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 811-4182
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 - 06/30/04
Item 1 - Report to Stockholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
Merrill Lynch
International Value Fund
Of Mercury Funds II
Annual Report
June 30, 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.
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) at www.mutualfunds.ml.com;
and (3) on the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the
most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com and (2) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
Merrill Lynch International Value Fund
Of Mercury Funds II
Box 9011
Princeton, NJ
08543-9011
(GO PAPERLESS LOGO)
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To sign up today, go to www.icsdelivery.com/live.
Merrill Lynch International Value Fund
Portfolio Information As of June 30, 2004 (unaudited)
Percent of
Ten Largest Equity Holdings Net Assets
Shell Transport & Trading Company 3.4%
Toyota Motor Corporation 3.3
Honda Motor Co., Ltd. 2.8
Intesa BCI SpA 2.8
TotalFinaElf SA 2.5
Promise Co., Ltd. 2.3
BNP Paribas SA 2.3
Asahi Breweries Limited 2.1
Accor SA 1.9
Telecom Italia SpA 1.9
Percent of
Five Largest Industries++ Net Assets
Commercial Banks 14.3%
Oil & Gas 10.8
Automobiles 7.3
Diversified Telecommunication Services 4.9
Pharmaceuticals 3.9
++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.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
A Letter From the President
Dear Shareholder
Equity markets largely 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 +3.44% and
+19.11% for the six-month and 12-month periods ended June 30, 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 +4.56% and +32.37% for the six-month and 12-month periods,
respectively. Emerging markets, as represented by the MSCI Emerging
Markets Index, returned -.97% and +33.14% for the same periods.
In many cases, market returns were supported by improving economies
in important areas around the globe. In particular, low interest
rates and tax cuts in the United States opened the door to consumer
spending, capital spending, increases in exports and long-awaited
job growth. Evidencing the strength of the U.S. economy, the Federal
Reserve Board moved to "normalize" interest rates with a 25 basis
point (.25%) increase on June 30. Since the United States represents
32% of global gross domestic product, the acceleration of its
economy has provided encouragement to other areas of the world.
Elsewhere, China has recorded a remarkable rate of economic
expansion, which 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.
At June month-end, we also witnessed the transfer of power in Iraq.
Although the market reaction to this pivotal event is yet to unfold,
we can be sure that global markets will always fluctuate. Still,
many of the world's economies are much stronger today than they were
just one year ago. With this in mind, 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, you should consult with your financial advisor,
who can help you assess the market and economic environment and then
develop a strategy most suitable for your circumstances and
financial goals.
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 Director
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed the MSCI EAFE Index for the fiscal year,
benefiting most from successful stock selection across various
industry sectors.
How did the Fund perform during the period in light of the existing
market conditions?
For the 12-month period ended June 30, 2004, Merrill Lynch
International Value Fund's Class A, Class B, Class C, Class I
and Class R Shares had total returns of +33.67%, +32.65%, +32.58%,
+34.00% and +33.43%, 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 - 11 of this report to shareholders.) This compared to a return
of +32.37% for the Fund's benchmark, the Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI EAFE) Index, and
an average return of +33.01% for the Lipper International Multi-Cap
Value Funds category for the same 12-month period. (Funds in this
Lipper category invest in a variety of market-capitalization ranges
without concentrating 75% of their equity assets in any one market-
cap range over an extended period of time. Multi-cap funds typically
have 25% - 75% of their assets invested in companies strictly
outside the United States with market capitalizations [on a three-
year weighted basis] above 400% of the 75th market-capitalization
percentile of the S&P/Citigroup World ex-U.S. Broad Market Index.)
We attribute the Fund's relative outperformance to successful stock
selection, counterbalanced slightly by negative results from the
portfolio's sector weightings during the period. Performance was
helped by an overweighting in Japanese consumer financial companies,
including Promise Co., Ltd. and Mitsui Sumitomo Insurance Company,
Limited. Other strong performers in Japan included beer producer
Asahi Breweries Limited, computer-game maker Namco Ltd. and housing
construction company Daiwa House Industry Co., Ltd. The portfolio
also gained after strong results from European holdings Buzzi Unicem
SpA, an Italian cement producer, and Vedior NV, a Dutch temporary-
employment agency. Finally, the Fund's weightings in materials;
diversified financials; consumer durables; and food, beverages and
tobacco contributed positively to returns.
The Fund had disappointing results from its holdings in Allied Irish
Banks PLC; Mabuchi Motor, a Japanese maker of electronic automotive
components; and PSA Peugeot Citroen, a French car maker. On a sector
basis, weightings in the banking, energy, and technology hardware
and equipment sectors hindered relative performance.
Following a strong rally from March to June 2003, international
stock markets were retrenching somewhat as the period began.
Investors were seeking clarity about the likely direction of the
economy and the strength of corporate earnings. Most leading
indicators suggested a more favorable future environment, and the
markets resumed their upward trend through the remainder of 2003.
Although global earnings continued to be robust during the first
half of 2004, financial markets were again hampered by questions
about the impact of anticipated interest rate hikes and higher oil
prices as a result of continuing geopolitical tensions.
We also saw a significant sector rotation take place over the past
12 months. During the first half of the period, with investors
increasingly willing to take on risk, the markets favored stocks
with lower-quality fundamentals, significant debt and a high degree
of economic sensitivity. These companies tended to outperform their
higher-quality, profitable counterparts. Beginning in 2004, however,
record-high oil prices, concerns about inflation and slowing
corporate profits led investors to favor higher-quality businesses
that were more likely to deliver sustainable earnings growth.
What changes were made to the portfolio during the period?
New transactions were the result of "bottom-up" stock picking, as
opposed to "top-down" sector allocation. Major new purchases
included Hochtief AG and TNT Post Group NV. We believed that the
assets and earnings power of Hochtief, a German construction
company, were worth more than the stock's market price indicated. We
also felt that Dutch logistics and mail-service provider TNT Post
Group was attractively valued and offered solid growth potential.
