UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21162
Name of Fund: Merrill Lynch Basic Value Principal Protected Fund of Merrill
Lynch Principal Protected Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., President, Merrill
Lynch Basic Value Principal Protected Fund of Merrill Lynch Principal
Protected Trust, 800 Scudders Mill Road, Plainsboro, NJ 08536. Mailing
address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 06/30/05
Date of reporting period: 07/01/04 - 12/31/04
Item 1 - Report to Stockholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Merrill Lynch
Basic Value
Principal Protected Fund
Semi-Annual Report
December 31, 2004
[LOGO] Merrill Lynch Investment Managers
Merrill Lynch Basic Value Principal Protected Fund
Portfolio Information as of December 31, 2004
Percent of
Ten Largest Equity Holdings Net Assets
================================================================================
Exxon Mobil Corp. .................................................... 4.6%
Citigroup Inc. ....................................................... 3.6
Wells Fargo & Co. .................................................... 3.1
JP Morgan Chase & Co. ................................................ 2.1
Unisys Corp. ......................................................... 1.9
Morgan Stanley ....................................................... 1.7
Raytheon Co. ......................................................... 1.7
Bank of America Corp. ................................................ 1.7
Viacom, Inc. Class B ................................................. 1.6
Kimberly-Clark Corp. ................................................. 1.6
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries* Net Asset
================================================================================
Media ................................................................ 6.8%
Oil & Gas ............................................................ 6.2
Commercial Banks ..................................................... 6.0
Diversified Financial Services ....................................... 5.7
Insurance ............................................................ 5.2
- --------------------------------------------------------------------------------
* For Fund compliance purposes, "Industries" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease.
- --------------------------------------------------------------------------------
Percent of
Investment Category Total Investment
================================================================================
Low Price-to-Book Value ...................................... 28.2%
Above-Average Yield .......................................... 24.1
Below-Average Price Earnings/Ratio ........................... 21.5
Special Situations ........................................... 3.3
Other* ....................................................... 22.9
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term securities, U.S. government
obligations and options.
Officers and Trustees
Terry K. Glenn, President and Trustee
David O. Beim, Trustee
James T. Flynn, Trustee
W. Carl Kester, Trustee
Karen P. Robards, Trustee
Robert C. Doll, Jr., Senior Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
- --------------------------------------------------------------------------------
Effective January 1, 2005, Terry K. Glenn retired as President and Trustee of
Merrill Lynch Basic Value Principal Protected Fund. The Fund's Board of Trustees
wishes Mr. Glenn well in his retirement.
Effective January 1, 2005, Robert C. Doll, Jr. became President and Trustee of
the Fund.
- --------------------------------------------------------------------------------
2 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
A Letter From the President and Chief Investment Officer
Dear Shareholder
The U.S. equity market ended 2004 in positive territory, although not without
some suspense along the way. Fixed income markets also performed well, with high
yield bond investors enjoying some of the greatest returns.
Over the past year, the equity market generally found support from a healthy
economic environment, above-average corporate earnings, increased capital
spending and still-low interest rates. Stalling the momentum somewhat throughout
the year was a contentious election, negligible inflation amid a rising federal
funds interest rate, record-high oil prices and the seemingly ever-present
worries over terrorism and the war in Iraq.
Still, the Standard & Poor's 500 Index posted a 12-month return of +10.88% and a
six-month return of +7.19% as of December 31, 2004. The fourth quarter of the
year proved to be the most telling, as the S&P 500 Index was up only 1.51%
year-to-date as of September 30, 2004. As the price of oil relaxed and election
uncertainties subsided, the market headed more convincingly upward in the last
quarter of the year.
Given the relatively positive environment for equities, the favorable
performance of the bond market came as somewhat of a surprise. The Lehman
Brothers Aggregate Bond Index posted a 12-month return of +4.34% and a six-month
return of +4.18% as of December 31, 2004. The tax-exempt market performed just
as well, with a 12-month return of +4.48% and a six-month return of +5.19%, as
measured by the Lehman Brothers Municipal Bond Index. Those comfortable with a
higher degree of risk benefited this past year, as the Credit Suisse First
Boston High Yield Index posted a 12-month return of +11.95% and a six-month
return of +9.26%. Interestingly, as the Federal Reserve Board began raising its
target short-term interest rate, long-term bond yields were little changed. In
fact, the yield on the 10-year Treasury was 4.24% at year-end compared to 4.27%
at December 31, 2003. The yield on the two-year Treasury climbed to 3.08% at
year-end 2004 from 1.84% a year earlier.
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 to
investment success -- particularly during uncertain times -- is to maintain a
long-term perspective and adhere 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 new year and beyond.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
The Fund was successfully able to preserve investor principal during the
period while providing modest capital appreciation.
How did the Fund perform during the period?
For the six-month period ended December 31, 2004, Merrill Lynch Basic Value
Principal Protected Fund's Class A, Class B, Class C and Class I Shares had
total returns of +3.38%, +2.98%, +3.02% and +3.54%, respectively. (Fund results
shown do not reflect sales charges and would be lower if sales charges were
included. Complete performance information can be found on pages 6 and 7 of this
report to shareholders.) For the same period, the Fund's all-equity benchmarks,
the Standard & Poor's 500 (S&P 500) Index and the S&P 500 Barra Value Index,
returned +7.19% and +11.08%, respectively. Although Fund results lagged that of
the equity benchmarks for the year, its performance exceeded the +2.75% average
return of the Lipper Balanced Target Maturity Funds category for the same
period. (Funds in this Lipper category invest to provide a guaranteed return of
investment at maturity. Some of the assets are invested in zero coupon U.S.
