UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21162
Name of Fund: Merrill Lynch Basic Value Principal Protected Fund
of Merrill Lynch Principal Protected Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., 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: 06/30/06
Date of reporting period: 07/01/05 - 12/31/05
Item 1 - Report to Stockholders
Merrill Lynch
Basic Value
Principal Protected Fund
Semi-Annual Report
December 31, 2005
Merrill Lynch Basic Value Principal Protected Fund
Portfolio Information as of December 31, 2005
Percent of
Ten Largest Equity Holdings Net Assets
================================================================================
JPMorgan Chase & Co. ................................................. 3.8%
Exxon Mobil Corp. .................................................... 3.6
Wells Fargo & Co. .................................................... 3.1
Morgan Stanley ....................................................... 3.1
GlobalSantaFe Corp. .................................................. 2.9
Time Warner, Inc. .................................................... 2.6
International Business Machines Corp. ................................ 2.6
Tyco International Ltd. .............................................. 2.4
The St. Paul Travelers Cos., Inc. .................................... 2.4
Raytheon Co. ......................................................... 2.2
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
================================================================================
Insurance ............................................................ 8.6%
Capital Markets ...................................................... 6.2
Energy Equipment & Services .......................................... 6.0
Media ................................................................ 5.9
Computers & Peripherals .............................................. 5.8
- --------------------------------------------------------------------------------
For Fund compliance purposes, the Fund's industry classifications refer to
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 industry sub-classifications for reporting
ease.
- --------------------------------------------------------------------------------
Percent of
Investment Category Total Investments
================================================================================
Low Price-to-Book Value ...................................... 29.7%
Above-Average Yield .......................................... 28.0
Below-Average Price/Earnings Ratio ........................... 25.9
Special Situations ........................................... 8.9
Price-to-Earnings Per Share .................................. 0.8
Price-to-Cash Flow ........................................... 0.1
Other* ....................................................... 6.6
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments and U.S. government
obligations.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site 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.
2 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
A Letter From the President
Dear Shareholder
On balance, 2005 was a year of "muddling through" for the U.S. financial
markets, as oil prices reached new record highs, the Federal Reserve Board (the
Fed) increased the target federal funds rate from 2.25% to 4.25%, the housing
market and the consumer finally showed some signs of slowing, and Hurricanes
Katrina and Rita ravaged the Gulf Coast, causing yet untold economic damage.
Although they struggled, stocks managed to post their third straight year of
positive performance. The year was equally uncertain for fixed income markets,
which were bemused by a flattening yield curve and a number of significant
credit events that brought a slowdown in high yield market returns. Notably, the
one-year results for the major asset classes -- stocks, bonds and cash -- were
the closest they have been in more than 100 years. For the 12- and six-month
periods ended December 31, 2005, most of the major market indexes managed to
land in positive territory:
Total Returns as of December 31, 2005 6-month 12-month
=================================================================================================
U.S. equities (Standard & Poor's 500 Index) + 5.77% + 4.91%
- -------------------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) + 5.88 + 4.55
- -------------------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) +14.88 +13.54
- -------------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.08 + 2.43
- -------------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.60 + 3.51
- -------------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) + 1.48 + 2.26
- -------------------------------------------------------------------------------------------------
In hindsight, these numbers are reasonably good given the headwinds facing the
markets in 2005. U.S. equities found support in strong corporate earnings, low
core inflation and healthy company balance sheets. Strength in the global
economy and non-U.S. equity markets helped, as did robust dividend-distribution,
share-buyback and merger-and-acquisition activity. International stocks had an
excellent year, with many markets benefiting from strong economic statistics,
trade surpluses and solid finances. In the U.S. bond market, long-term yields
remained low and, at year-end, the Treasury curve appeared ready to invert.
As 2006 begins, the largest question marks center on the Fed's future moves, the
U.S. consumer's ability (or inability) to continue spending, the direction of
the U.S. dollar following a year of appreciation and the potential for continued
strong economic and corporate earnings growth. As you turn the calendar and
consider how these factors might impact your investments, remember that the new
year is a good time to meet with your financial advisor to review your financial
goals, and to make portfolio changes where necessary. For investing insights and
timely "food for thought" for investors, we also invite you to visit Shareholder
magazine at www.mlim.ml.com/shareholdermagazine.
As always, we thank you for trusting Merrill Lynch Investment Managers with your
investment assets, and we look forward to serving you in the new year and
beyond.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Trustee
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 3
A Discussion With Your Fund's Portfolio Manager
The Fund was successfully able to meet its primary objective of preserving
investor principal while also providing capital appreciation for shareholders.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended December 31, 2005, Merrill Lynch Basic Value
Principal Protected Fund's Class A, Class B, Class C and Class I Shares had
total returns of +4.13%, +3.70%, +3.72% and +4.31%, respectively. (Fund results
shown do not reflect sales charges and would be lower if sales charges were
included. Complete performance information can be found on pages 6 and 7 of this
report to shareholders.) For the same period, the Fund's all-equity benchmarks,
the Standard & Poor's 500 (S&P 500) Index and the S&P 500 Barra Value Index,
returned +5.77% and +6.23%, respectively. Because the Fund incorporates a fixed
income component, its returns will differ from those of its all-equity
benchmarks. Notably, however, the Fund significantly outperformed the Lipper
Balanced Target Maturity Funds category, which posted an average return of
+1.45% for the six-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.)
The second half of 2005, the Fund's semi-annual reporting period, was very
different from the first six months of the calendar year. In the first six
months, as the Federal Reserve Board (the Fed) advanced its interest rate-hiking
campaign and investors worried about a slowing economy, the equity markets were
relatively flat. In the latter six months, despite record-high oil prices, a
vigilant Fed and two catastrophic hurricanes, the economic data was largely
positive. Gross domestic product growth rose from 3.3% in the second quarter of
2005 to 4.1% in the third quarter. Corporate earnings also continued to come in
very strong. Investors began to believe that perhaps a soft landing was in the
making, and the markets strengthened. Most recently, after 13 consecutive
interest rate hikes between June 2004 and December 2005, the Fed finally hinted
that its monetary tightening campaign may be nearing an end. This was good news
for stocks.
