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 811-6521
Name of Fund: Merrill Lynch International Equity Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President,
Merrill Lynch International Equity Fund, Inc., 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: 05/31/04
Date of reporting period: 06/01/03 - 05/31/04
Item 1 - Report to Stockholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
Merrill Lynch
International Equity
Fund
Annual Report
May 31, 2004
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.
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is
available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) at www.mutualfunds.ml.com;
and (3) on the Securities and Exchange Commission's Web site at
http://www.sec.gov.
Merrill Lynch International Equity Fund
Box 9011
Princeton, NJ
08543-9011
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Merrill Lynch International Equity Fund
Portfolio Information as of May 31, 2004 (unaudited)
Percent of
Ten Largest Equity Holdings Net Assets
BP Amoco PLC 3.5%
Toyota Motor Corporation 2.2
Royal Dutch Petroleum Company 2.2
AstraZeneca Group PLC 2.0
Nestle SA (Registered Shares) 1.9
Royal Bank of Scotland Group PLC 1.9
Vodafone Group PLC 1.9
Barclays PLC 1.8
TotalFinaElf SA 1.8
Novartis AG (Registered Shares) 1.7
Percent of
Ten Largest Countries Net Assets
United Kingdom 26.9%
Japan 18.6
Switzerland 9.5
France 9.1
Netherlands 5.3
Italy 4.2
Canada 3.3
Sweden 2.7
Germany 2.7
Finland 2.0
Percent of
Five Largest Industries* (Equity Investments) Net Assets
Commercial Banks 16.1%
Oil & Gas 10.2
Pharmaceuticals 8.0
Wireless Telecommunication Services 4.8
Automobiles 4.0
*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. These industry classifications
are unaudited.
Percent of
Geographic Asset Mix Net Assets*
Europe (Ex United Kingdom) 39.3%
United Kingdom 26.9
Japan 18.6
Pacific Basin/Asia (Ex Japan) 8.3
North America 4.0
*Total may not equal 100%.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
A Letter From the President
Dear Shareholder
Equity markets posted positive results for the most recent reporting
periods. The U.S. stock market, as measured by the Standard & Poor's
500 Index, had respective returns of +6.79% and +18.33% for the six-
month and 12-month periods ended May 31, 2004. The Morgan Stanley
Capital International (MSCI) Europe, Australasia, Far East Index,
which measures the performance of equity markets in 21 developed
nations (excluding the United States and Canada), returned +10.32%
and +32.66% for the six-month and 12-month periods, respectively.
Emerging markets, as represented by the MSCI Emerging Markets Index,
returned +5.75% and +40.10% for the same periods.
The positive market returns have been supported by improving
economies in important areas around the globe. In particular, the
U.S. economy has benefited from fiscal and monetary stimulus in the
form of low interest rates and tax cuts. This has opened the door to
consumer spending, capital spending, increases in exports and long-
awaited job growth. Since the United States represents 32% of global
gross domestic product (GDP), the acceleration of its economy has
provided encouragement to other areas of the world.
Elsewhere, China has recorded a remarkable rate of economic
expansion. With real GDP growth of 9.1% in 2003, the country has
helped fuel growth in the economies of its trading partners. Given
efforts to preempt inflation, China's growth is expected to ease
somewhat in 2004, but still expand at a rate of 7% - 8%. Japan, in
the meantime, has begun to emerge from 13 years of sluggish growth.
In Europe, the European Union welcomed 10 new member nations in May,
and the enhanced integration may create further economic
opportunities.
The events and efforts of the past year leave us with stronger
global economies today. Of course, markets will always fluctuate,
and there are many uncertainties - including the possibility of
geopolitical events - that can translate into negative market
movements. Keeping this in mind, however, we encourage you to
revisit your portfolio and your asset allocation strategy to ensure
you are well positioned to take advantage of the opportunities that
lie ahead. Importantly, your financial advisor can help you develop
a strategy most suitable for your circumstances through all types of
market and economic cycles.
We thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the
months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Trustee
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
A Discussion With Your Fund's Portfolio Managers
At period-end, the Fund was positioned to benefit from what we
expect will be an investor flight away from more speculative
investments and toward higher-quality stocks.
How did the Fund perform during the fiscal year in light of the
existing market conditions?
For the 12-month period ended May 31, 2004, Merrill Lynch
International Equity Fund's Class A, Class B, Class C and Class I
Shares had total returns of +20.49%, +19.55%, +19.71% and +20.99%,
respectively. The Fund's benchmark, the Morgan Stanley Capital
International World Index (ex-U.S.), returned +32.11% for the same
period. (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 - 10 of this report to
shareholders.)
Fund returns lagged that of the benchmark, primarily because of our
investment view in what we believed to be an extreme market
environment. Unusually high appetites for risk, together with
plentiful liquidity, engendered speculative investor behavior and
led to significant outperformance of lower-quality stocks. We did
not chase this momentum because our analysis suggested that
investors had overpaid for economic leverage/risk, pushing many of
these stock prices to levels that could not be justified by our
medium-term earnings expectations. In our view, these valuations
also could not compensate investors for the specific risks attached.
Some of the most extreme examples of the performance variation were
seen in the technology sector and in areas of materials and
industrials.
Within information technology (IT), our underweight positions in
semiconductor-related and hardware stocks hampered the Fund's
relative results, as these areas made sharp gains. In particular,
stocks such as Infineon Technologies AG, Ericsson and Fujitsu
Computer Systems Corporation, which we did not hold, performed
strongly. IT valuations implied levels of earnings growth that we
thought were too high given the competitive environment and excess
capacity issues these companies face.
These trends also were evident in the consumer discretionary
sector. High-quality franchises held by the Fund, such as Reed
Elsevier NV, the UK-listed media company, declined as investors
sought out riskier stocks. For example, Reuters, not a Fund holding,
was perceived to offer greater earnings recovery and was bid-up
aggressively even though the company continued to experience losses.
In Japan, our strategy was negatively impacted by a number of
factors. First, the technical selling pressure caused by "daiko
henjo" (the returning of pension fund assets to the government) led
to declines for some of the blue chip stocks held by the Fund.
Second, investors were concerned that a stronger yen would hurt
exporters and aggressively rotated out of exporting companies into
domestic shares, ignoring the extended valuations of some of the
domestic names. Performance also was impacted by our avoidance of
the "big five" Japanese banks, all of which made sharp gains. Mizuho
Financial Group, Inc., for example, was up 560% in U.S. dollar
terms. Investors speculated that an improvement in the domestic
economy and recent equity market gains could lead to strong earnings
upside for the banks. Our analysis suggested that while the banks
had clearly made progress in dealing with their non-performing
loans, there were still risks attached to these stocks - risks that
we did not feel we were being compensated for. We maintain our view
that the large commercial city banks still face structural hurdles
and that recent sentiment may be overly optimistic given the risks
attached to these stocks.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
What changes were made to the portfolio during the period?
In the first six months of the fiscal year, we increased our
exposure to Japanese automakers by initiating positions in Toyota
Motor Corporation and Honda Motor Co., Ltd. Both were trading at a
discount compared to many other Japanese shares and other automobile
stocks, particularly the three largest U.S. automakers. In the
financials sector, we added to our position in Credit Suisse Group,
based on what we believed to be an attractive valuation relative to
its global peer group. Under new leadership, the company had lowered
costs and restructured its insurance business. We also reduced
exposure to materials in the first half of the period, trimming
positions in mining companies Rio Tinto PLC and BHP Billiton as they
approached the top end of our fair value range. Changes in the
portfolio's technology sector included reducing our position in
Nokia, as we became increasingly concerned that the company's high
margins would be threatened by intense price competition in areas
such as Asia. Some of the proceeds from the sale were reinvested in
Samsung, which was trading at a less expensive valuation and had a
leading position in the Asian handset market.
