UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21162
Name of Fund: Merrill Lynch Basic Value Principal Protected Fund of Merrill
Lynch Principal Protected Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Merrill Lynch Basic Value Principal Protected Fund of Merrill
Lynch Principal Protected Trust, 800 Scudders Mill Road, Plainsboro, NJ
08536. Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 06/30/06
Date of reporting period: 07/01/05 - 06/30/06
Item 1 - Report to Stockholders
Annual Report
June 30, 2006
Merrill Lynch
Basic Value Principal
Protected Fund
Merrill Lynch Basic Value Principal Protected Fund
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company ("New BlackRock") that will be one of the world's largest
asset management firms with over $1 trillion in assets under management (based
on combined assets under management as of June 30, 2006) (the "Transaction").
The Transaction is expected to close at the end of the third quarter of 2006, at
which time the new company will operate under the BlackRock name. The Fund's
Board of Trustees has approved a new investment advisory agreement with
BlackRock Advisors, Inc. or its successor on substantially the same terms and
for the same advisory fee as the current investment advisory agreement with the
Investment Adviser. If the new agreement is approved by the Fund's shareholders,
BlackRock Advisors, Inc. or its successor is expected to become the investment
adviser of the Fund upon the closing of the Transaction.
Portfolio Information as of June 30, 2006
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
Exxon Mobil Corp. ............................................ 4.2%
JPMorgan Chase & Co. ......................................... 3.9
Wells Fargo & Co. ............................................ 3.4
Morgan Stanley ............................................... 3.3
Bank of America Corp. ........................................ 2.9
International Business Machines Corp. ........................ 2.8
Raytheon Co. ................................................. 2.5
Citigroup, Inc. .............................................. 2.5
Time Warner, Inc. ............................................ 2.5
Kimberly-Clark Corp. ......................................... 2.2
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
- --------------------------------------------------------------------------------
Diversified Financial Services ............................... 9.3%
Insurance .................................................... 9.0
Media ........................................................ 7.3
Pharmaceuticals .............................................. 7.2
Aerospace & Defense .......................................... 6.1
- --------------------------------------------------------------------------------
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 Criteria Total Investments
- --------------------------------------------------------------------------------
Above-Average Yield .......................................... 34.6%
Below-Average Price/Earnings Ratio ........................... 29.3
Low Price-to-Book Value ...................................... 26.9
Special Situations ........................................... 7.6
Low Price-to-Earnings Per Share .............................. 1.0
Other* ....................................................... 0.6
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments and options.
2 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
A Letter From the President
Dear Shareholder
By now, you have probably heard of the important changes unfolding at Merrill
Lynch Investment Managers ("MLIM"). We have been communicating with
shareholders, via letters like this and in a detailed proxy mailing, about
MLIM's impending union with another highly regarded investment manager --
BlackRock, Inc. ("BlackRock"). This transaction marks the next chapter in MLIM's
growth story and, we believe, will be a benefit to our investors.
MLIM, a division of Merrill Lynch with over $583 billion in assets under
management, is a leading investment manager offering more than 100 investment
strategies in vehicles ranging from mutual funds to institutional portfolios.
BlackRock, with $464.1 billion in assets under management, is one of the largest
publicly traded investment management firms in the United States managing assets
on behalf of institutional and individual investors worldwide through a variety
of equity, fixed income, liquidity and alternative investment products. At the
completion of the transaction, which is expected by the end of third quarter
2006, the resultant firm will be a top-10 investment manager worldwide with over
$1 trillion in assets under management.*
The combined company, to be known as BlackRock, will provide a wide selection of
high-quality investment solutions across a range of asset classes and investment
styles. The organization will have over 4,500 employees in 18 countries and a
major presence in key markets worldwide. MLIM and BlackRock possess
complementary capabilities that together create a well-rounded organization
uniting some of the finest money managers in the industry. The firms share
similar values and beliefs -- each strives for excellence in all areas, and both
make investment performance their single most important mission. As such, our
combination only reinforces our commitment to shareholders.
Most of MLIM's investment products -- including mutual funds, separately managed
accounts, annuities and variable insurance funds -- eventually will carry the
"BlackRock" name. This will be reflected in newspaper and online information
sources beginning in October. Your account statements will reflect the BlackRock
name beginning with the October month-end reporting period. Unless otherwise
communicated via a proxy statement, your funds will maintain the same investment
objectives that they do today. Importantly, the MLIM/BlackRock union will not
affect your brokerage account or your relationship with your financial advisor.
If you are a client of Merrill Lynch, you will remain a client of Merrill Lynch.
As always, we thank you for entrusting us with your investment assets. We look
forward to continuing to serve your investment needs with even greater strength
and scale as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.047 trillion in assets under management as of June 30, 2006.
Data, including assets under management, are as of June 30, 2006.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 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 fiscal year in light of the existing market
conditions?
For the 12-month period ended June 30, 2006, Merrill Lynch Basic Value Principal
Protected Fund's Class A, Class B, Class C and Class I Shares had total returns
of +8.93%, +8.12%, +8.15% and +9.22%, respectively. (Fund results shown do not
reflect sales charges and would be lower if sales charges were included.
Complete performance information can be found on pages 6 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 Citigroup Value Index,
returned +8.63% and +14.90%, respectively. Because the Fund incorporates a fixed
income component, its returns will differ from those of its all-equity
benchmarks. Notably, the Fund's 12-month results far exceeded the +7.31% average
return of the Lipper Mixed-Asset Target Allocation Growth Funds category. (By
portfolio practice, funds in this Lipper category maintain a mix of 60% - 80%
equity securities, with the remainder invested in bonds, cash and cash
equivalents.)
The U.S. economy remained resilient during the past year, despite record-high
oil prices, a vigilant Federal Reserve Board (the Fed) and two catastrophic
hurricanes. Gross domestic product (GDP) growth of just 1.7% in the fourth
quarter of 2005 was followed by a 5.6% rate of growth in the first quarter of
2006. Corporate earnings also continued to come in very strong. Dr. Ben Bernanke
replaced long-time Fed Chairman Alan Greenspan in January. Although the markets
initially anticipated that the Fed's monetary tightening campaign might pause
soon after Dr. Bernanke's installment, the central bank proceeded to raise
interest rates in January, March, May and June. This brought the federal funds
rate to 5.25% at period-end. Tough talk from Chairman Bernanke regarding his
desire to curtail inflation has led many observers to speculate that the Fed
will continue to raise interest rates. Because Chairman Bernanke has stated he
is "data dependent" in determining monetary policy, each economic report has
received an exaggerated reaction in the marketplace. As such, Chairman
Bernanke's words have led to greater volatility and uncertainty in the markets,
particularly in the final quarter of the period.
Energy continued to be a strong performer in the Fund's equity portfolio, led by
GlobalSantaFe Corp. and Diamond Offshore Drilling. However, the largest
contribution to performance came from the information technology (IT) sector,
especially Agilent Technologies, Inc., Motorola, Inc. and BEA Systems. We also
saw positive attribution from Alcoa, Inc. which benefited from rising aluminum
prices, and Morgan Stanley, where the new CEO was able to successfully
restructure and improve the company's fortunes. It was a good environment for
investment banking companies in general, particularly amid the robust
merger-and-acquisition activity, and our positions in JPMorgan Chase & Co.,
Citicorp and Bank of America, Corp. performed well, as did our position in
Genworth Financial, Inc. In telecommunication services, AT&T, Inc.'s purchase of
BellSouth Corp. benefited the share prices of both companies.
Detracting from performance during the period were our positions in the consumer
sectors, which largely reflected a slowdown in consumer spending patterns. In
consumer discretionary, Interpublic Group of Companies, Inc., Foot Locker, Inc.
and The Gap, Inc. hurt performance. In consumer staples, Coca Cola Enterprises,
Inc. and Kimberly-Clark Corp. detracted from Fund results. Both companies
require oil and gas to run their manufacturing facilities and were pressured by
high energy and commodity prices.