We increased the Fund's exposure to financial stocks, establishing
new positions in Capitalia SpA, an Italian consumer bank; DNB
Holding ASA, a Norwegian commercial bank, and Acom Co., Ltd., a
Japanese consumer finance company. Other new positions included UK
healthcare retailer Boots Group PLC; UK consumer electrical retailer
Kesa Electricals PLC; Japanese car giant Toyota Motor Corporation;
Japanese telecommunications service provider NTT DoCoMo, Inc.; and
Japan Tobacco, Inc. All of these stocks, in our view, offered
compelling values and attractive growth prospects.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
We funded these purchases mainly with proceeds generated by the sale
of securities such as DePfa Bank PLC, a German bank; Fortis, a Dutch
financial conglomerate; Pechiney SA, a French metals company; and
Bayer AG, the German pharmaceuticals giant. We also sold two
Japanese holdings that reached our target prices - construction
company Daiwa House Industry and pharmaceutical company Yamanouchi
Pharmaceutical Co., Ltd.
How would you characterize the portfolio's position at the close of
the period?
In general, earnings reports have exceeded expectations as more
companies continue to surprise on the upside. At this stage in the
cycle, it is the sustainability of these earnings that becomes the
key issue. Overall, we view valuations as attractive, with projected
earnings growth of 10% - 15% in Europe and 7% in Japan.
Global monetary conditions are currently into their tightening
phase. The U.S. Federal Reserve Board increased the Federal Funds
target rate from 1% to 1.25% on June 30, and the futures markets are
now fully discounting additional interest rate hikes at the upcoming
Federal Open Market Committee meetings. In an environment where U.S.
data releases are generating significant volatility, there is scope
for liquidity to tighten further. At the same time, it is worth
reiterating that monetary conditions remain extremely accommodative,
even in regions where tightening has begun in earnest. Elsewhere,
the Bank of Japan has reaffirmed its commitment to a stable monetary
policy, while the European Central Bank remains some way off from
tightening. In fact, there may even be scope for further easing of
European monetary conditions.
On June 30, 2004, the Fund's largest sector weightings were in
banks, diversified financials and energy. Again, because of our
bottom-up approach to security selection, these weightings result
from our individual stock picks, not from a conviction that certain
areas of the market are more likely to outperform in the future.
In the banking sector, we favor domestically oriented consumer banks
such as Capitalia SpA and Banca Intesa, both based in Italy, as well
as Norwegian bank DNB NOR. We believe these stocks offer strong
growth prospects and manageable risk, and that they stand to benefit
from rising interest rates. Other significant bank holdings at
period-end include BNP Paribas SA (France) and Royal Bank of
Scotland Group PLC. The portfolio's exposure to the diversified
financial sector is mainly through holdings in Japanese consumer
financial companies, including Promise, Acom and Mitsubishi
Securities Co., Ltd. Finally, in the energy sector, we hold a number
of companies that generate substantial cash flow, offer a high
dividend yield and provide strong portfolio diversification.
By contrast, we are limiting the Fund's exposure to growth-oriented
sectors such as technology hardware and equipment, software and
services, and media. We have found it more difficult to uncover
companies in these areas that are trading at attractive valuations.
We continue to believe that fundamental factors such as earnings
growth and the ability to generate substantial cash flow will be
increasingly important to investors. In our opinion, the Fund is
well positioned for the expected market environment.
James Macmillan
Vice President and Portfolio Manager
July 20, 2004
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 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. 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. The Fund is subject
to a 2% redemption fee for sales or exchanges of shares within
30 days of purchase. Performance data does not reflect this
potential fee. 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 the classes, which are deducted from the
income available to be paid to shareholders.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Performance Data (continued)
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception
As of June 30, 2004 Total Return Total Return Total Return
ML International Value Fund--Class A Shares* +5.06% +33.67% + 24.81%
ML International Value Fund--Class B Shares* +4.64 +32.65 + 10.37
ML International Value Fund--Class C Shares* +4.62 +32.58 + 10.28
ML International Value Fund--Class I Shares* +5.18 +34.00 +122.63
ML International Value Fund--Class R Shares* +4.89 +33.43 + 42.89
MSCI EAFE Index** +4.56 +32.37 +48.81/+3.19/-6.72/+42.18
*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, JUNE 30, 2004
Performance Data (continued)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
Class A Shares
A line graph illustrating the growth of a $10,000 investment in
ML International Value Fund++ Class A Shares* compared to a similar
investment in MSCI EAFE Index++++. Values illustrated are as
follows:
ML International Value Fund++
Class A Shares*
Date Value
6/02/1999** $ 9,475.00
June 1999 $ 9,671.00
June 2000 $11,155.00
June 2001 $10,262.00
June 2002 $10,117.00
June 2003 $ 8,847.00
June 2004 $11,826.00
MSCI EAFE Index++++
Date Value
6/02/1999** $10,000.00
June 1999 $10,288.00
June 2000 $12,053.00
June 2001 $ 9,208.00
June 2002 $ 8,334.00
June 2003 $ 7,795.00
June 2004 $10,319.00
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++The Fund invests primarily in stocks of companies located outside
of the United States.
++++This unmanaged Index measures the total returns of developed
foreign stock markets in Europe, Australasia and the Far East (in
U.S. dollars).
Past performance is not indicative of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 6/30/04 +33.67% +26.65%
Five Years Ended 6/30/04 + 4.11 + 2.99
Inception (6/02/99) through
6/30/04 + 4.46 + 3.36
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Performance Data (continued)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
Class B & Class C Shares
A line graph illustrating the growth of a $10,000 investment in
ML International Value Fund++ Class B and Class C Shares* compared
to a similar investment in MSCI EAFE Index++++. Values illustrated
are as follows:
ML International Value Fund++
Class B Shares*
Date Value
10/06/2000** $10,000.00
June 2001 $ 9,799.00
June 2002 $ 9,594.00
June 2003 $ 8,320.00
June 2004 $10,765.00
ML International Value Fund++
Class C Shares*
Date Value
10/06/2000** $10,000.00
June 2001 $ 9,789.00
June 2002 $ 9,583.00
June 2003 $ 8,319.00
June 2004 $11,028.00
MSCI EAFE Index++++
Date Value
10/06/2000** $10,000.00
June 2001 $ 8,324.00
June 2002 $ 7,534.00
June 2003 $ 7,047.00
June 2004 $ 9,328.00
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++The Fund invests primarily in stocks of companies located outside
of the United States.