In the second half of the period, we made no major changes to our
overall portfolio strategy. On the margin, we trimmed our exposure
to mining shares, again reducing Rio Tinto and selling BHP Billiton.
Given clear signals from the Chinese government that it will be
taking stronger action to slow its economy, we expect to see
commodity prices weaken from their recent high levels.
In Japan, we increased our position in the financial sector (thereby
reducing our underweighting) by initiating positions in two Japanese
regional banks, The Bank of Yokohama, Ltd. and The Hiroshima Bank,
Ltd. We believe they stand to benefit from the recovery in loan
demand and possess more attractive valuations than the city banks,
which remain overvalued in our view. On a similar theme, we
established positions in the Japanese convenience store companies
C&S Co., Ltd. and FamilyMart Co., Ltd. Both companies possess
cutting-edge replenishment technologies which, together with a
franchise structure, provides for highly productive stores. The
companies' stocks had lagged the rally in more cyclical parts of the
Japanese retail sector and, in our view, offer upside potential as
consumer spending improves.
How would you characterize the Fund's position at the close of the
period?
The prospect of rising interest rates, together with awareness that
the pace of economic and earnings growth is likely to slow as we
move through this year, has recently begun to lower investors' risk
appetites. While the trend has been volatile, investors appear to
have started to rotate toward higher-quality companies capable of
delivering more sustainable earnings growth, where valuations are
attractive. This has benefited recent performance, and we believe
the process has further to run. For that reason, we remain biased
toward higher-quality shares, which we believe offer the best
prospects for appreciation in the months ahead.
Exposure to economic sensitivity is gained through investments in
media, industrial and selected IT and financial stocks. The Fund is
underweight in retail and certain areas in the materials sector,
such as mining/commodity stocks, as well as semiconductor,
networking and telecommunications equipment stocks where valuations
are too high, in our assessment. The Fund also has exposure to what
we believe to be undervalued franchises in areas such as banking,
personal products and beverages.
Ian Rowley
Vice President and Co-Portfolio Manager
Nigel Waller
Co-Portfolio Manager
June 10, 2004
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
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% declining to 0% after six years. All Class B Shares
purchased prior to June 1, 2001 will maintain the four-year
schedule. 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. (There is no initial sales charge for automatic share
conversions.)
* 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 are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class I Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class I Shares are available only to eligible
investors.
None of the past results shown should be considered a representation
of future performance. Current performance may be lower or higher
than the performance data quoted. Refer to www.mlim.ml.com to obtain
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 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.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Performance Data (continued)
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception
As of May 31, 2004 Total Return Total Return Total Return
ML International Equity Fund--Class A Shares* +8.13% +20.49% + 9.69%
ML International Equity Fund--Class B Shares* +7.62 +19.55 + 1.40
ML International Equity Fund--Class C Shares* +7.63 +19.71 - 0.18
ML International Equity Fund--Class I Shares* +8.24 +20.99 +10.26
Morgan Stanley Capital International World (Ex-U.S.) Index** +9.81 +32.11 +51.62/+44.46
*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 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 10 year/since inception dates are 10 years for Class A &
Class B Shares, and from 10/21/94 for Class C & Class I Shares.
**This unmanaged capitalization-weighted Index is comprised of a
representative sampling of stocks in 21 countries, excluding the
United States. Ten-year/since inception total returns are for 10
years and from 10/31/94, respectively.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Performance Data (continued)
MSCI COUNTRY INDEX PERFORMANCE
Total Return for the 12-Month Period Ended May 31, 2004 Representing
the Fund's Top Country Positions (In U.S. Dollars*)
Percent of
Country Net Assets
Japan 49.1%
Sweden 48.5
Germany 37.4
France 29.6
Ireland 28.6
Switzerland 28.1
United Kingdom 27.4
Netherlands 23.8
Canada 23.4
Italy 18.7
Finland -4.8
Source: Morgan Stanley Capital International World (Ex-U.S.) Index.
* For the 12-month period ended May 31, 2004, total investment
return (in U.S. dollars) for the Morgan Stanley Capital
International World (Ex-U.S.) Index was +32.11%.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Performance Data (continued)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
Class A & Class B Shares
A line graph illustrating the growth of a $10,000 investment in
ML International Equity Fund++ Class A and Class B Shares* compared
to a similar investment in Morgan Stanley Capital International
World (Ex-U.S.) Index++++. Values illustrated are as follows:
ML International Equity Fund++
Class A Shares*
Date Value
May 1994 $ 9,475.00
May 1995 $ 8,990.00
May 1996 $10,452.00
May 1997 $11,550.00
May 1998 $10,837.00
May 1999 $10,761.00
May 2000 $12,984.00
May 2001 $10,775.00
May 2002 $ 9,809.00
May 2003 $ 8,626.00
May 2004 $10,393.00
ML International Equity Fund++
Class B Shares*
Date Value
May 1994 $10,000.00
May 1995 $ 9,409.00
May 1996 $10,858.00
May 1997 $11,912.00
May 1998 $11,076.00
May 1999 $10,925.00
May 2000 $13,070.00
May 2001 $10,772.00
May 2002 $ 9,721.00
May 2003 $ 8,482.00
May 2004 $10,140.00
Morgan Stanley Capital International
World (Ex-U.S.) Index++++
Date Value
May 1994 $10,000.00
May 1995 $10,515.00
May 1996 $11,675.00
May 1997 $12,637.00
May 1998 $14,075.00
May 1999 $14,621.00
May 2000 $17,300.00
May 2001 $14,330.00
May 2002 $12,978.00
May 2003 $11,477.00
May 2004 $15,162.00
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
++The Fund invests in a diversified portfolio of equity securities
of issuers located in countries other than the United States.
++++This unmanaged market capitalization-weighted Index is comprised
of a representative sampling of stocks in 21 countries (excluding
the United States) and is widely used as a benchmark by
internationally invested equity funds.
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 5/31/04 +20.49% +14.16%
Five Years Ended 5/31/04 - 0.69 - 1.76
Ten Years Ended (5/31/04) + 0.93 + 0.39
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
Class B Shares*
One Year Ended 5/31/04 +19.55% +15.55%
Five Years Ended 5/31/04 - 1.48 - 1.87
Ten Years Ended 5/31/04 + 0.14 + 0.14
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after six years.
**Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Performance Data (concluded)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
Class C & Class I Shares
A line graph illustrating the growth of a $10,000 investment in
ML International Equity Fund++ Class C and Class I Shares* compared
to a similar investment in Morgan Stanley Capital International
World (Ex-U.S.) Index++++. Values illustrated are as follows:
ML International Equity Fund++
Class C Shares*
Date Value
10/21/1994** $10,000.00
May 1995 $ 9,264.00
May 1996 $10,686.00
May 1997 $11,723.00
May 1998 $10,907.00
May 1999 $10,743.00
May 2000 $12,861.00
May 2001 $10,602.00
May 2002 $ 9,564.00
May 2003 $ 8,339.00
May 2004 $ 9,982.00
ML International Equity Fund++
Class I Shares*
Date Value
10/21/1994** $ 9,475.00
May 1995 $ 8,833.00
May 1996 $10,289.00
May 1997 $11,396.00
May 1998 $10,710.00
May 1999 $10,672.00
May 2000 $12,909.00
May 2001 $10,744.00
May 2002 $ 9,797.00
May 2003 $ 8,635.00
May 2004 $10,447.00
Morgan Stanley Capital International
World (Ex-U.S.) Index++++
Date Value
10/21/1994** $10,000.00
May 1995 $10,019.00
May 1996 $11,124.00
May 1997 $12,041.00
May 1998 $13,411.00
May 1999 $13,931.00
May 2000 $16,484.00
May 2001 $13,654.00
May 2002 $12,366.00
May 2003 $10,935.00
May 2004 $14,446.00
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++The Fund invests in a diversified portfolio of equity securities
of issuers located in countries other than the United States.