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 78.7% of net assets to a high of 100%. The fixed
income allocation ranged from 0% of net assets to 21.3%. Consistent with its
stated investment strategy, the Fund's fixed income component was invested in
fixed income instruments, including U.S. Treasury zero-coupon bonds, set to
mature close to the expiration of the Fund (November 13, 2009).
In the equity portfolio, we reduced exposure to the energy sector through the
liquidations of Diamond Offshore Drilling and Royal Dutch Petroleum Co. and by
trimming positions in GlobalSantaFe Corp., BJ Services Co., Halliburton Co. and
Anadarko Petroleum Corp. While we are not bearish on energy, the risk/reward
tradeoff is simply different today than it was a few years ago. Many of our
energy holdings had reached our price targets, leading us to believe that the
elevated prices for crude oil and natural gas were unsustainably high. At the
same time, the valuation levels in sectors outside of energy had become quite
attractive. As a result, we made
4 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
significant investments in companies such as Bank of America, JPMorgan and
Morgan Stanley in financials. We also put some of those energy proceeds to work
in companies that had performed poorly because of the high energy prices. This
included Alcoa, International Paper Co. and E.I. du Pont de Nemours & Co., which
require crude oil to run their manufacturing facilities. After collapsing amid
the energy run-up, the valuations had become incredibly appealing.
In prior reports to shareholders, we talked about the evolution of the economic
cycle and its impact on our investment focus. Coming out of an economic
recession, the inclination is to favor smaller, lower-rated companies with the
potential to grow dramatically. We had that exposure in the portfolio and
benefited from it. As the economic cycle advances and earnings growth slows, we
believe conditions favor the large, multinational companies that can grow
earnings in a relatively consistent 8% - 10% range.
As such, we found compelling opportunities in health care and added big names
such as diversified health care giant Johnson & Johnson and pharmaceutical
company Eli Lilly and Co., neither of which we have ever held in the portfolio.
We also added pharmaceuticals firm Pfizer, Inc. and increased our positions in
drug maker Schering-Plough Corp. and medical supply company Baxter
International, Inc. After suffering through earnings shortfalls and
industry-related issues for years, these companies' share prices have become
incredibly attractive, particularly relative to the high valuations now being
commanded by some of the energy and materials stocks. Another favored area is
consumer staples, where we maintain ample positions in General Mills, Inc. and
Coca Cola Enterprises. We also substantially increased our position in consumer
products company Unilever NV, purchased paper products leader Kimberly-Clark
during a downturn, and added confection and beverage company Cadbury Schweppes
Plc. In other sectors, we increased exposure to large, multinational companies
General Electric Co. and International Business Machines Corp. and defense
company Northrop Grumman Corp.
Finally, we increased exposure to the financials sector in the aftermath of
Hurricane Katrina when investors worried that the hurricane's impact would
result in an economic recession. Financial and insurance companies were hurt
amid this sentiment and we took advantage of the low valuations by adding
insurers XL Capital Ltd. and Marsh & McLennan, Cos., Inc. We also bought
insurance company Ace Limited and sold it 30% higher during the period, and
added the major brokerage names mentioned earlier.
As a result of our shift in investment focus, the Fund's average market cap
increased from $74.6 billion at June 30, 2005, to $84.5 billion at June 30,
2006.
How would you characterize the Fund's position at the close of the period?
In seeking to meet its objective of principal protection and potential for
capital growth, the allocation between the Fund's fixed income and equity
components will continue to vary as market conditions change. As of June 30,
2006, the Fund was committed 100% to equities (although 1.85% of the equity
portfolio was held in cash). This compared to 88.3% equities and 11.9% fixed
income at June 30, 2005. (Allocation may exceed 100% due to a negative cash
balance.)
At period-end, the equity portfolio was most overweight relative to the S&P 500
Citigroup Value Index in health care, consumer staples, IT and consumer
discretionary, and underweight in financials, industrials, utilities and
telecommunication services.
We believe the economy is poised for a slowdown and that a gradual move away
from economic sensitivity is prudent. We believe the Fed's tightening cycle, to
date, has struck the proper balance of fending off inflation while allowing the
economic recovery to continue at a healthy pace. The strong economy has led to
solid corporate profits, strong balance sheets and robust merger-and-acquisition
activity, which has translated into healthy equity markets. We believe these
factors should remain in place, but are mindful that high oil prices, weakness
in the housing market and a continued vigilant Fed could lead to a slower rate
of growth in the future. On balance, we expect the next three years to be
different from the prior three in terms of the collection of companies with the
potential to outperform.
Given this outlook, we continue to migrate toward the larger end of the market
capitalization spectrum. In our assessment, large cap stocks have never looked
more attractive by all measures, including price-to-book ratios and forward
earnings. These are the companies with the free cash flow to invest in their own
businesses, buy back shares and engage in merger-and-acquisition activity --
affording them the potential to prosper regardless of the economic backdrop.
Kevin M. Rendino
Vice President and Equity Portfolio Manager
July 11, 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 JUNE 30, 2006 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 June 30, 2006 Total Return Total Return Total Return
===============================================================================================================================
ML Basic Value Principal Protected Fund Class A Shares* +4.61% + 8.93% +28.07%
- -------------------------------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class B Shares* +4.27 + 8.12 +24.57
- -------------------------------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class C Shares* +4.26 + 8.15 +24.60
- -------------------------------------------------------------------------------------------------------------------------------
ML Basic Value Principal Protected Fund Class I Shares* +4.70 + 9.22 +29.20
- -------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index** -0.72 - 0.81 +11.97
- -------------------------------------------------------------------------------------------------------------------------------
S&P 500(R) Index*** +2.71 + 8.63 +53.65
- -------------------------------------------------------------------------------------------------------------------------------
S&P 500/Citigroup Value Index**** +6.52 +14.90 +77.58
- -------------------------------------------------------------------------------------------------------------------------------
* 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 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 JUNE 30, 2006
Performance Data (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A, Class
B, Class C and Class I Shares compared to growth of an investment in the S&P 500
Index and the S&P 500/Citigroup Value Index. Values are from November 13, 2002
through June 2006:
ML Basic Value ML Basic Value ML Basic Value ML Basic Value
Principal Protected Principal Protected Principal Protected Principal Protected S&P 500/
Fund +-- Fund +-- Fund +-- Fund +-- S&P 500 Citigroup Value
Class A Shares* Class B Shares* Class C Shares* Class I Shares* Index++ Index+++
11/13/02** $9,475 $10,000 $10,000 $10,000 $10,000 $10,000
6/03 $9,990 $10,493 $10,493 $10,563 $11,169 $11,334
6/04 $11,033 $11,499 $11,494 $11,687 $13,303 $13,895
6/05 $11,140 $11,521 $11,521 $11,829 $14,144 $15,455
6/06 $12,135 $12,157 $12,460 $12,920 $15,365 $17,758
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ The Fund invests primarily in common stocks and in U.S. Treasury bonds,
including zero coupon bonds.
++ This unmanaged Index covers 500 industrial, utility, transportation and
financial companies of the U.S. markets (mostly NYSE issues) representing
about 75% of NYSE market capitalization and 30% of NYSE issues.
+++ This unmanaged Index is 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.