++++This unmanaged Index measures the total returns of developed
foreign stock markets in Europe, Australasia and the Far East (in
U.S. dollars).
Past performance is not indicative of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class B Shares*
One Year Ended 6/30/04 +32.65% +28.65%
Inception (10/06/00) through
6/30/04 + 2.68 + 2.00
*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 6/30/04 +32.58% +31.58%
Inception (10/06/00) through
6/30/04 + 2.66 + 2.66
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after one year.
**Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Performance Data (continued)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
Class I Shares
A line graph illustrating the growth of a $10,000 investment in
ML International Value Fund++ Class I Shares* compared to a similar
investment in MSCI EAFE Index++++. Values illustrated are as
follows:
ML International Value Fund++
Class I Shares*
Date Value
June 1994 $ 9,475.00
June 1995 $10,525.00
June 1996 $12,483.00
June 1997 $15,178.00
June 1998 $16,358.00
June 1999 $17,048.00
June 2000 $19,709.00
June 2001 $18,174.00
June 2002 $17,967.00
June 2003 $15,742.00
June 2004 $21,094.00
MSCI EAFE Index++++
Date Value
June 1994 $10,000.00
June 1995 $10,165.00
June 1996 $11,516.00
June 1997 $12,994.00
June 1998 $13,786.00
June 1999 $14,836.00
June 2000 $17,382.00
June 2001 $13,279.00
June 2002 $12,018.00
June 2003 $11,242.00
June 2004 $14,881.00
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
++The Fund invests primarily in stocks of companies located outside
of the United States.
++++This unmanaged Index measures the total returns of developed
foreign stock markets in Europe, Australasia and the Far East (in
U.S. dollars).
Past performance is not indicative of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class I Shares*
One Year Ended 6/30/04 +34.00% +26.96%
Five Years Ended 6/30/04 + 4.35 + 3.23
Ten Years Ended 6/30/04 + 8.33 + 7.75
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Performance Data (concluded)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
Class R Shares
A line graph illustrating the growth of a $10,000 investment in
ML International Value Fund++ Class R Shares* compared to a similar
investment in MSCI EAFE Index++++. Values illustrated are as
follows:
ML International Value Fund++
Class R Shares*
Date Value
1/03/2003** $10,000.00
June 2003 $10,709.00
June 2004 $14,289.00
MSCI EAFE Index++++
Date Value
1/03/2003** $10,000.00
June 2003 $10,741.00
June 2004 $14,218.00
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++The Fund invests primarily in stocks of companies located outside
of the United States.
++++This unmanaged Index measures the total returns of developed
foreign stock markets in Europe, Australasia and the Far East (in
U.S. dollars).
Past performance is not indicative of future results.
Average Annual Total Return
Class R Shares Return
One Year Ended 6/30/04 +33.43%
Inception (1/03/03) through 6/30/04 +27.11
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
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. $ 9,053,766 1.4%
Oil & Gas 2,489,878 Santos Limited 12,019,732 1.8
Total Common Stocks in Australia 21,073,498 3.2
Belgium Diversified 215,214 ++Belgacom SA 6,551,240 1.0
Telecommunication
Services
Total Common Stocks in Belgium 6,551,240 1.0
Finland Paper & Forest 470,849 Stora Enso Oyj 'R' 6,387,372 1.0
Products
Total Common Stocks in Finland 6,387,372 1.0
France Automobiles 148,343 PSA Peugeot Citroen 8,260,639 1.2
Commercial Banks 246,327 BNP Paribas SA 15,149,520 2.3
Commercial 180,479 Societe BIC SA 8,032,229 1.2
Services &
Supplies
Construction & 65,209 Vinci SA 6,569,065 1.0
Engineering
Construction 126,648 Lafarge SA (Ordinary) 11,294,526 1.7
Materials
Hotels, 303,739 Accor SA 12,819,484 1.9
Restaurants &
Leisure
Metals & Mining 382,173 Arcelor 6,416,597 1.0
Oil & Gas 88,191 TotalFinaElf SA 16,813,532 2.5
Total Common Stocks in France 85,355,592 12.8
Germany Airlines 570,452 Deutsche Lufthansa AG (Registered Shares) 7,759,373 1.1
Chemicals 131,205 Linde AG 7,221,687 1.1
Construction & 350,464 Hochtief AG 8,314,645 1.2
Engineering
Diversified 380,534 ++Deutsche Telekom AG (Registered Shares) 6,685,384 1.0
Telecommunication
Services
Electric 144,951 E.On AG 10,457,831 1.6
Utilities
Textiles, 54,894 Adidas-Salomon AG 6,553,788 1.0
Apparel &
Luxury Goods
Total Common Stocks in Germany 46,992,708 7.0
Ireland Commercial Banks 758,137 Allied Irish Banks PLC 11,714,321 1.7
Total Common Stocks in Ireland 11,714,321 1.7
Italy Commercial Banks 3,315,224 Capitalia SpA 10,374,079 1.6
4,735,482 Intesa BCI SpA 18,499,934 2.8
-------------- ------
28,874,013 4.4
