UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-4182
Name of Fund: Merrill Lynch International Value Fund of
Mercury Funds II
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President,
Merrill Lynch International Value Fund of Mercury Funds II, 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: 06/30/04
Date of reporting period: 07/01/03 - 12/31/03
Item 1 - Report to Shareholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
Merrill Lynch
International Value Fund
Of Mercury Funds II
Semi-Annual Report
December 31, 2003
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Investment in foreign securities involves special risks including
fluctuating foreign exchange rates, foreign government regulations,
differing degrees of liquidity and the possibility of substantial
volatility due to adverse political, economic or other developments.
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is
available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) on www.mutualfunds.ml.com; and
(3) on the Commission's website at http://www.sec.gov.
Merrill Lynch International Value Fund
of Mercury Funds II
Box 9011
Princeton, NJ
08543-9011
(GO PAPERLESS LOGO)
It's Fast, Convenient, & Timely!
To sign up today, go to www.icsdelivery.com/live.
Merrill Lynch International Value Fund
Portfolio Information As of December 31, 2003
Percent of
Ten Largest Equity Holdings Net Assets
TotalFinaElf SA 3.3%
BNP Paribas SA 3.2
Shell Transport & Trading Company 3.0
Royal Bank of Scotland Group PLC 2.8
Santos Limited 2.4
Credit Suisse Group 2.4
Asahi Breweries Limited 2.4
Telecom Italia SpA 2.4
Barclays PLC 2.3
Intesa BCI SpA 2.3
Percent of
Five Largest Industries* Net Assets
Commercial Banks 15.4%
Oil & Gas 12.0
Automobiles 6.9
Pharmaceuticals 5.6
Insurance 4.7
*For Fund compliance purposes, "Industries" means any one or more
of the industry sub-classifications used by one or more widely
recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for
purposes of this report, which may combine such industry
sub-classifications for reporting ease.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
A Letter From the President
Dear Shareholder
In my 35 years in the asset management business, 2003 was among the
more memorable. The year, which opened with global economic
uncertainty and a dismal continuation of a three-year equity market
slump, vigorously reversed course in the months that followed. To be
sure, 2003 came in like a lamb and went out like a lion. Or, some
might suggest, the year started as a bear and ended as a bull.
Notably, the U.S. stock market exceeded the expectations of even the
optimistic investor, with the S&P 500 Index and the Nasdaq posting
respective 12-month returns of +28.68% and +50.01% as of December
31, 2003. Notwithstanding the impressive results, several foreign
stock markets eclipsed the U.S. market returns in dollar terms.
Overall, the Morgan Stanley Capital International (MSCI) World
Index, which measures the performance of equity markets in 23
developed countries worldwide, returned +33.11% over the past 12
months. Several emerging markets also fared particularly well, with
Thailand's equity market up 139% and Brazil's up 131% for the year,
as measured by MSCI.
As we begin a new year, it is heartening to note that a global
economic expansion appears to be underway. In 2003, the U.S. economy
benefited from stimulative monetary and fiscal policy, improving
corporate profits and tightening credit spreads. Gross domestic
product (GDP) growth rallied from a dismal 1.4% in the first quarter
of the year to an extraordinary 8.2% in the third quarter. In
Europe, the central bank initiated a more active monetary policy in
an effort to rouse economic growth. The economies of several Asian
countries experienced strong growth in 2003. China, in particular,
is expected to grow at an annualized rate of 8% for 2003-2004.
Encouragingly, Japan, the world's second-largest economy, finally
appeared to be emerging from a long period of deflation. Elsewhere,
Latin America benefited from a combination of declining global risk
and relative political stability. It has been a long road for equity
investors, but coming into 2004, the events and efforts of 2003
leave us with stronger economies around the world.
In closing, I wish to share one final note regarding the look of our
shareholder communications. Our portfolio manager commentaries have
been trimmed and organized in such a way that you can get the
information you need at a glance, in plain language. Today's markets
can be confusing. We want to help you put it all in perspective. The
report's new size also allows us certain mailing efficiencies. Any
cost savings in production or postage are passed on to the Fund and,
ultimately, to Fund shareholders.
We thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the
New Year and beyond.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Trustee
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
A Discussion With Your Fund's Portfolio Manager
The Fund provided strong absolute and relative returns for the
period, with favorable stock selection having the greatest positive
impact on results.
How did the Fund perform during the period in light of the existing
market conditions?
For the six-month period ended December 31, 2003, Merrill Lynch
International Value Fund's Class A, Class B, Class C, Class I and
Class R Shares had total returns of +27.23%, +26.77%, +26.72%,
+27.39% and +27.22%, respectively. (Fund results shown do not
reflect sales charges and would be lower if sales charges were
included. Complete performance information can be found on pages
6 - 8 of this report to shareholders.) This compared to returns of
+26.59% for the unmanaged benchmark Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI EAFE) Index and
+29.82% for the unmanaged MSCI EAFE Value Index for the same period.
Fund performance exceeded the +23.93% average return of the Lipper
International Funds category for the same six-month period. (Funds
in this Lipper category invest in securities with primary trading
markets outside the United States.)
The year 2003 began with a three-month bear market trend followed by
a nine-month equity market rally that was led by lower-quality
issues with little earnings. The type of value stocks that we
consider for our shareholders--those with some earnings, cash flow
and dividends--generally were laggards during this rally. The
principal driver of Fund performance in 2003 as a whole was stock
selection, whereas sector and geographic allocation added little
value. Two of our positions, Germany's DePfa Bank PLC and Dutch
employment agency Vedior NV, returned more than 100% in local
currency terms during the year. Currency strength meant that these
returns were significantly enhanced when translated into U.S. dollar
terms. These remarkable returns point to the extent of the extreme
market conditions during the year.
