UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21162
Name of Fund: Merrill Lynch Basic Value Principal Protected Fund of Merrill
Lynch Principal Protected Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, 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 - 06/30/05
Item 1 - Report to Stockholders
Merrill Lynch
Basic Value
Principal Protected Fund
Annual Report
June 30, 2005
Merrill Lynch Basic Value Principal Protected Fund
Portfolio Information as of June 30, 2005
Percent of
Ten Largest Equity Holdings Net Assets
================================================================================
Exxon Mobil Corp. .................................................. 3.8%
JPMorgan Chase & Co. ............................................... 2.8
Wells Fargo & Co. .................................................. 2.8
GlobalSantaFe Corp. ................................................ 2.3
The St. Paul Travelers Cos., Inc. .................................. 2.0
Time Warner, Inc. .................................................. 2.0
Raytheon Co. ....................................................... 1.9
Kimberly-Clark Corp. ............................................... 1.8
The Bank of New York Co., Inc. ..................................... 1.8
International Business Machines Corp. .............................. 1.7
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries* Net Assets
================================================================================
Media .............................................................. 7.4%
Insurance .......................................................... 6.0
Oil, Gas & Consumable Fuels ........................................ 5.9
Commercial Banks ................................................... 5.6
Pharmaceuticals .................................................... 5.6
- --------------------------------------------------------------------------------
* 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 Criteria Total Investments
================================================================================
Low Price-to-Book Value ............................................ 30.7%
Above-Average Yield ................................................ 29.6
Below-Average Price/Earnings Ratio ................................. 19.6
Special Situations ................................................. 8.2
Other* ............................................................. 11.9
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments, U.S. government
obligations and options.
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.
2 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
A Letter From the President
Dear Shareholder
The financial markets continued to face a number of crosscurrents over the past
several months. On June 30, 2005, the Federal Reserve Board (the Fed) increased
the federal funds rate for the ninth consecutive time since June 2004, bringing
the target short-term interest rate to 3.25%. During the same week, first
quarter 2005 U.S. gross domestic product growth was revised upward to 3.8% --
behind the 4.4% annualized growth rate recorded for all of 2004 but ahead of
many economists' expectations. Signs of a slowing economy, coupled with easing
inflationary fears, have prompted some observers to believe that the Fed may
soon end its monetary tightening campaign.
After ending 2004 in a strong rally, U.S. equity markets have struggled to
record meaningful gains in 2005. Continued high oil prices and Fed interest rate
hikes have exerted downward pressure on stocks. Offsetting this somewhat have
been surprisingly strong corporate earnings and lower long-term bond yields.
Outside U.S. borders, results have been mixed. Several European markets have
been performing well despite ongoing economic problems. In Asia, many markets
have benefited from higher economic growth rates and relatively attractive
valuations, although Japanese stocks have struggled as a result of slowing
exports and high oil prices.
In the bond markets, the yield curve flattening "conundrum" continued. As
short-term yields increased in concert with Fed interest rate hikes, yields on
longer-term bonds declined (as their prices, which move opposite yields,
increased). Over the past year, the two-year Treasury yield rose 96 basis points
(.96%) while the 10-year Treasury yield declined 68 basis points. At period-end,
the spread between the two-year and 10-year Treasury yields was just 28 basis
points.
Amid these conditions, the major market benchmarks posted six-month and 12-month
returns as follows:
Total Returns as of June 30, 2005 6-month 12-month
===============================================================================================
U.S. equities (Standard & Poor's 500 Index) -0.81% + 6.32%
- -----------------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) -1.25% + 9.45%
- -----------------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) -1.17% +13.65%
- -----------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +2.51% + 6.80%
- -----------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +2.89% + 8.24%
- -----------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) +0.77% +10.10%
- -----------------------------------------------------------------------------------------------
Entering the second half of 2005, we expect more of the same type of "muddle
through" environment that has befallen financial markets in the first half of
the year. Nevertheless, opportunities do exist and we encourage you to work with
your financial advisor to diversify your portfolio among a variety of asset
types. This can help to diffuse risk while also tapping into the potential
benefits of a broader range of investment alternatives. 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/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Trustee
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 3
A Discussion With Your Fund's Portfolio Manager
During the fiscal year, the Fund was successfully able to meet its primary
objective of preserving investor principal.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended June 30, 2005, Merrill Lynch Basic Value Principal
Protected Fund's Class A, Class B, Class C and Class I Shares had total returns
of +.96%, +.19%, +.23% and +1.22%, respectively. (Fund results shown do not
reflect sales charges and would be lower if sales charges were included.
Complete performance information can be found on pages 6 - 8 of this report to
shareholders.) For the same period, the Fund's all-equity benchmarks, the
Standard & Poor's 500 (S&P 500) Index and the S&P 500 Barra Value Index,
returned +6.32% and +11.18%, respectively. The Lipper Balanced Target Maturity
Funds category 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.)
Because the Fund incorporates a fixed income component, its returns will differ
from those of its all-equity benchmarks. Although the Fund was heavily weighted
in stocks during the period, the procyclical bias of our equity portfolio proved
to be a detriment as the market reacted to signs of slowing economic growth.
As the fiscal period began, the Federal Reserve Board (the Fed) had just
embarked on its "measured" program of interest rate increases. In hindsight,
this marked the start of a period of relative uncertainty for equities. In
addition to rising interest rates, worries over the U.S. presidential election,
concern over geopolitical events and inconsistent economic releases were enough
to send the markets into a downturn that lasted into early November. Some relief
came after the uneventful conclusion of the presidential contest, when the
incumbent party was returned to office and investors prepared for business as
usual. Equity markets rallied through the end of 2004, only to fall back again
in 2005. Slower gross domestic product growth in the first quarter of the year,
coupled with fears of a slowdown in corporate earnings, a rising oil price,
heightened inflationary expectations and a Fed that appeared untiring in its
monetary tightening campaign, gave investors reason to pause.