Treasury securities, while the remainder is in equity securities for long-term
growth of capital and income.)
Because the Fund incorporates a fixed income component, it will, at times,
outperform or underperform its broad-based market benchmarks, which consist only
of equity securities. Although a fairly volatile six months for equities, the
market continued to find support in generally strong, though at times
questionable, economic growth, and the continuation of better-than-expected
corporate earnings. In this environment, the Fund's fixed income component
produced a drag on performance relative to its all-equity benchmarks. For some
context, the fixed income market, as measured by the Lehman Brothers Aggregate
Bond Index, provided a six-month return of +4.18% as of December 31, 2004. At
the end of the six months, however, the Fund was successfully able to meet its
primary objective of preserving investor principal.
A mathematical formula is used to determine the allocation between the Fund's
equity and fixed income components. During the period, the Fund's equity
component ranged from a low of 58.2% of net assets on August 13, 2004, to a high
of 91% of net assets at December 14, 2004. The fixed income allocation ranged
from 9% of net assets to 41.8%.
What factors influenced performance?
Conditions in the second half of 2004 were almost the complete opposite of those
that characterized the first half of the year. Many months ago, prior to the war
in Iraq, we had positioned the equity portfolio for an economic recovery,
emphasizing those companies with greater sensitivity to changes in the overall
economy. This strategy worked well through 2003 and the first half of 2004.
Areas we had emphasized -- including information technology (IT), consumer
discretionary, materials and industrials -- all outperformed.
As the reporting period began in July, gross domestic product growth had slowed
somewhat. This, coupled with election uncertainties, terrorism fears and rising
interest rates amid subdued inflation and high oil prices, began to weigh
heavily on investors' minds. We began to see the effects of a slowing economy
play out on the portfolio.
The IT sector suffered the most over the past six months and, in fact, was the
second-worst performing sector among the 10 in the S&P 500 this year. IT imposed
the most severe performance penalty within the equity portfolio for the
six-month period. IT stocks that detracted the most were 3Com Corp., LSI Logic
Corp., Unisys Corp. and Agilent Technologies, Inc. The materials sector also was
hurt in the second half of 2004. Materials stocks that disappointed included
Alcoa Inc. and International Paper Co.
While the Fund's holdings in health care generally performed well, our
overweight position in Merck & Co., Inc., albeit small, hampered relative
results as the company encountered trouble with Vioxx, its blockbuster
arthritis-pain medication. We immediately liquidated our position in Merck
following the drug's recall, although the stock declined 30% in just one day. In
consumer staples, our positions in Albertson's, Inc. and Coca-Cola Enterprises
Inc. also hurt performance, as both companies suffered earnings disappointments
in the second half of 2004.
A significant bright spot during the period was our above-average exposure to
energy. As our view on energy played out, this sector contributed meaningfully
to the performance of the equity portfolio. The bulk of the outperformance came
from names in the oil services subsector, as the price of oil sky-rocketed to
$56 per barrel in October.
What changes were made to the portfolio during the period?
As mentioned in our last report to shareholders, we expected that 2004 would be
a transition year for the market and
4 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
started making changes to the equity portfolio that reflected this view.
Typically, as the economic cycle progresses, we reach a point where small and
mid cap stocks are no longer outperforming large cap stocks, as they often do in
the first year of a recovery. Some of the defensive areas of the market also
start to outperform as investors begin to shift their focus from smaller cap and
higher risk to larger cap and lower risk.
With this view in mind, we began moving upward in market capitalization size,
while also decreasing the Fund's beta (a measure of risk) and increasing
portfolio diversification. We also began to trim some of the economically
sensitive stocks that performed so well in 2003 and early 2004 in favor of more
safe-haven names. This involved reducing our exposure to IT, industrials and
materials while increasing positions in consumer staples and utilities to take
advantage of what we expect will be a slower year for the economy.
We maintained our weighting in financials, but have been particular in the types
of financial stocks we own. Currently, the portfolio is geared more toward
brokers and the financial markets rather than companies whose fortunes rely on
the mortgage market.
We began to take profits in energy, although the Fund remained overweight in
this sector at period-end. For the most part, our thesis on oil has played out,
and an industry group that once had no expectations now has high expectations
built in.
Stocks added to the portfolio over the past six months included Abbott
Laboratories and GlaxoSmithKline Plc in healthcare, Public Service Enterprise
Group and The Southern Co. in utilities and Seagate Technology, Electronic Data
Systems Corp. and Nokia OYJ in IT.
Individual sales during the period included Kerr-McGee Corp. and Unocal Corp. in
oil services, and U.S. Bancorp in financials, all of which performed well. We
also sold Merck, for reasons mentioned earlier, and Aon Corp., a leading
insurance brokerage that was targeted in the insurance industry investigation
this past year.
Consistent with its stated investment strategy, the Fund's fixed income
component was invested in fixed income instruments, including U.S. Treasury
zero-coupon bonds, set to mature close to the expiration of the Fund (November
13, 2009).
How would you characterize the portfolio's position at the close of the period?
In seeking to meet its objective of principal protection and potential for
capital growth, the allocation between the Fund's fixed income and equity
components will continue to vary as market conditions change. As of December 31,
2004, the Fund was invested 83.4% in equities and 16.8% in fixed income
securities. (The allocation exceeds 100% due to a negative cash balance.) This
compared to 82.5% in equities and 17.8% in fixed income at June 30, 2004.