The Fund's strong relative and absolute performance during the
six-month period also is attributed to stock selection, which was
particularly favorable in the Netherlands, France and Japan. Our
holdings in Netherlands-based Vedior, Japanese computer games
company Namco Ltd. and brewer Asahi Breweries Limited, and French
metals company Pechiney SA were the top contributors to performance
for the period. Stocks that disappointed included French car company
PSA Peugeot Citroen, Anglo-Dutch oil company Shell Transport &
Trading Company, British engineering company Smiths Industries PLC
and Allied Irish Banks PLC.
Also contributing positively to performance in the six-month period
were our overweight positions in economically cyclical sectors, such
as energy, materials, commercial services and diversified
financials. At the same time, maintaining underweightings in highly
rated sectors, such as technology hardware and media, had a modest
positive effect on performance.
What changes were made to the portfolio during the period?
In 2003, we made several considerable changes to the portfolio. As
many of the stocks we owned reached our price target, we sold those
holdings and invested the proceeds in new positions. Overall, the
portfolio's turnover for the year was higher than normal, again
pointing to the extreme market environment. Having said that, our
strategy of concentrating on attractive companies with low
valuations and a mild tilt toward economic recovery remained
constant during the six-month period.
The main transactions during the six months were all the result of
bottom-up stock picking, based on our assessment of whether the
stocks were trading at bargain prices. Major additions to the
portfolio included mobile phone operator Vodafone Group PLC,
consumer electricals retailer Kesa Electricals PLC, insurer Mitsui
Sumitomo Insurance Company, Limited, car manufacturer Toyota Motor
Corporation, and French bank Credit Agricole SA. All were added on
the grounds of attractive valuations. In contrast, our positions in
drug giant GlaxoSmithKline PLC, U.K. bank Barclays PLC, electronics
manufacturer Motion Engineering Inc., German bank DePfa and Dutch
financial conglomerate Fortis were all trimmed as valuations reached
levels that were no longer appealing.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
How would you characterize the portfolio's position at the close of
the period?
The portfolio maintained its position in inexpensive stocks, with a
bias toward a continuation of global economic recovery. At December
31, 2003, we were overweight relative to the benchmark in the more
economically sensitive sectors, such as materials, energy and
automotive, and underweight in telecommunication services,
pharmaceuticals and capital goods.
We expect global earnings to continue their rise in 2004, although
perhaps at a slower pace than in 2003. As nominal gross domestic
product accelerates, the key driver of earnings growth is likely to
shift from margin enhancement through cost cutting to top-line
growth. Our analysis shows that earnings are still cyclically
depressed and are likely to rise as capacity utilization increases.
The earnings seasons in the United States, Europe and Japan have
provided further reason for encouragement. Not only have earnings
exceeded market expectations in all three regions, but earnings
guidance is beginning to improve. In 2003, earnings expectations
were upgraded dramatically from the depressed levels at the start of
the year, when fear and depression gripped the markets. While we
believe further upgrades are probable, the pace of earnings momentum
is not likely to be sustained. The initial spectacular rebound in
reported earnings was supported by the virtual cessation of write-
offs, while market expectations for 2004 are already very positive.
As a result, some slowdown in the pace of earnings growth is
inevitable in 2004.
While the recent equity market rally has taken absolute valuations
back above their long-run averages, valuations remain close to their
historic means and are not yet sending a strong signal. Equities
still appear attractively valued relative to real government bond
yields, whether on an equity risk premium or implied earnings growth
basis. Nevertheless, the compelling valuation case that appeared
early in the year has largely disappeared. In the United States, the
gap has closed, while in Europe, particularly the United Kingdom,
equities still possess attractive long-term return potential
relative to bonds. Global valuations have converged significantly,
with all major large cap markets trading within a relatively narrow
price/earnings ratio range.
Asian valuations remained attractive as of period end. The Japanese
market, in our opinion, is bifurcated. We believe the blue chip
stocks are still attractive, while the valuations of many low-
quality stocks appear excessive. In our view, improving economic
performance both in the United States and internationally will
result in higher stock market values ahead.
James A. Macmillan
Vice President and Portfolio Manager
January 9, 2004
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Performance Data
About Fund Performance
Investors are able to purchase shares of the Fund through multiple
pricing alternatives:
* Class A Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first two years, decreasing to
3% for each of the next two years and decreasing 1% each year
thereafter to 0% after the sixth year. In addition, Class B Shares
are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These Shares automatically convert to
Class A Shares after approximately eight years.
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares may be
subject to a 1% contingent deferred sales charge if redeemed within
one year after purchase.
* Class I Shares incur a maximum initial sales charge of 5.25% and
bear no ongoing distribution and account maintenance fees. Class I
Shares are available only to eligible investors.
* Class R Shares do not incur a maximum sales charge (front-end
load) or deferred sales charge. These shares are subject to a
distribution fee of 0.25% and an account maintenance fee of
0.25%.Class R Shares are available only to certain retirement plans.