Amid these conditions, the cyclical areas of the market began to underperform,
and we saw the effects of a slowing economy and investor caution play out on the
portfolio. We had expected this to be a transition year for the economy and the
market, and prepared the portfolio by drastically reducing the Fund's beta (a
measure of risk). However, unlike the more bearish observers, we view this as a
fairly natural (i.e., historically normal) transition from a period of robust
economic activity characterized by accommodative monetary and fiscal policy to a
new period of higher rates and slower -- yet still healthy -- growth. For that
reason, we moderated, but still maintained, our focus on those industries
sensitive to changes in the economy.
The information technology (IT) sector suffered the most over the past year. IT
holdings that disappointed the most were Unisys Corp., International Business
Machines Corp., 3Com Corp., Micron Technology, Inc. and Tektronix, Inc. In other
cyclical sectors, we had poor performance from Alcoa, Inc., E.I. du Pont de
Nemours & Co. and International Paper Co. in materials; Deere & Co. and
Honeywell International, Inc. in industrials; and Philips Electronics, Viacom,
Inc., Time Warner, Inc. and The Gap, Inc. in consumer discretionary. Each of
these sectors had contributed meaningfully to Fund performance in the prior
fiscal year.
While the Fund's holdings in health care generally performed well, our
overweight position in Merck & Co., Inc., albeit small, hampered relative
results by 49 basis points as the company encountered trouble with Vioxx, its
blockbuster arthritis-pain medication. We immediately liquidated our position in
Merck following the drug's recall. 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.
The energy sector proved to be the standout. As the oil price surpassed $60 per
barrel during the period, it was no surprise that the chief contributors to
performance were our holdings in oil drillers Diamond Offshore Drilling and
Transocean Inc., and oil and gas exploration company Unocal Corporation.
What changes were made to the portfolio during the period?
A mathematical formula is used to determine the allocation between the Fund's
equity and fixed income components.
4 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
During the period, the Fund's equity component ranged from a low of 76.3% of net
assets on January 25, 2005, to a high of 88.3% on June 23, 2005. The fixed
income allocation ranged from 11.5% of net assets to 22.6%. 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).
In the equity portfolio, we began to prepare for what we expected to be a
transition year for the market and the U.S. economy. This involved moving upward
in market capitalization size, decreasing the Fund's beta and increasing
portfolio diversification.
From a sector perspective, we reduced our exposure to IT, industrials and
materials while increasing positions in more defensive areas of the market, such
as consumer staples, health care and utilities. Notable sales included The
Boeing Company, Caterpillar, Inc. and CSX Corporation in industrials, and Nokia,
National Semiconductor Corporation and Tektronix in IT. We also trimmed our
position in International Paper Co. in materials. Additions to the portfolio
included AstraZeneca Group Plc and GlaxoSmithKline Plc in health care, The
Southern Co. in utilities and Sara Lee Corp. in consumer staples.
We began to take profits in energy, given the strong outperformance of this
sector and valuations that are beginning to look less compelling from the
perspective of a contrarian investor. Stocks that were eliminated from the
portfolio included Kerr-McGee Corporation, Unocal and Chevron Corp. We also
reduced our exposure to Diamond Offshore. Despite trimming our overweighting in
energy, we remain positive on the sector over the longer term.
We maintained our weighting in financials, but have been considering ways to
increase our exposure now that we believe the Fed is nearing the end of its
tightening cycle. Finally, in keeping with our still positive view on the
economy, we continued to find value in a number of cyclical stocks. To that end,
we added Seagate Technology, Electronic Data Systems Corp. and Micron
Technology, Inc. in IT, and manufacturing conglomerate Tyco International Ltd.
How would you characterize the Fund's position at the close of the period?
In seeking to meet its objective of principal protection and potential for
capital growth, the allocation between the Fund's fixed income and equity
components will continue to vary as market conditions change. As of June 30,
2005, the Fund was invested 88.3% in equities and 11.9% in fixed income
securities. This compared to 77.2% equities and 22.2% fixed income on December
31, 2004, and 82.7% equities and 17.9% fixed income at June 30, 2004.
(Allocations may not total 100% due to cash balances.)
At the close of the period, the equity portfolio was overweight versus the S&P
500 Barra Value Index in consumer staples, consumer discretionary, information
technology, energy, industrials and materials. We had underweights in
financials, health care, telecommunication services, consumer discretionary and
utilities.
As mentioned in our last report to shareholders, we expected that 2005 would be
a tougher year for equities, as valuations were starting from a much higher
level than a year ago. Having said that, we believe we are right in the middle
of a market and economic transition, and would characterize the current
environment as "the pause that refreshes." We view 2005 as much like 1994, the
last time the Fed embarked on an interest rate-hiking campaign. The three years
prior (1991 - 1993) were cyclical growth years and the four years that followed
(1995 - 1998) represented a Goldilocks period (not too hot, not too cold). We
are using historical precedent as our guide, and have positioned the portfolio
for a soft economic landing. We believe that, once the Fed completes its
monetary tightening, markets will move higher. One caveat to this view is the
red-hot housing market, which was not a variable in 1994.
Although corporate earnings have likely hit their peak, we believe Corporate
America is much healthier than it was in 1994. After years of cost-cutting and
historically low interest rates, companies have cash on their balance sheets to
invest for growth, increase dividends, buy back stock or make acquisitions. We
believe we are just seeing the beginning of this type of shareholder-friendly
activity. We will continue to search for companies that offer these types of
options given their excess cash flow. At the same time, particularly in this
environment of investor uncertainty, we will continue to emphasize proper
diversification and risk management in the portfolio 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
July 12, 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 JUNE 30, 2005 5
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 June 30, 2005 Total Return Total Return Total Return
===========================================================================================================
ML Basic Value Principal Protected Fund Class A Shares* - 2.33% + 0.96% +17.57%
- -----------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class B Shares* - 2.71 + 0.19 +15.21
- -----------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class C Shares* - 2.71 + 0.23 +15.21
- -----------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class I Shares* - 2.24 + 1.22 +18.29
- -----------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index** + 2.51 + 6.80 +12.88
- -----------------------------------------------------------------------------------------------------------
S&P 500(R) Index*** - 0.81 + 6.32 +41.44
- -----------------------------------------------------------------------------------------------------------
S&P 500 Barra Value Index**** + 0.09 +11.18 +56.14
- -----------------------------------------------------------------------------------------------------------
* 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 JUNE 30, 2005
Performance Data (continued)
Total Return Based on a $10,000 Investment--Class A and Class B Shares
A line graph depicting the growth of an investment in the Fund's Class A and
Class B Shares compared to growth of an investment in the S&P 500 Index and the
S&P/Barra Value Index. Values are from November 13, 2002 through June 2005:
11/13/02** 6/03 6/04 6/05
ML Basic Value Principal
Protected Fund+--
Class A Shares* $9,475 $9,990 $11,033 $11,140
ML Basic Value Principal
Protected Fund+--
Class B Shares* $10,000 $10,493 $11,499 $11,221
11/30/02** 6/03 6/04 6/05
S&P 500 Index++ $10,000 $11,169 $13,303 $14,144
S&P/Barra Value Index+++ $10,000 $11,487 $14,044 $15,614
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ The Fund invests primarily in common stocks and in U.S. Treasury bonds,
including zero coupon bonds.