At the close of the period, the Fund's equity portfolio was overweight versus
the S&P 500 Barra Value Index in consumer staples, information technology,
energy, industrials and materials. We had underweights in financials, health
care, telecommunications services, consumer discretionary and utilities.
On balance, 2004 was a fairly normal year within the context of history and
given what we would expect for the second year of an economic recovery. Entering
2005, the main questions will center on the pace of economic growth, the number
and magnitude of Fed interest rate hikes, and the direction of energy prices.
Working in favor of the equity market are healthy corporate balance sheets and
low absolute levels of interest rates and inflation. These positives are offset
by widening budget, trade and current account deficits, along with historically
high valuations for U.S. equities. At this point in the cycle, it appears that
earnings growth rates have peaked, making it more difficult for U.S. companies
to achieve the level of earnings growth they have enjoyed over the past two
years. As a result, we would expect larger, blue-chip companies with more stable
earnings prospects to outperform small and midsize companies in the new year.
As mentioned, we have started to position the equity portfolio with this view in
mind, although we remain cognizant that 2005 is likely to be a much tougher year
for the market. In this environment, we continue to emphasize proper
diversification and risk management as we continue our search for undervalued
companies that we believe have the potential to offer significant value over a
three-year time horizon.
Kevin M. Rendino
Equity Portfolio Manager
January 13, 2005
- --------------------------------------------------------------------------------
If you would like a copy, free of charge, of the most recent annual or quarterly
report of Main Place Funding, LLC, the Warranty Provider, or its parent
corporation, Bank of America Corporation, please contact the Fund at
1-800-MER-FUND.
- --------------------------------------------------------------------------------
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 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.) All returns for periods greater than
eight years reflect this conversion.
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. Investment return and principal value of shares will fluctuate
so that shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the different
levels of account maintenance, distribution and transfer agency fees applicable
to each class, which are deducted from the income available to be paid to
shareholders.
Recent Performance Results
6-Month 12-Month Since Inception
As of December 31, 2004 Total Return Total Return Total Return
===============================================================================================================
ML Basic Value Principal Protected Fund Class A Shares* + 3.38% + 5.20% +20.38%
- ---------------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class B Shares* + 2.98 + 4.44 +18.42
- ---------------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class C Shares* + 3.02 + 4.39 +18.42
- ---------------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class I Shares* + 3.54 + 5.46 +21.01
- ---------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index** + 4.18 + 4.34 +10.12
- ---------------------------------------------------------------------------------------------------------------
S&P 500(R) Index*** + 7.19 +10.88 +42.60
- ---------------------------------------------------------------------------------------------------------------
S&P 500 Barra Value Index**** +11.08 +15.70 +56.00
- ---------------------------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Cumulative total investment
returns are based on changes in net asset values for the periods shown,
and assume reinvestment of all dividends and capital gains distributions
at net asset value on the ex-dividend date. The Fund's inception date is
11/13/02.
** This unmanaged market-weighted Index is comprised of investment grade
corporate bonds (rated BBB or better), mortgages and U.S. Treasury and
government agency issues with at least one year to maturity. Since
inception total return is from 11/13/02.
*** This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues), representing
about 75% of NYSE market capitalization and 30% of NYSE issues. Since
inception total return is from 11/13/02.
**** This unmanaged Index is a capitalization-weighted index of those stocks in
the S&P 500 Index that have lower price-to-book ratios. Since inception
total return is from 11/13/02.
S&P 500 is a registered trademark of the McGraw-Hill Companies.
6 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 12/31/04 +5.20% -0.32%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/04 +9.09 +6.37
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 12/31/04 +4.44% +0.52%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/04 +8.25 +6.96
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 12/31/04 +4.39% +3.41%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/04 +8.25 +8.25
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
- --------------------------------------------------------------------------------
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class I Shares*
================================================================================
One Year Ended 12/31/04 +5.46% -0.08%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/04 +9.36 +6.63
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 7
[LOGO] Merrill Lynch Investment Managers
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 July 1, 2004 and held through
December 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 July 1, 2004 to
July 1, 2004 December 31, 2004 December 31, 2004
============================================================================================================
Actual
============================================================================================================
Class A $1,000 $1,033.80 $ 9.89
- ------------------------------------------------------------------------------------------------------------
Class B $1,000 $1,029.80 $13.81
- ------------------------------------------------------------------------------------------------------------
Class C $1,000 $1,030.20 $13.82
- ------------------------------------------------------------------------------------------------------------
Class I $1,000 $1,035.40 $ 8.62
============================================================================================================
Hypothetical (5% annual return before expenses)**
============================================================================================================
Class A $1,000 $1,015.48 $ 9.80
- ------------------------------------------------------------------------------------------------------------
Class B $1,000 $1,011.59 $13.69
- ------------------------------------------------------------------------------------------------------------
Class C $1,000 $1,011.59 $13.69
- ------------------------------------------------------------------------------------------------------------
Class I $1,000 $1,016.74 $ 8.54
- ------------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.93% for Class A, 2.70% for Class B, 2.70% for Class
C and 1.68% for Class I), multiplied by the average account value over the
period, multiplied by 184/365 (to reflect the one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal half-year divided by 365.