Within the Fund's equity portfolio, we saw strong performance from energy
stocks, led by offshore oil driller GlobalSantaFe Corp. and oil service
companies BJ Services Co. and Halliburton Co. The budgets for many oil
exploration & production companies are expanding at a fast rate, and drilling
activity is exploding throughout the world given the high prices for crude and
gas.
The Fund also realized positive attribution from its investments in the
financials sector. While financials struggled over the past 18 months as the Fed
raised interest rates, they began to rally significantly in the latter months of
2005 as the market began to anticipate the end of monetary tightening. Financial
stocks that contributed to Fund results included JPMorgan Chase & Co. and
American International Group, Inc.
Several of the portfolio's technology names performed well. Among them were
Agilent Technologies, Inc. a company that reorganized, sold some assets and
announced a dutch auction during the period; Hewlett-Packard Co., which also
underwent a positive transformation with a new CEO in place; and Motorola, Inc.,
a strong franchise whose new management did a good job of focusing the business
on areas that offer high returns and moving away from those that don't.
Conversely, we saw some weakness from materials and industrials stocks,
particularly those companies that use fuel to power their manufacturing
facilities. As oil and gas prices rose, our energy holdings benefited, but
positions such as Kimberly-Clark Corp., top maker of personal paper products,
and International Paper Co., the leading forest products company, declined.
In consumer discretionary, media names Interpublic Group of Cos., Inc. and
Comcast Corp. disappointed, as did our only retail stock, The Gap, Inc. Like
most retailers, Gap came under pressure on the prospects of a weak holiday
shopping season. This, coupled with worries over a slowdown in consumer spending
and a poor product cycle, caused Gap to underperform. The media stocks lagged on
concerns over weak advertising revenues. Finally, our position in Verizon
Communications, Inc. also detracted from returns as the company weathered the
highly competitive landscape for DSL and VoIP. Verizon purchased MCI out of
bankruptcy, so there was some share pressure associated with that transaction as
well.
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. During the period, the Fund's equity
component ranged from a low of 77.6% of net assets on January 5, 2005 to a high
of 98.0% on December 13, 2005. The fixed income allocation ranged from 5.2% of
net assets to 22.6%. Consistent with
4 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
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 continued to shift more assets from our smaller,
tertiary names into the larger companies in the portfolio. We believe these
types of stocks should fare well as the economic cycle evolves. We also
continued our efforts to diversify the equity portfolio in a market environment
where no particular sector seemed particularly ripe for outperformance.
We increased exposure to the financials sector based on our belief that the Fed
is near the end of its interest rate-hiking campaign, which should continue to
support banks and financial stocks. We have already seen this play out somewhat
during the past six months. Four prominent additions in this sector were Morgan
Stanley, MBNA Corp., XL Capital, Ltd. and ACE, Ltd. Other significant new
additions included defense company Northrop Grumman Corp. Defense stocks came
under pressure from fears that defense spending would face scrutiny as the U.S.
budget deficits grew. We believe defense budgets will be unaffected by any
budgetary action and that companies such as Northrop Grumman will rise from
their relatively low levels. We added significantly to our position in
International Business Machines Corp. (IBM), a company that has undergone an
important transformation. Specifically, IBM sold a number of commodity-like
products and businesses, such as the PC, memory and disk drive businesses, and
is now focusing on higher-margin endeavors, such as services, mainframes and
software. We believe the stock represents compelling value.
In terms of sales, we eliminated International Paper from the portfolio as we
became less intrigued with the investment story after the company restructured.
Most other sales were made at profits. We sold Wachovia Corp., a good stock for
a number of years, as financial stocks came under pressure post-Hurricane
Katrina. We found more interesting places in financials to invest the proceeds
as the sector subsequently rallied. We sold Liberty Media Corp. at a slight
profit and eliminated AstraZeneca Group Plc, Seagate Technology and Abbott
Laboratories, after they reached our price targets. We also reduced our position
in Motorola with some profit taking.
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 December 31,
2005, the Fund was invested 93.6% in equities and 5.2% in fixed income
securities. This compared to 88.3% equities and 11.9% fixed income at June 30,
2005. (Allocations may exceed 100% due to a negative cash balance.)
In mid-December, the S&P 500/Citigroup Value Index replaced the S&P 500 Barra
Value Index benchmark. At year-end, the equity portfolio was overweight versus
this new benchmark in the consumer discretionary, consumer staples, energy,
health care and information technology sectors, and underweight in financials,
industrials, materials, telecommunication services and utilities.
In 2005, the market faced continued Fed interest rate hikes, twin deficits,
record-high energy prices and a devastating hurricane season. And yet, the
economy continued to grow at a rate exceeding 3% while corporate earnings
remained robust. We view the 2006 landscape as much the same. Equities face
similar headwinds -- geopolitical uncertainty, budget and current account
deficits, a consumer that could be close to tapped out and the potential for a
couple more Fed rate hikes. Offsetting this is the profitability and overall
financial well-being of Corporate America. We believe the U.S. corporation is
much healthier than the consumer, and with record cash flows, strong earnings
and cash to deploy via dividend increases, share repurchases or investments in
their own businesses, we do not see a recession on the horizon.
While we do not expect earnings growth to decline, we do anticipate a slowdown,
which leads us to favor some of the larger, multinational companies that can
more readily capture market share in all kinds of economic environments. We also
see continued merger-and-acquisition activity and a healthy IPO environment in
2006. With companies challenged to show the same type of earnings growth that
they have over the past few years, we believe they will seek to achieve growth
through merger-and-acquisition and buyout activity, a trend that began to emerge
strongly in 2005. Overall, we are fairly constructive on the markets and expect
the Fed to complete its interest rate-hiking campaign early in 2006 -- a
long-awaited positive for equities.
Kevin M. Rendino
Equity Portfolio Manager
January 9, 2006
- --------------------------------------------------------------------------------
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
1-800-637-3863.