++++This unmanaged market capitalization-weighted Index is comprised
of a representative sampling of stocks in 21 countries (excluding
the United States) and is widely used as a benchmark by
internationally invested equity funds. The starting date for the
Index in the Class C and Class I Shares' graph is from 10/31/94.
Past performance is not indicative of future results.
Average Annual Total Return
Return Return
Without CDSC With CDSC**
Class C Shares*
One Year Ended 5/31/04 +19.71% +18.71%
Five Years Ended 5/31/04 - 1.46 - 1.46
Inception (10/21/94) through
5/31/04 - 0.02 - 0.02
*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 5/31/04 +20.99% +14.64%
Five Years Ended 5/31/04 - 0.43 - 1.49
Inception (10/21/94) through
5/31/04 + 1.02 + 0.46
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Schedule of Investments
Value Percent of
Europe Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
Finland Machinery 29,026 Kone Corporation 'B' $ 1,673,009 0.6%
Paper & Forest 186,100 Stora Enso Oyj 'R' 2,415,732 0.8
Products 99,390 UPM-Kymmene Oyj 1,784,141 0.6
--------------- ------
4,199,873 1.4
Total Common Stocks in Finland 5,872,882 2.0
France Building Products 35,570 Compagnie de Saint-Gobain 1,791,748 0.6
Chemicals 23,171 Air Liquide 4,063,201 1.4
Commercial Banks 69,733 BNP Paribas SA 4,257,724 1.5
Diversified 85,425 France Telecom SA 2,053,997 0.7
Telecommunication
Services
Food & Staples 12,156 Carrefour SA 593,624 0.2
Retailing
Food Products 4,048 Groupe Danone 697,982 0.2
Insurance 93,870 Axa 1,925,774 0.7
Oil & Gas 28,227 TotalFinaElf SA 5,297,948 1.8
Pharmaceuticals 27,615 Aventis SA 2,190,248 0.7
56,330 Sanofi-Synthelabo SA 3,721,398 1.3
--------------- ------
5,911,646 2.0
Total Common Stocks in France 26,593,644 9.1
Germany Automobiles 17,687 Bayerische Motoren Werke (BMW) AG 749,467 0.3
Commercial Banks 76,500 ++Bayerische Hypo-und Vereinsbank AG 1,292,905 0.4
Diversified Financial 21,600 Deutsche Boerse AG 1,151,349 0.4
Services
Diversified 51,200 ++Deutsche Telekom AG (Registered Shares) 859,065 0.3
Telecommunication
Services
Electric Utilities 45,200 E.On AG 3,132,373 1.1
Thrifts & Mortgage 24,425 ++Hypo Real Estate Holding AG 686,608 0.2
Finance
Total Common Stocks in Germany 7,871,767 2.7
Ireland Commercial Banks 222,348 Allied Irish Banks PLC 3,160,497 1.1
188,774 Bank of Ireland 2,277,552 0.8
Total Common Stocks in Ireland 5,438,049 1.9
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Schedule of Investments (continued)
Value Percent of
Europe Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
Italy Commercial Banks 431,716 Banca Intesa SpA $ 1,180,906 0.4%
80,600 Banco Popolare di Verona e Novara Scrl 1,322,828 0.4
976,440 Intesa BCI SpA 3,505,597 1.2
303,684 Unicredito Italiano SpA 1,420,332 0.5
--------------- ------
7,429,663 2.5
Insurance 81,500 Assicurazioni Generali 2,113,884 0.7
Oil & Gas 140,610 ENI SpA 2,865,772 1.0
Total Common Stocks in Italy 12,409,319 4.2
Netherlands Air Freight & 139,795 TNT Post Group NV 3,144,491 1.1
Logistics
Commercial Banks 80,452 ABN AMRO BANK 1,694,709 0.6
Diversified 47,900 Euronext NV 1,368,739 0.4
Financial 74,179 ING Groep NV 1,673,987 0.6
Services --------------- ------
3,042,726 1.0
Food Products 19,075 Unilever NV 'A' 1,254,352 0.4
Oil & Gas 128,000 Royal Dutch Petroleum Company 6,408,597 2.2
Total Common Stocks in the Netherlands 15,544,875 5.3
Spain Diversified 255,147 Telefonica SA 3,701,485 1.3
Telecommunication
Services
Tobacco 55,100 Altadis, SA 1,686,172 0.6
Total Common Stocks in Spain 5,387,657 1.9
Sweden Building Products 115,623 Assa Abloy AB 'B' 1,341,523 0.5
Commercial Banks 88,500 Skandinaviska Enskilda Banken (SEB) 'A' 1,276,114 0.4
Insurance 245,400 Skandia Forsakrings AB 984,200 0.3
Machinery 74,112 SKF AB 'B' 2,703,929 0.9
59,800 Scania AB 'B' 1,872,949 0.6
--------------- ------
4,576,878 1.5
Total Common Stocks in Sweden 8,178,715 2.7
Switzerland Capital Markets 109,025 Credit Suisse Group 3,741,650 1.3
44,463 UBS AG (Registered Shares) 3,186,562 1.1
--------------- ------
6,928,212 2.4
Construction 66,122 Holderbank Finan Glaris Ltd. (Registered Shares) 3,442,097 1.2
Materials
Food Products 21,783 Nestle SA (Registered Shares) 5,661,079 1.9
Insurance 43,600 Swiss Re (Registered Shares) 2,704,145 0.9
Machinery 5,436 Schindler Holding AG 1,551,409 0.5
Pharmaceuticals 107,800 Novartis AG (Registered Shares) 4,829,688 1.7
25,363 Roche Holding AG 2,668,938 0.9
--------------- ------
7,498,626 2.6
Total Common Stocks in Switzerland 27,785,568 9.5
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Schedule of Investments (continued)
Value Percent of
Europe Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
United Beverages 260,705 Diageo PLC $ 3,460,644 1.2%
Kingdom
Commercial Banks 609,842 Barclays PLC 5,316,634 1.8
181,669 Royal Bank of Scotland Group PLC 5,485,843 1.9
--------------- ------
10,802,477 3.7
Commercial 219,750 Bunzl PLC 1,849,314 0.6
Services &
Supplies
Food & Staples 589,018 Tesco PLC 2,689,038 0.9
Retailing
Household Durables 82,800 Barratt Developments PLC 869,869 0.3
103,400 The Berkeley Group PLC 1,747,915 0.6
70,300 Bovis Homes Group PLC 659,602 0.2
80,100 Persimmon PLC 883,359 0.3
--------------- ------
4,160,745 1.4
Household Products 113,930 Reckitt Benckiser PLC 3,087,319 1.0
Industrial 225,305 Smiths Group PLC 2,881,270 1.0
Conglomerates
Media 163,375 British Sky Broadcasting Group PLC ("BSkyB") 1,837,677 0.6
99,869 EMAP PLC 1,393,427 0.5
120,118 Johnston Press PLC 1,204,109 0.4
417,208 Reed Elsevier NV 4,023,531 1.4
219,424 WPP Group PLC 2,188,527 0.7
--------------- ------
10,647,271 3.6
Metals & Mining 50,800 Rio Tinto PLC (Registered Shares) 1,223,850 0.4
Multi-Utilities & 515,377 National Grid Group PLC 4,084,407 1.4
Unregulated Power
Oil & Gas 527,880 BG Group PLC 3,213,233 1.1
1,166,882 BP Amoco PLC 10,221,075 3.5
--------------- ------
13,434,308 4.6
Pharmaceuticals 128,290 AstraZeneca Group PLC 5,976,768 2.0
94,159 GlaxoSmithKline PLC 1,968,048 0.7
--------------- ------
7,944,816 2.7
Real Estate 48,600 The British Land Company PLC 597,453 0.2
28,800 Land Securities Group PLC 617,799 0.2
--------------- ------
1,215,252 0.4
Tobacco 92,570 British American Tobacco PLC 1,357,779 0.5
117,676 Imperial Tobacco Group PLC 2,619,241 0.9
--------------- ------
3,977,020 1.4
Transportation 209,255 BAA PLC 2,087,102 0.7
Infrastructure
Wireless 2,319,236 Vodafone Group PLC 5,453,449 1.9
Telecommunication
Services
Total Common Stocks in the United Kingdom 78,998,282 26.9
Total Common Stocks in Europe
(Cost--$162,536,576) 194,080,758 66.2
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Schedule of Investments (continued)
North Value Percent of
America Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
Canada Aerospace & Defense 229,859 Bombardier Inc. 'B' $ 769,790 0.3%
Commercial Banks 62,639 Royal Bank of Canada 2,703,677 0.9
Diversified Financial 60,456 Power Financial Corporation 2,382,177 0.8
Services