8 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
Schedule of Investments (in U.S. dollars)
Percent of
Industry@ Shares Held Common Stocks Value Net Assets
====================================================================================================================================
Above-Average Metals & Mining 100,100 Alcoa, Inc. $ 3,145,142 1.2%
Yield Diversified Telecommunication Services 59,400 BCE, Inc. 1,433,322 0.6
Capital Markets 86,000 The Bank of New York Co., Inc. 2,874,120 1.1
Pharmaceuticals 32,900 Bristol-Myers Squibb Co. 842,898 0.3
Food Products 44,700 ConAgra Foods, Inc. 1,316,415 0.5
Chemicals 81,500 E.I. du Pont de Nemours & Co. 3,997,575 1.6
Oil & Gas 224,800 Exxon Mobil Corp. 11,523,248 4.6
Industrial Conglomerates 97,400 General Electric Co. 3,555,100 1.4
Food Products 43,800 General Mills, Inc. 2,177,298 0.9
Personal Products 58,500 The Gillette Co. 2,619,630 1.0
Pharmaceuticals 33,400 GlaxoSmithKline Plc (d) 1,582,826 0.6
Aerospace & Defense 76,700 Honeywell International, Inc. 2,715,947 1.1
Diversified Financial Services 133,932 JP Morgan Chase & Co. 5,224,687 2.1
Capital Markets 54,600 Mellon Financial Corp. 1,698,606 0.7
Multi-Utilities & Unregulated Power 30,600 Public Service Enterprise Group, Inc. 1,584,162 0.6
Oil & Gas 34,600 Royal Dutch Petroleum Co. 1,985,348 0.8
Diversified Telecommunication Services 130,000 SBC Communications, Inc. 3,350,100 1.3
Food Products 73,900 Sara Lee Corp. 1,783,946 0.7
Electric Utilities 41,500 The Southern Co. 1,391,080 0.6
Diversified Telecommunication Services 76,300 Verizon Communications, Inc. 3,090,913 1.2
Commercial Banks 58,200 Wachovia Corp. 3,061,320 1.2
-----------------------
60,953,683 24.1
====================================================================================================================================
Below-Average Insurance 26,501 ACE Ltd. 1,132,918 0.5
Price Earnings Insurance 41,800 The Allstate Corp. 2,161,896 0.8
/Ratio Insurance 54,100 American International Group, Inc. 3,552,747 1.4
Health Care Providers & Services 20,000 AmerisourceBergen Corp. 1,173,600 0.5
Commercial Banks 88,900 Bank of America Corp. 4,177,411 1.7
Health Care Equipment & Supplies 67,800 Baxter International, Inc. 2,341,812 0.9
Diversified Financial Services 188,700 Citigroup, Inc. 9,091,566 3.6
Beverages 83,000 Coca-Cola Enterprises, Inc. 1,730,550 0.7
Automobiles 46,900 Ford Motor Co. 686,616 0.3
Capital Markets 18,900 Goldman Sachs Group, Inc. 1,966,356 0.8
Computers & Peripherals 160,900 Hewlett-Packard Co. 3,374,073 1.3
Household Durables 97,200 Koninklijke Philips Electronics NV 2,575,800 1.0
Food Products 73,300 Kraft Foods, Inc. 2,610,213 1.0
Hotels, Restaurants & Leisure 73,900 McDonald's Corp. 2,369,234 0.9
Capital Markets 79,200 Morgan Stanley 4,397,184 1.7
Pharmaceuticals 131,200 Schering-Plough Corp. 2,739,456 1.1
Electrical Equipment 23,800 +Thomas & Betts Corp. 731,850 0.3
Energy Equipment & Services 15,700 +Transocean, Inc. 665,523 0.3
Food Products 34,000 Unilever NV (d) 2,268,140 0.9
IT Services 466,400 +Unisys Corp. 4,747,952 1.9
-----------------------
54,494,897 21.6
====================================================================================================================================
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in U.S. dollars)
Percent of
Industry@ Shares Held Common Stocks Value Net Assets
====================================================================================================================================
Low Price to Communications Equipment 193,900 +3Com Corp. $ 808,563 0.3%
Book Value Semiconductors & Semiconductor Equipment 136,200 +Advanced Micro Devices, Inc. 2,999,124 1.2
Electronic Equipment & Instruments 71,100 +Agilent Technologies, Inc. 1,713,510 0.7
Food & Staples Retailing 66,600 Albertson's, Inc. 1,590,408 0.6
Oil & Gas 32,000 Anadarko Petroleum Corp. 2,073,920 0.9
Media 105,200 +Comcast Corp. Special Class A 3,454,768 1.4
Energy Equipment & Services 57,800 Diamond Offshore Drilling 2,314,890 0.9
IT Services 42,700 Electronic Data Systems Corp. 986,370 0.4
Energy Equipment & Services 101,600 GlobalSantaFe Corp. 3,363,976 1.3
Energy Equipment & Services 48,200 Halliburton Co. 1,891,368 0.8
Insurance 30,400 Hartford Financial Services Group,
Inc. 2,107,024 0.8
Paper & Forest Products 78,800 International Paper Co. 3,309,600 1.3
Household Products 62,300 Kimberly-Clark Corp. 4,099,963 1.6
Semiconductors & Semiconductor Equipment 333,600 +LSI Logic Corp. 1,828,128 0.7
Media 279,700 +Liberty Media Corp. Class A 3,071,106 1.2
Communications Equipment 401,000 +Lucent Technologies, Inc. 1,507,760 0.6
Semiconductors & Semiconductor Equipment 129,700 +Micron Technology, Inc. 1,601,795 0.6
Communications Equipment 74,800 Motorola, Inc. 1,286,560 0.5
Aerospace & Defense 111,100 Raytheon Co. 4,314,013 1.7
Insurance 109,934 The St. Paul Travelers Cos., Inc. 4,075,253 1.6
Computers & Peripherals 424,800 +Sun Microsystems, Inc. 2,285,424 0.9
Media 198,300 +Time Warner, Inc. 3,854,952 1.5
Media 112,800 Viacom, Inc. Class B 4,104,792 1.6
Media 97,000 Walt Disney Co. 2,696,600 1.1
Commercial Banks 124,700 Wells Fargo & Co. 7,750,105 3.1
Paper & Forest Products 33,900 Weyerhaeuser Co. 2,278,758 0.9
-----------------------
71,368,730 28.2
====================================================================================================================================
Special Pharmaceuticals 30,500 Abbott Laboratories 1,422,825 0.6
Situations Software 30,200 Computer Associates International,
Inc. 938,012 0.4
Computers & Peripherals 35,400 International Business Machines Corp. 3,489,732 1.4
Communications Equipment 68,200 Nokia OYJ (d) 1,068,694 0.4
Computers & Peripherals 75,900 +Seagate Technology 1,310,793 0.5
-----------------------
8,230,056 3.3
--------------------------------------------------------------------------------------------------------------------
Total Common Stocks
(Cost--$155,249,183) 195,047,366 77.2
====================================================================================================================
10 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
Schedule of Investments (concluded) (in U.S. dollars)
Percent of
Face Amount U.S. Government Obligations Value Net Assets