- --------------------------------------------------------------------------------
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 5
Performance Data
About Fund Performance
When the Fund is available for purchase, investors may 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 Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or
account maintenance fees and are available only to eligible investors. Had
the sales charge been included, the Fund's Class I Shares' performance
would have been lower.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain performance data current to the
most recent month-end. Performance results do not reflect the deduction of taxes
that a shareholder would pay on fund distributions or the redemption of fund
shares. Figures shown in each of the following tables assume reinvestment of all
dividends and capital gain distributions, if any, at net asset value on the
ex-dividend date. Investment return and principal value of shares will fluctuate
so that shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the different
levels of account maintenance, distribution and transfer agency fees applicable
to each class, which are deducted from the income available to be paid to
shareholders.
Recent Performance Results
6-Month 12-Month Since Inception
As of December 31, 2005 Total Return Total Return Total Return
===========================================================================================================
ML Basic Value Principal Protected Fund Class A Shares* +4.13% +1.70% +22.42%
- -----------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class B Shares* +3.70 +0.89 +19.46
- -----------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class C Shares* +3.72 +0.92 +19.50
- -----------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class I Shares* +4.31 +1.97 +23.39
- -----------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index** -0.08 +2.43 +12.79
- -----------------------------------------------------------------------------------------------------------
S&P 500(R) Index*** +5.77 +4.91 +49.60
- -----------------------------------------------------------------------------------------------------------
S&P 500 Barra Value Index**** +6.23 +6.33 +65.87
- -----------------------------------------------------------------------------------------------------------
S&P 500/Citigroup Value Index***** +7.87 +8.71 +66.71
- -----------------------------------------------------------------------------------------------------------
* 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.
***** The S&P 500/Citigroup Value Index is designed to provide a comprehensive
measure of large cap U.S. equity "value" performance. It is an unmanaged
float adjusted market capitalization weighted index comprised of stocks
representing approximately half the market capitalization of the S&P 500
Index that have been identified as being on the value end of the
growth-value spectrum. Since inception total return is from 11/13/02.
S&P 500 is a registered trademark of the McGraw-Hill Companies.
6 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 12/31/05 +1.70% -3.64%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/05 +6.67 +4.85
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 12/31/05 +0.89% -3.01%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/05 +5.84 +4.99
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 12/31/05 +0.92% -0.06%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/05 +5.85 +5.85
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
================================================================================
Class I Shares Return
================================================================================
One Year Ended 12/31/05 +1.97%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 12/31/05 +6.94
- --------------------------------------------------------------------------------
Officers and Trustees
Robert C. Doll, Jr., President and Trustee
David O. Beim, Trustee
James T. Flynn, Trustee
W. Carl Kester, Trustee
Karen P. Robards, Trustee
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 7
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
12b-1 fees, and other Fund expenses. The following example (which is based on a
hypothetical investment of $1,000 invested on July 1, 2005 and held through
December 31, 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 July 1, 2005 to
July 1, 2005 December 31, 2005 December 31, 2005
===========================================================================================================
Actual
===========================================================================================================
Class A $1,000 $1,041.30 $ 9.98
- -----------------------------------------------------------------------------------------------------------
Class B $1,000 $1,037.00 $13.84
- -----------------------------------------------------------------------------------------------------------
Class C $1,000 $1,037.20 $13.89
- -----------------------------------------------------------------------------------------------------------
Class I $1,000 $1,043.10 $ 8.71
===========================================================================================================
Hypothetical (5% annual return before expenses)**
===========================================================================================================
Class A $1,000 $1,015.32 $ 9.85
- -----------------------------------------------------------------------------------------------------------
Class B $1,000 $1,011.51 $13.67
- -----------------------------------------------------------------------------------------------------------
Class C $1,000 $1,011.46 $13.72
- -----------------------------------------------------------------------------------------------------------
Class I $1,000 $1,016.58 $ 8.59
- -----------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.95% for Class A, 2.71% for Class B, 2.72% for Class
C and 1.70% for Class I), multiplied by the average account value over the
period, multiplied by 183/365 (to reflect the one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal half year divided by 365.
8 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
Schedule of Investments
Percent of
Industry Shares Held Common Stocks Value Net Assets
====================================================================================================================================
Above-Average Diversified Telecommunication Services 109,000 AT&T, Inc. $ 2,669,410 1.3%
Yield Metals & Mining 78,000 Alcoa, Inc. 2,306,460 1.2
Capital Markets 134,600 The Bank of New York Co., Inc. 4,287,010 2.2
Diversified Telecommunication Services 74,000 BellSouth Corp. 2,005,400 1.0
Multi-Utilities 6,900 Consolidated Edison, Inc. 319,677 0.2
Multi-Utilities 17,100 Dominion Resources, Inc. 1,320,120 0.7
Chemicals 75,500 E.I. du Pont de Nemours & Co. 3,208,750 1.6
Multi-Utilities 12,100 Energy East Corp. 275,880 0.1
Oil, Gas & Consumable Fuels 128,400 Exxon Mobil Corp. 7,212,228 3.6
Electric Utilities 9,100 FPL Group, Inc. 378,196 0.2
Industrial Conglomerates 96,600 General Electric Co. 3,385,830 1.7
Food Products 76,500 General Mills, Inc. 3,772,980 1.9
Pharmaceuticals 58,300 GlaxoSmithKline Plc (c) 2,942,984 1.5
Aerospace & Defense 80,600 Honeywell International, Inc. 3,002,350 1.5