++ This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues) representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
+++ This unmanaged Index is a capitalization Index of those stocks in the S&P
500 Index that have lower price-to-book ratios. The starting date for the
Index in the Class A and Class B Shares' graph is from 11/30/02.
Past performance is not predictive of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/05 +0.96% -4.34%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/05 +6.35 +4.19
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 6/30/05 +0.19% -3.57%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/05 +5.54 +4.48
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 7
Performance Data (concluded)
Total Return Based on a $10,000 Investment--Class C and I Shares
A line graph depicting the growth of an investment in the Fund's Class C and
Class I Shares compared to growth of an investment in the S&P 500 Index and the
S&P/Barra Value Index. Values are from November 13, 2002 through June 2005:
11/13/02** 6/03 6/04 6/05
ML Basic Value Principal
Protected Fund+--
Class C Shares* $10,000 $10,493 $11,494 $11,521
ML Basic Value Principal
Protected Fund+--
Class I Shares* $9,475 $10,009 $11,073 $11,208
11/30/02** 6/03 6/04 6/05
S&P 500 Index++ $10,000 $11,169 $13,303 $14,144
S&P/Barra Value Index+++ $10,000 $11,487 $14,044 $15,614
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ The Fund invests primarily in common stocks and in U.S. Treasury bonds,
including zero coupon bonds.
++ This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues) representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
+++ This unmanaged Index is a capitalization Index of those stocks in the S&P
500 Index that have lower price-to-book ratios. The starting date for the
Index in the Class C & Class I Shares' graph is from 11/30/02.
Past performance is not predictive of future results.
Average Annual Total Return
Return Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 6/30/05 +0.23% -0.71%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/05 +5.54 +5.54
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class I Shares*
================================================================================
One Year Ended 6/30/05 +1.22% -4.10%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/05 +6.60 +4.44
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
8 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
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 January 1, 2005 and held through
June 30, 2005) 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 January 1, 2005 to
January 1, 2005 June 30, 2005 June 30, 2005
==================================================================================================================
Actual
==================================================================================================================
Class A $1,000 $ 976.70 $ 9.46
- ------------------------------------------------------------------------------------------------------------------
Class B $1,000 $ 972.90 $13.21
- ------------------------------------------------------------------------------------------------------------------
Class C $1,000 $ 972.90 $13.21
- ------------------------------------------------------------------------------------------------------------------
Class I $1,000 $ 977.60 $ 8.24
==================================================================================================================
Hypothetical (5% annual return before expenses)**
==================================================================================================================
Class A $1,000 $1,015.22 $ 9.64
- ------------------------------------------------------------------------------------------------------------------
Class B $1,000 $1,011.41 $13.47
- ------------------------------------------------------------------------------------------------------------------
Class C $1,000 $1,011.41 $13.47
- ------------------------------------------------------------------------------------------------------------------
Class I $1,000 $1,016.46 $ 8.40
- ------------------------------------------------------------------------------------------------------------------
* 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 181/365 (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.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 9
Schedule of Investments
Percent of
Industry+ Shares Held Common Stocks Value Net Assets
====================================================================================================================================
Above-Average Yield Metals & Mining 83,800 Alcoa, Inc. $ 2,189,694 1.0%
Pharmaceuticals 45,900 AstraZeneca Group Plc (c) 1,893,834 0.9
Diversified Telecommunication 68,200 BCE, Inc. 1,614,976 0.8
Services
Capital Markets 133,700 The Bank of New York Co., Inc. 3,847,886 1.8
Diversified Telecommunication 73,000 BellSouth Corp. 1,939,610 0.9
Services
Pharmaceuticals 32,900 Bristol-Myers Squibb Co. 821,842 0.4
Multi-Utilities 16,800 Dominion Resources, Inc. 1,232,952 0.6
Chemicals 81,500 E.I. du Pont de Nemours & Co. 3,505,315 1.6
Oil, Gas & Consumable Fuels 142,100 Exxon Mobil Corp. 8,166,487 3.8
Industrial Conglomerates 95,100 General Electric Co. 3,295,215 1.5
Food Products 43,800 General Mills, Inc. 2,049,402 1.0
Pharmaceuticals 59,400 GlaxoSmithKline Plc (c) 2,881,494 1.3
Aerospace & Defense 78,500 Honeywell International, Inc. 2,875,455 1.3
Diversified Financial Services 170,632 JPMorgan Chase & Co. 6,026,722 2.8
Food & Staples Retailing 54,700 The Kroger Co. (d) 1,040,941 0.5
Capital Markets 64,000 Mellon Financial Corp. 1,836,160 0.9
Pharmaceuticals 75,400 Pfizer, Inc. 2,079,532 1.0
Multi-Utilities 34,600 Public Service Enterprise Group,
Inc. 2,104,372 1.0
Oil, Gas & Consumable Fuels 43,900 Royal Dutch Petroleum Co. (c) 2,849,110 1.3
Diversified Telecommunication 130,000 SBC Communications, Inc. 3,087,500 1.4
Services
Food Products 90,000 Sara Lee Corp. 1,782,900 0.8
Electric Utilities 46,600 The Southern Co. 1,615,622 0.8
Diversified Telecommunication 76,300 Verizon Communications, Inc. 2,636,165 1.2
Services
Commercial Banks 47,900 Wachovia Corp. 2,375,840 1.1
--------------------------
63,749,026 29.7
====================================================================================================================================
Below-Average Insurance 25,100 The Allstate Corp. 1,499,725 0.7
Price/Earnings Ratio Insurance 54,100 American International Group,
Inc. 3,143,210 1.4
Commercial Banks 80,800 Bank of America Corp. 3,685,288 1.7
Health Care Equipment & Supplies 67,800 Baxter International, Inc. 2,515,380 1.2