====================================================================================================================
U.S. Treasury STRIPS: (a)(b)
$22,789,000 3.586% due 8/15/2009 $ 19,319,261 14.6%
43,827,000 3.704% due 11/15/2009 36,823,270 7.6
--------------------------------------------------------------------------------------------------------------------
Total U.S. Government Obligations
(Cost--$55,998,778) 56,142,531 22.2
====================================================================================================================
Beneficial
Interest Short-Term Securities
====================================================================================================================
$ 2,002,699 Merrill Lynch Liquidity Series,
LLC Cash Sweep Series I (c) 2,002,699 0.8
--------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$2,002,699) 2,002,699 0.8
====================================================================================================================
Number of
Contracts Call Options Written
--------------------------------------------------------------------------------------------------------------------
260 Walt Disney Co., expiring January
2005 at USD 30, Broker UBS Warburg (1,300) 0.0
--------------------------------------------------------------------------------------------------------------------
Total Options Written
(Premiums Received--$43,418) (1,300) 0.0
====================================================================================================================
Total Investments, Net of Options Written (Cost--$213,207,242*) 253,191,296 100.2
Liabilities in Excess of Other Assets (538,005) (0.2)
-----------------------
Net Assets $252,653,291 100.0
=======================
* The cost and unrealized appreciation/depreciation of investments, net of
options written, as of December 31, 2004, as computed for federal income
tax purposes, were as follows:
Aggregate cost .................................... $ 218,919,486
=============
Gross unrealized appreciation ..................... $ 36,092,474
Gross unrealized depreciation ..................... (1,820,664)
-------------
Net unrealized appreciation ....................... $ 34,271,810
=============
+ Non-income producing security.
@ For Fund compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease.
(a) Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase at December 31, 2004.
(b) Separately Traded Registered Interest and Principal of Securities
(STRIPS).
(c) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2 (a)(3) of the
Investment Company Act of 1940) were as follows:
--------------------------------------------------------------------------
Interest/
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $2,002,699 $24,475
Merrill Lynch Premier
Institutional Fund -- $ 1,167
--------------------------------------------------------------------------
(d) Depositary Receipts.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 11
[LOGO] Merrill Lynch Investment Managers
Statement of Assets and Liabilities
As of December 31, 2004
====================================================================================================================
Assets
- --------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$211,247,961) ......................... $ 251,189,897
Investments in affiliated securities, at value
(identified cost--$2,002,699) ........................... 2,002,699
Foreign cash (cost--$25,374) ............................. 27,195
Receivables:
Securities sold ....................................... $ 283,305
Dividends ............................................. 247,192
Interest from affiliates .............................. 8,140 538,637
-------------------------------
Total assets ............................................. 253,758,428
-------------
====================================================================================================================
Liabilities
- --------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$43,418) ... 1,300
Payables:
Beneficial interest redeemed .......................... 268,681
Securities purchased .................................. 218,048
Distributor ........................................... 196,096
Financial warranty fee ................................ 174,300
Investment adviser .................................... 157,902
Other affiliates ...................................... 72,917 1,087,944
-------------
Accrued expenses ......................................... 15,893
-------------
Total liabilities ........................................ 1,105,137
-------------
====================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------
Net assets ............................................... $ 252,653,291
=============
====================================================================================================================
Net Assets Consist of
- --------------------------------------------------------------------------------------------------------------------
Paid-in capital, unlimited shares of no par value
authorized .............................................. $ 216,612,136
Accumulated investment loss--net ......................... $ (32,254)
Accumulated distributions in excess of realized capital
gains--net .............................................. (3,912,466)
Unrealized appreciation--net ............................. 39,985,875
-------------
Total accumulated earnings--net .......................... 36,041,155
-------------
Net Assets ............................................... $ 252,653,291
=============
====================================================================================================================
Net Asset Value
- --------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $11,353,198 and 1,019,063
beneficial interest outstanding ......................... $ 11.14
=============
Class B--Based on net assets of $135,202,282 and 12,211,865
beneficial interest outstanding ......................... $ 11.07
=============
Class C--Based on net assets of $92,528,134 and 8,350,373
beneficial interest outstanding ......................... $ 11.08
=============
Class I--Based on net assets of $13,569,677 and 1,216,817
beneficial interest outstanding ......................... $ 11.15
=============
See Notes to Financial Statements.