Diversified Financial Services 190,032 JPMorgan Chase & Co. 7,542,370 3.8
Capital Markets 54,700 Mellon Financial Corp. 1,873,475 0.9
Pharmaceuticals 93,100 Pfizer, Inc. 2,171,092 1.1
Multi-Utilities 30,100 Public Service Enterprise Group, Inc. 1,955,597 1.0
Oil, Gas & Consumable Fuels 21,600 Royal Dutch Shell Plc (c) 1,328,184 0.7
Electric Utilities 55,300 The Southern Co. 1,909,509 1.0
Diversified Telecommunication Services 61,900 Verizon Communications, Inc. 1,864,428 0.9
-----------------------
55,731,930 28.1
====================================================================================================================================
Below-Average Insurance 26,000 The Allstate Corp. 1,405,820 0.7
Price/ Insurance 54,600 American International Group, Inc. 3,725,358 1.9
Earnings Commercial Banks 88,600 Bank of America Corp. 4,088,890 2.1
Ratio Health Care Equipment & Supplies 67,500 Baxter International, Inc. 2,541,375 1.3
Diversified Financial Services 71,700 Citigroup, Inc. 3,479,601 1.7
Beverages 142,640 Coca-Cola Enterprises, Inc. 2,734,409 1.4
Insurance 105,900 Genworth Financial, Inc. Class A 3,662,022 1.8
Computers & Peripherals 114,400 Hewlett-Packard Co. 3,275,272 1.6
Household Durables 98,000 Koninklijke Philips Electronics NV 3,047,800 1.5
Food Products 65,700 Kraft Foods, Inc. 1,848,798 0.9
Consumer Finance 63,000 MBNA Corp. 1,710,450 0.9
Hotels, Restaurants & Leisure 81,900 McDonald's Corp. 2,761,668 1.4
Capital Markets 107,100 Morgan Stanley 6,076,854 3.1
Aerospace & Defense 59,800 Northrop Grumman Corp. 3,594,578 1.8
Pharmaceuticals 132,900 Schering-Plough Corp. 2,770,965 1.4
Food Products 39,900 Unilever NV (c) 2,739,933 1.4
IT Services 330,600 Unisys Corp. (a) 1,927,398 1.0
-----------------------
51,391,191 25.9
====================================================================================================================================
Low Communications Equipment 168,700 3Com Corp. (a) 607,320 0.3
Price-to-Book Oil, Gas & Consumable Fuels 14,700 Anadarko Petroleum Corp. 1,392,825 0.7
Value Media 81,800 Comcast Corp. Special Class A (a) 2,101,442 1.1
Machinery 39,200 Deere & Co. 2,669,912 1.3
Energy Equipment & Services 25,700 Diamond Offshore Drilling 1,787,692 0.9
Energy Equipment & Services 121,900 GlobalSantaFe Corp. 5,869,485 2.9
Energy Equipment & Services 29,300 Halliburton Co. 1,815,428 0.9
Insurance 22,900 Hartford Financial Services
Group, Inc. 1,966,881 1.0
Household Products 63,700 Kimberly-Clark Corp. 3,799,705 1.9
Semiconductors & Semiconductor Equipment 337,700 LSI Logic Corp. (a) 2,701,600 1.4
Communications Equipment 84,500 Motorola, Inc. 1,908,855 1.0
Semiconductors & Semiconductor Equipment 95,400 Novellus Systems, Inc. (a) 2,301,048 1.2
Aerospace & Defense 107,300 Raytheon Co. 4,308,095 2.2
Insurance 104,834 The St. Paul Travelers Cos., Inc. 4,682,935 2.4
Computers & Peripherals 752,200 Sun Microsystems, Inc. (a) 3,151,718 1.6
Media 291,800 Time Warner, Inc. 5,088,992 2.6
Industrial Conglomerates 165,900 Tyco International Ltd. 4,787,874 2.4
Media 80,400 Walt Disney Co. 1,927,188 0.9
Commercial Banks 97,700 Wells Fargo & Co. 6,138,491 3.1
-----------------------
59,007,486 29.8
====================================================================================================================================
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 9
Schedule of Investments (concluded)
Percent of
Industry Shares Held Common Stocks Value Net Assets
====================================================================================================================================
Price-to-Cash Aerospace & Defense 4,400 Lockheed Martin Corp. $ 279,972 0.1%
Flow
====================================================================================================================================
Price-to- Insurance 23,200 XL Capital Ltd. Class A 1,563,216 0.8
Earnings
Per Share
====================================================================================================================================
Special Semiconductors & Semiconductor Equipment 99,700 Applied Materials, Inc. 1,788,618 0.9
Situations Energy Equipment & Services 64,200 BJ Services Co. 2,354,214 1.2
Semiconductors & Semiconductor Equipment 132,400 Fairchild Semiconductor
International, Inc. (a) 2,238,884 1.1
Specialty Retail 126,400 The Gap, Inc. 2,229,696 1.1
Computers & Peripherals 61,900 International Business Machines Corp. 5,088,180 2.6
Media 279,400 Interpublic Group of Cos., Inc. (a) 2,696,210 1.4
Communications Equipment 67,200 Nokia Oyj (c) 1,229,760 0.6
------------------------
17,625,562 8.9
---------------------------------------------------------------------------------------------------------------------
Total Common Stocks
(Cost -- $154,551,468) 185,599,357 93.6
=====================================================================================================================
=====================================================================================================================
Face
Amount U.S. Government Obligations
=====================================================================================================================
U.S. Treasury STRIPS (b)(e):
$9,850,000 3.585% due 8/15/2009 8,423,326 4.2
2,313,000 3.915% due 11/15/2009 1,955,984 1.0
---------------------------------------------------------------------------------------------------------------------
Total U.S. Government Obligations
(Cost -- $10,650,376) 10,379,310 5.2
=====================================================================================================================
=====================================================================================================================
Beneficial
Interest Short-Term Securities
=====================================================================================================================
$2,901,610 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (d) 2,901,610 1.5
---------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost -- $2,901,610) 2,901,610 1.5
=====================================================================================================================
Total Investments (Cost -- $168,103,454*) 198,880,277 100.3
Liabilities in Excess of Other Assets (667,606) (0.3)
------------------------
Net Assets $198,212,671 100.0%
========================
For Fund compliance purposes, the Fund's industry classifications refer to
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 industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
* The cost and unrealized appreciation (depreciation) of investments, as of
December 31, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost ......................................... $171,764,287
============
Gross unrealized appreciation .......................... $ 31,224,850
Gross unrealized depreciation .......................... (4,108,860)
------------
Net unrealized appreciation ............................ $ 27,115,990
============
(a) Non-income producing security.
(b) Separately Traded Registered Interest and Principal of Securities
(STRIPS).
(c) Depositary receipts.
(d) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $2,808,467 $38,457
--------------------------------------------------------------------------
(e) Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of the purchase.
See Notes to Financial Statements.
