08543-9095 Asset Management from 1992 to 1995; Chairman
Age: 67 of Salomon Brothers equity mutual funds from 1992
to 1995; regular columnist with Forbes Magazine
from 1992 to 2002; Director of Stock Research and
U.S. Equity Strategist at Salomon Brothers from 1975
to 1991; Trustee, Commonfund from 1980 to 2001.
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Trustee 2002 to Chairman of Fernwood Advisors Inc. (investment 39 Funds None
Swensrud Princeton, NJ present adviser) since 1996; Principal, Fernwood Associates 56 Portfolios
08543-9095 (financial consultants) since 1975; Chairman of R.P.P.
Age: 71 Corporation (manufacturing company) since 1978;
Director of International Mobile Communications,
Incorporated (telecommunications) since 1998.
------------------------------------------------------------------------------------------------------------------------
* 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.
- ------------------------------------------------------------------------------------------------------------------------------------
38 MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004
Officers and Trustees of Master Large Cap Series Trust (unaudited) (concluded)
Position(s) Length of
Held Time
Name Address & Age with Trust Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Trust Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2003 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 and Director
08543-9011 and since 2004; Vice President of FAMD since 1999; Vice President of MLIM and FAM from
Age: 44 Treasurer 1990 to 1997; Director of MLIM Taxation since 1990.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 Senior 2003 to President of MLIM and member of the Executive Management Committee of ML & Co.,
Doll, Jr. Princeton, NJ Vice present Inc. since 2001; Global Chief Investment Officer and Senior Portfolio Manager of
08543-9011 President MLIM since 1999; Chief Investment Officer of Equities at Oppenheimer Funds, Inc.
Age: 50 from 1990 to 1999 and Chief Investment Officer thereof from 1998 to 1999; Executive
Vice President of Oppenheimer Funds, Inc. from 1991 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM since 2004; Global Director of Compliance at
08543-9011 Officer Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Age: 53 Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance Officer
at Prudential Financial from 1995 to 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997.
08543-9011
Age: 44
------------------------------------------------------------------------------------------------------------------------
* Officers of the Trust serve at the pleasure of the Board of Trustees.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Trust's Officers and Trustees is available in the Trust'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
- --------------------------------------------------------------------------------
Andre F. Perold resigned as a Trustee of the Trust effective October 22, 2004.
- --------------------------------------------------------------------------------
MERRILL LYNCH CORE PRINCIPAL PROTECTED FUND OCTOBER 31, 2004 39
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
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 Core Principal Protected Fund
Box 9011
Princeton, NJ
08543-9011
#CPP -- 10/04
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
Merrill Lynch Core Principal Protected Fund
(a) Audit Fees - Fiscal Year Ending October 31, 2004 - $25,000
Fiscal Year Ending October 31, 2003 - $15,000
Master Large Cap Core Portfolio of Master Large Cap Series Trust
(a) Audit Fees - Fiscal Year Ending October 31, 2004 - $33,000
Fiscal Year Ending October 31, 2003 - $30,000
Merrill Lynch Core Principal Protected Fund
(b) Audit-Related Fees - Fiscal Year Ending October 31, 2004 - $0
Fiscal Year Ending October 31, 2003 - $0
Master Large Cap Core Portfolio of Master Large Cap Series Trust
(b) Audit-Related Fees - Fiscal Year Ending October 31, 2004 - $0
Fiscal Year Ending October 31, 2003 - $0
Merrill Lynch Core Principal Protected Fund
(c) Tax Fees - Fiscal Year Ending October 31, 2004 - $5,800
Fiscal Year Ending October 31, 2003 - $5,400
The nature of the services include tax compliance, tax advice and tax
planning.
Master Large Cap Core Portfolio of Master Large Cap Series Trust
(c) Tax Fees - Fiscal Year Ending October 31, 2004 - $8,000
Fiscal Year Ending October 31, 2003 - $7,500
The nature of the services include tax compliance, tax advice and tax
planning.
Merrill Lynch Core Principal Protected Fund
(d) All Other Fees - Fiscal Year Ending October 31, 2004 - $0
Fiscal Year Ending October 31, 2003 - $0
Master Large Cap Core Portfolio of Master Large Cap Series Trust
(d) All Other Fees - Fiscal Year Ending October 31, 2004 - $0
Fiscal Year Ending October 31, 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 October 31, 2004 - $13,270,096
Fiscal Year Ending October 31, 2003 - $18,737,552
(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) - $945,000, 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 Core Principal Protected Fund of Merrill Lynch Principal Protected
Trust and Master Large Cap Core Portfolio of Master Large Cap Series Trust
By: /s/ Terry K. Glenn
-----------------------
Terry K. Glenn,
President of
Merrill Lynch Core Principal Protected Fund of Merrill Lynch Principal
Protected Trust and Master Large Cap Core Portfolio of Master Large Cap
Series Trust
Date: December 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 Core Principal Protected Fund of Merrill Lynch Principal
Protected Trust and Master Large Cap Core Portfolio of Master Large Cap
Series Trust
Date: December 13, 2004
By: /s/ Donald C. Burke
-----------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Core Principal Protected Fund of Merrill Lynch Principal
Protected Trust and Master Large Cap Core Portfolio of Master Large Cap
Series Trust
Date: December 13, 2004