Diversified Financial Services 73,100 Citigroup, Inc. 3,379,413 1.6
Beverages 104,100 Coca-Cola Enterprises, Inc. 2,291,241 1.0
Thrifts & Mortgage Finance 32,300 Fannie Mae 1,886,320 0.9
Insurance 75,700 Genworth Financial, Inc. Class A 2,288,411 1.1
Computers & Peripherals 144,500 Hewlett-Packard Co. 3,397,195 1.6
Household Durables 97,200 Koninklijke Philips Electronics
NV 2,448,468 1.1
Food Products 73,300 Kraft Foods, Inc. 2,331,673 1.1
Hotels, Restaurants & Leisure 73,900 McDonald's Corp. 2,050,725 1.0
Capital Markets 63,000 Morgan Stanley 3,305,610 1.5
Pharmaceuticals 131,200 Schering-Plough Corp. 2,500,672 1.2
Food Products 36,700 Unilever NV (c) 2,379,261 1.1
IT Services 466,400 Unisys Corp. (d) 2,952,312 1.4
--------------------------
42,054,904 19.6
====================================================================================================================================
10 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
Schedule of Investments (continued)
Percent of
Industry+ Shares Held Common Stocks Value Net Assets
====================================================================================================================================
Low Price-to-Book Communications Equipment 193,900 3Com Corp. (d) $ 705,796 0.3%
Value Electronic Equipment & 79,900 Agilent Technologies, Inc. (d) 1,839,298 0.8
Instruments
Oil, Gas & Consumable Fuels 22,300 Anadarko Petroleum Corp. 1,831,945 0.8
Media 83,100 Comcast Corp. Special Class A
(d) 2,488,845 1.1
Machinery 39,600 Deere & Co. 2,593,404 1.2
Energy Equipment & Services 44,800 Diamond Offshore Drilling 2,393,664 1.1
IT Services 39,600 Electronic Data Systems Corp. 762,300 0.4
Energy Equipment & Services 119,800 GlobalSantaFe Corp. 4,887,840 2.3
Energy Equipment & Services 43,500 Halliburton Co. 2,080,170 1.0
Insurance 22,600 Hartford Financial Services
Group, Inc. 1,690,028 0.8
Paper & Forest Products 105,400 International Paper Co. 3,184,134 1.5
Household Products 62,300 Kimberly-Clark Corp. 3,899,357 1.8
Semiconductors & Semiconductor 422,700 LSI Logic Corp. (d) 3,588,723 1.7
Equipment
Media 291,700 Liberty Media Corp. Class A (d) 2,972,423 1.4
Semiconductors & Semiconductor 55,200 Micron Technology, Inc. (d) 563,592 0.3
Equipment
Communications Equipment 163,200 Motorola, Inc. 2,980,032 1.4
Aerospace & Defense 106,200 Raytheon Co. 4,154,544 1.9
Insurance 109,934 The St. Paul Travelers Cos.,
Inc. 4,345,691 2.0
Computers & Peripherals 439,400 Sun Microsystems, Inc. (d) 1,638,962 0.8
Media 258,800 Time Warner, Inc. (d) 4,324,548 2.0
Industrial Conglomerates 123,400 Tyco International Ltd. 3,603,280 1.7
Media 34,100 Viacom, Inc. Class B 1,091,882 0.5
Media 102,100 Walt Disney Co. 2,570,878 1.2
Commercial Banks 96,600 Wells Fargo & Co. 5,948,628 2.8
--------------------------
66,139,964 30.8
====================================================================================================================================
Special Situations Pharmaceuticals 35,400 Abbott Laboratories 1,734,954 0.8
Semiconductors & Semiconductor 98,000 Applied Materials, Inc. 1,585,640 0.7
Equipment
Energy Equipment & Services 38,600 BJ Services Co. 2,025,728 1.0
Semiconductors & Semiconductor 70,700 Fairchild Semiconductor
Equipment International, Inc. (d) 1,042,825 0.5
Specialty Retail 97,500 The Gap, Inc. 1,925,625 0.9
Computers & Peripherals 49,700 International Business Machines
Corp. 3,687,740 1.7
Media 183,400 Interpublic Group of Cos., Inc.
(d) 2,233,812 1.1
Semiconductors & Semiconductor 61,900 Novellus Systems, Inc. (d) 1,529,549 0.7
Equipment
Computers & Peripherals 102,400 Seagate Technology 1,797,120 0.8
--------------------------
17,562,993 8.2
--------------------------------------------------------------------------------------------------------------
Total Common Stocks
(Cost -- $163,165,775) 189,506,887 88.3
====================================================================================================================================
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 11
Schedule of Investments (concluded)
Percent of
Face Amount U.S. Government Obligations Value Net Assets
==============================================================================================================
U.S. Treasury STRIPS (b)(e):
$19,234,000 3.916% due 8/15/2009 $ 16,542,875 7.7%
10,589,000 3.916% due 11/15/2009 9,028,446 4.2
--------------------------------------------------------------------------------------------------------------
Total U.S. Government Obligations
(Cost--$25,550,316) 25,571,321 11.9
==============================================================================================================
Beneficial
Interest Short-Term Securities
==============================================================================================================
$ 93,143 Merrill Lynch Liquidity Series,
LLC Cash Sweep Series I (a) 93,143 0.1
--------------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$93,143) 93,143 0.1
==============================================================================================================
Number of
Contracts Options Written
==============================================================================================================
150 Hewlett-Packard Co., expiring
August 2005 at USD 22.5,
Broker Citigroup Global Markets Inc. (23,250) 0.0
Morgan Stanley:
46 Expiring July 2005 at USD 55,
Broker Banc Alex Brown Inc. (1,380) 0.0
15 Expiring July 2005 at USD 55,
Broker Morgan Stanley & Co., Inc. (450) 0.0
171 Expiring July 2005 at USD 55,
Broker UBS Securities LLC (5,130) 0.0
--------------------------------------------------------------------------------------------------------------
Total Options Written
(Premiums Received--$40,360) (30,210) 0.0
==============================================================================================================
Total Investments, Net of Options Written (Cost--$188,768,874*) 215,141,141 100.3
Liabilities in Excess of Other Assets (653,841) (0.3)
--------------------------
Net Assets $214,487,300 100.0%
==========================
* The cost and unrealized appreciation (depreciation) of investments, net of
options written, as of June 30, 2005, as computed for federal income tax
purposes, were as follows:
Aggregate cost ........................................... $192,429,707
============
Gross unrealized appreciation ............................ $ 28,613,818
Gross unrealized depreciation ............................ (5,902,384)
------------
Net unrealized appreciation .............................. $ 22,711,434
============
+ For Fund compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease. These
industry and investment criteria classifications are unaudited.