Diversified 4,098,364 Telecom Italia SpA 12,739,933 1.9
Telecommunication
Services
Insurance 309,157 Fondiaria SAI 6,889,305 1.0
Oil & Gas 631,691 ENI SpA 12,541,917 1.9
Total Common Stocks in Italy 61,045,168 9.2
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Schedule of Investments (continued)
Value Percent of
Country Industry+++ Shares Held Common Stocks (in U.S. dollars) Net Assets
Japan Automobiles 388,700 Honda Motor Co., Ltd. $ 18,737,680 2.8%
546,100 Toyota Motor Corporation 22,121,267 3.3
-------------- ------
40,858,947 6.1
Beverages 1,250,000 Asahi Breweries Limited 13,781,332 2.1
Capital Markets 466,000 Mitsubishi Securities Co., Ltd. 6,119,947 0.9
Commercial 536,000 Toppan Printing Co., Ltd. 6,066,627 0.9
Services &
Supplies
Consumer Finance 162,000 Acom Co., Ltd. 10,526,326 1.6
234,000 Promise Co., Ltd. 15,612,152 2.3
-------------- ------
26,138,478 3.9
Household 612,000 Sekisui House, Ltd. 6,792,210 1.0
Durables
Machinery 1,077,000 Amada Co., Ltd. 7,106,631 1.1
Oil & Gas 879,000 Showa Shell Sekiyu K.K. 7,902,662 1.2
Pharmaceuticals 202,000 Takeda Pharmaceutical Co, Ltd. 8,867,525 1.3
Software 196,000 Namco Ltd. 5,496,586 0.8
Tobacco 1,600 Japan Tobacco, Inc. 12,434,587 1.9
Wireless 6,105 NTT DoCoMo, Inc. 10,910,278 1.7
Telecommunication
Services
Total Common Stocks in Japan 152,475,810 22.9
Netherlands Air Freight & 376,418 TNT Post Group NV 8,600,658 1.3
Logistics
Chemicals 191,442 Akzo Nobel NV 7,041,109 1.0
Commercial 520,131 Buhrmann NV 5,170,118 0.8
Services & 461,809 Vedior NV 'A' 6,731,082 1.0
Supplies -------------- ------
11,901,200 1.8
Diversified 430,404 ING Groep NV 10,158,831 1.5
Financial
Services
Food & Staples 842,459 ++Koninklijke Ahold NV 6,611,107 1.0
Retailing 285,540 Koninklijke Ahold NV (ADR) (a) 2,264,332 0.3
-------------- ------
8,875,439 1.3
Household 394,952 Koninklijke (Royal) Philips Electronics NV 10,633,872 1.6
Durables
Insurance 477,733 Aegon NV 5,760,028 0.9
Total Common Stocks in the Netherlands 62,971,137 9.4
New Zealand Diversified 1,784,139 Telecom Corporation of New Zealand Limited 6,662,143 1.0
Telecommunication
Services
Total Common Stocks in New Zealand 6,662,143 1.0
Norway Commercial Banks 1,265,317 DNB Holding ASA 8,634,422 1.3
Total Common Stocks in Norway 8,634,422 1.3
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Schedule of Investments (continued)
Value Percent of
Country Industry+++ Shares Held Common Stocks (in U.S. dollars) Net Assets
Sweden Diversified 1 ++Ainax AB $ 17 0.0%
Financial 730,738 Investor AB 'B' 7,469,428 1.1
Services -------------- ------
7,469,445 1.1
Machinery 198,997 Volvo AB 'B' 6,921,221 1.1
Total Common Stocks in Sweden 14,390,666 2.2
Switzerland Capital Markets 330,852 Credit Suisse Group 11,755,760 1.8
Construction 104,095 Holcim (Registered Shares) 5,660,228 0.8
Materials
Insurance 48,344 ++Swiss Life Holding 6,745,540 1.0
Pharmaceuticals 214,367 Novartis AG (Registered Shares) 9,456,864 1.4
Total Common Stocks in Switzerland 33,618,392 5.0
United Aerospace & 2,345,781 BAE Systems PLC 9,327,055 1.4
Kingdom Defense
Commercial Banks 1,104,787 Barclays PLC 9,411,586 1.4
412,368 Royal Bank of Scotland Group PLC 11,875,528 1.8
-------------- ------
21,287,114 3.2
Food & Staples 742,928 Boots Group PLC 9,269,422 1.4
Retailing
Food Products 875,454 Unilever PLC 8,589,108 1.3
Industrial 899,773 Smiths Group PLC 12,180,925 1.8
Conglomerates
Insurance 646,175 AVIVA PLC 6,667,759 1.0
Oil & Gas 3,064,626 Shell Transport & Trading Company PLC 22,480,890 3.4
Pharmaceuticals 403,154 GlaxoSmithKline PLC 8,159,295 1.2
Specialty Retail 1,779,869 Kesa Electricals PLC 9,336,388 1.4
Transportation 856,634 BAA PLC 8,598,653 1.3
Infrastructure
Wireless 3,952,270 Vodafone Group PLC 8,654,684 1.3
Telecommunication
Services
Total Common Stocks in the United Kingdom 124,551,293 18.7
Total Common Stocks (Cost--$506,532,548) 642,423,762 96.4
Preferred Stocks
Germany Household Products 38,394 Henkel KGaA (Non-Convertible) 3,278,253 0.5
Total Preferred Stocks (Cost--$2,318,633) 3,278,253 0.5
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Schedule of Investments (concluded)
Face Value Percent of
Amount Short-Term Securities (in U.S. dollars) Net Assets
Time US$27,692,250 Brown Brothers Harriman & Co., 0.76% due
Deposits 7/01/2004 $ 27,692,250 4.2%
Total Short-Term Investments
(Cost--$27,692,250) 27,692,250 4.2
Total Investments (Cost--$536,543,431) 673,394,265 101.1
Liabilities in Excess of Other Assets (7,261,745) (1.1)
-------------- ------
Net Assets $ 666,132,520 100.0%
============== ======
++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. These industry classifications
are unaudited.
(a)American Depositary Receipts (ADR).