Past performance is not indicative of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 6/30/06 +8.93% +3.22%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/06 +7.06 +5.48
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC+++
================================================================================
Class B Shares+
================================================================================
One Year Ended 6/30/06 +8.12% +4.12%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/06 +6.24 +5.53
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC+++
================================================================================
Class C Shares++
================================================================================
One Year Ended 6/30/06 +8.15% +7.15%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/06 +6.25 +6.25
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
+ Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
================================================================================
Class I Shares Return
================================================================================
One Year Ended 6/30/06 +9.22%
- --------------------------------------------------------------------------------
Inception (11/13/02)
through 6/30/06 +7.32
- --------------------------------------------------------------------------------
++ Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
+++ Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 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 January 1, 2006 and held through
June 30, 2006) is intended to assist shareholders both in calculating expenses
based on an investment in the Fund and in comparing these expenses with similar
costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders' ongoing
costs only and do not reflect any transactional expenses, such as sales charges,
redemption fees or exchange fees. Therefore, the second table is useful in
comparing ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these transactional
expenses were included, shareholder expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value January 1, 2006 to
January 1, 2006 June 30, 2006 June 30, 2006
===========================================================================================================================
Actual
===========================================================================================================================
Class A $ 1,000 $1,046.10 $ 9.79
- ---------------------------------------------------------------------------------------------------------------------------
Class B $ 1,000 $1,042.70 $ 13.70
- ---------------------------------------------------------------------------------------------------------------------------
Class C $ 1,000 $1,042.60 $ 13.70
- ---------------------------------------------------------------------------------------------------------------------------
Class I $ 1,000 $1,047.00 $ 8.52
===========================================================================================================================
Hypothetical (5% annual return before expenses)**
===========================================================================================================================
Class A $ 1,000 $1,015.33 $ 9.65
- ---------------------------------------------------------------------------------------------------------------------------
Class B $ 1,000 $1,011.49 $ 13.49
- ---------------------------------------------------------------------------------------------------------------------------
Class C $ 1,000 $1,011.49 $ 13.49
- ---------------------------------------------------------------------------------------------------------------------------
Class I $ 1,000 $1,016.57 $ 8.40
- ---------------------------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.92% for Class A, 2.69% for Class B, 2.69% for Class
C and 1.67% for Class I), multiplied by the average account value over the
period, multiplied by 182/365 (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 JUNE 30, 2006
Schedule of Investments
Percent of
Industry Shares Held Common Stocks Value Net Assets
====================================================================================================================================
Above-Average Diversified Telecommunication Services 88,200 AT&T, Inc. $ 2,459,898 1.4%
Yield Metals & Mining 122,200 Alcoa, Inc. 3,954,392 2.2
Tobacco 2,500 Altria Group, Inc. 183,575 0.1
Capital Markets 105,200 The Bank of New York Co., Inc. 3,387,440 1.9
Diversified Telecommunication Services 66,700 BellSouth Corp. 2,414,540 1.4
Oil, Gas & Consumable Fuels 28,600 Chevron Corp. 1,774,916 1.0
Multi-Utilities 18,700 Dominion Resources, Inc. 1,398,573 0.8
Chemicals 86,400 E.I. du Pont de Nemours & Co. 3,594,240 2.0
Pharmaceuticals 43,100 Eli Lilly & Co. 2,382,137 1.3
Oil, Gas & Consumable Fuels 122,900 Exxon Mobil Corp. 7,539,915 4.2
Industrial Conglomerates 102,000 General Electric Co. 3,361,920 1.9
Food Products 70,300 General Mills, Inc. 3,631,698 2.0
Pharmaceuticals 52,500 GlaxoSmithKline Plc (b) 2,929,500 1.6
Aerospace & Defense 69,900 Honeywell International, Inc. 2,816,970 1.6
Paper & Forest Products 49,400 International Paper Co. 1,595,620 0.9
Diversified Financial Services 169,032 JPMorgan Chase & Co. 7,099,344 3.9
Pharmaceuticals 35,300 Johnson & Johnson 2,115,176 1.2
Pharmaceuticals 136,200 Pfizer, Inc. 3,196,614 1.8
Multi-Utilities 29,800 Public Service Enterprise Group, Inc. 1,970,376 1.1
Electric Utilities 50,500 The Southern Co. 1,618,525 0.9
Diversified Telecommunication Services 62,300 Verizon Communications, Inc. 2,086,427 1.1
------------------------
61,511,796 34.3
====================================================================================================================================
Below-Average Insurance 32,800 The Allstate Corp. 1,795,144 1.0
Price/ Insurance 55,400 American International Group, Inc. 3,271,370 1.8
Earnings Diversified Financial Services 108,556 Bank of America Corp. 5,221,543 2.9
Ratio Health Care Equipment & Supplies 75,700 Baxter International, Inc. 2,782,732 1.6
Food Products 9,400 Cadbury Schweppes Plc (b) 364,908 0.2
Diversified Financial Services 91,600 Citigroup, Inc. 4,418,784 2.5
Beverages 134,440 Coca-Cola Enterprises, Inc. 2,738,543 1.5
Media 20,000 Gannett Co., Inc. 1,118,600 0.6
Insurance 68,900 Genworth Financial, Inc. Class A 2,400,476 1.4
Computers & Peripherals 80,200 Hewlett-Packard Co. 2,540,736 1.4
Semiconductors & Semiconductor Equipment 9,700 Intel Corp. 183,815 0.1
Household Durables 62,900 Koninklijke Philips Electronics NV 1,958,706 1.1
Food Products 39,600 Kraft Foods, Inc. 1,223,640 0.7
Hotels, Restaurants & Leisure 77,400 McDonald's Corp. 2,600,640 1.4
Capital Markets 93,400 Morgan Stanley 5,903,814 3.3
Aerospace & Defense 55,800 Northrop Grumman Corp. 3,574,548 2.0
Pharmaceuticals 122,500 Schering-Plough Corp. 2,331,175 1.3
Food Products 134,400 Unilever NV (b) 3,030,720 1.7
IT Services 374,300 Unisys Corp. (a) 2,350,604 1.3
Office Electronics 153,400 Xerox Corp. (a) 2,133,794 1.2
------------------------
51,944,292 29.0
====================================================================================================================================
Low Price-to- Oil, Gas & Consumable Fuels 22,400 Anadarko Petroleum Corp. 1,068,256 0.6
Book Value Media 88,800 Comcast Corp. Special Class A (a) 2,910,864 1.6
Machinery 18,600 Deere & Co. 1,552,914 0.9
Energy Equipment & Services 58,200 GlobalSantaFe Corp. 3,361,050 1.9
Energy Equipment & Services 23,500 Halliburton Co. 1,743,935 1.0
Insurance 26,100 Hartford Financial Services Group, Inc. 2,208,060 1.2
Household Products 64,800 Kimberly-Clark Corp. 3,998,160 2.2
Semiconductors & Semiconductor Equipment 285,700 LSI Logic Corp. (a) 2,557,015 1.4
Insurance 43,500 Marsh & McLennan Cos., Inc. 1,169,715 0.7
Communications Equipment 17,500 Motorola, Inc. 352,625 0.2
Aerospace & Defense 101,100 Raytheon Co. 4,506,027 2.5
Insurance 85,934 The St. Paul Travelers Cos., Inc. 3,830,938 2.1
Computers & Peripherals 403,100 Sun Microsystems, Inc. (a) 1,672,865 0.9
Media 245,700 Time Warner, Inc. 4,250,610 2.5
Industrial Conglomerates 139,500 Tyco International Ltd. 3,836,250 2.1
Media 83,700 Walt Disney Co. 2,511,000 1.4
Commercial Banks 92,000 Wells Fargo & Co. 6,171,360 3.4
------------------------
47,701,644 26.6
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 9
Schedule of Investments (concluded)
Percent of
Industry Shares Held Common Stocks Value Net Assets
====================================================================================================================================
Low Price-to- Insurance 28,100 XL Capital Ltd. Class A $ 1,722,530 1.0%
Earnings
Per Share
====================================================================================================================================
Special Energy Equipment & Services 33,700 BJ Services Co. 1,255,662 0.7
Situations Semiconductors & Semiconductor Equipment 120,900 Fairchild Semiconductor International,
Inc. (a) 2,196,753 1.2
Specialty Retail 121,200 The Gap, Inc. 2,108,880 1.2
Computers & Peripherals 64,800 International Business Machines Corp. 4,977,936 2.8
Media 261,600 Interpublic Group of Cos., Inc. (a) 2,184,360 1.2
Communications Equipment 36,900 Nokia Oyj (b) 747,594 0.4
------------------------
13,471,185 7.5
---------------------------------------------------------------------------------------------------------------------
Total Common Stocks
(Cost--$144,585,003) 176,351,447 98.4
=====================================================================================================================
=====================================================================================================================
Beneficial
Interest Short-Term Securities
=====================================================================================================================
$1,215,630 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I, 4.78% (c)(d) 1,215,630 0.7
---------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$1,215,630) 1,215,630 0.7
=====================================================================================================================
=====================================================================================================================
Number of
Contracts Options Purchased
=====================================================================================================================
Put Options Purchased 1,000 Wells Fargo & Co., expiring July 2006
at USD 67, Broker Morgan Stanley 94,600 0.0
---------------------------------------------------------------------------------------------------------------------
Total Options Purchased
(Premiums Paid--$210,870) 94,600 0.0
=====================================================================================================================
Total Investments (Cost--$146,011,503) 177,661,677 99.1
=====================================================================================================================
=====================================================================================================================
Options Written
=====================================================================================================================
Call Options Written 1,000 Wells Fargo & Co., expiring October
2006 at USD 70, Broker Morgan Stanley (134,400) (0.1)
---------------------------------------------------------------------------------------------------------------------
Total Options Written
(Premiums Received--$122,008) (134,400) (0.1)
=====================================================================================================================
Total Investments, Net of Options Written (Cost--$145,889,495*) 177,527,277 99.0
Other Assets Less Liabilities 1,738,402 1.0
------------------------
Net Assets $179,265,679 100.0%
========================
* The cost and unrealized appreciation (depreciation) of investments, net of
options written, as of June 30, 2006, as computed for federal income tax
purposes, were as follows:
Aggregate cost ......................................... $148,949,043
============
Gross unrealized appreciation .......................... $ 32,167,434
Gross unrealized depreciation .......................... (3,589,200)
------------
Net unrealized appreciation ............................ $ 28,578,234
============
(a) Non-income producing security.