(a) 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 $93,143 $52,074
Merrill Lynch Premier
Institutional Fund -- $ 1,167
--------------------------------------------------------------------------
(b) Separately Traded Registered Interest and Principal of Securities.
(c) Depositary Receipts.
(d) Non-income producing security.
(e) Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase by the Fund.
See Notes to Financial Statements.
12 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
Statement of Assets and Liabilities
As of June 30, 2005
=======================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified
cost--$188,716,091) ........................................ $ 215,078,208
Investments in affiliated securities, at value (identified
cost--$93,143) ............................................. 93,143
Foreign cash (cost--$25,375) ................................ 26,444
Receivables:
Dividends ................................................ $ 252,755
Interest from affiliates ................................. 10,785 263,540
-------------
Prepaid expenses ............................................ 1,053
-------------
Total assets ................................................ 215,462,388
-------------
=======================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$40,360) ...... 30,210
Payables:
Beneficial interest redeemed ............................. 434,204
Distributor .............................................. 165,551
Financial warranty fee ................................... 146,034
Investment adviser ....................................... 105,272
Other affiliates ......................................... 41,799 892,860
-------------
Accrued expenses and other liabilities ...................... 52,018
-------------
Total liabilities ........................................... 975,088
-------------
=======================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Net assets .................................................. $ 214,487,300
=============
=======================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------
Paid-in capital, unlimited shares of no par value authorized $ 185,107,721
Undistributed realized capital gains--net ................... $ 3,006,243
Unrealized appreciation--net ................................ 26,373,336
-------------
Total accumulated earnings--net ............................. 29,379,579
-------------
Net Assets .................................................. $ 214,487,300
=============
=======================================================================================================================
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $8,735,256 and 803,137
beneficial interest outstanding ............................ $ 10.88
=============
Class B--Based on net assets of $117,139,796 and 10,878,429
beneficial interest outstanding ............................ $ 10.77
=============
Class C--Based on net assets of $78,109,741 and 7,247,792
beneficial interest outstanding ............................ $ 10.78
=============
Class I--Based on net assets of $10,502,507 and 963,425
beneficial interest outstanding ............................ $ 10.90
=============
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 13
Statement of Operations
For the Year Ended June 30, 2005
=======================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------
Dividends (net of $46,910 foreign withholding tax) .......... $ 3,850,409
Interest (including $52,074 from affiliates) ................ 2,251,771
Securities lending--net ..................................... 1,167
-------------
Total income ................................................ 6,103,347
-------------
=======================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------
Financial warranty fees ..................................... $ 1,982,060
Investment advisory fees .................................... 1,588,363
Account maintenance and distribution fees--Class B .......... 1,306,214
Account maintenance and distribution fees--Class C .......... 897,432
Transfer agent fees--Class B ................................ 140,621
Accounting services ......................................... 120,966
Transfer agent fees--Class C ................................ 99,220
Professional fees ........................................... 66,979
Printing and shareholder reports ............................ 50,380
Custodian fees .............................................. 37,990
Account maintenance fees--Class A ........................... 27,304
Trustees' fees and expenses ................................. 22,453
Transfer agent fees--Class I ................................ 12,079
Transfer agent fees--Class A ................................ 10,090
Pricing fees ................................................ 1,177
Other ....................................................... 10,943
-------------
Total expenses .............................................. 6,374,271
-------------
Investment loss--net ........................................ (270,924)
-------------
=======================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -----------------------------------------------------------------------------------------------------------------------
Realized gain on:
Investments--net ......................................... 13,150,061
Options written--net ..................................... 79,342
Foreign currency transactions--net ....................... 654 13,230,057
-------------------------------
Change in unrealized appreciation/depreciation on:
Investments--net ......................................... (12,503,839)
Option written--net ...................................... (18,968)
Foreign currency transactions--net ....................... 2,276 (12,520,531)
-------------------------------
Total realized and unrealized gain--net ..................... 709,526
-------------
Net Increase in Net Assets Resulting from Operations ........ $ 438,602
=============
See Notes to Financial Statements.
14 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
Statements of Changes in Net Assets
For the Year Ended
June 30,
-------------------------------
Increase (Decrease) in Net Assets: 2005 2004
=======================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------
Investment loss--net ........................................ $ (270,924) $ (573,598)
Realized gain--net .......................................... 13,230,057 13,046,696
Change in unrealized appreciation/depreciation--net ......... (12,520,531) 16,359,563
-------------------------------
Net increase in net assets resulting from operations ........ 438,602 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 .................................................. (903,280) --
-------------------------------
Net decrease in net assets resulting from dividends and
distributions to shareholders .............................. (15,613,961) (1,156,010)
-------------------------------
=======================================================================================================================
Beneficial Interest Transactions
- -----------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from beneficial interest
transactions ............................................... (48,562,747) (81,866,798)
-------------------------------
=======================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets ................................ (63,738,106) (54,190,147)
Beginning of year ........................................... 278,225,406 332,415,553
-------------------------------
End of year ................................................. $ 214,487,300 $ 278,225,406
===============================
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 15
Financial Highlights
Class A
---------------------------------------------------
For the
For the Year Ended Period
June 30, November 13,
The following per share data and ratios have been derived ------------------------------- 2002+ to
from information provided in the financial statements. 2005 2004 June 30, 2003
=====================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.52 $ 10.53 $ 10.00
---------------------------------------------------
Investment income--net ................. .06* .06* .05
Realized and unrealized gain--net ...... .06 1.03 .49
---------------------------------------------------
Total from investment operations ....... .12 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 ......... $ 10.88 $ 11.52 $ 10.53
===================================================
=====================================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... .96% 10.44% 5.43%@@
===================================================
=====================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.93% 2.00% 2.05%@
===================================================
Investment income--net ................. .57% .51% .83%@
===================================================
=====================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 8,735 $ 13,022 $ 22,090
===================================================
Portfolio turnover ..................... 64.69% 87.57% 107.66%
===================================================
* Based on average shares outstanding.
** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
@ Annualized.
@@ Aggregate total investment return.
See Notes to Financial Statements.
16 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
Financial Highlights (continued)
Class B
---------------------------------------------------
For the
For the Year Ended Period
June 30, November 13,
The following per share data and ratios have been derived ------------------------------- 2002+ to
from information provided in the financial statements. 2005 2004 June 30, 2003
=====================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.45 $ 10.48 $ 10.00
---------------------------------------------------
Investment income (loss)--net .......... (.02)* (.03)* --++
Realized and unrealized gain--net ...... .05 1.03 .49
---------------------------------------------------
Total from investment operations ....... .03 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 ......... $ 10.77 $ 11.45 $ 10.48
===================================================
=====================================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... .19% 9.58% 4.93%@@
===================================================
=====================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------
Expenses ............................... 2.70% 2.76% 2.82%@
===================================================
Investment income (loss)--net .......... (.20%) (.30%) .07%@
===================================================
=====================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 117,140 $ 144,787 $ 159,057
===================================================
Portfolio turnover ..................... 64.69% 87.57% 107.66%
===================================================
* Based on average shares outstanding.
** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
++ Amount is less than $.01 per share.
@ Annualized.
@@ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 17
Financial Highlights (continued)
Class C
---------------------------------------------------
For the
For the Year Ended Period
June 30, November 13,
The following per share data and ratios have been derived ------------------------------- 2002+ to
from information provided in the financial statements. 2005 2004 June 30, 2003
=====================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.45 $ 10.48 $ 10.00
---------------------------------------------------
Investment income (loss)--net .......... (.02)* (.03)* --++
Realized and unrealized gain--net ...... .06 1.03 .49
---------------------------------------------------
Total from investment operations ....... .04 1.00 .49
---------------------------------------------------
Less dividends and distributions from:
Investments--net ...................... -- (.03) (.01)
Realized gain--net .................... (.71) -- --
---------------------------------------------------
Total dividends and distributions ...... (.71) (.03) (.01)
---------------------------------------------------
Net asset value, end of period ......... $ 10.78 $ 11.45 $ 10.48
===================================================
=====================================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... .23% 9.54% 4.93%@@
===================================================
=====================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------
Expenses ............................... 2.70% 2.76% 2.82%@
===================================================
Investment income (loss)--net .......... (.20%) (.29%) .06%@
===================================================
=====================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 78,110 $ 104,840 $ 129,392
===================================================
Portfolio turnover ..................... 64.69% 87.57% 107.66%
===================================================
* Based on average shares outstanding.
** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
++ Amount is less than $.01 per share.
@ Annualized.
@@ Aggregate total investment return.
See Notes to Financial Statements.
18 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
Financial Highlights (concluded)
Class I
---------------------------------------------------
For the
For the Year Ended Period
June 30, November 13,
The following per share data and ratios have been derived ------------------------------- 2002+ to
from information provided in the financial statements. 2005 2004 June 30, 2003
=====================================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 11.53 $ 10.55 $ 10.00
---------------------------------------------------
Investment income--net ................. .09* .08* .08
Realized and unrealized gain--net ...... .06 1.03 .48
---------------------------------------------------
Total from investment operations ....... .15 1.11 .56
---------------------------------------------------
Less dividends and distributions from:
Investments--net ...................... -- (.13) (.01)
Realized gain--net .................... (.78) -- --
---------------------------------------------------
Total dividends and distributions ...... (.78) (.13) (.01)
---------------------------------------------------
Net asset value, end of period ......... $ 10.90 $ 11.53 $ 10.55
===================================================
=====================================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 1.22% 10.64% 5.63%@@
===================================================
=====================================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.68% 1.75% 1.80%@
===================================================
Investment income--net ................. .82% .73% 1.08%@
===================================================
=====================================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 10,503 $ 15,576 $ 21,877
===================================================
Portfolio turnover ..................... 64.69% 87.57% 107.66%
===================================================
* Based on average shares outstanding.
** Total investment returns exclude the effect of sales charges.
+ Commencement of operations.
@ Annualized.
@@ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 19
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Basic Value Principal Protected Fund (the "Fund") is part of
Merrill Lynch Principal Protected Trust (the "Trust"). Under the Investment
Company Act of 1940, as amended, the Fund is diversified and the Trust is
registered as an open-end management investment company. The Fund's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. The Fund offers multiple classes
of shares. Shares of the Fund were offered during the initial offering period
but will not be offered during the Guarantee Period from November 13, 2002
through November 13, 2009 (the "Guarantee Maturity Date"), except in connection
with reinvestment of dividends and distributions. The Fund will be offered on a
continuous basis after this date. During the Guarantee Period, the Fund will
seek long-term growth of capital to the extent permitted by a strategy that
seeks to use investments in common stocks, U.S. Treasury bonds, including zero
coupon bonds, and other fixed income instruments, to protect the original
principal value of the Fund (less redemptions, cash distributions and dividends
and extraordinary expenses) at the Guarantee Maturity Date.