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
more current performance information. 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 gains distributions 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 the
classes, which are deducted from the income available to be paid to
shareholders. The Fund's investment adviser voluntarily paid annual
operating expenses in excess of 1.0% of average Class I net assets
until 3/1/99, when it removed/discontinued capping expenses. Without
such expense cap, the Fund's Class I performance would have been
lower.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Performance Data (continued)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 12/31/03 +38.06% +30.81%
Inception (06/02/99) through
12/31/03 + 3.83 + 2.62
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class B Shares*
One Year Ended 12/31/03 +37.07% +33.07%
Inception (10/06/00) through
12/31/03 + 1.66 + 0.88
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after six years.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class C Shares*
One Year Ended 12/31/03 +37.10% +36.10%
Inception (10/06/00) through
12/31/03 + 1.64 + 1.64
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after one year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class I Shares*
One Year Ended 12/31/03 +38.45% +31.18%
Five Years Ended 12/31/03 + 5.39 + 4.26
Ten Years Ended 12/31/03 + 7.20 + 6.62
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Aggregate Total Return
% Return
Class R Shares
Inception (1/03/03) through 12/31/03 +36.23%
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Performance Data (concluded)
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception
As of December 31, 2003 Total Return Total Return Total Return
ML International Value Fund--Class A Shares* +27.23% +38.06% + 18.80%
ML International Value Fund--Class B Shares* +26.77 +37.07 + 5.48
ML International Value Fund--Class C Shares* +26.72 +37.10 + 5.41
ML International Value Fund--Class I Shares* +27.39 +38.45 +100.43
ML International Value Fund--Class R Shares* +27.22 -- + 36.23
MSCI EAFE Index** +26.59 +38.59 +54.81/-1.32/-10.79/+35.98
*Investment results shown do not reflect sales charges. Results
shown would be lower if a sales charge were included. Total
investment returns are based on changes in the Fund's net asset
values for the periods shown, and assume reinvestment of all
dividends and capital gains at net asset value on the ex-dividend
date. The Fund's 10-year/since inception periods are for 10 years
for Class I Shares, from 6/02/99 for Class A Shares, from 10/06/00
for Class B & Class C Shares, and from 1/03/03 for Class R Shares.
**An unmanaged Index measures the total returns of developed foreign
stock markets in Europe, Australasia and the Far East (in U.S.
dollars). Ten-year/since inception total returns are for 10 years,
from 6/02/99, from 10/06/00 and from 1/03/03, respectively.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Schedule of Investments
Value Percent of
Country Industry+++ Shares Held Common Stocks (in U.S. dollars) Net Assets
Australia Commercial Banks 711,000 Australia and New Zealand Banking Group Ltd. $ 9,471,229 1.5%
Oil & Gas 2,918,000 Santos Limited 15,104,157 2.4
Total Common Stocks in Australia 24,575,386 3.9
France Automobiles 193,129 PSA Peugeot Citroen 9,841,576 1.6
Commercial Banks 318,794 BNP Paribas SA 20,073,381 3.2
374,896 Credit Agricole S.A. 8,951,529 1.4
--------------- ------
29,024,910 4.6
Commercial Services 141,335 Societe BIC SA 6,531,922 1.0
& Supplies
Construction 80,843 Societe Generale d'Entreprises SA 6,694,420 1.1
& Engineering
Construction 126,648 Lafarge SA (Ordinary) 11,278,175 1.8
Materials
Hotels, Restaurants 294,732 Accor SA 13,346,197 2.1
& Leisure
Metals & Mining 385,175 Arcelor 6,714,319 1.1
Multi-Utilities & 351,270 Suez SA 7,058,179 1.1
Unregulated Power
Oil & Gas 111,078 TotalFinaElf SA 20,651,963 3.3
Total Common Stocks in France 111,141,661 17.7
Germany Airlines 475,377 Deutsche Lufthansa AG (Registered Shares) 7,944,926 1.3
Automobiles 120,246 Volkswagen AG 6,696,335 1.1
Chemicals 324,674 Bayer AG 9,509,234 1.5
157,067 Linde AG 8,459,577 1.3
--------------- ------
17,968,811 2.8
Electric Utilities 215,688 E.On AG 14,076,290 2.2
Textiles, Apparel 98,917 Adidas-Salomon AG 11,266,642 1.8
& Luxury Goods
Total Common Stocks in Germany 57,953,004 9.2
Hong Kong Media 4,155,000 South China Morning Post Holdings Ltd. 1,833,025 0.3
Total Common Stocks in Hong Kong 1,833,025 0.3
Ireland Commercial Banks 758,137 Allied Irish Banks PLC 12,144,712 1.9
Total Common Stocks in Ireland 12,144,712 1.9
Italy Commercial Banks 3,720,637 Intesa BCI SpA 14,548,386 2.3
Construction 654,994 Buzzi Unicem SpA 7,718,972 1.2
Materials
Diversified 5,022,991 ++Telecom Italia SpA 14,889,019 2.4
Telecommunication
Services
Oil & Gas 732,666 ENI SpA 13,825,264 2.2