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 $(38,889,986) $ 91,216
Merrill Lynch Premier
Institutional Fund (25,926,657) $ 34,423
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Statement of Assets and Liabilities
As of June 30, 2004
Assets
Investments in unaffiliated securities, at value
(identified cost--$536,543,431) $ 673,394,265
Foreign cash (cost--$749,672) 742,339
Cash 8,915
Receivables:
Dividends $ 3,028,174
Capital shares sold 2,367,205
Securities sold 2,146,646
Interest 585
Securities lending--net 21 7,542,631
---------------
Prepaid expenses and other assets 72,564
---------------
Total assets 681,760,714
---------------
Liabilities
Payables:
Capital shares redeemed 14,487,322
Securities purchased 499,723
Other affiliates 152,111
Investment adviser 69,830
Distributor 56,572 15,265,558
---------------
Accrued expenses and other liabilities 362,636
---------------
Total liabilities 15,628,194
---------------
Net Assets
Net assets $ 666,132,520
===============
Net Assets Consist of
Paid-in capital $ 567,560,665
Undistributed investment income--net $ 7,278,099
Accumulated realized capital losses on investments and foreign currency
transactions--net (45,550,135)
Unrealized appreciation on investments and foreign currency
transactions--net 136,843,891
---------------
Total accumulated earnings--net 98,571,855
---------------
Net Assets $ 666,132,520
===============
Net Asset Value
Class A--Based on net assets of $42,237,559 and 1,799,072 shares outstanding++ $ 23.48
===============
Class B--Based on net assets of $19,852,448 and 854,124 shares outstanding++ $ 23.24
===============
Class C--Based on net assets of $38,607,946 and 1,671,790 shares outstanding++ $ 23.09
===============
Class I--Based on net assets of $559,529,565 and 23,768,113 shares outstanding++ $ 23.54
===============
Class R--Based on net assets of $5,905,002 and 252,443 shares outstanding++ $ 23.39
===============
++Unlimited shares of no par value authorized.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Statement of Operations
For the Year Ended June 30, 2004
Investment Income
Dividends (net of $1,974,458 foreign withholding tax) $ 15,501,710
Securities lending--net 125,639
Interest 38,551
---------------
Total income 15,665,900
---------------
Expenses
Investment advisory fees $ 4,548,311
Transfer agent fees--Class I 1,168,892
Accounting services 252,673
Custodian fees 161,090
Account maintenance fees--Class A 116,280
Account maintenance and distribution fees--Class C 112,315
Account maintenance and distribution fees--Class B 109,642
Transfer agent fees--Class A 100,596
Registration fees 91,920
Printing and shareholder reports 66,216
Professional fees 47,406
Transfer agent fees--Class C 30,267
Trustees' fees and expenses 27,984
Transfer agent fees--Class B 27,639
Pricing fees 13,672
Account maintenance and distribution fees--Class R 9,516
Transfer agent fees--Class R 4,447
Other 43,169
---------------
Total expenses 6,932,035
---------------
Investment income--net 8,733,865
---------------
Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net
Realized gain from:
Investments--net 49,628,220
Foreign currency transactions--net 59,646 49,687,866
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 115,656,552
Foreign currency transactions--net (281,510) 115,375,042
--------------- ---------------
Total realized and unrealized gain from investments and foreign currency
transactions--net 165,062,908
---------------
Net Increase in Net Assets Resulting from Operations $ 173,796,773
===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Statements of Changes in Net Assets
For the Year Ended
June 30,
Increase (Decrease) in Net Assets: 2004 2003
Operations
Investment income--net $ 8,733,865 $ 9,422,107
Realized gain (loss) on investments and foreign currency transactions--net 49,687,866 (79,904,041)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net 115,375,042 9,981,036
--------------- ---------------
Net increase (decrease) in net assets resulting from operations 173,796,773 (60,480,898)
--------------- ---------------
Dividends 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 (13,809,390) (59,101,229)
--------------- ---------------
Net Assets
Total increase (decrease) in net assets 145,651,259 (120,925,768)
Beginning of year 520,481,261 641,407,029
--------------- ---------------
End of year* $ 666,132,520 $ 520,481,261
=============== ===============
*Undistributed investment income--net $ 7,278,099 $ 8,191,889
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 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 June 30,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001++ 2000++
Per Share Operating Performance
Net asset value, beginning of year $ 17.98 $ 20.55 $ 22.89 $ 27.27 $ 25.72
---------- ---------- ---------- ---------- ----------
Investment income--net .25++++ .39++++ .23++++ .31 .39
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 5.70 (2.96) (.70) (2.41) 3.41
---------- ---------- ---------- ---------- ----------
Total from investment operations 5.95 (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 year $ 23.48 $ 17.98 $ 20.55 $ 22.89 $ 27.27
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 33.67% (12.55%) (1.42%) (8.00%) 15.36%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.33% 1.32% 1.38% 1.31% 1.31%
========== ========== ========== ========== ==========
Investment income--net 1.20% 2.30% 1.19% 2.05% 1.37%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 42,238 $ 49,395 $ 97,769 $ 52,110 $ 4,920
========== ========== ========== ========== ==========
Portfolio turnover 75% 89% 45% 26% 50%
========== ========== ========== ========== ==========
*Total investment returns exclude the effect of sales charges.
++Prior to October 6, 2000, Class A Shares were redesignated as
Distributor Class Shares.