The Trust, on behalf of the Fund, has entered into a Financial Warranty
Agreement with Main Place Funding, LLC (the "Warranty Provider"). The Financial
Warranty Agreement is intended to make sure that on the Guarantee Maturity Date,
each shareholder of the Fund will be entitled to redeem his or her shares for an
amount no less than the initial value of that shareholder's account (less
expenses and sales charges not covered by the Financial Warranty Agreement),
provided that all dividends and distributions received from the Fund have been
reinvested and no shares have been redeemed (the "Guaranteed Amount"). The Fund
will pay to the Warranty Provider, under the Financial Warranty Agreement, an
annual fee equal to .80% of the Fund's average daily net assets during the
Guarantee Period. If the value of the Fund's assets on the Guarantee Maturity
Date is insufficient to result in the value of each shareholder's account being
at least equal to the shareholder's Guaranteed Amount, the Warranty provider
will pay the Fund an amount sufficient to make sure that each shareholder's
account can be redeemed for an amount equal to his or her Guaranteed Amount.
Shares of Class A and Class I are sold with a front-end sales charge. Shares of
Class B and Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class A, Class B and Class C
Shares bear certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to its account maintenance and distribution expenditures
(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 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 asked
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 asked 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 OTC markets and are valued at the
last available bid price in the OTC 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.
20 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
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 asked
price. Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Trust
employs pricing services to provide certain securities prices for the Fund.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees of the Trust, including valuations furnished by the
pricing services retained by the Trust, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are reviewed
by the officers of the Trust under the general supervision of the Trust's Board
of Trustees. Such valuations and procedures will be reviewed periodically by the
Board of Trustees of the Trust.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the New York Stock Exchange ("NYSE").
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
also are generally determined prior to the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and the close of
business on the NYSE that may not be reflected in the computation of the Fund's
net asset value. If events (for example, a company announcement, market
volatility or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Trust's Board of Trustees
or by the Investment Adviser using a pricing service and/or procedures approved
by the Trust's Board of Trustees.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options -- The Fund may write and purchase call and put options. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is added to
(or deducted from) the basis of the security acquired or deducted from (or
added to) the proceeds of the security sold. When an option expires (or
the Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 21
Notes to Financial Statements (continued)
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
(d) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
(f) 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.
(h) 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, $270,270 has been reclassified between undistributed net realized capital
gains and accumulated net investment loss and $654 has been reclassified between
undistributed net realized capital gains and accumulated net investment loss as
a result of permanent differences attributable to net operating losses and
foreign currency transactions. These reclassifications have no effect on net
assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
the annual rate of .65% of the Fund's average daily net assets. FAM has entered
into a contractual arrangement with the Fund under which the expenses incurred
by each class of shares of the Fund (excluding distribution and/or account
maintenance fees) will not exceed 1.99%. This arrangement has a one-year term
and is renewable.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
22 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
Notes to Financial Statements (continued)
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"), an affiliate of FAM, also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B and Class C shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended June 30, 2005, MLPF&S received contingent deferred sales
charges of $509,234 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
Investments Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by FAM
or its affiliates. For the year ended June 30, 2005, MLIM, LLC received $542 in
security lending fees.
In addition, MLPF&S received $49,458 in commissions on the execution of
portfolio security transactions for the Fund for the year ended June 30, 2005.
For the year ended June 30, 2005, the Fund reimbursed FAM $5,376 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, ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 2005 were $157,677,621 and $225,121,619, respectively.
Transactions in call options written for the year ended June 30, 2005 were as
follows:
- --------------------------------------------------------------------------------
Number of Premiums
Contracts Received
- --------------------------------------------------------------------------------
Outstanding call options written,
beginning of year .......................... 260 $ 43,418
Options written .............................. 652 78,494
Options closed ............................... (260) (43,418)
Options expired .............................. (270) (38,134)
-------------------------
Outstanding call options written,
end of year ................................ 382 $ 40,360
=========================
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions were
$48,562,747 and $81,866,798 for the years ended June 30, 2005 and June 30, 2004,
respectively.
Transactions in beneficial interest for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions ......... 61,905 $ 682,813
Shares redeemed .......................... (389,642) (4,309,187)
-------------------------------
Net decrease ............................. (327,737) $ (3,626,374)
===============================
- --------------------------------------------------------------------------------
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 Year Dollar
Ended June 30, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions ......... 710,991 $ 7,799,569
Shares redeemed .......................... (2,482,269) (27,357,602)
-------------------------------
Net decrease ............................. (1,771,278) $(19,558,033)
===============================
- --------------------------------------------------------------------------------
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)
===============================
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 23
Notes to Financial Statements (concluded)
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions ......... 495,351 $ 5,434,000
Shares redeemed .......................... (2,403,917) (26,505,904)
-------------------------------
Net decrease ............................. (1,908,566) $(21,071,904)
===============================
- --------------------------------------------------------------------------------
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 .......................... (3,211,445) (35,643,436)
-------------------------------
Net decrease ............................. (3,183,693) $(35,340,107)
===============================
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions ......... 75,616 $ 834,805
Shares redeemed .......................... (463,116) (5,141,241)
-------------------------------
Net decrease ............................. (387,500) $ (4,306,436)
===============================
- --------------------------------------------------------------------------------
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)
===============================
5. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended June 30,
2005 and June 30, 2004 was as follows:
- --------------------------------------------------------------------------------
6/30/2005 6/30/2004
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ........................ $ 5,279,079 $ 1,156,010
Net long-term capital gains ............ 10,334,882 --
------------------------------
Total distributions ...................... $15,613,961 $ 1,156,010
==============================
As of June 30, 2005, the components of accumulated earnings on a tax basis were
as follows:
- --------------------------------------------------------------------------------
Undistributed ordinary income--net ........................ $ 337,872
Undistributed long-term capital gains--net ................ 6,329,207
-----------
Total undistributed earnings -- net ....................... 6,667,079
Capital loss carryforward ................................. --
Unrealized gains--net ..................................... 22,712,500*
-----------
Total accumulated earnings--net ........................... $29,379,579
===========
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales.