10 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
Statement of Assets and Liabilities
As of December 31, 2005
==========================================================================================================================
Assets
- --------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$165,201,844) ........................................ $ 195,978,667
Investments in affiliated securities, at value
(identified cost--$2,901,610) .......................................... 2,901,610
Foreign cash (cost--$25,374) ........................................... 25,448
Receivables:
Securities sold ..................................................... $ 283,350
Dividends ........................................................... 277,101 560,451
-------------
Prepaid expenses ....................................................... 946
-------------
Total assets ........................................................... 199,467,122
-------------
==========================================================================================================================
Liabilities
- --------------------------------------------------------------------------------------------------------------------------
Payables:
Beneficial interest redeemed ........................................ 400,694
Securities purchased ................................................ 370,235
Distributor ......................................................... 153,622
Financial warranty fee .............................................. 134,866
Investment adviser .................................................. 100,835
Other affiliates .................................................... 54,509 1,214,761
-------------
Accrued expenses and other liabilities ................................. 39,690
-------------
Total liabilities ...................................................... 1,254,451
-------------
==========================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Net assets ............................................................. $ 198,212,671
=============
==========================================================================================================================
Net Assets Consist of
- --------------------------------------------------------------------------------------------------------------------------
Paid-in capital, unlimited shares of no par value authorized ........... $ 168,398,160
Accumulated investment loss--net ....................................... $ (466,759)
Accumulated distributions in excess of realized capital gains--net ..... (495,627)
Unrealized appreciation--net ........................................... 30,776,897
-------------
Total accumulated earnings--net ........................................ 29,814,511
-------------
Net Assets ............................................................. $ 198,212,671
=============
==========================================================================================================================
Net Asset Value
- --------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $7,424,684 and 685,214 beneficial
interest outstanding ................................................... $ 10.84
=============
Class B--Based on net assets of $109,689,037 and 10,183,684 beneficial
interest outstanding ................................................... $ 10.77
=============
Class C--Based on net assets of $71,610,014 and 6,638,638 beneficial
interest outstanding ................................................... $ 10.79
=============
Class I--Based on net assets of $9,488,936 and 875,758 beneficial
interest outstanding ................................................... $ 10.84
=============
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 11
Statement of Operations
For the Six Months Ended December 31, 2005
==========================================================================================================================
Investment Income
- --------------------------------------------------------------------------------------------------------------------------
Dividends (net of $13,696 foreign withholding tax) ..................... $ 1,848,103
Interest (including $38,457 from affiliates) ........................... 438,786
-------------
Total income ........................................................... 2,286,889
-------------
==========================================================================================================================
Expenses
- --------------------------------------------------------------------------------------------------------------------------
Financial warranty fees ................................................ $ 847,670
Investment advisory fees ............................................... 679,297
Account maintenance and distribution fees--Class B ..................... 574,893
Account maintenance and distribution fees--Class C ..................... 378,443
Transfer agent fees--Class B ........................................... 61,755
Accounting services .................................................... 57,031
Transfer agent fees--Class C ........................................... 41,707
Printing and shareholder reports ....................................... 25,458
Professional fees ...................................................... 24,204
Custodian fees ......................................................... 21,760
Trustees' fees and expenses ............................................ 12,178
Account maintenance fees--Class A ...................................... 10,331
Transfer agent fees--Class I ........................................... 4,656
Transfer agent fees--Class A ........................................... 3,815
Pricing fees ........................................................... 819
Other .................................................................. 9,631
-------------
Total expenses ......................................................... 2,753,648
-------------
Investment loss--net ................................................... (466,759)
-------------
==========================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- --------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net .................................................... 3,893,002
Options written--net ................................................ (4,962)
Foreign currency transactions--net .................................. (61) 3,887,979
-------------------------------
Change in unrealized appreciation/depreciation on:
Investments--net .................................................... 4,414,706
Options written--net ................................................ (10,150)
Foreign currency transactions--net .................................. (995) 4,403,561
-------------------------------
Total realized and unrealized gain--net ................................ 8,291,540
-------------
Net Increase in Net Assets Resulting from Operations ................... $ 7,824,781
=============
See Notes to Financial Statements.
12 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2005 2005
==========================================================================================================================
Operations
- --------------------------------------------------------------------------------------------------------------------------
Investment loss--net ................................................... $ (466,759) $ (270,924)
Realized gain--net ..................................................... 3,887,979 13,230,057
Change in unrealized appreciation/depreciation--net .................... 4,403,561 (12,520,531)
-------------------------------
Net increase in net assets resulting from operations ................... 7,824,781 438,602
-------------------------------
==========================================================================================================================
Distributions to Shareholders
- --------------------------------------------------------------------------------------------------------------------------
Realized gain--net:
Class A ............................................................. (330,265) (731,649)
Class B ............................................................. (4,018,149) (8,325,142)
Class C ............................................................. (2,584,549) (5,653,890)
Class I ............................................................. (456,886) (903,280)
-------------------------------
Net decrease in net assets resulting from distributions to shareholders (7,389,849) (15,613,961)
-------------------------------
==========================================================================================================================
Beneficial Interest Transactions
- --------------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from beneficial interest transactions (16,709,561) (48,562,747)
-------------------------------
==========================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets ........................................... (16,274,629) (63,738,106)
Beginning of period .................................................... 214,487,300 278,225,406
-------------------------------
End of period* ......................................................... $ 198,212,671 $ 214,487,300
===============================
* Accumulated investment loss--net .................................. $ (466,759) --
===============================
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 13
Financial Highlights
Class A
---------------------------------------------------------------
For the
For the Six For the Year Ended Period
Months Ended June 30, November 13,
The following per share data and ratios have been derived December 31, ------------------------- 2002+ to
from information provided in the financial statements. 2005 2005 2004 June 30, 2003
============================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.88 $ 11.52 $ 10.53 $ 10.00
--------------------------------------------------------------
Investment income--net ................. .01* .06* .06* .05
Realized and unrealized gain--net ...... .45 .06 1.03 .49
--------------------------------------------------------------
Total from investment operations ....... .46 .12 1.09 .54
--------------------------------------------------------------
Less dividends and distributions from:
Investment income--net ................ -- -- (.10) (.01)
Realized gain--net .................... (.50) (.76) -- --
--------------------------------------------------------------
Total dividends and distributions ...... (.50) (.76) (.10) (.01)
--------------------------------------------------------------
Net asset value, end of period ......... $ 10.84 $ 10.88 $ 11.52 $ 10.53
==============================================================
============================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 4.13%@@ .96% 10.44% 5.43%@@
==============================================================
============================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.95%@ 1.93% 2.00% 2.05%@
==============================================================
Investment income--net ................. .24%@ .57% .51% .83%@
==============================================================
============================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 7,425 $ 8,735 $ 13,022 $ 22,090
==============================================================
Portfolio turnover ..................... 45.04% 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.