Food & Staples 90,648 ++Shoppers Drug Mart Corporation 2,134,340 0.7
Retailing
Oil & Gas 24,500 EnCana Corporation 964,075 0.3
34,447 Suncor Energy, Inc. 810,310 0.3
--------------- ------
1,774,385 0.6
Total Common Stocks in Canada 9,764,369 3.3
United Software 79,238 ++Amdocs Limited 1,955,594 0.7
States
Total Common Stocks in the United States 1,955,594 0.7
Total Common Stocks in North America
(Cost--$9,703,066) 11,719,963 4.0
Pacific Basin/Asia
Australia Commercial Banks 84,584 Australia and New Zealand Banking Group Ltd. 1,094,311 0.4
43,105 Commonwealth Bank of Australia 1,011,380 0.3
170,100 Westpac Banking Corporation Limited 2,087,794 0.7
--------------- ------
4,193,485 1.4
Metals & Mining 762,000 ++Zinifex Limited 995,087 0.3
Total Common Stocks in Australia 5,188,572 1.7
Hong Kong Commercial Banks 356,600 Bank of East Asia, Ltd. 1,013,445 0.4
100,800 Dah Sing Financial Group 678,993 0.2
--------------- ------
1,692,438 0.6
Real Estate 86,000 Cheung Kong (Holdings) Ltd. 645,505 0.2
Total Common Stocks in Hong Kong 2,337,943 0.8
Japan Automobiles 29,900 Honda Motor Co., Ltd. 1,287,709 0.4
324,700 Nissan Motor Co., Ltd. 3,275,644 1.1
178,700 Toyota Motor Corporation 6,467,315 2.2
--------------- ------
11,030,668 3.7
Beverages 78,300 Asahi Breweries Limited 824,621 0.3
Capital Markets 228,000 Daiwa Securities Group Inc. 1,592,545 0.5
Chemicals 41,500 Shin-Etsu Chemical Co., Ltd. 1,453,110 0.5
Commercial Banks 347,000 ++The Bank of Yokohama, Ltd. 1,977,924 0.7
200,000 The Hiroshima Bank, Ltd. 893,915 0.3
198 Sumitomo Mitsui Financial Group, Inc. 1,418,828 0.5
--------------- ------
4,290,667 1.5
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Schedule of Investments (continued)
Pacific Value Percent of
Basin/Asia Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
Japan Construction & 305,000 Obayashi Corporation $ 1,457,046 0.5%
(concluded) Engineering
Consumer Finance 21,800 Orix Corporation 2,211,065 0.8
Food & Staples 21,100 C&S Co., Ltd. 480,131 0.2
Retailing 16,300 FamilyMart Co., Ltd. 477,829 0.2
18,100 MINISTOP Co., Ltd. 296,249 0.1
--------------- ------
1,254,209 0.5
Food Products 84,000 Ajinomoto Co., Inc. 965,211 0.3
Gas Utilities 315,000 Tokyo Gas Co. 1,108,663 0.4
Health Care 76,000 Olympus Optical Co., Ltd. 1,368,378 0.5
Equipment &
Supplies
Household Durables 7,400 Funai Electric Co., Ltd. 1,013,002 0.3
66,000 Matsushita Electric Industrial Company, Ltd. 911,251 0.3
--------------- ------
1,924,253 0.6
Household Products 31,000 Uni-Charm Corporation 1,503,370 0.5
Insurance 120 Millea Holdings, Inc. 1,552,590 0.5
Leisure Equipment & 48,000 BANDAI Co., Ltd. 1,192,128 0.4
Products
Office Electronics 96,000 Canon, Inc. 4,733,771 1.6
235,000 Ricoh Co., Ltd. 4,560,733 1.6
--------------- ------
9,294,504 3.2
Pharmaceuticals 48,000 Takeda Chemical Industries, Ltd. 1,993,395 0.7
Semiconductors & 7,900 Rohm Company Ltd. 943,497 0.3
Semiconductor
Equipment
Textiles, Apparel & 60,000 Onward Kashiyama Co., Ltd. 968,469 0.3
Luxury Goods
Trading Companies & 184,000 Mitsubishi Corporation 1,816,277 0.6
Distributors 203,000 Mitsui & Co., Ltd. 1,546,492 0.5
--------------- ------
3,362,769 1.1
Wireless 346 KDDI Corporation 2,016,051 0.7
Telecommunication 1,259 NTT DoCoMo, Inc. 2,369,346 0.8
Services --------------- ------
4,385,397 1.5
Total Common Stocks in Japan 54,676,555 18.6
Malaysia Diversified 553,000 Telekom Malaysia Berhad 1,426,158 0.5
Telecommunication
Services
Hotels, Restaurants & 716,000 Resorts World Berhad 1,667,526 0.6
Leisure
Total Common Stocks in Malaysia 3,093,684 1.1
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Schedule of Investments (continued)
Pacific Value Percent of
Basin/Asia Industry* Shares Held Common Stocks (in U.S. dollars) Net Assets
Singapore Wireless 923,000 MobileOne Limited $ 819,480 0.3%
Telecommunication
Services
Total Common Stocks in Singapore 819,480 0.3
South Korea Semiconductors 9,800 Samsung Electronics (GDR) (e)(f) 2,187,218 0.8
& Semiconductor
Equipment
Tobacco 49,000 KT&G Corporation (GDR) (e)(f) 556,268 0.2
Wireless 87,400 SK Telecom Co., Ltd. (ADR) (d) 1,824,038 0.6
Telecommunication
Services
Total Common Stocks in South Korea 4,567,524 1.6
Taiwan Computers 227,000 Compal Electronics Inc. (GDR) (e) 1,396,391 0.5
& Peripherals 208,300 Hon Hai Precision Industry Co., Ltd. (GDR) (e) 1,706,394 0.6
--------------- ------
3,102,785 1.1
Diversified 97,100 Chunghwa Telecom Co., Ltd. (ADR) (d) 1,568,165 0.5
Telecommunication
Services
Total Common Stocks in Taiwan 4,670,950 1.6
Thailand Commercial Banks 304,300 ++Bangkok Bank Public Company Limited
'Foreign Registered' 720,059 0.2
4,810,000 ++Bank of Ayudhya Public Company Limited 1,458,294 0.5
--------------- ------
2,178,353 0.7
Wireless 637,900 Advanced Info Service Public Company Limited
Telecommunication 'Foreign Registered' 1,399,386 0.5
Services
Total Common Stocks in Thailand 3,577,739 1.2
Total Common Stocks in the Pacific Basin/Asia
(Cost---$73,388,256) 78,932,447 26.9
Europe Face Amount Fixed Income Securities
France Insurance US$ 3,548 Axa SA, 0%** due 12/21/2004 (Convertible) 73,872 0.0
Total Fixed Income Securities in Europe
(Cost--$52,602) 73,872 0.0
Latin America
Brazil Metals & Mining 44,000 ++Companhia Vale do Rio Doce (a) 0 0.0
Total Fixed Income Securities in
Latin America (Cost--$0) 0 0.0
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Schedule of Investments (concluded)
Beneficial Value Percent of
Europe Interest Other Interests (g) (in U.S. dollars) Net Assets
United 70,000 British Energy PLC (Deferred Shares) $ 0 0.0%
Kingdom
Total Other Interests in the
United Kingdom (Cost--$0) 0 0.0
Beneficial Interest/
Shares Held Short-Term Securities
US$ 7,362,133 Merrill Lynch Liquidity Series, LLC Cash Sweep
Series I (b) 7,362,133 2.5
US$ 1,319,999 Merrill Lynch Liquidity Series, LLC Money
Market Series (b)(c) 1,319,999 0.4
440,001 Merrill Lynch Premier Institutional Fund (b)(c) 440,001 0.2
Total Short-Term Securities
(Cost--$9,122,133) 9,122,133 3.1
Total Investments (Cost--$254,802,633) 293,929,173 100.2
Liabilities in Excess of Other Assets (666,242) (0.2)
--------------- ------
Net Assets $ 293,262,931 100.0%
=============== ======
*For Fund compliance purposes, "Industry" means any one or more
of the industry sub-classifications used by one or more widely
recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for
purposes of this report, which may combine such industry sub-
classifications for reporting ease. These industry classifications
are unaudited.
**Represents a zero coupon bond.
++Non-income producing security.
(a)Received through a bonus issue from Compania Vale do Rio Doce. As
of May 31, 2004, the bonds have not commenced trading and the coupon
rate has not been determined. This security is a perpetual bond and
has no definite maturity date.
(b)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 Cash Sweep Series I $ 3,487,902 $ 36,112
Merrill Lynch Liquidity Series,
LLC Money Market Series $ (4,823,281) $ 59,153