(b) Depositary receipts.
(c) 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 $1,122,487 $96,370
--------------------------------------------------------------------------
(d) Represents the current yield as of 6/30/2006.
o 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. These industry and
investment criteria classifications are unaudited.
See Notes to Financial Statements.
10 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
Statement of Assets and Liabilities
As of June 30, 2006
==========================================================================================================================
Assets
- --------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified
cost--$144,585,003) $ 176,351,447
Investments in affiliated securities, at value (identified
cost--$1,215,630) 1,215,630
Options purchased, at value (premiums paid--$210,870) .................. 94,600
Cash ................................................................... 230
Receivables:
Securities sold ..................................................... $ 3,055,188
Dividends ........................................................... 183,365 3,238,553
-------------
Prepaid expenses ....................................................... 1,154
-------------
Total assets ........................................................... 180,901,614
-------------
==========================================================================================================================
Liabilities
- --------------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$122,008) ................ 134,400
Payables:
Securities purchased ................................................ 727,071
Beneficial interest redeemed ........................................ 351,502
Distributor ......................................................... 136,863
Financial warranty fee .............................................. 119,555
Investment adviser .................................................. 89,209
Other affiliates .................................................... 15,847 1,440,047
-------------
Accrued expenses ....................................................... 61,488
-------------
Total liabilities ...................................................... 1,635,935
-------------
==========================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Net assets ............................................................. $ 179,265,679
=============
==========================================================================================================================
Net Assets Consist of
- --------------------------------------------------------------------------------------------------------------------------
Paid-in capital, unlimited shares of no par value authorized ........... $ 140,939,629
Undistributed realized capital gains--net .............................. $ 6,688,268
Unrealized appreciation--net ........................................... 31,637,782
-------------
Total accumulated earnings--net ........................................ 38,326,050
-------------
Net Assets ............................................................. $ 179,265,679
=============
==========================================================================================================================
Net Asset Value
- --------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $6,637,319 and 585,268 beneficial
interest outstanding .................................................. $ 11.34
=============
Class B--Based on net assets of $100,583,672 and 8,956,434 beneficial
interest outstanding .................................................. $ 11.23
=============
Class C--Based on net assets of $64,158,892 and 5,704,757 beneficial
interest outstanding .................................................. $ 11.25
=============
Class I--Based on net assets of $7,885,796 and 694,510 beneficial
interest outstanding .................................................. $ 11.35
=============
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 11
Statement of Operations
For the Year Ended June 30, 2006
==========================================================================================================================
Investment Income
- --------------------------------------------------------------------------------------------------------------------------
Dividends (net of $37,400 foreign withholding tax) ..................... $ 3,863,597
Interest (including $96,370 from affiliates) ........................... 563,530
-------------
Total income ........................................................... 4,427,127
-------------
==========================================================================================================================
Expenses
- --------------------------------------------------------------------------------------------------------------------------
Financial warranty fee ................................................. $ 1,625,021
Investment advisory fees ............................................... 1,302,243
Account maintenance and distribution fees--Class B ..................... 1,110,191
Account maintenance and distribution fees--Class C ..................... 721,656
Transfer agent fees--Class B ........................................... 114,013
Accounting services .................................................... 104,997
Transfer agent fees--Class C ........................................... 76,137
Professional fees ...................................................... 48,663
Printing and shareholder reports ....................................... 44,977
Custodian fees ......................................................... 30,372
Trustees' fees and expenses ............................................ 23,725
Account maintenance fees--Class A ...................................... 19,350
Transfer agent fees--Class I ........................................... 8,300
Transfer agent fees--Class A ........................................... 6,817
Pricing fees ........................................................... 1,420
Other .................................................................. 18,638
-------------
Total expenses ......................................................... 5,256,520
-------------
Investment loss--net ................................................... (829,393)
-------------
==========================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- --------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net .................................................... 11,906,220
Options written--net ................................................ (4,962)
Foreign currency transactions--net .................................. 8 11,901,266
-------------------------------
Change in unrealized appreciation/depreciation on:
Investments--net .................................................... 5,288,057
Option written--net ................................................. (22,542)
Foreign currency transactions--net .................................. (1,069) 5,264,446
-------------------------------
Total realized and unrealized gain--net ................................ 17,165,712
-------------
Net Increase in Net Assets Resulting from Operations ................... $ 16,336,319
=============
See Notes to Financial Statements.
12 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
Statements of Changes in Net Assets
For the Year Ended
June 30,
-------------------------------
Increase (Decrease) in Net Assets: 2006 2005
==========================================================================================================================
Operations
- --------------------------------------------------------------------------------------------------------------------------
Investment loss--net ................................................... $ (829,393) $ (270,924)
Realized gain--net ..................................................... 11,901,266 13,230,057
Change in unrealized appreciation/depreciation--net .................... 5,264,446 (12,520,531)
-------------------------------
Net increase in net assets resulting from operations ................... 16,336,319 438,602
-------------------------------
==========================================================================================================================
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 ............................................................. (456,885) (903,280)
-------------------------------
Net decrease in net assets resulting from distributions to shareholders (7,389,848) (15,613,961)
-------------------------------
==========================================================================================================================
Beneficial Interest Transactions
- --------------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from beneficial interest transactions (44,168,092) (48,562,747)
-------------------------------
==========================================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets ........................................... (35,221,621) (63,738,106)
Beginning of year ...................................................... 214,487,300 278,225,406
-------------------------------
End of year ............................................................ $ 179,265,679 $ 214,487,300
===============================
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 13
Financial Highlights
Class A
---------------------------------------------------
For the
Period
For the Year Ended Nov. 13,
The following per share data and ratios June 30, 2002+ to
have been derived from information ------------------------------------ June 30,
provided in the financial statements. 2006 2005 2004 2003
==============================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.88 $ 11.52 $ 10.53 $ 10.00
---------------------------------------------------
Investment income (loss)--net .......... .03* .06* .06* .05
Realized and unrealized gain--net ...... .93 .06 1.03 .49
---------------------------------------------------
Total from investment operations ....... .96 .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 ......... $ 11.34 $ 10.88 $ 11.52 $ 10.53
===================================================
==============================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------
Based on net asset value per share ..... 8.93% .96% 10.44% 5.43%@@
===================================================
==============================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------
Expenses ............................... 1.94% 1.93% 2.00% 2.05%@
===================================================
Investment income (loss)--net .......... .27% .57% .51% .83%@
===================================================
==============================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 6,637 $ 8,735 $ 13,022 $ 22,090
===================================================
Portfolio turnover ..................... 64.93% 64.69% 87.57% 107.66%
===================================================
Class B
--------------------------------------------------------
For the
Period
For the Year Ended Nov. 13,
The following per share data and ratios June 30, 2002+ to
have been derived from information ---------------------------------------- June 30,
provided in the financial statements. 2006 2005 2004 2003
===================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.77 $ 11.45 $ 10.48 $ 10.00
--------------------------------------------------------
Investment income (loss)--net .......... (.05)* (.02)* (.03)* --++
Realized and unrealized gain--net ...... .91 .05 1.03 .49
--------------------------------------------------------
Total from investment operations ....... .86 .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 ......... $ 11.23 $ 10.77 $ 11.45 $ 10.48
========================================================
===================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 8.12% .19% 9.58% 4.93%@@
========================================================
===================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------
Expenses ............................... 2.70% 2.70% 2.76% 2.82%@
========================================================
Investment income (loss)--net .......... (.49%) (.20%) (.30%) .07%@
========================================================
===================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $100,584 $117,140 $144,787 $159,057
========================================================
Portfolio turnover ..................... 64.93% 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.