14 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
Financial Highlights (continued)
Class B
---------------------------------------------------------------
For the
For the Six For the Year Ended Period
Months Ended June 30, November 13,
The following per share data and ratios have been derived December 31, ------------------------- 2002+ to
from information provided in the financial statements. 2005 2005 2004 June 30, 2003
============================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.77 $ 11.45 $ 10.48 $ 10.00
--------------------------------------------------------------
Investment income (loss)--net .......... (.03)* (.02)* (.03)* --++
Realized and unrealized gain--net ...... .43 .05 1.03 .49
--------------------------------------------------------------
Total from investment operations ....... .40 .03 1.00 .49
--------------------------------------------------------------
Less dividends and distributions from:
Investment income--net ................ -- -- (.03) (.01)
Realized gain--net .................... (.40) (.71) -- --
--------------------------------------------------------------
Total dividends and distributions ...... (.40) (.71) (.03) (.01)
--------------------------------------------------------------
Net asset value, end of period ......... $ 10.77 $ 10.77 $ 11.45 $ 10.48
==============================================================
============================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 3.70%@@ .19% 9.58% 4.93%@@
==============================================================
============================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 2.71%@ 2.70% 2.76% 2.82%@
==============================================================
Investment income (loss)--net .......... (.53%)@ (.20%) (.30%) .07%@
==============================================================
============================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $109,689 $117,140 $144,787 $159,057
==============================================================
Portfolio turnover ..................... 45.04% 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 DECEMBER 31, 2005 15
Financial Highlights (continued)
Class C
---------------------------------------------------------------
For the
For the Six For the Year Ended Period
Months Ended June 30, November 13,
The following per share data and ratios have been derived December 31, ------------------------- 2002+ to
from information provided in the financial statements. 2005 2005 2004 June 30, 2003
============================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.78 $ 11.45 $ 10.48 $ 10.00
--------------------------------------------------------------
Investment income (loss)--net .......... (.03)* (.02)* (.03)* --++
Realized and unrealized gain--net ...... .44 .06 1.03 .49
--------------------------------------------------------------
Total from investment operations ....... .41 .04 1.00 .49
--------------------------------------------------------------
Less dividends and distributions from:
Investment income--net ................ -- -- (.03) (.01)
Realized gain--net .................... (.40) (.71) -- --
--------------------------------------------------------------
Total dividends and distributions ...... (.40) (.71) (.03) (.01)
--------------------------------------------------------------
Net asset value, end of period ......... $ 10.79 $ 10.78 $ 11.45 $ 10.48
==============================================================
============================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 3.72%@@ .23% 9.54% 4.93%@@
==============================================================
============================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 2.72%@ 2.70% 2.76% 2.82%@
==============================================================
Investment income (loss)--net .......... (.53%)@ (.20%) (.29%) .06%@
==============================================================
============================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 71,610 $ 78,110 $104,840 $129,392
==============================================================
Portfolio turnover ..................... 45.04% 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.
16 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
Financial Highlights (concluded)
Class I
---------------------------------------------------------------
For the
For the Six For the Year Ended Period
Months Ended June 30, November 13,
The following per share data and ratios have been derived December 31, ------------------------- 2002+ to
from information provided in the financial statements. 2005 2005 2004 June 30, 2003
============================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.90 $ 11.53 $ 10.55 $ 10.00
--------------------------------------------------------------
Investment income--net ................. .03* .09* .08* .08
Realized and unrealized gain--net ...... .45 .06 1.03 .48
--------------------------------------------------------------
Total from investment operations ....... .48 .15 1.11 .56
--------------------------------------------------------------
Less dividends and distributions from:
Investment income--net ................ -- -- (.13) (.01)
Realized gain--net .................... (.54) (.78) -- --
--------------------------------------------------------------
Total dividends and distributions ...... (.54) (.78) (.13) (.01)
--------------------------------------------------------------
Net asset value, end of period ......... $ 10.84 $ 10.90 $ 11.53 $ 10.55
==============================================================
============================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 4.31%@@ 1.22% 10.64% 5.63%@@
==============================================================
============================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Expenses ............................... 1.70%@ 1.68% 1.75% 1.80%@
==============================================================
Investment income--net ................. .49%@ .82% .73% 1.08%@
==============================================================
============================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 9,489 $ 10,503 $ 15,576 $ 21,877
==============================================================
Portfolio turnover ..................... 45.04% 64.69% 87.57% 107.66%
==============================================================
* Based on average shares outstanding.
** Total investment returns exclude the effect of sales charges. Effective
December 28, 2005, Class I Shares are no longer subject to any front-end
sales charge.
+ Commencement of operations.
@ Annualized.
@@ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 17
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Basic Value Principal Protected Fund (the "Fund") is part of
Merrill Lynch Principal Protected Trust (the "Trust"). Under the Investment
Company Act of 1940, as amended, the Fund is diversified and the Trust is
registered as an open-end management investment company. The Fund's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of management,
necessary to present a fair statement of the results for the interim period. All
such adjustments are of a normal, recurring nature. The Fund offers multiple
classes of shares. Shares of the Fund were offered during the initial offering
period but will not be offered during the Guarantee Period from November 13,
2002 through November 13, 2009 (the "Guarantee Maturity Date"), except in
connection with reinvestment of dividends and distributions. The Fund will be
offered on a continuous basis after this date. During the Guarantee Period, the
Fund will seek long-term growth of capital to the extent permitted by a strategy
that seeks to use investments in common stocks, U.S. Treasury bonds, including
zero coupon bonds, and other fixed income instruments, to protect the original
principal value of the Fund (less redemptions, cash distributions and dividends
and extraordinary expenses) at the Guarantee Maturity Date.