Merrill Lynch Premier
Institutional Fund (2,867,919) $ 27,632
(c)Security was purchased with the cash proceeds from securities
loans.
(d)AmericanDepositary Receipts (ADR).
(e)GlobalDepositary Receipts (GDR).
(f)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(g)Other interests represent beneficial interest in liquidation
trusts and other reorganization entities and are non-income
producing.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Statement of Assets and Liabilities
As of May 31, 2004
Assets
Investments in unaffiliated securities, at value (including securities
loaned at $1,669,600) (identified cost--$245,680,500) $ 284,807,040
Investments in affiliated securities, at value (identified cost--$9,122,133) 9,122,133
Foreign cash (cost--$107) 96
Receivables:
Securities sold $ 2,113,136
Dividends 1,368,654
Beneficial interest sold 209,343
Interest from affiliates 4,684
Securities lending--net 477 3,696,294
---------------
Prepaid expenses 37,492
---------------
Total assets 297,663,055
---------------
Liabilities
Collateral on securities loaned, at value 1,760,000
Payables:
Securities purchased 1,976,857
Beneficial interest redeemed 338,671
Investment adviser 165,105
Distributor 50,189
Other affiliates 42,617 2,573,439
---------------
Accrued expenses 66,685
---------------
Total liabilities 4,400,124
---------------
Net Assets
Net assets $ 293,262,931
===============
Net Assets Consist of
Class A Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized $ 1,786,045
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 196,339
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 147,195
Class I Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 1,321,728
Paid-in capital in excess of par 346,887,002
Undistributed investment income--net $ 3,240,507
Accumulated realized capital losses on investments and foreign currency
transactions--net (99,469,255)
Unrealized appreciation on investments and foreign currency
transactions--net 39,153,370
---------------
Total accumulated losses--net (57,075,378)
---------------
Net Assets $ 293,262,931
===============
Net Asset Value
Class A--Based on net assets of $152,036,672 and 17,860,448 shares of beneficial
interest outstanding $ 8.51
===============
Class B--Based on net assets of $16,357,865 and 1,963,385 shares of beneficial
interest outstanding $ 8.33
===============
Class C--Based on net assets of $12,042,123 and 1,471,953 shares of beneficial
interest outstanding $ 8.18
===============
Class I--Based on net assets of $112,826,271 and 13,217,280 shares of beneficial
interest outstanding $ 8.54
===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Statement of Operations
For the Year Ended May 31, 2004
Investment Income
Dividends (net of $812,901 foreign withholding tax) $ 6,518,866
Interest from affiliates 36,112
Securities lending--net 86,785
---------------
Total income 6,641,763
---------------
Expenses
Investment advisory fees $ 1,922,314
Account maintenance fees--Class A 328,855
Transfer agent fees--Class A 241,685
Account maintenance and distribution fees--Class B 183,633
Transfer agent fees--Class I 174,537
Accounting services 133,140
Custodian fees 125,649
Account maintenance and distribution fees--Class C 113,908
Professional fees 83,391
Printing and shareholder reports 59,152
Trustees' fees and expenses 47,767
Registration fees 43,474
Transfer agent fees--Class B 42,534
Transfer agent fees--Class C 25,544
Pricing fees 12,560
Other 37,497
---------------
Total expenses 3,575,640
---------------
Investment income--net 3,066,123
---------------
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net
Realized gain on:
Investments--net 15,972,175
Foreign currency transactions--net 146,611 16,118,786
---------------
Change in unrealized appreciation on:
Investments--net 26,867,584
Foreign currency transactions--net (23,518) 26,844,066
--------------- ---------------
Total realized and unrealized gain on investments and foreign currency
transactions--net 42,962,852
---------------
Net Increase in Net Assets Resulting from Operations $ 46,028,975
===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Statements of Changes in Net Assets
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 2004 2003
Operations
Investment income--net $ 3,066,123 $ 1,934,319
Realized gain (loss)on investments and foreign currency transactions--net 16,118,786 (40,478,318)
Change in unrealized appreciation on investments and foreign currency
transactions--net 26,844,066 12,371,050
--------------- ---------------
Net increase (decrease) in net assets resulting from operations 46,028,975 (26,172,949)
--------------- ---------------
Dividends to Shareholders
Investment income--net:
Class A (1,550,638) (545,683)
Class B (32,996) --
Class C (57,142) --
Class I (1,278,065) (495,809)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (2,918,841) (1,041,492)
--------------- ---------------
Beneficial Interest Transactions
Net increase in net assets derived from beneficial interest transactions 33,982,364 16,990,107
--------------- ---------------
Net Assets
Total increase (decrease) in net assets 77,092,498 (10,224,334)
Beginning of year 216,170,433 226,394,767
--------------- ---------------
End of year* $ 293,262,931 $ 216,170,433
=============== ===============
*Undistributed investment income--net $ 3,240,507 $ 2,865,149
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Financial Highlights
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 2004 2003++ 2002++ 2001++ 2000++
Per Share Operating Performance
Net asset value, beginning of year $ 7.16 $ 8.19 $ 9.13 $ 11.10 $ 9.20
---------- ---------- ---------- ---------- ----------
Investment income--net** .10 .07 .03 .01 .06
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.35 (1.06) (.84) (1.89) 1.84
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.45 (.99) (.81) (1.88) 1.90
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.10) (.04) (.04) -- --
Realized gain on investments--net -- -- (.09) -- --
In excess of realized gain on
investments--net -- -- -- (.09) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.10) (.04) (.13) (.09) --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 8.51 $ 7.16 $ 8.19 $ 9.13 $ 11.10
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 20.49% (12.06%) (8.96%) (17.01%) 20.65%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, excluding reorganization expenses 1.39% 1.53% 1.57% 1.51% 1.57%
========== ========== ========== ========== ==========
Expenses 1.39% 1.53% 1.57% 1.54% 1.66%
========== ========== ========== ========== ==========
Investment income--net 1.19% 1.07% .40% .14% .55%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 152,037 $ 108,162 $ 103,791 $ 28,905 $ 41,931
========== ========== ========== ========== ==========
Portfolio turnover 69.44% 140.97% 135.54% 154.99% 149.78%
========== ========== ========== ========== ==========
*Total investment returns exclude the effect of sales charges.