12 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
Statement of Operations
For the Six Months Ended December 31, 2004
====================================================================================================================
Investment Income
- --------------------------------------------------------------------------------------------------------------------
Dividends (net of $16,978 foreign withholding tax) ....... $ 1,917,487
Interest (including $24,475 from affiliates) ............. 1,437,579
Securities lending ....................................... 1,167
-------------
Total income ............................................. 3,356,233
-------------
====================================================================================================================
Expenses
- --------------------------------------------------------------------------------------------------------------------
Financial warranty fee ................................... $ 1,054,783
Investment advisory fees ................................. 845,275
Account maintenance and distribution fees--Class B ....... 689,484
Account maintenance and distribution fees--Class C ....... 480,347
Transfer agent fees--Class B ............................. 73,955
Accounting services ...................................... 62,401
Transfer agent fees--Class C ............................. 52,961
Custodian fees ........................................... 30,985
Professional fees ........................................ 28,626
Printing and shareholder reports ......................... 26,212
Account maintenance fees--Class A ........................ 14,786
Trustees' fees and expenses .............................. 10,869
Transfer agent fees--Class I ............................. 6,570
Transfer agent fees--Class A ............................. 5,440
Pricing fees ............................................. 875
Other .................................................... 4,918
-------------
Total expenses ........................................... 3,388,487
-------------
Investment loss--net ..................................... (32,254)
-------------
====================================================================================================================
Realized & Unrealized Gain--Net
- --------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ........................ 6,040,425
Change in unrealized appreciation/depreciation on:
Investments--net ...................................... 1,075,981
Option written--net ................................... 12,999
Foreign currency transactions--net .................... 3,028 1,092,008
-------------------------------
Total realized and unrealized gain--net .................. 7,132,433
-------------
Net Increase in Net Assets Resulting from Operations ..... $ 7,100,179
=============
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 13
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2004 2004
====================================================================================================================
Operations
- --------------------------------------------------------------------------------------------------------------------
Investment loss--net ..................................... $ (32,254) $ (573,598)
Realized gain--net ....................................... 6,040,425 13,046,696
Change in unrealized appreciation/depreciation--net ...... 1,092,008 16,359,563
-------------------------------
Net increase in net assets resulting from operations ..... 7,100,179 28,832,661
-------------------------------
====================================================================================================================
Dividends & Distributions to Shareholders
- --------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ............................................... -- (161,901)
Class B ............................................... -- (461,281)
Class C ............................................... -- (312,300)
Class I ............................................... -- (220,528)
Realized gain--net:
Class A ............................................... (731,649) --
Class B ............................................... (8,325,142) --
Class C ............................................... (5,653,890) --
Class I ............................................... (903,281) --
-------------------------------
Net decrease in net assets resulting from dividends and
distributions to shareholders ........................... (15,613,962) (1,156,010)
-------------------------------
====================================================================================================================
Beneficial Interest Transactions
- --------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from beneficial
interest transactions ................................... (17,058,332) (81,866,798)
-------------------------------
====================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------
Total decrease in net assets ............................. (25,572,115) (54,190,147)
Beginning of period ...................................... 278,225,406 332,415,553
-------------------------------
End of period* ........................................... $ 252,653,291 $ 278,225,406
===============================
* Accumulated investment loss--net .................... $ (32,254) $ --
===============================
See Notes to Financial Statements.
14 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
Financial Highlights
Class A
------------------------------------------------------
For the
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Year Ended November 13,
December 31, June 30, 2002+ to
Increase (Decrease) in Net Asset Value: 2004 2004 June 30, 2003
==============================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.52 $ 10.53 $ 10.00
------------------------------------------------------
Investment income--net ................. .04** .06** .05
Realized and unrealized gain--net ...... .34 1.03 .49
------------------------------------------------------
Total from investment operations ....... .38 1.09 .54
------------------------------------------------------
Less dividends and distributions from:
Investment income--net .............. -- (.10) (.01)
Realized gain--net .................. (.76) -- --
------------------------------------------------------
Total dividends and distributions ...... (.76) (.10) (.01)
------------------------------------------------------
Net asset value, end of period ......... $ 11.14 $ 11.52 $ 10.53
======================================================
==============================================================================================================================
Total Investment Return***
- ------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 3.38%@ 10.44% 5.43%@
======================================================
==============================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.93%* 2.00% 2.05%*
======================================================
Investment income--net ................. .65%* .51% .83%*
======================================================
==============================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 11,353 $ 13,022 $ 22,090
======================================================
Portfolio turnover ..................... 40.43% 87.57% 107.66%
======================================================
* Annualized.
** Based on average shares outstanding.
*** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
@ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 15
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (continued)
Class B
------------------------------------------------------
For the
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Year Ended November 13,
December 31, June 30, 2002+ to
Increase (Decrease) in Net Asset Value: 2004 2004 June 30, 2003
==============================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.45 $ 10.48 $ 10.00
------------------------------------------------------
Investment income (loss)--net .......... (.01)** (.03)** --++
Realized and unrealized gain--net ...... .34 1.03 .49
------------------------------------------------------
Total from investment operations ....... .33 1.00 .49
------------------------------------------------------
Less dividends and distributions from:
Investment income--net .............. -- (.03) (.01)
Realized gain--net .................. (.71) -- --
------------------------------------------------------
Total dividends and distributions ...... (.71) (.03) (.01)
------------------------------------------------------
Net asset value, end of period ......... $ 11.07 $ 11.45 $ 10.48
======================================================
==============================================================================================================================
Total Investment Return***
- ------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 2.98%@ 9.58% 4.93%@
======================================================
==============================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 2.70%* 2.76% 2.82%*
======================================================
Investment income (loss)--net .......... (.12%)* (.30%) .07%*
======================================================
==============================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 135,202 $ 144,787 $ 159,057
======================================================
Portfolio turnover ..................... 40.43% 87.57% 107.66%
======================================================
* Annualized.