The Trust, on behalf of the Fund, has entered into a Financial Warranty
Agreement with Main Place Funding, LLC (the "Warranty Provider"). The Financial
Warranty Agreement is intended to make sure that on the Guarantee Maturity Date,
each shareholder of the Fund will be entitled to redeem his or her shares for an
amount no less than the initial value of that shareholder's account (less
expenses and sales charges not covered by the Financial Warranty Agreement),
provided that all dividends and distributions received from the Fund have been
reinvested and no shares have been redeemed (the "Guaranteed Amount"). The Fund
will pay to the Warranty Provider, under the Financial Warranty Agreement, an
annual fee equal to .80% of the Fund's average daily net assets during the
Guarantee Period. If the value of the Fund's assets on the Guarantee Maturity
Date is insufficient to result in the value of each shareholder's account being
at least equal to the shareholder's Guaranteed Amount, the Warranty provider
will pay the Fund an amount sufficient to make sure that each shareholder's
account can be redeemed for an amount equal to his or her Guaranteed Amount.
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.
18 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 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 based upon quoted fair valuations
received daily by the Trust from a pricing service or counterparty. 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,
money market instruments and certain fixed income securities, is substantially
completed each day at various times prior to the close of business on the New
York Stock Exchange ("NYSE"). The values of such securities used in computing
the net asset value of the Fund's shares are determined as of such times.
Foreign currency exchange rates also are generally determined prior to the close
of business on the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of business on the NYSE that may not be reflected in
the computation of the Fund's net asset value. If events (for example, a company
announcement, market volatility or a natural disaster) occur during such periods
that are expected to materially affect the value of such securities, those
securities may be valued at their fair value as determined in good faith by the
Trust's Board of Trustees or by the Investment Adviser using a pricing service
and/or procedures approved by the Trust's Board of Trustees.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options -- The Fund may write and purchase call and put options. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is added to
(or deducted from) the basis of the security acquired or deducted from (or
added to) the proceeds of the security sold. When an option expires (or
the Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
The Fund invests in foreign securities, which may involve a
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 19
Notes to Financial Statements (continued)
number of risk factors and special considerations not present with investments
in securities of U.S. corporations.
(d) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
(f) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(g) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
the annual rate of .65% of the Fund's average daily net assets. FAM has entered
into a contractual arrangement with the Fund under which the expenses incurred
by each class of shares of the Fund (excluding distribution and/or account
maintenance fees) will not exceed 1.99%. This arrangement has a one-year term
and is renewable.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class A ..................................... .25% --
Class B ..................................... .25% .75%
Class C ..................................... .25% .75%
- --------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), 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 six months ended December 31, 2005, MLPF&S received contingent deferred
sales charges of $187,517 and $82 relating to transactions in Class B and Class
C Shares, respectively.
20 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
Notes to Financial Statements (concluded)
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.
In addition, MLPF&S received $28,130 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended December
31, 2005.
For the six months ended December 31, 2005, the Fund reimbursed FAM $2,280 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 trustees of the Trust 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 six
months ended December 31, 2005 were $91,268,748 and $119,074,671, respectively.
Transactions in call options written for the six months ended December 31, 2005
were as follows:
- -------------------------------------------------------------------------------
Number of Premiums
Contracts Received
- -------------------------------------------------------------------------------
Outstanding call options written,
beginning of period ........................ 382 $ 40,360
Options written .............................. 376 18,423
Options expired .............................. (758) (58,783)
------------------------
Outstanding call options written,
end of period .............................. -- --
========================
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions were
$16,709,561 and $48,562,747 for the six months ended December 31, 2005 and for
the year ended June 30, 2005, respectively.
Transactions in beneficial interest for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Six Months Dollar
Ended December 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions .......... 28,638 $ 314,157
Shares redeemed .......................... (146,561) (1,639,242)
------------------------------
Net decrease ............................. (117,923) $ (1,325,085)
==============================
- -------------------------------------------------------------------------------
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 B Shares for the Six Months Dollar
Ended December 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions .......... 341,017 $ 3,720,491
Shares redeemed .......................... (1,035,762) (11,389,731)
------------------------------
Net decrease ............................. (694,745) $ (7,669,240)
==============================
- -------------------------------------------------------------------------------
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 C Shares for the Six Months Dollar
Ended December 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions .......... 224,208 $ 2,448,351
Shares redeemed .......................... (833,362) (9,176,855)
------------------------------
Net decrease ............................. (609,154) $ (6,728,504)
==============================
- -------------------------------------------------------------------------------
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 I Shares for the Six Months Dollar
Ended December 31, 2005 Shares Amount
- -------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions .......... 37,577 $ 412,219
Shares redeemed .......................... (125,244) (1,398,951)
------------------------------
Net decrease ............................. (87,667) $ (986,732)
==============================
- -------------------------------------------------------------------------------
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)
==============================
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 21
Disclosure of Investment Advisory Agreement
Activities and Composition of the Board of Trustees
All but one member of the Board of Trustees is an independent trustee whose only
affiliation with Fund Asset Management, L.P. (the "Investment Adviser") or other
Merrill Lynch affiliates is as a trustee of the Trust and certain other funds
advised by the Investment Adviser or its affiliates. The Chair of the Board is
an independent trustee. New trustee nominees are chosen by a Nominating
Committee comprised entirely of independent trustees. All independent trustees
also are members of the Board's Audit Committee and the independent trustees
meet in executive session at each in-person Board meeting. The Board and the
Audit Committee meet in person for at least two days each quarter and conduct
other in-person and telephone meetings throughout the year, some of which are
formal Board meetings, and some of which are informational meetings. Independent
counsel to the independent trustees attends all in-person Board and Audit
Committee meetings and other meetings at the independent trustees' request.
Investment Advisory Agreement -- Matters Considered by the Board
Every year, the Board considers approval of the Trust's investment advisory
agreement (the "Investment Advisory Agreement"). The Board assesses the nature,
scope and quality of the services provided to the Trust by the personnel of the
Investment Adviser and their affiliates, including administrative services,
shareholder services, oversight of fund accounting, marketing services and
assistance in meeting legal and regulatory requirements. The Board also receives
and assesses information regarding the services provided to the Trust by certain
unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered are: (a)
fees (in addition to management fees) paid to the Investment Adviser and its
affiliates by the Trust, such as transfer agency fees and fees for marketing and
distribution; (b) Trust operating expenses paid to third parties; (c) the
resources devoted to and compliance reports relating to the Trust's investment
objective, policies and restrictions, and its compliance with its Code of Ethics
and the Investment Adviser's compliance policies and procedures; and (d) the
nature, cost and character of non-investment management services provided by the
Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by the
Investment Adviser to be of high quality. The Board also believes that the
Investment Adviser is financially sound and well managed and notes that the
Investment Adviser is affiliated with one of America's largest financial firms.