Total Common Stocks in Italy 50,981,641 8.1
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Schedule of Investments (continued)
Value Percent of
Country Industry+++ Shares Held Common Stocks (in U.S. dollars) Net Assets
Japan Automobiles 305,000 Honda Motor Co., Ltd. $ 13,546,701 2.2%
375,000 Toyota Motor Corporation 12,666,791 2.0
--------------- ------
26,213,492 4.2
Beverages 1,647,000 Asahi Breweries Limited 15,014,640 2.4
Consumer Finance 234,000 Promise Co., Ltd. 10,196,697 1.6
220,000 Sanyo Shinpan Finance Co., Ltd. 7,287,487 1.2
--------------- ------
17,484,184 2.8
Diversified 600 Nippon Telegraph & Telephone Corporation (NTT) 2,894,467 0.5
Telecommunication
Services
Insurance 1,587,000 Mitsui Sumitomo Insurance Company, Limited 13,031,259 2.1
Machinery 1,077,000 Amada Co., Ltd. 5,607,595 0.9
Oil & Gas 879,000 Showa Shell Sekiyu K.K. 7,143,874 1.1
Pharmaceuticals 202,000 Takeda Chemical Industries, Ltd. 8,010,637 1.3
250,000 Yamanouchi Pharmaceutical Co., Ltd. 7,768,032 1.2
--------------- ------
15,778,669 2.5
Software 299,000 Namco Ltd. 8,286,181 1.3
Wireless 1,500 NTT DoCoMo, Inc. 3,401,138 0.5
Telecommunication
Services
Total Common Stocks in Japan 114,855,499 18.3
Netherlands Chemicals 191,442 Akzo Nobel NV 7,389,150 1.2
Commercial Services 488,378 ++Buhrmann NV 4,256,670 0.7
& Supplies 585,048 Vedior NV 'A' 9,150,588 1.4
--------------- ------
13,407,258 2.1
Diversified 550,739 ING Groep NV 12,844,540 2.0
Financial Services
Food & Staples 1,127,999 ++Koninklijke Ahold NV 8,593,725 1.4
Retailing
Household Durables 296,300 Koninklijke (Royal) Philips Electronics NV 8,652,039 1.4
Media 519,392 Wolters Kluwer NV 'A' 8,123,679 1.3
Total Common Stocks in the Netherlands 59,010,391 9.4
New Zealand Diversified 358,816 Telecom Corporation of New Zealand Limited 1,265,068 0.2
Telecommunication
Services
Total Common Stocks in New Zealand 1,265,068 0.2
Singapore Air Freight & 5,459,000 Singapore Post Limited 2,234,002 0.3
Logistics
Total Common Stocks in Singapore 2,234,002 0.3
Spain Tobacco 219,058 Altadis 6,216,951 1.0
Total Common Stocks in Spain 6,216,951 1.0
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Schedule of Investments (continued)
Value Percent of
Country Industry+++ Shares Held Common Stocks (in U.S. dollars) Net Assets
Switzerland Capital Markets 411,595 Credit Suisse Group $ 15,059,368 2.4%
Construction 203,484 Holcim Ltd. (Registered Shares) 9,476,999 1.5
Materials
Electrical 1,215,966 ++ABB Ltd. 6,164,631 1.0
Equipment
Insurance 42,564 ++Swiss Life Holding 7,812,434 1.2
Pharmaceuticals 214,367 Novartis AG (Registered Shares) 9,732,530 1.6
Total Common Stocks in Switzerland 48,245,962 7.7
United Commercial Banks 1,654,546 Barclays PLC 14,757,605 2.3
Kingdom 593,105 Royal Bank of Scotland Group PLC 17,476,367 2.8
--------------- ------
32,233,972 5.1
Food & Staples 1,426,331 J Sainsbury PLC 7,985,597 1.3
Retailing
Food Products 875,454 Unilever PLC 8,161,169 1.3
Industrial 654,890 Smiths Industries PLC 7,749,248 1.2
Conglomerates
Insurance 971,185 AVIVA PLC 8,523,330 1.4
Oil & Gas 2,574,730 Shell Transport & Trading Company 19,151,044 3.0
Pharmaceuticals 403,154 GlaxoSmithKline PLC 9,237,845 1.5
Specialty Retail 2,259,000 Kesa Electricals PLC 10,403,066 1.6
Transportation 1,069,190 BAA PLC 9,498,284 1.5
Infrastructure
Wireless 4,026,552 Vodafone Group PLC 9,983,270 1.6
Telecommunication
Services
Total Common Stocks in the United Kingdom 122,926,825 19.5
Total Common Stocks (Cost--$464,888,780) 613,384,127 97.5
Preferred Stocks
Germany Household Products 125,358 Henkel KGaA 9,803,464 1.6
Total Preferred Stocks (Cost--$8,275,233) 9,803,464 1.6
Face Amount Fixed Income Securities
Switzerland Insurance CHF 697,000 Swiss Life Cayman Finance Ltd.,
1% due 12/30/2004 (Convertible) 590,907 0.1
Total Fixed Income Securities (Cost--$554,693) 590,907 0.1
Short-Term Securities
Time Deposits US$5,447,418 Brown Brothers, 0.35% due 1/02/2004 5,447,418 0.8
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Schedule of Investments (concluded)
Beneficial Interest/ Value Percent of
Shares Held Short-Term Securities (in U.S. dollars) Net Assets
US$ 25,834,324 Merrill Lynch Liquidity Series, LLC $ 25,834,324 4.1%
Money Market Series (a)(b)
8,611,441 Merrill Lynch Premier Institutional Fund (a)(b) 8,611,441 1.4
--------------- ------
34,445,765 5.5
Total Short-Term Investments
(Cost--$39,893,183) 39,893,183 6.3
Total Investments (Cost--$513,611,889) 663,671,681 105.5
Liabilities in Excess of Other Assets (34,723,181) (5.5)
--------------- ------
Net Assets $ 628,948,500 100.0%
=============== ======
++Non-income producing security.
+++For Fund compliance purposes, "Industry" means any one or more
of the industry sub-classifications used by one or more widely
recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for
purposes of this report, which may combine such industry sub-
classifications for reporting ease.