++++Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Financial Highlights (continued)
Class B
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Oct. 6, 2000++
For the Year Ended June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 17.84 $ 20.57 $ 23.09 $ 25.65
---------- ---------- ---------- ----------
Investment income--net .17++++ .29++++ .10++++ .39
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 5.57 (3.02) (.71) (.82)
---------- ---------- ---------- ----------
Total from investment operations 5.74 (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 $ 23.24 $ 17.84 $ 20.57 $ 23.09
========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 32.65% (13.27%) (2.10%) (2.01%)+++
========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.11% 2.06% 2.12% 2.18%*
========== ========== ========== ==========
Investment income--net .81% 1.74% .48% 1.49%*
========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 19,852 $ 5,343 $ 2,064 $ 1,016
========== ========== ========== ==========
Portfolio turnover 75% 89% 45% 26%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effect 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, JUNE 30, 2004
Financial Highlights (continued)
Class C
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Oct. 6, 2000++
For the Year Ended June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 17.70 $ 20.39 $ 22.91 $ 25.65
---------- ---------- ---------- ----------
Investment income--net .29++++ .17++++ .09++++ .60
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net 5.41 (2.86) (.70) (1.05)
---------- ---------- ---------- ----------
Total from investment operations 5.70 (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 $ 23.09 $ 17.70 $ 20.39 $ 22.91
========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 32.58% (13.19%) (2.10%) (2.11%)+++
========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.14% 2.07% 2.06% 1.70%*
========== ========== ========== ==========
Investment income--net 1.38% 1.02% .47% 1.76%*
========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 38,608 $ 2,672 $ 2,285 $ 762
========== ========== ========== ==========
Portfolio turnover 75% 89% 45% 26%
========== ========== ========== ==========
*Annualized.
**Total investment returns exclude the effect 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, JUNE 30, 2004
Financial Highlights (continued)
The following per share data and ratios have been derived Class I
from information provided in the financial statements.
For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001++ 2000++
Per Share Operating Performance
Net asset value, beginning of year $ 18.03 $ 20.63 $ 22.97 $ 27.33 $ 25.73
---------- ---------- ---------- ---------- ----------
Investment income--net .31++++ .30++++ .29++++ .48 .43
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 5.71 (2.85) (.70) (2.53) 3.43
---------- ---------- ---------- ---------- ----------
Total from investment operations 6.02 (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 year $ 23.54 $ 18.03 $ 20.63 $ 22.97 $ 27.33
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 34.00% (12.38%) (1.14%) (7.79%) 15.60%
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.08% 1.07% 1.14% 1.06% 1.06%
========== ========== ========== ========== ==========
Investment income--net 1.47% 1.78% 1.42% 1.78% 1.62%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 559,530 $ 463,071 $ 617,289 $1,024,993 $1,393,910
========== ========== ========== ========== ==========
Portfolio turnover 75% 89% 45% 26% 50%
========== ========== ========== ========== ==========
*Total investment returns exclude the effect of sales charges.
++Prior to October 6, 2000, Class I Shares were redesignated as
Investor Class Shares.
++++Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Financial Highlights (concluded)
Class R
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Year Ended January 3, 2003++
June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 17.98 $ 16.79
------------ ------------
Investment income--net*** .52 .32
Realized and unrealized gain on investments and foreign currency
transactions--net 5.38 .87
------------ ------------
Total from investment operations 5.90 1.19
------------ ------------
Less dividends from investment income--net (.49) --
------------ ------------
Net asset value, end of period $ 23.39 $ 17.98
============ ============
Total Investment Return**
Based on net asset value per share 33.43% 7.09%+++
============ ============
Ratios to Average Net Assets
Expenses 1.60% 1.55%*
============ ============
Investment income--net 2.34% 3.04%*
============ ============
Supplemental Data
Net assets, end of period (in thousands) $ 5,905 $ --+++++
============ ============
Portfolio turnover 75% 89%
============ ============
*Annualized.
**Total investment returns exclude the effect 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, JUNE 30, 2004
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 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. 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, JUNE 30, 2004
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) 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) Reclassifications--U.S. generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, during the current year, $4,676,392 has been
reclassified between accumulated realized net capital losses on
investments and foreign currency transactions and undistributed net
investment income and $12,077 has been reclassified between paid-in
capital in excess of par and undistributed net investment income as
a result of permanent differences attributable to gains from the
sale of stock of passive foreign investment companies, foreign
currency transaction gains/losses and non-deductible expenses. These
reclassifications have no effect on net assets or net asset values
per share.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Notes to Financial Statements (continued)
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. 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"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
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.
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 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 year ended June 30, 2004, 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 $ 7,902 $ 91,222
Class I $ 228 $ 844
For the year ended June 30, 2004, MLPF&S received contingent
deferred sales charges of $5,280 and $6,562 relating to transactions
in Class B and Class C Shares, respectively.
In addition, MLPF&S received $21,826 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
June 30, 2004.
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. For the year ended June 30, 2004,
MLIM, LLC received $50,724 in security lending agent fees.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
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.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Notes to Financial Statements (continued)
For the year ended June 30, 2004, the Fund reimbursed FAM $12,292
for certain accounting services.
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.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended June 30, 2004 were $445,947,835 and $480,779,058,
respectively.
Net realized gains for the year ended June 30, 2004 and net
unrealized appreciation/depreciation as of June 30, 2004 were as
follows:
Unrealized
Realized Appreciation/
Gains Depreciation
Long-term investments $ 49,628,220 $ 136,850,834
Foreign currency transactions 59,646 (6,943)
-------------- ---------------
Total $ 49,687,866 $ 136,843,891
============== ===============
As of June 30, 2004, net unrealized appreciation for federal income
tax purposes aggregated $120,125,803, of which $128,643,830 related
to appreciated securities and $8,518,027 related to depreciated
securities. At June 30, 2004, the aggregate cost of investments for
federal income tax purposes was $553,268,462.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $13,809,390 and $59,101,229 for the years ended June 30, 2004
and June 30, 2003, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended June 30, 2004 Shares Amount
Shares sold 8,800,514 $ 164,996,795
Automatic conversion of shares 41,692 962,246
Shares issued to shareholders
in reinvestment of dividends 57,445 1,097,605
-------------- ---------------
Total issued 8,899,651 167,056,646
Shares redeemed (9,848,355) (187,909,481)
-------------- ---------------
Net decrease (948,704) $ (20,852,835)
============== ===============
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 Year Dollar
Ended June 30, 2004 Shares Amount
Shares sold 933,567 $ 19,761,164
Shares issued to shareholders
in reinvestment of dividends 6,323 119,861
-------------- ---------------
Total issued 939,890 19,881,025
Automatic conversion of shares (42,007) (962,246)
Shares redeemed (343,196) (6,939,516)
-------------- ---------------
Net increase 554,687 $ 11,979,263
============== ===============
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 Year Dollar
Ended June 30, 2004 Shares Amount
Shares sold 1,746,815 $ 38,013,548
Shares issued to shareholders
in reinvestment of dividends 3,249 62,793
-------------- ---------------
Total issued 1,750,064 38,076,341
Shares redeemed (229,268) (4,694,572)
-------------- ---------------
Net increase 1,520,796 $ 33,381,769
============== ===============
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 Year Dollar
Ended June 30, 2004 Shares Amount
Shares sold 18,148,648 $ 357,808,494
Shares issued to shareholders
in reinvestment of dividends 629,110 12,134,608
-------------- ---------------
Total issued 18,777,758 369,943,102
Shares redeemed (20,695,248) (413,913,322)
-------------- ---------------
Net decrease (1,917,490) $ (43,970,220)
============== ===============
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Notes to Financial Statements (concluded)
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 reinvestment of 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 Dollar
Ended June 30, 2004 Shares Amount
Shares sold 331,464 $ 7,449,954
Shares issued to shareholders
in reinvestment of dividends 288 6,142
-------------- ---------------
Total issued 331,752 7,456,096
Shares redeemed (79,315) (1,803,463)
-------------- ---------------
Net increase 252,437 $ 5,652,633
============== ===============
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.