**Based on average shares outstanding.
++Effective April 14, 2003, Class D Shares were redesignated Class A
Shares.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Financial Highlights (continued)
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
Per Share Operating Performance
Net asset value, beginning of year $ 6.98 $ 8.00 $ 8.96 $ 10.97 $ 9.17
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net** .02 --++ (.05) (.07) (.03)
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.34 (1.02) (.82) (1.85) 1.83
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.36 (1.02) (.87) (1.92) 1.80
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.01) -- -- -- --
Realized gain on investments--net -- -- (.09) -- --
In excess of realized gain on
investments--net -- -- -- (.09) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.01) -- (.09) (.09) --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 8.33 $ 6.98 $ 8.00 $ 8.96 $ 10.97
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 19.55% (12.75%) (9.76%) (17.58%) 19.63%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, excluding reorganization expenses 2.19% 2.35% 2.33% 2.30% 2.35%
========== ========== ========== ========== ==========
Expenses 2.19% 2.35% 2.33% 2.33% 2.44%
========== ========== ========== ========== ==========
Investment income (loss)--net .32% .06% (.60%) (.65%) (.26%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 16,358 $ 19,491 $ 40,854 $ 97,211 $ 150,140
========== ========== ========== ========== ==========
Portfolio turnover 69.44% 140.97% 135.54% 154.99% 149.78%
========== ========== ========== ========== ==========
*Total investment returns exclude the effect of sales charges.
**Based on average shares outstanding.
++Amount is less than $.01 per share.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Financial Highlights (continued)
The following per share data and ratios have been derived Class C
from information provided in the financial statements.
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
Per Share Operating Performance
Net asset value, beginning of year $ 6.87 $ 7.88 $ 8.83 $ 10.81 $ 9.03
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net** .03 .01 (.04) (.07) (.02)
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.32 (1.02) (.82) (1.82) 1.80
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.35 (1.01) (.86) (1.89) 1.78
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.04) -- -- -- --
Realized gain on investments--net -- -- (.09) -- --
In excess of realized gain on
investments--net -- -- -- (.09) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.04) -- (.09) (.09) --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 8.18 $ 6.87 $ 7.88 $ 8.83 $ 10.81
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 19.71% (12.82%) (9.79%) (17.56%) 19.71%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, excluding reorganization expenses 2.18% 2.33% 2.33% 2.29% 2.41%
========== ========== ========== ========== ==========
Expenses 2.18% 2.33% 2.33% 2.32% 2.51%
========== ========== ========== ========== ==========
Investment income (loss)--net .39% .17% (.50%) (.66%) .54%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 12,042 $ 10,586 $ 14,696 $ 20,987 $ 33,999
========== ========== ========== ========== ==========
Portfolio turnover 69.44% 140.97% 135.54% 154.99% 149.78%
========== ========== ========== ========== ==========
*Total investment returns exclude the effect of sales charges.
**Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Financial Highlights (concluded)
The following per share data and ratios have been derived Class I
from information provided in the financial statements.
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 2004 2003++ 2002++ 2001++ 2000++
Per Share Operating Performance
Net asset value, beginning of year $ 7.17 $ 8.20 $ 9.14 $ 11.08 $ 9.16
---------- ---------- ---------- ---------- ----------
Investment income--net** .12 .09 .06 .05 .09
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.37 (1.06) (.86) (1.90) 1.83
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.49 (.97) (.80) (1.85) 1.92
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.12) (.06) (.05) -- --
Realized gain on investments--net -- -- (.09) -- --
In excess of realized gain on
investments--net -- -- -- (.09) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.12) (.06) (.14) (.09) --
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 8.54 $ 7.17 $ 8.20 $ 9.14 $ 11.08
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 20.99% (11.86%) (8.82%) (16.77%) 20.96%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, excluding reorganization expenses 1.14% 1.28% 1.31% 1.26% 1.32%
========== ========== ========== ========== ==========
Expenses 1.14% 1.28% 1.31% 1.29% 1.41%
========== ========== ========== ========== ==========
Investment income--net 1.46% 1.34% .72% .45% .83%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 112,826 $ 77,931 $ 67,054 $ 32,933 $ 34,693
========== ========== ========== ========== ==========
Portfolio turnover 69.44% 140.97% 135.54% 154.99% 149.78%
========== ========== ========== ========== ==========
*Total investment returns exclude the effect of sales charges.
**Based on average shares outstanding.
++Effective April 14, 2003, Class A Shares were redesignated Class I
Shares.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch International Equity Fund (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a
diversified, 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 Class A and Class I are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class A, Class B and Class C Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to
the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures. 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 Fund. 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 Fund. 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
Fund, 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 Fund under the general supervision of the
Fund's Board of Trustees. Such valuations and procedures will be
reviewed periodically by the Board of Trustees of the Fund.
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 Fund's Board of Trustees or
by the Investment Adviser using a pricing service and/or procedures
approved by the Fund's Board of Trustees.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Notes to Financial Statements (continued)
(b) 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.
(c) 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.
* 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.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* 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.
* Options--The Fund may write and purchase put and call 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 market 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.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Notes to Financial Statements (continued)
(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) 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.
(i) Reclassification--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, $565 has been reclassified
between paid-in capital in excess of par and undistributed net
investment income and $227,511 has been reclassified between
accumulated realized capital losses on investments and foreign
currency transactions and undistributed net investment income as a
result of permanent differences attributable to non-deductible
expenses paid, foreign currency transaction gains/losses and gains
from the sale of stock of passive foreign investment companies.
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
Merrill Lynch Investment Managers, L.P. ("MLIM"). The general
partner of MLIM 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.