24 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
of Merrill Lynch Basic Value Principal
Protected Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Basic Value Principal Protected
Fund as of June 30, 2005, and 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 Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of June 30, 2005, by correspondence with the custodian.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Basic Value Principal Protected Fund as of June 30, 2005, 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
August 15, 2005
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distribution paid by Merrill Lynch Basic Value Principal Protected Fund of the
Merrill Lynch Principal Protected Trust to shareholders of record on December
13, 2004:
- --------------------------------------------------------------------------------
Qualified Dividend Income for Individuals ............................ 71.82%
Dividends Qualifying for the Dividends Received
Deduction for Corporations ........................................... 65.33%
Federal Obligation Interest .......................................... 24.54%
- --------------------------------------------------------------------------------
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 paid a long-term capital gain distribution of $.475359 to
shareholders of record on December 13, 2004.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005 25
Officers and Trustees
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to President of the MLIM/FAM-advised funds since 2005; 125 Funds None
Doll, Jr.* Princeton, NJ and present President of MLIM and FAM since 2001; Co-Head 169 Portfolios
08543-9011 Trustee (Americas Region) thereof from 2000 to 2001 and
Age: 50 Senior Vice President from 1999 to 2001; President
and Director of Princeton Services, Inc. ("Princeton
Services") since 2001; President of Princeton
Administrators, L.P. ("Princeton Administrators")
since 2001; Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice President
thereof from 1991 to 1999.
---------------------------------------------------------------------------------------------------------
* Mr. Doll 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. Doll is an "interested person," as defined in the
Investment Company Act, of the Fund based on his current positions with MLIM, FAM, Princeton Services
and Princeton Administrators. Trustees serve until their resignation, removal or death, or until
December 31 of the year in which they turn 72. As Fund President, Mr. Doll serves at the pleasure of
the Board of Trustees.
====================================================================================================================================
Independent Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
David O. P.O. Box 9095 Trustee 2002 to Professor of Finance and Economics at the Columbia 17 Funds None
Beim** Princeton, NJ present University Graduate School of Business since 1991; 22 Portfolios
08543-9095 Chairman of Outward Bound USA from 1997 to
Age: 65 2001; Chairman of Wave Hill, Inc. since 1990; Trustee
of Phillips Exeter Academy from 2002 to present.
- ------------------------------------------------------------------------------------------------------------------------------------
James T. P.O. Box 9095 Trustee 2002 to Chief Financial Officer of JPMorgan & Co., Inc. 17 Funds None
Flynn Princeton, NJ present from 1990 to 1995 and an employee of JPMorgan 22 Portfolios
08543-9095 in various capacities from 1967 to 1995.
Age: 65
- ------------------------------------------------------------------------------------------------------------------------------------
W. Carl P.O. Box 9095 Trustee 2002 to Mizuho Financial Group, Professor of Finance; 18 Funds None
Kester Princeton, NJ present Senior Associate Dean and Chairman of the MBA 23 Portfolios
08543-9095 Program of Harvard Business School since 1999;
Age: 53 Member of the faculty of Harvard Business School
since 1981; Independent consultant since 1978.
- ------------------------------------------------------------------------------------------------------------------------------------
Karen P. P.O. Box 9095 Trustee 2002 to President of Robards & Company, a financial 17 Funds None
Robards*** Princeton, NJ present advisory firm, since 1987; formerly an investment 22 Portfolios
08543-9095 banker with Morgan Stanley for more than ten
Age: 55 years; Director 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.
---------------------------------------------------------------------------------------------------------
* Trustees serve until their resignation, removal or death, or until December 31 of the year in which
they turn 72.
** Chairman of the Audit Committee.
*** Chair of the Board.
26 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2005
Officers and Trustees (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2002 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
08543-9011 and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999; Vice
Age: 45 Treasurer President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from 1990
to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. P.O. Box 9011 Vice 2005 to Managing Director of MLIM since 2000; First Vice President of MLIM from 1997 to
Martorelli Princeton, NJ President present 2000.
08543-9011
Age: 48
- ------------------------------------------------------------------------------------------------------------------------------------
Kevin M. P.O. Box 9011 Vice 2003 to Managing Director of MLIM since 2000; First Vice President of MLIM from 1997 to
Rendino Princeton, NJ President present 2000.
08543-9011
Age: 38
- ------------------------------------------------------------------------------------------------------------------------------------
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 (Americas Region) since 2004; Chief Compliance
08543-9011 Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Age: 53 Investment Management from 2002 to 2004; Managing Director and 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; Senior Counsel in the Commission's Division of
Enforcement in Washington, D.C. from 1990 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
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; Secretary of MLIM, FAM, FAMD and
08543-9011 Princeton Services since 2004.
Age: 45
---------------------------------------------------------------------------------------------------------
* 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
Electronic Delivery
The Fund offers electronic delivery of communi cations to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail informa-tion. 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 JUNE 30, 2005 27
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
- --------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
This report is for shareholders of Merrill Lynch Basic Value Principal Protected
Fund. Past performance results shown in this report should not be considered a
representation of future performance. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth more or less
than their original cost. Statements and other information herein are as dated
and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Basic Value Principal Protected Fund
Box 9011
Princeton, NJ
08543-9011
#BVPP -- 6/05
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 12 years.
Prof. Kester has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Prof. Kester
has been involved in providing valuation and other financial consulting
services to corporate clients since 1978. Prof. Kester's financial
consulting services present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the Registrant's financial statements.
Ms. Robards has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Ms. Robards
has been President of Robards & Company, a financial advisory firm,
since 1987. Ms. Robards was formerly an investment banker for more than
10 years where she was responsible for evaluating and assessing the
performance of companies based on their financial results. Ms. Robards
has over 30 years of experience analyzing financial statements. She
also is the member of the Audit Committees of two privately held
companies and a non-profit organization.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending June 30, 2005 - $27,000
Fiscal Year Ending June 30, 2004 - $30,200
(b) Audit-Related Fees - Fiscal Year Ending June 30, 2005 - $0
Fiscal Year Ending June 30, 2004 - $0
(c) Tax Fees - Fiscal Year Ending June 30, 2005 - $6,300
Fiscal Year Ending June 30, 2004 - $5,800
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending June 30, 2005 - $0
Fiscal Year Ending June 30, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending June 30, 2005 - $8,181,305
Fiscal Year Ending June 30, 2004 - $16,114,216
(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 - 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 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 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
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.,
Chief Executive Officer of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: August 19, 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.,
Chief Executive Officer of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: August 19, 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: August 19, 2005