(a)Investments in companies considered to be an affiliate of the
Fund (such companies are defined as "Affiliated Companies" in
Section 2(a)(3) of the Investment Company Act of 1940) are as
follows:
Interest/
Net Dividend
Affiliate Activity Income
Merrill Lynch Liquidity Series,
LLC Money Market Series $(13,055,662) $ 56,944
Merrill Lynch Premier
Institutional Fund (17,315,216) $ 27,683
(b)Security was purchased with the cash proceeds from securities
loans.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Statement of Assets and Liabilities
As of December 31, 2003
Assets
Investments, at value (including securities loaned of $32,815,373)
(identified cost--$513,611,889) $ 663,671,681
Cash 1,919
Receivables:
Dividends $ 1,649,481
Securities sold 1,622,854
Capital shares sold 1,033,809
Securities lending--net 7,447
Interest 244 4,313,835
---------------
Prepaid registration fees 61,688
---------------
Total assets 668,049,123
---------------
Liabilities
Collateral on securities loaned, at value 34,445,765
Payables:
Capital shares redeemed 2,323,355
Securities purchased 1,239,776
Custodian bank 563,576
Other affiliates 357,037
Investment adviser 63,282
Distributor 26,510
Organization costs 7,122 4,580,658
---------------
Accrued expenses 74,200
---------------
Total liabilities 39,100,623
---------------
Net Assets
Net assets $ 628,948,500
===============
Net Assets Consist of
Paid-in capital $ 563,088,829
Accumulated distributions in excess of investment income--net $ (4,992,751)
Accumulated realized capital losses on investments and foreign
currency transactions--net (79,445,322)
Unrealized appreciation on investments and foreign currency
transactions--net 150,297,744
---------------
Total accumulated earnings--net 65,859,671
---------------
Net Assets $ 628,948,500
===============
Net Asset Value
Class A--Based on net assets of $47,687,786 and 2,133,504 shares outstanding++ $ 22.35
===============
Class B--Based on net assets of $10,953,845 and 493,087 shares outstanding++ $ 22.21
===============
Class C--Based on net assets of $8,760,865 and 396,904 shares outstanding++ $ 22.07
===============
Class I--Based on net assets of $560,380,708 and 25,034,493 shares outstanding++ $ 22.38
===============
Class R--Based on net assets of $1,165,296 and 52,265 shares outstanding++ $ 22.30
===============
++Unlimited shares of no par value authorized.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Statement of Operations
For the Six Months Ended December 31, 2003
Investment Income
Dividends (net of $242,271 foreign withholding tax) $ 4,222,802
Securities lending--net 84,627
Interest 19,621
---------------
Total income 4,327,050
---------------
Expenses
Investment advisory fees $ 2,130,127
Transfer agent fees--Class I 509,615
Accounting services 119,037
Custodian fees 77,628
Account maintenance fees--Class A 62,684
Transfer agent fees--Class A 50,440
Registration fees 46,524
Printing and shareholder reports 41,368
Account maintenance and distribution fees--Class B 38,053
Account maintenance and distribution fees--Class C 25,147
Professional fees 23,091
Trustees' fees and expenses 13,407
Transfer agent fees--Class B 8,449
Pricing fees 8,070
Transfer agent fees--Class C 5,976
Account maintenance and distribution fees--Class R 711
Transfer agent fees--Class R 284
Other 14,955
---------------
Total expenses 3,175,566
---------------
Investment Income--net 1,151,484
---------------
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net
Realized gain from:
Investments--net 11,076,010
Foreign currency transactions--net 40,277 11,116,287
---------------
Change in unrealized appreciation on:
Investments--net 128,865,510
Foreign currency transactions--net (36,615) 128,828,895
--------------- ---------------
Total realized and unrealized gain from investments and foreign currency
transactions--net 139,945,182
---------------
Net Increase in Net Assets Resulting from Operations $ 141,096,666
===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2003 2003
Operations
Investment income--net $ 1,151,484 $ 9,422,107
Realized gain (loss) on investments and foreign currency
transactions--net 11,116,287 (79,904,041)
Change in unrealized appreciation on investments and foreign currency
transactions--net 128,828,895 9,981,036
--------------- ---------------
Net increase (decrease) in net assets resulting from operations 141,096,666 (60,480,898)
--------------- ---------------
Dividends & Distributions to Shareholders
Investment income--net:
Class A (1,333,430) --
Class B (125,031) --
Class C (66,820) --
Class I (12,804,694) (1,343,641)
Class R (6,149) --
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (14,336,124) (1,343,641)
--------------- ---------------
Capital Share Transactions
Decrease in net assets derived from net capital share transactions (18,293,303) (59,101,229)
Net Assets
Total increase (decrease) in net assets 108,467,239 (120,925,768)
Beginning of period 520,481,261 641,407,029
--------------- ---------------
End of period* $ 628,948,500 $ 520,481,261
=============== ===============
*Undistributed (distributions in excess of) investment income--net $ (4,992,751) $ 8,191,889
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Financial Highlights
Class A
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
December 31, For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001++ 2000++
Per Share Operating Performance
Net asset value, beginning of period $ 17.98 $ 20.55 $ 22.89 $ 27.27 $ 25.72
---------- ---------- ---------- ---------- ----------
Investment income--net .04++++ .39++++ .23++++ .31 .39
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 4.78 (2.96) (.70) (2.41) 3.41
---------- ---------- ---------- ---------- ----------
Total from investment operations 4.82 (2.57) (.47) (2.10) 3.80
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investments income--net (.45) -- (.70) (.47) (.74)
Realized gain on investments--net -- -- (1.17) (1.81) (1.51)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.45) -- (1.87) (2.28) (2.25)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 22.35 $ 17.98 $ 20.55 $ 22.89 $ 27.27
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 27.23%+++ (12.55%) (1.42%) (8.00%) 15.36%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.32%* 1.32% 1.38% 1.31% 1.31%
========== ========== ========== ========== ==========
Investment income--net .46%* 2.30% 1.19% 2.05% 1.37%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 47,688 $ 49,395 $ 97,769 $ 52,110 $ 4,920
========== ========== ========== ========== ==========
Portfolio turnover 41% 89% 45% 26% 50%
========== ========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Prior to October 6, 2000, Class A Shares were redesignated as
Distributor Class Shares.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Financial Highlights (continued)
Class B
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Oct. 6, 2000++
December 31, For the Year Ended June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 17.84 $ 20.57 $ 23.09 $ 25.65
---------- ---------- ---------- ----------
Investment income (loss)--net (.07)++++ .29++++ .10++++ .39
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 4.78 (3.02) (.71) (.82)
---------- ---------- ---------- ----------
Total from investment operations 4.71 (2.73) (.61) (.43)
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.34) -- (.74) (.32)
Realized gain on investments--net -- -- (1.17) (1.81)
---------- ---------- ---------- ----------
Total dividends and distributions (.34) -- (1.91) (2.13)
---------- ---------- ---------- ----------
Net asset value, end of period $ 22.21 $ 17.84 $ 20.57 $ 23.09