14 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
Financial Highlights (concluded)
Class C
---------------------------------------------------
For the
Period
For the Year Ended Nov. 13,
The following per share data and ratios June 30, 2002+ to
have been derived from information ------------------------------------ June 30,
provided in the financial statements. 2006 2005 2004 2003
==============================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.78 $ 11.45 $ 10.48 $ 10.00
---------------------------------------------------
Investment income (loss)--net .......... (.05)* (.02)* (.03)* --++
Realized and unrealized gain--net ...... .92 .06 1.03 .49
---------------------------------------------------
Total from investment operations ....... .87 .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 ......... $ 11.25 $ 10.78 $ 11.45 $ 10.48
===================================================
==============================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------
Based on net asset value per share ..... 8.15% .23% 9.54% 4.93%@@
===================================================
==============================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------
Expenses ............................... 2.70% 2.70% 2.76% 2.82%@
===================================================
Investment income (loss)--net .......... (.49%) (.20%) (.29%) .06%@
===================================================
==============================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 64,159 $ 78,110 $104,840 $129,392
===================================================
Portfolio turnover ..................... 64.93% 64.69% 87.57% 107.66%
===================================================
Class I
--------------------------------------------------------
For the
Period
For the Year Ended Nov. 13,
The following per share data and ratios June 30, 2002+ to
have been derived from information ----------------------------------------- June 30,
provided in the financial statements. 2006 2005 2004 2003
===================================================================================================
Per Share Operating Performance
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of period ... $ 10.90 $ 11.53 $ 10.55 $ 10.00
--------------------------------------------------------
Investment income (loss)--net .......... .06* .09* .08* .08
Realized and unrealized gain--net ...... .93 .06 1.03 .48
--------------------------------------------------------
Total from investment operations ....... .99 .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 ......... $ 11.35 $ 10.90 $ 11.53 $ 10.55
========================================================
===================================================================================================
Total Investment Return**
- ---------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 9.22% 1.22% 10.64% 5.63%@@
========================================================
===================================================================================================
Ratios to Average Net Assets
- ---------------------------------------------------------------------------------------------------
Expenses ............................... 1.69% 1.68% 1.75% 1.80%@
========================================================
Investment income (loss)--net .......... .52% .82% .73% 1.08%@
========================================================
===================================================================================================
Supplemental Data
- ---------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 7,886 $ 10,503 $ 15,576 $ 21,877
========================================================
Portfolio turnover ..................... 64.93% 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.
++ Amount is less than $.01 per share.
@ Annualized.
@@ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 15
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Basic Value Principal Protected Fund (the "Fund") is part of
Merrill Lynch Principal Protected Trust (the "Trust"). Under the Investment
Company Act of 1940, as amended, the Fund is diversified and the Trust is
registered as an open-end management investment company. The Fund's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. The Fund offers multiple classes
of shares. Shares of the Fund were offered during the initial offering period
but will not be offered during the Guarantee Period from November 13, 2002
through November 13, 2009 (the "Guarantee Maturity Date"), except in connection
with reinvestment of dividends and distributions. The Fund will be offered on a
continuous basis after this date. During the Guarantee Period, the Fund will
seek long-term growth of capital to the extent permitted by a strategy that
seeks to use investments in common stocks, U.S. Treasury bonds, including zero
coupon bonds, and other fixed income instruments, to protect the original
principal value of the Fund (less redemptions, cash distributions and dividends
and extraordinary expenses) at the Guarantee Maturity Date.
The Trust, on behalf of the Fund, has entered into a Financial Warranty
Agreement with Main Place Funding, LLC (the "Warranty Provider"). The Financial
Warranty Agreement is intended to make sure that on the Guarantee Maturity Date,
each shareholder of the Fund will be entitled to redeem his or her shares for an
amount no less than the initial value of that shareholder's account (less
expenses and sales charges not covered by the Financial Warranty Agreement),
provided that all dividends and distributions received from the Fund have been
reinvested and no shares have been redeemed (the "Guaranteed Amount"). The Fund
will pay to the Warranty Provider, under the Financial Warranty Agreement, an
annual fee equal to .80% of the Fund's average daily net assets during the
Guarantee Period. If the value of the Fund's assets on the Guarantee Maturity
Date is insufficient to result in the value of each shareholder's account being
at least equal to the shareholder's Guaranteed Amount, the Warranty Provider
will pay the Fund an amount sufficient to make sure that each shareholder's
account can be redeemed for an amount equal to his or her Guaranteed Amount.
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.
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.
16 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
Notes to Financial Statements (continued)
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. Valuation of other short-term investment vehicles is generally
based on the net asset value of the underlying investment vehicle or amortized
cost.
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 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
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 17
Notes to Financial Statements (continued)
income tax provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital gains at
various rates.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
(f) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(g) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
(h) Reclassifications -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $829,393 has been reclassified between undistributed net realized capital
gains and accumulated net investment loss as a result of permanent differences
attributable to net operating losses and foreign currency transactions. These
reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
the annual rate of .65% of the Fund's average daily net assets. FAM has entered
into a contractual arrangement with the Fund under which the expenses incurred
by each class of shares of the Fund (excluding distribution and/or account
maintenance fees) will not exceed 1.99%. This arrangement has a one-year term
and is renewable.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
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.
18 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
Notes to Financial Statements (continued)
For the year ended June 30, 2006, MLPF&S received contingent deferred sales
charges of $407,128 and $84 relating to transactions in Class B and Class C
Shares, respectively.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S, or its
affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by
Merrill Lynch Investment Managers, L.P., ("MLIM"), an affiliate of FAM.
In addition, MLPF&S received $52,699 in commissions on the execution of
portfolio security transactions for the Fund for the year ended June 30, 2006.
For the year ended June 30, 2006, the Fund reimbursed FAM $4,599 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.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction is expected to
close at the end of the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 2006 were $127,418,833 and $183,997,338, respectively.
Transactions in call options written for the year ended June 30, 2006 were as
follows:
- -------------------------------------------------------------------------------
Number of Premiums
Contracts Received
- -------------------------------------------------------------------------------
Outstanding call options written,
beginning of year ........................ 382 $ 40,360
Options written ............................ 1,376 140,431
Options closed ............................. (150) (16,289)
Options expired ............................ (608) (42,494)
---------------------------
Outstanding call options written,
end of year .............................. 1,000 $ 122,008
===========================
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest transactions were
$44,168,092 and $48,562,747 for the years ended June 30, 2006 and June 30, 2005,
respectively.