MLIM 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 of .75%, on an annual basis,
of the average daily value of the Fund's net assets. MLIM has
entered into a Sub-Advisory Agreement with Merrill Lynch Asset
Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM,
pursuant to which MLAM U.K. provides investment advisory services to
MLIM with respect to the Fund. There is no increase in the aggregate
fees paid by the Fund for these services.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Notes to Financial Statements (continued)
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
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of
ML & Co., also provides account maintenance and distribution
services to the Fund. The ongoing account maintenance fee
compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B and Class C shareholders.
The ongoing distribution fee compensates the Distributor and
MLPF&S for providing shareholder and distribution-related services
to Class B and Class C shareholders.
For the year ended May 31, 2004, FAMD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class I Shares as follows:
FAMD MLPF&S
Class A $2,120 $ 17,422
Class I $ 67 $ 812
For the year ended May 31, 2004, MLPF&S received contingent deferred
sales charges of $17,042 and $7,144 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 MLIM, 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 MLIM or its affiliates. For the year ended May 31, 2004,
MLIM, LLC received $37,384 in securities lending agent fees.
In addition, MLPF&S received $15,075 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
May 31, 2004.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
For the year ended May 31, 2004, the Fund reimbursed MLIM $5,573 for
certain accounting services.
Certain officers and/or trustees of the Fund are officers and/or
directors of MLIM, FAMD, PSI, FDS, MLAM U.K. and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 2004 were $205,142,117 and $175,172,325,
respectively.
Net realized gains for the year ended May 31, 2004 and net
unrealized appreciation as of May 31, 2004 were as follows:
Realized Unrealized
Gains Appreciation
Long-term investments $ 15,972,175 $ 39,126,540
Foreign currency transactions 146,611 26,830
-------------- --------------
Total $ 16,118,786 $ 39,153,370
============== ==============
As of May 31, 2004, net unrealized appreciation for Federal income
tax purposes aggregated $34,683,327, of which $39,023,805 related to
appreciated securities and $4,340,478 related to depreciated
securities. At May 31, 2004, the aggregate cost of investments for
Federal income tax purposes was $259,245,846.
4. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest
transactions was $33,982,364 and $16,990,107 for the years ended
May 31, 2004 and May 31, 2003, respectively.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Notes to Financial Statements (continued)
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended May 31, 2004 Shares Amount
Shares sold 5,100,060 $ 40,111,986
Automatic conversion of shares 662,275 5,334,523
Shares issued to shareholders
in reinvestment of dividends 199,755 1,454,218
-------------- --------------
Total issued 5,962,090 46,900,727
Shares redeemed (3,217,448) (25,000,672)
-------------- --------------
Net increase 2,744,642 $ 21,900,055
============== ==============
Class A Shares for the Year Dollar
Ended May 31, 2003 Shares Amount
Shares sold 3,725,348 $ 25,520,501
Automatic conversion of shares 1,643,835 11,268,804
Shares issued to shareholders
in reinvestment of dividends 73,120 507,452
-------------- --------------
Total issued 5,442,303 37,296,757
Shares redeemed (3,005,397) (20,716,357)
-------------- --------------
Net increase 2,436,906 $ 16,580,400
============== ==============
Class B Shares for the Year Dollar
Ended May 31, 2004 Shares Amount
Shares sold 617,918 $ 4,886,806
Shares issued to shareholders
in reinvestment of dividends 4,030 28,895
-------------- --------------
Total issued 621,948 4,915,701
Shares redeemed (776,822) (6,088,211)
Automatic conversion of shares (675,904) (5,334,523)
-------------- --------------
Net decrease (830,778) $ (6,507,033)
============== ==============
Class B Shares for the Year Dollar
Ended May 31, 2003 Shares Amount
Shares sold 593,373 $ 3,970,548
Shares redeemed (1,226,302) (8,214,072)
Automatic conversion of shares (1,681,049) (11,268,804)
-------------- --------------
Net decrease (2,313,978) $ (15,512,328)
============== ==============
Class C Shares for the Year Dollar
Ended May 31, 2004 Shares Amount
Shares sold 299,328 $ 2,322,138
Shares issued to shareholders
in reinvestment of dividends 6,900 48,573
-------------- --------------
Total issued 306,228 2,370,711
Shares redeemed (374,225) (2,870,827)
-------------- --------------
Net decrease (67,997) $ (500,116)
============== ==============
Class C Shares for the Year Dollar
Ended May 31, 2003 Shares Amount
Shares sold 245,559 $ 1,629,243
Shares redeemed (570,532) (3,792,108)
-------------- --------------
Net decrease (324,973) $ (2,162,865)
============== ==============
Class I Shares for the Year Dollar
Ended May 31, 2004 Shares Amount
Shares sold 8,800,619 $ 68,242,191
Shares issued to shareholders
in reinvestment of dividends 163,988 1,195,471
-------------- --------------
Total issued 8,964,607 69,437,662
Shares redeemed (6,612,676) (50,348,204)
-------------- --------------
Net increase 2,351,931 $ 19,089,458
============== ==============
Class I Shares for the Year Dollar
Ended May 31, 2003 Shares Amount
Shares sold 12,923,188 $ 87,086,396
Shares issued to shareholders
in reinvestment of dividends 65,602 455,275
-------------- --------------
Total issued 12,988,790 87,541,671
Shares redeemed (10,299,147) (69,456,771)
-------------- --------------
Net increase 2,689,643 $ 18,084,900
============== ==============
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by MLIM 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 year ended May 31, 2004.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Notes to Financial Statements (concluded)
6. Commitments:
At May 31, 2004, the Fund had entered into foreign exchange
contracts, under which it had agreed to purchase and sell various
foreign currencies with an approximate value of $331,000 and
$601,000, respectively.
7. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years
ended May 31, 2004 and May 31, 2003 was as follows:
5/31/2004 5/31/2003
Distributions paid from:
Ordinary income $ 2,918,841 $ 1,041,492
-------------- --------------
Total taxable distributions $ 2,918,841 $ 1,041,492
============== ==============
As of May 31, 2004, the components of accumulated losses on a tax
basis were as follows:
Undistributed ordinary income--net $ 3,239,864
Undistributed long-term capital gains--net --
--------------
Total undistributed earnings--net 3,239,864
Capital loss carryforward (95,026,042)*
Unrealized gains--net 34,710,800**
--------------
Total accumulated losses--net $ (57,075,378)
==============
*On May 31, 2004, the Fund had a net capital loss carryforward of
$95,026,042, of which $21,557,088 expires in 2007, $30,743,912
expires in 2010 and $42,725,042 expires in 2011. This amount will be
available to offset like amounts of any future taxable gains.
**The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on
wash sales and the realization for tax purposes of net unrealized
gains on certain forward foreign currency contracts.
8. Plan of Reorganization:
The Fund's Board of Trustees approved a plan of reorganization,
subject to shareholder approval and certain other conditions,
whereby Merrill Lynch International Value Fund of Mercury Funds II
("International Value") will acquire all of the assets and will
assume all of the liabilities of the Fund in exchange for newly
issued shares of International Value.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of
Merrill Lynch International Equity Fund:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
International Equity Fund as of May 31, 2004, 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 five years in
the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of May 31, 2004, by
correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. 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 International Equity Fund as of
May 31, 2004, 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 five
years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 16, 2004
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary
income distribution paid by Merrill Lynch International Equity Fund
to shareholders of record on August 13, 2003:
Qualified Dividend Income for Individuals 89.19%
Foreign Source Income 83.83%
Foreign Taxes Paid Per Share $.019366
The foreign taxes paid represent taxes incurred by the Fund from
foreign sources. Foreign taxes paid may be included in taxable
income with an offsetting deduction from gross income or may be
taken as a credit for taxes paid to foreign governments. You should
consult your tax adviser regarding the appropriate treatment of
foreign taxes paid.