========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 26.77%+++ (13.27%) (2.10%) (2.01%)+++
========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.09%* 2.06% 2.12% 2.18%*
========== ========== ========== ==========
Investment income (loss)--net (.67%)* 1.74% .48% 1.49%*
========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 10,954 $ 5,343 $ 2,064 $ 1,016
========== ========== ========== ==========
Portfolio turnover 41% 89% 45% 26%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Financial Highlights (continued)
Class C
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Oct. 6, 2000++
December 31, For the Year Ended June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 17.70 $ 20.39 $ 22.91 $ 25.65
---------- ---------- ---------- ----------
Investment income (loss)--net (.08)++++ .17++++ .09++++ .60
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 4.76 (2.86) (.70) (1.05)
---------- ---------- ---------- ----------
Total from investment operations 4.68 (2.69) (.61) (.45)
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.31) -- (.74) (.48)
Realized gain on investments--net -- -- (1.17) (1.81)
---------- ---------- ---------- ----------
Total dividends and distributions (.31) -- (1.91) (2.29)
---------- ---------- ---------- ----------
Net asset value, end of period $ 22.07 $ 17.70 $ 20.39 $ 22.91
========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 26.72%+++ (13.19%) (2.10%) (2.11%)+++
========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.10%* 2.07% 2.06% 1.70%*
========== ========== ========== ==========
Investment income (loss)--net (.79%)* 1.02% .47% 1.76%*
========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 8,761 $ 2,672 $ 2,285 $ 762
========== ========== ========== ==========
Portfolio turnover 41% 89% 45% 26%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Financial Highlights (continued)
Class I
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
December 31, For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001++ 2000++
Per Share Operating Performance
Net asset value, beginning of period $ 18.03 $ 20.63 $ 22.97 $ 27.33 $ 25.73
---------- ---------- ---------- ---------- ----------
Investment income--net .04++++ .30++++ .29++++ .48 .43
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 4.82 (2.85) (.70) (2.53) 3.43
---------- ---------- ---------- ---------- ----------
Total from investment operations 4.86 (2.55) (.41) (2.05) 3.86
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.51) (.05) (.76) (.50) (.76)
Realized gain on investments--net -- -- (1.17) (1.81) (1.50)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.51) (.05) (1.93) (2.31) (2.26)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 22.38 $ 18.03 $ 20.63 $ 22.97 $ 27.33
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 27.39%+++ (12.38%) (1.14%) (7.79%) 15.60%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.07%* 1.07% 1.14% 1.06% 1.06%
========== ========== ========== ========== ==========
Investment income--net .43%* 1.78% 1.42% 1.78% 1.62%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 560,381 $ 463,071 $ 617,289 $1,024,993 $1,393,910
========== ========== ========== ========== ==========
Portfolio turnover 41% 89% 45% 26% 50%
========== ========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Prior to October 6, 2000, Class I Shares were redesignated as
Investor Class Shares.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Financial Highlights (concluded)
Class R
For the Six For the Period
The following per share data and ratios have been derived Months Ended January 3, 2003++
from information provided in the financial statements. December 31, to June 30,
Increase (Decrease) in Net Asset Value: 2003 2003
Per Share Operating Performance
Net asset value, beginning of period $ 17.98 $ 16.79
------------ ------------
Investment income (loss)--net*** (.09) .32
Realized and unrealized gain on investments and foreign currency
transactions--net 4.90 .87
------------ ------------
Total from investment operations 4.81 1.19
------------ ------------
Less dividends from investment income--net (.49) --
------------ ------------
Net asset value, end of period $ 22.30 $ 17.98
============ ============
Total Investment Return**
Based on net asset value per share 27.22%+++ 7.09%+++
============ ============
Ratios to Average Net Assets
Expenses 1.57%* 1.55%*
============ ============
Investment income (loss)--net (.84%)* 3.04%*
============ ============
Supplemental Data
Net assets, end of period (in thousands) $ 1,165 $ --+++++
============ ============
Portfolio turnover 41% 89%
============ ============
*Annualized.
**Total investment returns exclude the effects of sales charges.
***Based on average shares outstanding.
++Commencement of operations.
+++Aggregate total investment return.
+++++Amount is less than $1,000.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch International Value Fund (the "Fund") is a fund of
Mercury Funds II (the "Trust"). The Trust is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-
end management investment company, which is organized as a
Massachusetts business trust. The Fund's financial statements are
prepared in conformity with accounting principles generally accepted
in the United States of America, which may require the use of
management accruals and estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal,
recurring nature. The Fund offers multiple classes of shares. Class
A and Class I Shares are sold with a front-end sales charge. Class B
and Class C Shares may be subject to a contingent deferred sales
charge. Class R Shares are sold only to certain retirement plans.
All classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that
Class A, Class B, Class C and Class R Shares bear certain expenses
related to the account maintenance of such shares, and Class B,
Class C and Class R 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 Shares have certain
voting rights with respect to Class A distribution expenditures).
Income, expenses (other than expenses attributable to a specific
class) and realized and unrealized gains and losses on investments
and foreign currency transactions are allocated daily to each class
based on its relative net assets. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Equity securities that are held by the
Fund that are traded on stock exchanges or the Nasdaq National
Market are valued at the last sale price or official close price on
the exchange, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for
short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange
designated as the primary market by or under the authority of the
Board of Trustees of the Trust. Long positions traded in the over-
the-counter ("OTC") market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price or yield equivalent obtained
from one or more dealers or pricing services approved by the Board
of Trustees of the Trust. Short positions traded in the OTC market
are valued at the last available ask price. Portfolio securities
that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC
market, the last ask price. Options purchased are valued at their
last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last bid price. Swap
agreements are valued daily based upon quotations from market
makers. Financial futures contracts and options thereon, which are
traded on exchanges, are valued at their last sale price as of the
close of such exchanges. Obligations with remaining maturities of
60 days or less are valued at amortized cost unless the Investment
Adviser believes that this method no longer produces fair
valuations.