Transactions in beneficial interest for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended June 30, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions .......... 28,638 $ 314,157
Shares redeemed .......................... (246,507) (2,777,666)
------------------------------
Net decrease ............................. (217,869) $ (2,463,509)
==============================
- -------------------------------------------------------------------------------
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 Year Dollar
Ended June 30, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions .......... 341,017 $ 3,720,491
Shares redeemed .......................... (2,263,012) (25,163,001)
------------------------------
Net decrease ............................. (1,921,995) $(21,442,510)
==============================
- -------------------------------------------------------------------------------
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)
==============================
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 19
Notes to Financial Statements (concluded)
- -------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended June 30, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions .......... 224,208 $ 2,448,351
Shares redeemed .......................... (1,767,243) (19,663,712)
------------------------------
Net decrease ............................. (1,543,035) $(17,215,361)
==============================
- -------------------------------------------------------------------------------
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 Year Dollar
Ended June 30, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions .......... 37,577 $ 412,219
Shares redeemed .......................... (306,492) (3,458,931)
------------------------------
Net decrease ............................. (268,915) $ (3,046,712)
==============================
- -------------------------------------------------------------------------------
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)
==============================
5. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended June 30,
2006 and June 30, 2005 was as follows:
- --------------------------------------------------------------------------------
6/30/2006 6/30/2005
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ........................ $ 337,890 $ 5,279,079
Net long-term capital gains ............ 7,051,958 10,334,882
------------------------------
Total taxable distributions .............. $ 7,389,848 $15,613,961
==============================
As of June 30, 2006, the components of accumulated earnings on a tax basis were
as follows:
- -------------------------------------------------------------------------------
Undistributed ordinary income -- net ...................... $ 1,762,204
Undistributed long-term capital gains -- net .............. 7,985,615
-----------
Total undistributed earnings -- net ....................... 9,747,819
Capital loss carryforward ................................. --
Unrealized gains -- net ................................... 28,578,231*
-----------
Total accumulated earnings -- net ......................... $38,326,050
===========
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales.
20 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of Merrill Lynch Principal Protected
Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Basic Value Principal Protected
Fund, one of the Funds constituting Merrill Lynch Principal Protected Trust (the
"Trust"), as of June 30, 2006, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
respective periods then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Trust
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Trust's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of June 30, 2006, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Basic Value Principal Protected Fund of the Merrill Lynch
Principal Protected Trust as of June 30, 2006, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and its financial highlights for each of the respective
periods then ended, in conformity with U.S. generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 24, 2006
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distribution paid by Merrill Lynch Basic Value Principal Protected Fund of the
Merrill Lynch Principal Protected Trust to shareholders of record on December
12, 2005:
- --------------------------------------------------------------------------------
Qualified Dividend Income for Individuals ...................... 100.00%
Dividends Qualifying for the Dividends Received
Deduction for Corporations ..................................... 100.00%
Federal Obligation Interest .................................... 32.54%
- --------------------------------------------------------------------------------
The law varies in each state as to whether and what percentage of dividend
income attributable to federal obligations is exempt from state income tax. We
recommend that you consult your tax adviser to determine if any portion of the
dividends you received is exempt from state income tax.
Additionally, the Fund paid a long-term capital gain distribution of $.391612 to
shareholders of record on December 12, 2005.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 21
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement -- Matters Considered by the Board
In connection with the Transaction between Merrill Lynch and BlackRock, the
Trust's Board of Trustees considered a new investment advisory agreement (the
"New Investment Advisory Agreement") between the Trust and BlackRock Advisors,
Inc. or its successor ("BlackRock Advisors"). If the New Investment Advisory
Agreement is approved by the Trust's shareholders, it will become effective upon
the expected closing of the Transaction, which is expected in the third quarter
of 2006.
The Board discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent trustees, approved the New Investment Advisory Agreement at a
meeting held on May 10, 2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent trustees, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the New Investment Advisory
Agreement. The additional information was provided in advance of the May 10,
2006 meeting. In addition, the independent trustees consulted with their counsel
and Trust counsel on numerous occasions, discussing, among other things, the
legal standards and certain other considerations relevant to the trustees'
deliberations.
At the Board meetings, the trustees discussed with Merrill Lynch management and
certain BlackRock representatives the Transaction, its strategic rationale and
BlackRock's general plans and intentions regarding the Trust. At these Board
meetings, representatives of Merrill Lynch and BlackRock made presentations to
and responded to questions from the Board. The trustees also inquired about the
plans for and anticipated roles and responsibilities of certain employees and
officers of the Investment Adviser and certain affiliates being transferred to
BlackRock in connection with the Transaction. The independent trustees of the
Board also conferred separately and with their counsel about the Transaction and
other matters related to the Transaction on a number of occasions, including in
connection with the April and May 2006 meetings. After the presentations and
after reviewing the written materials provided, the independent trustees met in
executive sessions with their counsel to consider the New Investment Advisory
Agreement.
In connection with the Board's review of the New Investment Advisory Agreement,
Merrill Lynch and/or BlackRock advised the trustees about a variety of matters.
The advice included the following, among other matters:
o that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Trust and its shareholders by BlackRock
Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented
professionals;
o that the Trust should benefit from having access to BlackRock's state of
the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions(R) brand name;
o that BlackRock has no present intention to alter any applicable expense
waivers or reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of the Board
before making any changes;
o that under the Transaction Agreement, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Investment Adviser (or its affiliates), respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Trust
shareholders.
The trustees considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
o the potential benefits to Trust shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
22 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Trust's total advisory fees
will not increase by virtue of the New Investment Advisory Agreement, but
will remain the same;
o that in November 2005, the Board had performed a full annual review of the
investment advisory agreement currently in effect for the Trust (the
"Current Investment Advisory Agreement") as required by the 1940 Act and
has determined that the Investment Adviser has the capabilities, resources
and personnel necessary to provide the advisory and administrative
services currently provided to the Trust; and that the advisory and/or
management fees paid by the Trust, taking into account any applicable
agreed-upon fee waivers and breakpoints, represent reasonable compensation
to the Investment Adviser in light of the services provided, the costs to
the Investment Adviser of providing those services, economies of scale,
the fees and other expenses paid by similar funds (including information
provided by Lipper Inc. ["Lipper"]), and such other matters as the
trustees have considered relevant in the exercise of their reasonable
judgment; and
o that Merrill Lynch agreed to pay all expenses of the Trust in connection
with the Board's consideration of the New Investment Advisory Agreement
and related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Trust would bear no
costs in obtaining shareholder approval of the New Investment Advisory
Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed the
nature, scope and quality of the services to be provided to the Trust by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting, marketing services
and assistance in meeting legal and regulatory requirements. In its review of
the New Investment Advisory Agreement, the Board also considered a range of
information in connection with its oversight of the services to be provided by
BlackRock Advisors and its affiliates. Among the matters considered were: (a)
fees (in addition to management fees) to be paid to BlackRock Advisors and its
affiliates by the Trust; (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 BlackRock Advisors' compliance policies and procedures; and
(d) the nature, cost and character of non-investment management services to be
provided by BlackRock Advisors and its affiliates.
In the period prior to the Board meeting to consider renewal of the Current
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the Current Investment Advisory Agreement. These
materials included (a) information compiled by 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) a discussion by the Trust's portfolio
management team on investment strategies used by the Trust during its most
recent fiscal year; (c) information on the profitability to the Investment
Adviser of the Current Investment Advisory Agreement and other payments received
by the Investment Adviser and its affiliates from the Trust; and (d) information
provided by the Investment Adviser concerning services related to the valuation
and pricing of the Trust's portfolio holdings, allocation of brokerage fees, the
Trust's portfolio turnover statistics, and direct and indirect benefits to the
Investment Adviser and its affiliates from their relationship with the Trust.