** Based on average shares outstanding.
*** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
++ Amount is less than $.01 per share.
@ Aggregate total investment return.
See Notes to Financial Statements.
16 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
Financial Highlights (continued)
Class C
------------------------------------------------------
For the
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Year Ended November 13,
December 31, June 30, 2002+ to
Increase (Decrease) in Net Asset Value: 2004 2004 June 30, 2003
==============================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.45 $ 10.48 $ 10.00
------------------------------------------------------
Investment income (loss)--net .......... (.01)** (.03)** --++
Realized and unrealized gain--net ...... .35 1.03 .49
------------------------------------------------------
Total from investment operations ....... .34 1.00 .49
------------------------------------------------------
Less dividends and distributions from:
Investment income--net .............. -- (.03) (.01)
Realized gain--net .................. (.71) -- --
------------------------------------------------------
Total dividends and distributions ...... (.71) (.03) (.01)
------------------------------------------------------
Net asset value, end of period ......... $ 11.08 $ 11.45 $ 10.48
======================================================
==============================================================================================================================
Total Investment Return***
- ------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 3.02%@ 9.54% 4.93%@
======================================================
==============================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 2.70%* 2.76% 2.82%*
======================================================
Investment income (loss)--net .......... (.12%)* (.29%) .06%*
======================================================
==============================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 92,528 $ 104,840 $ 129,392
======================================================
Portfolio turnover ..................... 40.43% 87.57% 107.66%
======================================================
* Annualized.
** Based on average shares outstanding.
*** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
++ Amount is less than $.01 per share.
@ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 17
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (concluded)
Class I
------------------------------------------------------
For the
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Year Ended November 13,
December 31, June 30, 2002+ to
Increase (Decrease) in Net Asset Value: 2004 2004 June 30, 2003
==============================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.53 $ 10.55 $ 10.00
------------------------------------------------------
Investment income--net ................. .05** .08** .08
Realized and unrealized gain--net ...... .35 1.03 .48
------------------------------------------------------
Total from investment operations ....... .40 1.11 .56
------------------------------------------------------
Less dividends and distributions from:
Investment income--net .............. -- (.13) (.01)
Realized gain--net .................. (.78) -- --
------------------------------------------------------
Total dividends and distributions ...... (.78) (.13) (.01)
------------------------------------------------------
Net asset value, end of period ......... $ 11.15 $ 11.53 $ 10.55
======================================================
==============================================================================================================================
Total Investment Return***
- ------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 3.54%@ 10.64% 5.63%@
======================================================
==============================================================================================================================
Ratios to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.68%* 1.75% 1.80%*
======================================================
Investment income--net ................. .90%* .73% 1.08%*
======================================================
==============================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 13,570 $ 15,576 $ 21,877
======================================================
Portfolio turnover ..................... 40.43% 87.57% 107.66%
======================================================
* Annualized.
** Based on average shares outstanding.
*** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
@ Aggregate total investment return.
See Notes to Financial Statements.
18 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Basic Value Principal Protected Fund (the "Fund") is part of
Merrill Lynch Principal Protected Trust (the "Trust"). Under the Investment
Company Act of 1940, as amended, the Fund is diversified and the Trust is
registered as an open-end management investment company. The Fund's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of management,
necessary to present a fair statement of the results for the interim period. All
such adjustments are of a normal, recurring nature. The Fund offers multiple
classes of shares. Shares of the Fund were offered during the initial offering
period but will not be offered during the Guarantee Period from November 13,
2002 through November 13, 2009 (the "Guarantee Maturity Date"), except in
connection with reinvestment of dividends and distributions. The Fund will be
offered on a continuous basis after this date. During the Guarantee Period, the
Fund will seek long-term growth of capital to the extent permitted by a strategy
that seeks to use investments in common stocks, U.S. Treasury bonds, including
zero coupon bonds, and other fixed income instruments, to protect the original
principal value of the Fund (less redemptions, cash distributions and dividends
and extraordinary expenses) at the Guarantee Maturity Date.
The Trust, on behalf of the Fund, has entered into a Financial Warranty
Agreement with Main Place Funding, LLC (the "Warranty Provider"). The Financial
Warranty Agreement is intended to make sure that on the Guarantee Maturity Date,
each shareholder of the Fund will be entitled to redeem his or her shares for an
amount no less than the initial value of that shareholder's account (less
expenses and sales charges not covered by the Financial Warranty Agreement),
provided that all dividends and distributions received from the Fund have been
reinvested and no shares have been redeemed (the "Guaranteed Amount"). The Fund
will pay to the Warranty Provider, under the Financial Warranty Agreement, an
annual fee equal to .80% of the Fund's average daily net assets during the
Guarantee Period. If the value of the Fund's assets on the Guarantee Maturity
Date is insufficient to result in the value of each shareholder's account being
at least equal to the shareholder's Guaranteed Amount, the Warranty provider
will pay the Fund an amount sufficient to make sure that each shareholder's
account can be redeemed for an amount equal to his or her Guaranteed Amount.