Effective June 30, 2004, the Fund began charging a 2% redemption fee
on the proceeds (calculated at market value) of a redemption (either
by sale or exchange) of Fund shares made within thirty days of
purchase. The redemption fee is paid to the Fund and is intended to
offset the trading costs, market impact and other costs associated
with short-term trading into and out of the Fund.
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 year ended June 30, 2004.
6. Commitments:
At June 30, 2004, the Fund had entered into foreign exchange
contracts, under which it had agreed to purchase and sell various
foreign currencies with approximate values of $501,000 and
$2,129,000, respectively.
7. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years
ended June 30, 2004 and June 30, 2003 was as follows:
6/30/2004 6/30/2003
Distributions paid from:
Ordinary income $ 14,336,124 $ 1,343,641
-------------- ---------------
Total taxable distributions $ 14,336,124 $ 1,343,641
============== ===============
As of June 30, 2004, the components of accumulated earnings on a tax
basis were as follows:
Undistributed ordinary income--net $ 12,326,267
Undistributed long-term capital gains--net --
---------------
Total undistributed earnings--net 12,326,267
Capital loss carryforward (33,853,952)*
Unrealized gains--net 120,099,540**
---------------
Total accumulated earnings--net $ 98,571,855
===============
*On June 30, 2004, the Fund had a net capital loss carryforward of
$33,853,952, of which $33,409,374 expires in 2011 and $444,578
expires in 2012. 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, the realization for tax purposes of unrealized gains
(losses) on certain foreign currency contracts, and the realization
for tax purposes of unrealized gains on investments in passive
foreign investment companies.
8. Plan of Reorganization:
On July 28, 2004, Merrill Lynch International Equity Fund's
shareholders approved a plan of reorganization, subject to certain
other conditions, whereby the Fund will acquire substantially all of
the assets and will assume substantially all of the liabilities of
Merrill Lynch International Equity Fund in exchange for newly issued
shares of the Fund.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Mercury Funds II and Shareholders of
Merrill Lynch International Value Fund:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
International Value Fund (one of the portfolios comprising Mercury
Funds II) as of June 30, 2004, 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 periods indicated therein. These
financial statements and the 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. The financial highlights for the
period ended June 30, 2000 were audited by other auditors, whose
report dated August 17, 2000 expressed an unqualified opinion on
such financial highlights.
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 and financial
highlights. Our procedures included confirmation of securities owned
as of June 30, 2004, by correspondence with the custodian and
others. 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 Value Fund at June
30, 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 the financial highlights for each of the indicated
periods in conformity with U.S. generally accepted accounting
principles.
(Ernst & Young LLP)
Philadelphia, Pennsylvania
August 16, 2004
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 2004
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary
income distributions paid by Merrill Lynch International Value Fund
of Mercury Funds II, Inc. during the fiscal year ended June 30,
2004:
Record Date August 13, 2003 December 15, 2003
Payable Date August 19, 2003 December 19, 2003
Qualified Dividend Income for Individuals 68.13% 60.80%
Foreign Source Income 91.48% 60.80%
Foreign Taxes Paid Per Share $.070551 $.008757
The foreign taxes paid represent taxes incurred by the Fund on
income received 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 VALUE FUND, JUNE 30, 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 2000 to President of the Merrill Lynch Investment 125 Funds None
P.O. Box 9011 and present Managers, L.P. ("MLIM")/Fund Asset 160 Portfolios
Princeton, Trustee Management, L.P. ("FAM")--Advised Funds
NJ 08543-9011 since 1999; Chairman (Americas Region)
Age: 63 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
present and 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 VALUE FUND, JUNE 30, 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*
James H. Bodurtha Trustee 2002 to Director, The China Business Group, Inc. 38 Funds None
P.O. Box 9095 present since 1996 and Executive Vice President 55 Portfolios
Princeton, thereof from 1996 to 2003; Chairman of
NJ 08543-9095 the Board, Berkshire Holding Corporation
Age: 60 since 1980; Partner, Squire, Sanders &
Dempsey from 1980 to 1993.