In their deliberations, the trustees considered information received in
connection with their most recent continuation of the Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the New Investment Advisory Agreement. The trustees did not
identify any particular information that was all-important or controlling, and
each trustee attributed different weights to the various factors. The trustees,
including a majority of the independent trustees, concluded that the terms of
the New Investment Advisory Agreement are appropriate, that the fees to be paid
are reasonable in light of the services to be provided to the Trust, and that
the New Investment Advisory Agreement should be approved and recommended to
Trust shareholders.
Nature, Quality and Extent of Services Provided -- The Board reviewed the
nature, extent and quality of services pro-
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 23
Disclosure of New Investment Advisory Agreement (continued)
vided by the Investment Adviser, including the investment advisory services and
the resulting performance of the Trust, as well as the nature, quality and
extent of services expected to be provided by BlackRock Advisors. The Board
focused primarily on the Investment Adviser's investment advisory services and
the Trust's investment performance, but also considered certain areas in which
both the Investment Adviser and the Trust receive services as part of the
Merrill Lynch complex. The Board compared the Trust's 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.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the New Investment Advisory Agreement, the trustees
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of BlackRock Advisors and how
it would affect the Trust; the ability of BlackRock Advisors to perform its
duties after the Transaction; and any anticipated changes to the current
investment and other practices of the Trust.
The trustees were given information with respect to the potential benefits to
the Trust and its shareholders from having access to BlackRock's state of the
art technology and risk management analytic tools, including the investment
tools provided under the BlackRock Solutions brand name.
The trustees were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Trust will continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch affiliates
(for example, transactions with a Merrill Lynch broker-dealer acting as
principal) absent revised or new regulatory relief. The trustees were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief. There can be no
assurance that such relief will be obtained.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the trustees
determined that the nature and quality of services to be provided to the Trust
under the New Investment Advisory Agreement were expected to be as good as or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in personnel
following the Transaction and the combination of the operations of the
Investment Adviser and its affiliates with those of BlackRock. The trustees
noted that if current portfolio managers or other personnel cease to be
available, the Board would consider all available options, which could include
seeking the investment advisory or other services of BlackRock affiliates.
Accordingly, the trustees concluded that, overall, they were satisfied at the
present time with assurances from BlackRock and BlackRock Advisors as to the
expected nature, extent and quality of the services to be provided to the Trust
under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Current Investment Advisory Agreement,
the trustees had received, among other things, a report from Lipper comparing
the Trust's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser or its
affiliates to other registered investment company clients for investment
management services. The Board reviewed 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 fees and the effects of any
fee waivers -- compared to the other funds in its Lipper category. They also
compared the Trust's total expenses to those of other comparable funds. The
information showed that the Trust had fees and expenses within the range of fees
and expenses of comparable funds. The Board noted that if all assets are
irreversibly allocated to the Protection Component under the terms of the
Trust's Warranty Agreement, the management fee will be reduced. The Board
concluded that the Trust's management fee and fee rate and overall expense ratio
are reasonable compared to those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, the trustees considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on their review of the materials provided and the fact
that the New Investment Advisory Agreement is substantially similar to the
Current Investment Advisory Agreement in all material respects, including the
rate of compensation, the trustees determined that the Transaction should not
increase the total fees payable, including any fee waivers and expense
reimbursements, for advisory and administrative services. The trustees noted
that it was not
24 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
possible to predict with certainty New BlackRock's future profitability from its
relationship with the Trust.
The trustees discussed with BlackRock Advisors its general methodology to be
used in determining New BlackRock's profitability with respect to its
relationship with the Trust. The trustees noted that they expect to receive
profitability information from New BlackRock on at least an annual basis and
thus be in a position to evaluate whether any adjustments in the Trust's fees
and/or fee breakpoints would be appropriate.
Fees and 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. The Board
determined that changes were not currently necessary and that the Trust
appropriately participated in these economies of scale.
In reviewing the Transaction, the trustees considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the trustees determined
that as a result of the Transaction, the Trust's total advisory fees would be no
higher than the fees under its Current Investment Advisory Agreement. The
trustees noted that in conjunction with their most recent deliberations
concerning the Current Investment Advisory Agreement, they had determined that
the total fees for advisory and administrative services for the Trust were
reasonable in light of the services provided. It was noted that in conjunction
with the recent review of the Current Investment Advisory Agreement, the
trustees had received, among other things, a report from Lipper comparing the
Trust's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser to
other registered investment company clients for investment management services.
The trustees concluded that, because the rates for advisory fees for the Trust
would be no higher than its current fee rates, the proposed management fee
structure, including any fee waivers, was reasonable and that no additional
changes were currently necessary.
Fall-Out Benefits -- In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, the trustees
considered whether the Transaction would have an impact on the fall-out benefits
received by the Investment Adviser by virtue of the Current Investment Advisory
Agreement. Based on their review of the materials provided, including materials
received in connection with their most recent approval or continuance of the
Current Investment Advisory Agreement, and their discussions with management of
the Investment Adviser and BlackRock, the trustees determined that those
benefits could include increased ability for BlackRock to distribute shares of
its funds and other investment products and to obtain research services using
portfolio transaction brokerage commissions. The trustees also considered
possible benefits stemming from the proposal that PFPC Financial Services, an
affiliate of BlackRock, serve as transfer agent for the Trust following the
Transaction. The trustees noted that any benefits were difficult to quantify
with certainty at this time, and indicated that they would continue to evaluate
them going forward.
Investment Performance -- The trustees considered investment performance for the
Trust. The trustees compared the Trust's 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. The comparative information received from Lipper showed
Trust performance at various levels within the range of performance of
comparable funds over different time periods. While the Board reviews
performance data at least quarterly, consistent with the Investment Adviser's
investment goals, the Board attaches more importance over relatively long
periods of time. The trustees believed the Trust's performance was satisfactory.
Also, the trustees took into account the investment performance of funds
currently advised by BlackRock Advisors. The Board considered comparative
information from Lipper which showed that the performance of the funds advised
by BlackRock Advisors was within the range of performance of comparable funds
over different time periods. The Board noted BlackRock's considerable investment
management experience and capabilities, but were unable to predict what effect,
if any, consummation of the Transaction would have on the future performance of
the Trust.
Conclusion -- After the independent trustees of the Trust deliberated in
executive session, the entire Board, including the independent trustees,
approved the New Investment Advisory Agreement, concluding that the advisory fee
rate was reasonable in relation to the services provided and that the New
Investment Advisory Agreement was in the best interests of the shareholders. In
approving the New Investment Advisory Agreement, the Board noted that it
anticipated reviewing the continuance of the agreement in advance of the
expiration of the initial two-year period.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 25
Disclosure of New Investment Advisory Agreement (concluded)
Contingent BlackRock Subadvisory Agreement -- Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at which
the Board of Trustees discussed and approved the New Investment Advisory
Agreement, the Board, including the independent trustees, also considered a
contingent subadvisory agreement (the "Contingent Subadvisory Agreement")
between the Investment Adviser and BlackRock Advisors (the "BlackRock
Subadviser"). The Contingent Subadvisory Agreement is intended to ensure that
the Trust operates with efficient portfolio management services until the
closing of the Transaction, in the event that the Board deems it necessary and
in the best interests of the Trust and its shareholders that the BlackRock
Subadviser assist in managing the operations of the Trust during the interim
period until the closing of the Transaction. If shareholders approve the
Contingent Subadvisory Agreement, it will take effect only upon recommendation
from the Investment Adviser and upon subsequent approval of the Board in the
period up to the closing of the Transaction. The effectiveness of the Contingent
Subadvisory Agreement, therefore, would be contingent on further Board approval
after shareholders approve it. Pursuant to the Contingent Subadvisory Agreement,
the BlackRock Subadviser would receive a monthly fee from the Investment Adviser
equal to 50% of the advisory fee received by the Investment Adviser. The
Investment Adviser would pay the BlackRock Subadviser out of its own resources.
There would be no increase in the Trust's expenses as a result of the Contingent
Subadvisory Agreement.