Shares of Class A and Class I are sold with a front-end sales charge. Shares of
Class B and Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class A, Class B and Class C
Shares bear certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures
(except that Class B shareholders may vote on certain 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 -- Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available ask
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Trustees of the Trust.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Trustees of the Trust. Short positions traded in the OTC market are valued at
the last available ask price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
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.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 19
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last ask price.
Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees of the Trust, including valuations furnished by the pricing services
retained by the Trust, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Trust under the general supervision of the Trust's Board of Trustees.
Such valuations and procedures will be reviewed periodically by the Board of
Trustees of the Trust.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the New York Stock Exchange ("NYSE").
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
also are generally determined prior to the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and the close of
business on the NYSE that may not be reflected in the computation of the Fund's
net asset value. If events (for example, a company announcement, market
volatility or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Trust's Board of Trustees
or by the Investment Adviser using a pricing service and/or procedures approved
by the Trust's Board of Trustees.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options -- The Fund may write and purchase call and put options. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is added to
(or deducted from) the basis of the security acquired or deducted from (or
added to) the proceeds of the security sold. When an option expires (or
the Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars.
20 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
Notes to Financial Statements (continued)
Realized and unrealized gains or losses from investments include the effects of
foreign exchange rates on investments.
(d) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
(f) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(g) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
the annual rate of .65% of the Fund's average daily net assets. FAM has entered
into a contractual arrangement with the Fund under which the expenses incurred
by each class of shares of the Fund (excluding distribution and/or account
maintenance fees) will not exceed 1.99%. This arrangement has a one-year term
and is renewable.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class A ................................ .25% --
Class B ................................ .25% .75%
Class C ................................ .25% .75%
- --------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B and Class C shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 21
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
For the six months ended December 31, 2004, MLPF&S received contingent deferred
sales charges of $290,685 relating to transactions in Class B Shares.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S, or its
affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by FAM
or its affiliates. For the six-month period ended December 31, 2004, MLIM, LLC
received $542 in security lending fees.
In addition, MLPF&S received $28,578 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended December
31, 2004.
For the six months ended December 31, 2004, the Fund reimbursed FAM $2,792 for
certain accounting services.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, FDS, PSI, FAMD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended December 31, 2004 were $102,896,386 and $140,006,803, respectively.
Transactions in call options written for the six months ended December 31, 2004
were as follows:
- --------------------------------------------------------------------------------
Number of Premiums
Contracts Received
- --------------------------------------------------------------------------------
Outstanding call options written,
beginning of period .......................... 260 $43,418
Options written ................................ -- --
Options closed ................................. -- --
---------------------
Outstanding call options written,
end of period ................................ 260 $43,418
=====================
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions were
$17,058,332 and $81,866,798 for the six months ended December 31, 2004 and for
the year ended June 30, 2004, respectively.
Transactions in beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended December 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions ......... 61,905 $ 682,812
Shares redeemed .......................... (173,716) (1,967,792)
-----------------------------
Net decrease ............................. (111,811) $ (1,284,980)
=============================
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended June 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends ............. 14,175 $ 155,083
Shares redeemed .......................... (980,709) (10,857,965)
-----------------------------
Net decrease ............................. (966,534) $(10,702,882)
=============================
- --------------------------------------------------------------------------------
Class B Shares for the Six Months Dollar
Ended December 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions ......... 710,991 $ 7,799,569
Shares redeemed .......................... (1,148,833) (12,912,070)
-----------------------------
Net decrease ............................. (437,842) $ (5,112,501)
=============================
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended June 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends ............. 40,836 $ 445,926
Shares redeemed .......................... (2,566,201) (28,347,849)
-----------------------------
Net decrease ............................. (2,525,365) $(27,901,923)
=============================
- --------------------------------------------------------------------------------
Class C Shares for the Six Months Dollar
Ended December 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions ......... 495,351 $ 5,434,000
Shares redeemed .......................... (1,301,336) (14,557,016)
-----------------------------
Net decrease ............................. (805,985) $ (9,123,016)
=============================
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended June 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends ............. 27,752 $ 303,329
Shares redeemed .......................... (3,211,444) (35,643,436)
-----------------------------
Net decrease ............................. (3,183,692) $(35,340,107)
=============================
22 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004
Notes to Financial Statements (concluded)
- --------------------------------------------------------------------------------
Class I Shares for the Six Months Dollar
Ended December 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions ......... 75,616 $ 834,804
Shares redeemed .......................... (209,724) (2,372,639)
-----------------------------
Net decrease ............................. (134,108) $ (1,537,835)
=============================
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended June 30, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of dividends ............. 18,993 $ 207,785
Shares redeemed .......................... (741,990) (8,129,671)
-----------------------------
Net decrease ............................. (722,997) $ (7,921,886)
=============================
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 regis-ter your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2004 23
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
This report is for shareholders of Merrill Lynch Basic Value Principal Protected
Fund. Past performance results shown in this report should not be considered a
representation of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth more or less
than their original cost. Statements and other information herein are as dated
and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Basic Value Principal Protected Fund
Box 9011
Princeton, NJ
08543-9011
#BVPP -- 12/04
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(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.
11(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 last 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 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch Principal
Protected Trust
By: /s/ Robert C. Doll, Jr.
------------------------------
Robert C. Doll, Jr.,
President of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: February 24, 2005
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/ Robert C. Doll, Jr.
------------------------------
Robert C. Doll, Jr.,
President of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: February 24, 2005
By: /s/ Donald C. Burke
------------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: February 24, 2005