The Board works closely with the Investment Adviser in overseeing the Investment
Adviser's efforts to achieve good performance. As part of this effort, the Board
discusses portfolio manager effectiveness and, when performance is not
satisfactory, discusses with the Investment Adviser taking steps such as
changing investment personnel.
Annual Consideration of Approval by the Board of Trustees
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, the Board requests and receives materials specifically
relating to the Trust's Investment Advisory Agreement. These materials include
(a) information compiled by Lipper Inc. ("Lipper") on the fees and expenses and
the investment performance of the Trust as compared to a comparable group of
funds as classified by Lipper; (b) sales and redemption data for the Trust; (c)
a discussion by the Trust's portfolio management team of investment strategies
used by the Trust during its most recent fiscal year; (d) information on the
profitability to the Investment Adviser and its affiliates of the Investment
Advisory Agreement and other relationships with the Trust; and (e) information
provided by the Investment Adviser concerning investment advisory fees charged
to other clients, such as other mutual funds and offshore funds under similar
investment mandates. The Board also considers other matters it deems important
to the approval process such as payments made to the Investment Adviser or its
affiliates relating to the distribution of Trust shares, services related to the
valuation and pricing of Trust portfolio holdings, the Trust's portfolio
turnover statistics, and direct and indirect benefits to the Investment Adviser
and its affiliates from their relationship with the Trust.
Certain Specific Renewal Data
In connection with the most recent renewal of the Trust's Investment Advisory
Agreement in November 2005, the independent trustees' and Board's review
included the following:
Services Provided by the Investment Adviser -- The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including the
investment advisory services and the resulting performance of the Trust. The
Board focused primarily on the Investment Adviser's investment advisory services
and the Trust's investment performance.
22 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005
The Board compared Trust performance -- both including and excluding the effects
of the Trust's fees and expenses -- to the performance of a comparable group of
mutual funds, and the performance of a relevant index or combination of indexes.
While the Board reviews performance data at least quarterly, consistent with the
Investment Adviser's investment goals, the Board attaches more importance to
performance over relatively long periods of time, typically three to five years.
For a fund in operation for less than three years, such as the Trust, the Board
considers performance for the life of the fund. For the periods ended August 31,
2005, the Trust's performance after fees and expenses ranked in the first
quintile for the one-year and since inception periods. The Board concluded that
the nature and quality of the services supported the continuation of the
Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process -- The Board reviews
at least annually the Trust's investment objectives and strategies. The Board
discusses with senior management of the Investment Adviser responsible for
investment operations and the senior management of the Investment Adviser's
equity investing group the strategies being used to achieve the stated
objectives. Among other things, the Board considers the size, education and
experience of the Investment Adviser's investment staff, its use of technology,
and the Investment Adviser's approach to training and retaining portfolio
managers and other research, advisory and management personnel. The Board also
reviews the Investment Adviser's compensation policies and practices with
respect to the Trust's portfolio managers. The Board also considered the
experience of the Trust's co-portfolio management team and noted that Mr.
Martorelli and Mr. Rendino, the Trust's co-portfolio managers, have over twenty
and seventeen years' experience in portfolio management, respectively. Moreover,
the Investment Adviser and its investment staff have extensive experience in
analyzing and managing the types of investments used by the Trust. The Board
concluded that the Trust benefits from that expertise.
Management Fees and Other Expenses -- The Board reviews the Trust's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds in its Lipper category. It also compares the Trust's total
expenses to those of other comparable funds. The Board was advised by the
Investment Adviser that there were no comparable clients or accounts with
similar investment mandates. The Board noted that the fees charged to offshore
funds exceeded those being charged to the Trust. The Board noted that the
Trust's contractual and actual management fee rates were lower than the median
of management fees charged by comparable funds, as determined by Lipper, while
the Trust's total expenses were above the median expenses charged by such
comparable funds. The Board also noted that if all the Fund's assets are
irreversibly allocated to the Fund's Protection Component under the terms of the
Warranty Agreement, the management fee will be reduced to 0.25%. The Board
concluded that the Trust's management fee rate and overall expense ratio are
reasonable when compared to those of other comparable funds.
Profitability -- The Board considers the cost of the services provided to the
Trust by the Investment Adviser, and the Investment Adviser's and its
affiliates' profits relating to the management and distribution of the Trust and
the MLIM/FAM-advised funds. As part of its analysis, the Board reviewed the
Investment Adviser's methodology in allocating its costs to the management of
the Trust and concluded that there was a reasonable basis for the allocation.
The Board also considered federal court decisions discussing an investment
adviser's profitability and profitability levels considered to be reasonable in
those decisions. The Board believes that the profits of the Investment Adviser
and its affiliates are acceptable in relation to the nature and quality of
services provided and given the level of fees and expenses overall.
Economies of Scale -- The Board considered the extent to which economies of
scale might be realized as the assets of the Trust increase and whether there
should be changes in the management fee rate or structure in order to enable the
Trust to participate in these economies of scale. While there was no evidence to
date that the Trust's assets have reached a level where such economies are
effectively available, the Board will continue to seek information relating to
economies of scale. The Board determined that the management fee structure was
reasonable and that no changes were currently necessary.
Conclusion
After the independent trustees deliberated in executive session, the entire
Board, including all of the independent trustees, approved the renewal of the
existing Investment Advisory Agreement, concluding that the advisory fee was
reasonable in relation to the services provided and that a contract renewal was
in the best interests of the shareholders.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND DECEMBER 31, 2005 23
[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 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's Web
site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Basic Value Principal Protected Fund
Box 9011
Princeton, NJ
08543-9011
#BVPP -- 12/05
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch Principal
Protected Trust
By: /s/ Robert C. Doll, Jr.
--------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: February 21, 2006
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: February 21, 2006
By: /s/ Donald C. Burke
--------------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: February 21, 2006