In making its approval at the May in-person meeting, the Board considered the
Contingent Subadvisory Agreement in conjunction with the New Investment Advisory
Agreement and reviewed the same information and factors discussed above. The
Board also considered in conjunction with the Contingent Subadvisory Agreement
the necessity of ensuring that the Trust operates with effective management
services until the closing of the Transaction. In reviewing the subadvisory fee
rate provided in the Contingent Subadvisory Agreement, the Board took note of
the fact that both the Investment Adviser and the BlackRock Subadviser would
have significant responsibilities under their respective advisory agreements.
The Investment Adviser would remain responsible for oversight of the Trust's
operations and administration and the BlackRock Subadviser would provide
advisory services to the Trust under the Contingent Subadvisory Agreement. The
Board also took into account the expected short duration of the term of any
Contingent Subadvisory Agreement and the fact that total advisory fees paid by
the Trust would not increase as a result of the Contingent Subadvisory
Agreement. Under all of the circumstances, the Board concluded that it was a
reasonable allocation of fees for the BlackRock Subadviser to receive 50% of the
advisory fee paid by the Trust to the Investment Adviser.
After the independent trustees deliberated in executive session, the entire
Board, including the independent trustees, approved the Contingent Subadvisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Subadvisory Agreement was in the best
interests of shareholders.
26 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
Officers and Trustees
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to President of the MLIM/FAM-advised funds since 2005; 131 Funds None
Doll, Jr.* Princeton, NJ and present President and Chief Investment Officer of MLIM and 178 Portfolios
08543-9011 Trustee FAM since 2001; Co-Head (Americas Region) thereof
Age: 51 from 2000 to 2001 and Senior Vice President from
1999 to 2001; President and Director of Princeton
Services, Inc. ("Princeton Services") since 2001;
President of Princeton Administrators, L.P.
("Princeton Administrators") since 2001; Chief
Investment Officer of OppenheimerFunds, Inc. in 1999
and Executive Vice President thereof from 1991 to
1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which
MLIM or FAM acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company
Act, of the Fund based on his positions with MLIM, FAM, Princeton Services and Princeton Administrators. Trustees
serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund
President, Mr. Doll serves at the pleasure of the Board of Trustees.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 27
Officers and Trustees (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
David O. P.O. Box 9095 Trustee 2002 to Professor of Finance and Economics at the Columbia 20 Funds None
Beim** Princeton, NJ present University Graduate School of Business since 1991; 26 Portfolios
08543-9095 Chairman of Outward Bound USA from 1997 to 2001;
Age: 66 Chairman of Wave Hill Inc. since 1990; Trustee
of Phillips Exeter Academy from 2002 to present.
- ------------------------------------------------------------------------------------------------------------------------------------
James T. P.O. Box 9095 Trustee 2002 to Chief Financial Officer of JPMorgan & Co., Inc. from 20 Funds None
Flynn Princeton, NJ present 1990 to 1995 and an employee of JPMorgan in various 26 Portfolios
08543-9095 capacities from 1967 to 1995.
Age: 66
- ------------------------------------------------------------------------------------------------------------------------------------
W. Carl P.O. Box 9095 Trustee 2002 to Deputy Dean for Academic Affairs, Harvard Business 21 Funds None
Kester Princeton, NJ present School since 2006; Mizuho Financial Group, Professor 27 Portfolios
08543-9095 of Finance, Harvard Business School, Unit Head,
Age: 54 Finance since 2005; Senior Associate Dean and
Chairman of the MBA Program of Harvard Business
School, 1999 to 2005; Member of the faculty of
Harvard Business School since 1981; Independent
Consultant since 1978.
- ------------------------------------------------------------------------------------------------------------------------------------
Karen P. P.O. Box 9095 Trustee 2002 to President of Robards & Company, a financial advisory 20 Funds None
Robards*** Princeton, NJ present firm since 1987; formerly an investment banker with 26 Portfolios
08543-9095 Morgan Stanley for more than ten years; Director
Age: 56 of Enable Medical Corp. from 1996 to 2005;
Director of AtriCure, Inc. since 2000; Director of
the Cooke Center for Learning and Development,
a not-for-profit organization, since 1987.
------------------------------------------------------------------------------------------------------------------------
* Trustees serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Chairman of the Audit Committee.
*** Chair of the Board of Trustees.
28 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
Officers and Trustees (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2002 to Managing Director of MLIM and FAM since 2006 and Treasurer thereof since 1999;
Burke Princeton, NJ President present First Vice President of MLIM and FAM from 1997 to 2005; Senior Vice President and
08543-9011 and Treasurer of Princeton Services since 1999 and Director since 2004; Vice President
Age: 46 Treasurer of FAM Distributors, Inc. ("FAMD") since 1999 and Director since 2004; Vice
President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from 1990
to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. P.O. Box 9011 Vice 2005 to Managing Director of MLIM since 2000; First Vice President of MLIM from 1997
Martorelli Princeton, NJ President present to 2000.
08543-9011
Age: 49
- ------------------------------------------------------------------------------------------------------------------------------------
Kevin M. P.O. Box 9011 Vice 2003 to Managing Director of MLIM since 2000; First Vice President of MLIM from 1997
Rendino Princeton, NJ President present to 2000.
08543-9011
Age: 39
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
08543-9011 Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Age: 54 Investment Management from 2002 to 2004; Managing Director and Global Director of
Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Securities and Exchange
Commission's Division of Enforcement in Washington, D.C. from 1990 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD and
08543-9011 Princeton Services since 2004.
Age: 46
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Trustees.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Fund's Officers and Trustees is available in the Fund's Statement of Additional
Information, which can be obtained without charge by calling 1-800-637-3863.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 29
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.
30 MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006
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.
MERRILL LYNCH BASIC VALUE PRINCIPAL PROTECTED FUND JUNE 30, 2006 31
[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 -- 6/06
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) David O.
Beim, (2) W. Carl Kester, (3) James T. Flynn and (4) Karen P. Robards.
The registrant's board of directors has determined that David O. Beim,
W. Carl Kester and Karen P. Robards qualify as financial experts
pursuant to Item 3(c)(4) of Form N-CSR.
Mr. Beim has a thorough understanding of generally accepted accounting
principles, financial statements and internal control over financial
reporting as well as audit committee functions. For 25 years, Mr. Beim
was an investment banker actively engaged in financial analysis for
securities transactions and mergers. These transactions presented a
breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can reasonably
be expected to be raised by the Registrant's financial statements. Mr.
Beim has also been a professor of finance and economics at the Columbia
University Graduate School of Business for the past 13 years.
Prof. Kester has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Prof. Kester
has been involved in providing valuation and other financial consulting
services to corporate clients since 1978. Prof. Kester's financial
consulting services present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the Registrant's financial statements.
Ms. Robards has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Ms. Robards
has been President of Robards & Company, a financial advisory firm,
since 1987. Ms. Robards was formerly an investment banker for more than
10 years where she was responsible for evaluating and assessing the
performance of companies based on their financial results. Ms. Robards
has over 30 years of experience analyzing financial statements. She
also is the member of the Audit Committees of two privately held
companies and a non-profit organization.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending June 30, 2006 - $27,400
Fiscal Year Ending June 30, 2005 - $27,000
(b) Audit-Related Fees - Fiscal Year Ending June 30, 2006 - $0
Fiscal Year Ending June 30, 2005 - $0
(c) Tax Fees - Fiscal Year Ending June 30, 2006 - $6,000
Fiscal Year Ending June 30, 2005 - $6,300
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending June 30, 2006 - $0
Fiscal Year Ending June 30, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending June 30, 2006 - $2,909,800
Fiscal Year Ending June 30, 2005 - $8,181,305
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,227,000, 0%
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch Principal
Protected Trust
By: /s/ Robert C. Doll, Jr.
--------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Basic Value Principal Protected Fund of Merrill Lynch
Principal Protected Trust
Date: August 23, 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: August 23, 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: August 23, 2006