Repurchase agreements are valued at cost plus accrued interest. The
Fund employs pricing services to provide certain securities prices
for the Fund. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good
faith by or under the direction of the Board of Trustees of the
Trust, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations.
The procedures of a pricing service and its valuations are reviewed
by the officers of the Trust under the general supervision of the
Trust's Board of Trustees. Such valuations and procedures will be
reviewed periodically by the Board of Trustees of the Trust.
Generally, trading in foreign securities, as well as U.S. government
securities and money market instruments, is substantially completed
each day at various times prior to the close of business on the New
York Stock Exchange ("NYSE"). The values of such securities used in
computing the net asset value of the Fund's shares are determined as
of such times. Foreign currency exchange rates also are generally
determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and
the close of business on the NYSE that may not be reflected in the
computation of the Fund's net asset value. If events (for example, a
company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value
of such securities, those securities may be valued at their fair
value as determined in good faith by the Trust's Board of Trustees
or by the Investment Adviser using a pricing service and/or
procedures approved by the Trust's Board of Trustees.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Notes to Financial Statements (continued)
(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.
* Forward foreign exchange contracts--The Fund may enter into
forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. The contract is marked-
to-market daily and the change in market value is recorded by the
Fund as an unrealized gain or loss. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between
the value at the time it was opened and the value at the time it was
closed.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into U.S. dollars. Realized and unrealized gains or
losses from investments include the effects of foreign exchange
rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required. Under the applicable foreign tax law,
withholding taxes 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) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Expenses--Common expenses incurred by the Trust are allocated
among the funds based upon: (i) relative net assets; (ii) as
incurred on a specific identification basis; or (iii) evenly among
the funds, depending on the nature of the expenditure.
(i) 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.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Notes to Financial Statements (continued)
(j) Custodian bank--The Fund recorded an amount payable to the
custodian bank which resulted from a failed foreign exchange
contract.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement for the
Fund with Fund Asset Management L.P. ("FAM"). The general partner of
FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. FAM is responsible for the management of the Fund's
investments 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 an
annual rate of .75% of the average daily value of the Fund's net
assets.
FAM has entered into Sub-Advisory agreements for the Fund with
Merrill Lynch Investment Managers International Limited and Merrill
Lynch Asset Management U.K. Limited ("MLAM U.K."), affiliated
investment advisers that are indirect subsidiaries of ML & Co.
The Sub-Advisory arrangements are for investment research,
recommendations and other investment-related services to be provided
to the Fund. There is no increase in aggregate fees paid by the Fund
for these services.
The Trust on behalf of the Fund has also entered into a Distribution
Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD"
or the "Distributor"), an indirect, wholly-owned subsidiary of
Merrill Lynch Group, Inc. 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 on-going account
maintenance and distribution fees. The fees are accrued daily and
paid monthly at the annual rates based upon the average daily net
assets of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Class R .25% .25%
Pursuant to a sub-agreement with the Distributor, selected dealers
also provide account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and selected dealers for providing account maintenance
services to Class A, Class B, Class C and Class R shareholders. The
ongoing distribution fee compensates the Distributor and selected
dealers for providing shareholder and distribution-related services
to Class B, Class C and Class R shareholders.
For the six months ended December 31, 2003, FAMD earned underwriting
discounts and direct commissions and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned
dealer concessions on sales of the Fund's Class A and Class I Shares
as follows:
FAMD MLPF&S
Class A $1,497 $13,355
Class I $ 59 $ 525
For the six months ended December 31, 2003, MLPF&S received
contingent deferred sales charges of $836 and $363 relating to
transactions in Class B and Class C shares, respectively.
In addition, MLPF&S received $10,582 in commissions on the execution
of portfolio security transactions for the Fund for the six months
ended December 31, 2003.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
MLPF&S or its affiliates. Pursuant to that order, the Fund also has
retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an
affiliate of FAM, as the securities lending agent for a fee based on
a share of the returns on investment of cash collateral. MLIM, LLC
may, on behalf of the Fund, invest cash collateral received by the
Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates. As of December 31, 2003, the Fund
lent securities with a value of $2,356,958 to MLPF&S or its
affiliates. For the six months ended December 31, 2003, MLIM, LLC
received $33,446 in securities lending agent fees.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Notes to Financial Statements (continued)
Certain officers and/or trustees of the Trust are officers and/or
directors of FAM, PSI, MLAM U.K., FAMD, FDS, and/or ML & Co.
Certain authorized agents of the Fund charge a fee for accounting
and shareholder services that they provide to the Fund on behalf of
certain shareholders; the portion of this fee paid by the Fund is
included within Transfer agent fees in the Statement of Operations.
For the six months ended December 31, 2003, the Fund reimbursed FAM
$5,936 for certain accounting services.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended December 31, 2003 were $229,816,231 and
$261,227,055, respectively.