Please retain this information for your records.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Officers and Trustees (unaudited)
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
Terry K. Glenn* President 1999 to President of the Merrill Lynch Investment 126 Funds None
P.O. Box 9011 and present Managers, L.P. ("MLIM")/Fund Asset 161 Portfolios
Princeton, Trustee and Management, L.P. ("FAM")--Advised Funds
NJ 08543-9011 1993 to since 1999; Chairman (Americas Region)
Age: 63 present of MLIM from 2000 to 2002; Executive Vice
President of MLIM and FAM (which terms
as used herein include their corporate
predecessors) from 1983 to 2002; President
of FAM Distributors, Inc. ("FAMD") from
1986 to 2002 and Director thereof from
1991 to 2002; Executive Vice President
and Director of Princeton Services, Inc.
("Princeton Services") from 1993 to 2002;
President of Princeton Administrators, L.P.
from 1989 to 2002; Director of Financial
Data Services, Inc. since 1985.
* Mr. Glenn 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. Glenn is an "interested person," as
described in the Investment Company Act, of the Fund based on his
former positions with MLIM, FAM, FAMD, Princeton Services and
Princeton Administrators, L.P. The Trustee's term is unlimited.
Trustees serve until their resignation, removal or death, or until
December 31 of the year in which they turn 72. As Fund President,
Mr. Glenn serves at the pleasure of the Board of Trustees.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Officers and Trustees (unaudited)(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*
Ronald W. Forbes Trustee 2000 to Professor Emeritus of Finance, School of 50 Funds None
P.O. Box 9095 present Business, State University of New York at 49 Portfolios
Princeton, Albany since 2000 and Professor thereof
NJ 08543-9095 from 1989 to 2000; International Consultant
Age: 63 at the Urban Institute, Washington, D.C.
from 1995 to 1999.
Cynthia A. Montgomery Trustee 2000 to Professor, Harvard Business School since 50 Funds Newell
P.O. Box 9095 present 1989; Associate Professor, J.L. Kellogg 49 Portfolios Rubbermaid, Inc.
Princeton, Graduate School of Management,
NJ 08543-9095 Northwestern University from 1985 to
Age: 51 1989; Associate Professor, Graduate
School of Business Administration,
University of Michigan from 1979 to 1985.
Kevin A. Ryan Trustee 2000 to Founder and currently Director Emeritus 50 Funds None
P.O. Box 9095 present of the Boston University Center for the 49 Portfolios
Princeton, Advancement of Ethics and Character and
NJ 08543-9095 Director thereof from 1989 to 1999;
Age: 71 Professor from 1982 to 1999 and currently
Professor Emeritus of Education of
Boston University; formerly taught on the
faculties of The University of Chicago,
Stanford University and Ohio State
University.
Roscoe S. Suddarth Trustee 2000 to President, Middle East Institute from 1995 50 Funds None
P.O. Box 9095 present to 2001; Foreign Service Officer, United 49 Portfolios
Princeton, States Foreign Service from 1961 to 1995;
NJ 08543-9095 Career Minister, from 1989 to 1995; Deputy
Age: 68 Inspector General of U.S. Department of
State from 1991 to 1994; U.S. Ambassador
to the Hashemite Kingdom of Jordan from 1987
to 1990.
Richard R. West Trustee 1993 to Professor of Finance since 1984, Dean from 50 Funds Bowne & Co.,
P.O. Box 9095 present 1984 to 1993 and currently Dean Emeritus 49 Portfolios Inc.; Vornado
Princeton, of New York University Leonard N. Stern Operating
NJ 08543-9095 School of Business Administration. Company;
Age: 66 Vornado Realty
Trust and
Alexander's, Inc.
Edward D. Zinbarg Trustee 1994 to Self-employed financial consultant since 50 Funds None
P.O. Box 9095 present 1994; Executive Vice President of the 49 Portfolios
Princeton, Prudential Insurance Company of America
NJ 08543-9095 from 1988 to 1994; Former Director of
Age: 69 Prudential Reinsurance Company and former
Trustee of the Prudential Foundation.
* The Trustee's term is unlimited. Trustees serve until their
resignation, removal or death, or until December 31 of the year in
which they turn 72.
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
Officers and Trustees (unaudited)(concluded)
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since
P.O. Box 9011 President present 1999; Senior Vice President and Treasurer of Princeton Services since 1999;
Princeton, and and Vice President of FAMD since 1999; Director of MLIM Taxation since 1990.
NJ 08543-9011 Treasurer 1999 to
Age: 43 present
Robert C. Doll, Jr. Senior 1999 to President of MLIM and member of the Executive Management Committee of
P.O. Box 9011 Vice present ML & Co., Inc. since 2001; Global Chief Investment Officer and Senior
Princeton, President Portfolio Manager of MLIM since 1999; Chief Investment Officer of Equities
NJ 08543-9011 at Oppenheimer Funds, Inc. from 1990 to 1999 and Chief Investment Officer
Age: 49 thereof from 1998 to 1999; Executive Vice President of Oppenheimer Funds,
Inc. from 1991 to 1999.
Ian Rowley Vice 2002 to Managing Director of MLIM since 2003; Director (Equities) of MLIM from 2001 to
P.O. Box 9011 President present 2003; Head of Global Equity Strategy at UBS Asset Management from 1988 to 2001.
Princeton,
NJ 08543-9011
Age: 42
Phillip S. Gillespie Secretary 2003 to First Vice President of MLIM since 2001; Director (Legal Advisory) from 2000
P.O. Box 9011 present to 2001; Vice President from 1999 to 2000 and Attorney associated with MLIM
Princeton, since 1998.
NJ 08543-9011
Age: 40
* Officers of the Fund serve at the pleasure of the Board of
Trustees.
Further information about the Fund's Officers and Trustees is
available in the Fund's Statement of Additional Information, which
can be obtained without charge by calling 1-800-MER-FUND.
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
MERRILL LYNCH INTERNATIONAL EQUITY FUND, MAY 31, 2004
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
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 EQUITY FUND, MAY 31, 2004
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) Ronald W. Forbes, (2) Richard R. West, and (3)
Edward D. Zinbarg.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending May 31, 2004 - $39,600
Fiscal Year Ending May 31, 2003 - $45,000
(b) Audit-Related Fees - Fiscal Year Ending May 31, 2004 - $0
Fiscal Year Ending May 31, 2003 - $0
(c) Tax Fees - Fiscal Year Ending May 31, 2004 - $5,200
Fiscal Year Ending May 31, 2003 - $6,100
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending May 31, 2004 - $0
Fiscal Year Ending May 31, 2003 - $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 the
project as a whole. 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 May 31, 2004 - $16,581,086
Fiscal Year Ending May 31, 2003 - $17,622,606
(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) - $541,640, 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 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 10 - Controls and Procedures
10(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.
10(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 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - See Item 2
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(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 International Equity Fund, Inc.
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
Merrill Lynch International Equity Fund, Inc.
Date: July 19, 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 Equity Fund, Inc.
Date: July 19, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch International Equity Fund, Inc.
Date: July 19, 2004