Joe Grills Trustee 1996 to Member of the Committee of Investment of 38 Funds Kimco Realty
P.O. Box 9095 present Employee Benefit Assets of the Association 55 Portfolios Corporation
Princeton, of Financial Professionals ("CIEBA") since
NJ 08543-9095 1986; Member of CIEBA's Executive Committee
Age: 69 since 1988 and its Chairman from 1991 to
1992; Assistant Treasurer of International
Business Machines Corporation ("IBM") and
Chief Investment Officer of IBM Retirement
Funds from 1986 to 1993; Member of the
Investment Advisory Committee of the State
of New York Common Retirement Fund since
1989; Member of the Investment Advisory
Committee of the Howard Hughes Medical
Institute from 1997 to 2000; Director,
Duke Management Company since 1992 and
Vice Chairman thereof since 1998; Director,
LaSalle Street Fund from 1995 to 2001;
Director, Kimco Realty Corporation since
1997; Member of the Investment Advisory
Committee of the Virginia Retirement System
since 1998 and Vice Chairman thereof since
2002; Director, Montpelier Foundation since
1998 and its Vice Chairman since 2000;
Member of the Investment Committee of the
Woodberry Forest School since 2000; Member
of the Investment Committee of the National
Trust for Historic Preservation since 2000.
Herbert I. London Trustee 2002 to John M. Olin Professor of Humanities, New 38 Funds None
P.O. Box 9095 present York University since 1993 and Professor 55 Portfolios
Princeton, thereof since 1980; President, Hudson
NJ 08543-9095 Institute since 1997 and Trustee thereof
Age: 65 since 1980; Dean, Gallatin Division of
New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair,
Hudson Institute from 1984 to 1985;
Director, Damon Corp. from 1991 to 1995;
Overseer, Center for Naval Analyses from
1983 to 1993; Limited Partner, Hypertech LP
since 1996.
MERRILL LYNCH INTERNATIONAL VALUE FUND, JUNE 30, 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* (concluded)
Andre F. Perold Trustee 2002 to Harvard Business School, George Gund 38 Funds None
P.O. Box 9095 present Professor of Finance and Banking since 55 Portfolios
Princeton, 2000; Senior Associate Dean, Director of
NJ 08543-9095 Faculty Recruiting since 2001; Finance Area
Age: 52 Chair from 1996 to 2001; Sylvan C. Coleman
Professor of Financial Management from 1993
to 2000; Director, Genbel Securities Limited
and Gensec Bank from 1999 to 2003; Director,
Stockback, Inc. from 2000 to 2002; Director,
Sanlam Limited from 2001 to 2003; Trustee,
Commonfund from 1989 to 2001; Director,
Sanlam Investment Management from 1999 to
2001; Director, Bulldogresearch.com from
2000 to 2001; Director, Quantec Limited
from 1991 to 1999; Director and Chairman
of the Board of UNX Inc. since 2003.
Roberta Cooper Ramo Trustee 2002 to Shareholder, Modrall, Sperling, Roehl, 38 Funds None
P.O. Box 9095 present Harris & Sisk, P.A. since 1993; President, 55 Portfolios
Princeton, American Bar Association from 1995 to 1996
NJ 08543-9095 and Member of the Board of Governors
Age: 61 thereof from 1994 to 1997; Shareholder,
Poole, Kelly & Ramo, Attorneys at Law, P.C.
from 1977 to 1993; Director, Coopers, Inc.
since 1999; Director, ECMC Group (service
provider to students, schools and lenders)
since 2001; Director, United New Mexico
Bank (now Wells Fargo) from 1983 to 1988;
Director, First National Bank of New Mexico
(now Wells Fargo) from 1975 to 1976.
Robert S. Salomon, Jr. Trustee 2002 to Principal of STI Management (investment 38 Funds None
P.O. Box 9095 present adviser) since 1994; Chairman and CEO of 55 Portfolios
Princeton, Salomon Brothers Asset Management from
NJ 08543-9095 1992 until 1995; Chairman of Salomon
Age: 67 Brothers equity mutual funds from 1992
until 1995; regular columnist with Forbes
Magazine from 1992 to 2002; Director of
Stock Research and U.S. Equity Strategist
at Salomon Brothers from 1975 until 1991;
Trustee, Commonfund from 1980 to 2001.
Stephen B. Swensrud Trustee 2002 to Chairman of Fernwood Associates (investment 39 Funds None
P.O. Box 9095 present adviser) since 1996; Principal, Fernwood 56 Portfolios
Princeton, Associates (financial consultants) since
NJ 08543-9095 1975; Chairman of R.P.P. Corporation
Age: 70 (manufacturing company) since 1978; Director
of International Mobile Communications,
Incorporated (telecommunications company)
since 1998.
*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 VALUE FUND, JUNE 30, 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 2002 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 Vice President of FAMD since 1999; Director of MLIM Taxation since 1990.
NJ 08543-9011 Treasurer
Age: 44
Robert C. Doll, Jr. Senior 2002 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.
James A. Macmillan Vice 2000 to Managing Director of MLIM since 2000; Director (Equities) of MLIM from 1999
P.O. Box 9011 President present to 2000.
Princeton,
NJ 08543-9011
Age: 39
Phillip S. Gillespie Secretary 2000 to First Vice President of MLIM since 2001; Director (Legal Advisory) of MLIM
P.O. Box 9011 present from 2000 to 2001; Vice President of MLIM from 1999 to 2000 and Attorney
Princeton, associated with MLIM 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 VALUE FUND, JUNE 30, 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 VALUE FUND, JUNE 30, 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) Joe Grills, (2) Andre F. Perold, (3) Robert S.
Salomon, Jr., and (4) Stephen B. Swensrud.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending June 30, 2004 - $30,000
Fiscal Year Ending June 30, 2003 - $26,000
(b) Audit-Related Fees - Fiscal Year Ending June 30, 2004 - $0
Fiscal Year Ending June 30, 2003 - $0
(c) Tax Fees - Fiscal Year Ending June 30, 2004 - $5,200
Fiscal Year Ending June 30, 2003 - $5,000
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending June 30, 2004 - $0
Fiscal Year Ending June 30, 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 all of
the registrants the Committee oversees. Any proposed services
exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending June 30, 2004 - $5,200
Fiscal Year Ending June 30, 2003 - $105,200
(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 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: August 13, 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: August 13, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch International Value Fund of Mercury Funds II
Date: August 13, 2004