Net realized gains for the six months ended December 31, 2003 and
net unrealized gains as of December 31, 2003 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 11,076,010 $ 150,059,792
Foreign currency transactions 40,277 237,952
-------------- --------------
Total $ 11,116,287 $ 150,297,744
============== ==============
As of December 31, 2003, net unrealized appreciation for Federal
income tax purposes aggregated $124,076,194, of which $145,493,743
related to appreciated securities and $21,417,549 related to
depreciated securities. At December 31, 2003, the aggregate cost of
investments for Federal income tax purposes was $539,595,487.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $18,293,303 and $59,101,229 for the six months ended December
31, 2003 and for the year ended June 30, 2003, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
December 31, 2003 Shares Amount
Shares sold 8,361,549 $ 154,989,176
Automatic conversion of shares 67 1,351
Shares issued to shareholders
in reinvestment of dividends 57,445 1,097,605
-------------- ---------------
Total issued 8,419,061 156,088,132
Shares redeemed (9,033,333) (169,682,733)
-------------- ---------------
Net decrease (614,272) $ (13,594,601)
============== ===============
Class A Shares for the Year Dollar
Ended June 30, 2003 Shares Amount
Shares sold 50,175,623 $ 826,346,971
Shares redeemed (48,389,657) (805,874,151)
-------------- ---------------
Net increase 1,785,966 $ 20,472,820
============== ===============
Class B Shares for the
Six Months Ended Dollar
December 31, 2003 Shares Amount
Shares sold 415,021 $ 8,031,850
Shares issued to shareholders
in reinvestmentof dividends 6,323 119,861
-------------- ---------------
Total issued 421,344 8,151,711
Automatic conversion of shares (67) (1,351)
Shares redeemed (227,627) (4,315,231)
-------------- ---------------
Net increase 193,650 $ 3,835,129
============== ===============
Class B Shares for the Year Dollar
Ended June 30, 2003 Shares Amount
Shares sold 250,163 $ 4,117,534
Shares redeemed (51,072) (838,821)
-------------- ---------------
Net increase 199,091 $ 3,278,713
============== ===============
Class C Shares for the
Six Months Ended Dollar
December 31, 2003 Shares Amount
Shares sold 385,921 $ 7,483,556
Shares issued to shareholders
in reinvestmentof dividends 3,249 62,793
-------------- ---------------
Total issued 389,170 7,546,349
Shares redeemed (143,260) (2,760,665)
-------------- ---------------
Net increase 245,910 $ 4,785,684
============== ===============
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Notes to Financial Statements (concluded)
Class C Shares for the Year Dollar
Ended June 30, 2003 Shares Amount
Shares sold 1,292,556 $ 21,275,561
Shares redeemed (1,253,624) (20,927,952)
-------------- ---------------
Net increase 38,932 $ 347,609
============== ===============
Class I Shares for the
Six Months Ended Dollar
December 31, 2003 Shares Amount
Shares sold 14,730,154 $ 279,341,159
Shares issued to shareholders
in reinvestment of dividends 629,110 12,134,608
-------------- ---------------
Total issued 15,359,264 291,475,767
Shares redeemed (16,010,374) (305,865,314)
-------------- ---------------
Net decrease (651,110) $ (14,389,547)
============== ===============
Class I Shares for the Year Dollar
Ended June 30, 2003 Shares Amount
Shares sold 85,706,445 $ 1,421,840,060
Share issued to shareholders
in reinvestmentof dividends 72,331 1,308,467
-------------- ---------------
Total issued 85,778,776 1,423,148,527
Shares redeemed (90,020,609) (1,506,348,998)
-------------- ---------------
Net decrease (4,241,833) $ (83,200,471)
============== ===============
Class R Shares for the
Six Months Ended Dollar
December 31, 2003 Shares Amount
Shares sold 58,026 $ 1,194,884
Shares issued to shareholders
in reinvestment of dividends 288 6,142
-------------- ---------------
Total issued 58,314 1,201,026
Shares redeemed (6,055) (130,994)
-------------- ---------------
Net increase 52,259 $ 1,070,032
============== ===============
Class R Shares for the
Period January 3, 2003++ to Dollar
June 30, 2003 Shares Amount
Shares sold 5.95 $ 100
-------------- ---------------
Net increase 5.95 $ 100
============== ===============
++Commencement of operations.
5. Short-Term Borrowings:
The Trust, along with certain other funds managed by FAM and its
affiliates, is a party to a $500,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the
credit agreement to fund shareholder redemptions and for other
lawful purposes other than for leverage. The Fund may borrow up to
the maximum amount allowable under the Fund's current prospectus and
statement of additional information, subject to various other legal,
regulatory or contractual limits. The Fund pays a commitment fee of
..09% per annum based on the Fund's pro rata share of the unused
portion of the credit agreement. Amounts borrowed under the credit
agreement bear interest at a rate equal to, at each fund's election,
the Federal Funds rate plus .50% or a base rate as determined by
Bank One, N.A. On November 28, 2003, the credit agreement was
renewed for one year under the same terms. The Fund did not borrow
under the credit agreement during the six months ended December 31,
2003.
6. Capital Loss Carryforward:
On June 30, 2003, the Fund had a net capital loss carryforward of
$33,409,373, all of which expires in 2011. This amount will be
available to offset like amounts of any future taxable gains.
7. Commitments:
At December 31, 2003, the Fund had entered into foreign exchange
contracts, under which it had agreed to purchase and sell various
foreign currencies with approximate values of $1,243,000 and
$1,626,000, respectively.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Officers and Trustees
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Joe Grills, Trustee
Herbert I. London, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Robert S. Salomon, Jr., Trustee
Stephen B. Swensrud, Trustee
Robert C. Doll, Jr., Senior Vice President
James A. Macmillan, Vice President and Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Phillip S. Gillespie, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
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 website
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 INTERNATIONAL VALUE FUND, DECEMBER 31, 2003
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this
semi-annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to
this semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Reserved
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies - Not Applicable
Item 8 - Reserved
Item 9 - Controls and Procedures
9(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.
9(b) - There were no significant changes in the registrant's
internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Item 10 - Exhibits attached hereto
10(a) - Not Applicable
10(b) - 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 International Value Fund of Mercury Funds II
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
Merrill Lynch International Value Fund of Mercury Funds II
Date: February 23, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: _/s/ Terry K. Glenn________
Terry K. Glenn,
President of
Merrill Lynch International Value Fund of Mercury Funds II
Date: February 23, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch International Value Fund of Mercury Funds II
Date: February 23, 2004