UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-04182
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: Robert C. Doll, Jr.,
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: 06/30/05
Date of reporting period: 07/01/04 - 12/31/04
Item 1 - Report to Stockholders
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Merrill Lynch Investment Managers
www.mlim.ml.com
Merrill Lynch
International Value Fund
Of Mercury Funds II
Semi-Annual Report
December 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.
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 December 31, 2004
Percent of
Ten Largest Equity Holdings Net Assets
Total SA 3.2%
Mitsubishi Tokyo Financial Group Inc. 2.9
Royal Bank of Scotland Group Plc 2.3
NTT DoCoMo Inc. 2.2
GlaxoSmithKline Plc 2.1
E.ON AG 2.1
Barclays Plc 2.0
Credit Suisse Group 2.0
Banca Intesa SpA 2.0
BNP Paribas 2.0
Percent of
Five Largest Industries++ Net Assets
Commercial Banks 16.5%
Oil & Gas 8.6
Automobiles 5.4
Diversified Telecommunication Services 5.4
Pharmaceuticals 4.9
++ 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.
Percent of
Total
Geographic Allocation Investments
Japan 20.3%
United Kingdom 19.0
France 13.5
Italy 8.9
Germany 7.5
Netherlands 7.4
Switzerland 5.9
Sweden 2.3
Norway 2.1
Australia 1.8
Belgium 1.5
Portugal 1.4
Ireland 1.2
Singapore 1.1
South Korea 0.9
Finland 0.5
Other* 4.7
* Includes portfolio holdings in short-term securities.
Electronic Delivery
The Fund offers electronic delivery of communications to its
shareholders. In order to receive this service, you must
register your account and provide us with e-mail information.
To sign up for this service, simply access this Web site at
http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification
number (PIN). You will need this PIN should you wish to update your
e-mail address, choose to discontinue this service and/or make any
other changes to the service. This service is not available for
certain retirement accounts at this time.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
A Letter From the President and Chief Investment Officer
Dear Shareholder
The U.S. equity market ended 2004 in positive territory, although
not without some suspense along the way. Fixed income markets also
performed well, with high yield bond investors enjoying some of the
greatest returns.
Over the past year, the equity market generally found support from a
healthy economic environment, above-average corporate earnings,
increased capital spending and still-low interest rates. Stalling
the momentum somewhat throughout the year was a contentious
election, negligible inflation amid a rising federal funds interest
rate, record-high oil prices and the seemingly ever-present worries
over terrorism and the war in Iraq.
Still, the Standard & Poor's 500 Index posted a 12-month return of
+10.88% and a six-month return of +7.19% as of December 31, 2004.
The fourth quarter of the year proved to be the most telling, as the
S&P 500 Index was up only 1.51% year-to-date as of September 30,
2004. As the price of oil relaxed and election uncertainties
subsided, the market headed more convincingly upward in the last
quarter of the year.
Given the relatively positive environment for equities, the
favorable performance of the bond market came as somewhat of a
surprise. The Lehman Brothers Aggregate Bond Index posted a 12-month
return of +4.34% and a six-month return of +4.18% as of December 31,
2004. The tax-exempt market performed just as well, with a 12-month
return of +4.48% and a six-month return of +5.19%, as measured by
the Lehman Brothers Municipal Bond Index. Those comfortable with a
higher degree of risk benefited this past year, as the Credit Suisse
First Boston High Yield Index posted a 12-month return of +11.95%
and a six-month return of +9.26%. Interestingly, as the Federal
Reserve Board began raising its target short-term interest rate,
long-term bond yields were little changed. In fact, the yield on the
10-year Treasury was 4.24% at year-end compared to 4.27% at December
31, 2003. The yield on the two-year Treasury climbed to 3.08% at
year-end 2004 from 1.84% a year earlier.
As always, our investment professionals are closely monitoring the
markets, the economy and the overall environment in an effort to
make well-informed decisions for the portfolios they manage. For the
individual investor, the key to investment success - particularly
during uncertain times - is to maintain a long-term perspective and
adhere to the disciplines of asset allocation, diversification and
rebalancing. We encourage you to work with your financial advisor to
ensure these time-tested techniques are incorporated into your
investment plan.
We thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the
new year and beyond.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
A Discussion With Your Fund's Portfolio Manager
The Fund provided highly competitive returns for the period,
benefiting from the outperformance of value stocks as well as good
stock picking and favorable sector selection.
How did the Fund perform during the period in light of the existing
market conditions?
For the six-month period ended December 31, 2004, Merrill Lynch
International Value Fund's Class A, Class B, Class C, Class I and
Class R Shares had total returns of +15.64%, +15.20%, +15.22%,
+15.81% and +15.51%, respectively. (Fund results shown do not
reflect sales charges and would be lower if sales charges were
included. Complete performance information can be found on pages
6 - 8 of this report to shareholders.) Fund results outpaced the
+15.00% return of the benchmark Morgan Stanley Capital International
Europe, Australasia, Far East (MSCI EAFE) Index and the +15.02%
average return of the Lipper International Multi-Cap Value Funds
category for the same period. (Funds in this Lipper category invest
in a variety of market-capitalization ranges without concentrating
75% of their equity assets in any one range over an extended period
of time. Multi-cap funds typically invest 25% - 75% of their assets
in companies 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.)
Despite strong earnings growth during July and early August, stock
markets continued to drift downward on investor fears that economic
growth could be peaking and corporate earnings growth would decline.
While equity markets reversed course and headed upward in mid-
August, the increase was short-lived. Uncertainty surrounding the
U.S. presidential election - and especially the eventual direction
of U.S. foreign and domestic policy - along with continued fears of
terrorism gave investors reason to adopt a more defensive stance.
Finally, in November and December, investors were relieved about the
clear outcome of the presidential contest, a retreating price of oil
and a continued decline in the value of the U.S. dollar, and equity
markets finished the year on a positive note.
Best-performing sectors during the period, as measured by the MSCI
EAFE Index, were the defensive areas of the market, including
utilities and telecommunications, as well as banks and real estate.
The worst-performing sectors were in the cyclical growth areas, such
as technology hardware and semiconductors, and household and
personal products.
What factors most influenced Fund performance?
The Fund benefited from the favorable market environment for value
stocks, which outperformed their growth counterparts during the
period. The Fund's outperformance of its benchmark is attributed to
good stock selection, with sector selection also playing a positive
role. Sectors that made the largest contribution to Fund performance
during the past six months were energy, banks, and food, beverage
and tobacco. The Fund also benefited from underweighting the
pharmaceuticals and technology hardware sectors. The Fund's
weightings in food and staples retailing, hotels, restaurants and
leisure, materials, and commercial services and supplies detracted
from relative returns.
At the individual stock level, the Fund benefited from its holdings
in the banking sector, including Italian retail bank Capitalia SpA
and Norwegian commercial bank Den Norske Bank, both of which
continued to benefit from their successful restructuring programs,
and Allied Irish Banks Plc, which was helped by strong growth from
its international branches. Other strong performers included Japan
Tobacco, Inc., the country's largest cigarette maker, which rose
after its management announced a new business plan. The stock's
defensive characteristics also helped in an environment in which
defensive sectors outperformed. Also a top performer was Australian
gas producer Santos Ltd., which benefited from a major oil find and
the high oil price.
Hindering Fund results was Dutch food retailer Koninklijke Ahold NV.
The company's second-quarter earnings report showed a greater-than-
expected decline in its U.S. profit margins. In the financials
sector, detractors included Japan-based Mitsubishi Tokyo Financial
Group, Inc. (MTFG), which fell as investors questioned the terms of
its proposed merger with UFJ Holdings, Inc. (UFJ), and Japanese
financial services provider Mitsubishi Securities Co., Ltd. French
sheet metal maker Amada also detracted from results, based on
concerns that machine orders may have peaked, as did Japanese
telecommunications provider NTT DoCoMo, Inc.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
What changes were made to the portfolio during the period?
Our main transactions were the result of "bottom-up" stock picking,
based on our evaluation of companies' individual appreciation
prospects. In Japan, we increased our position in MTFG after it
entered merger discussions with rival UFJ. We believe MTFG could see
profit growth from financial deregulation in Japan. Furthermore, if
the merger with UFJ proceeds, the group will become the biggest bank
in the world and potentially realize substantial merger synergies.
We also increased our position in Japan Tobacco, which we believe is
undervalued based on the company's extremely strong cash flow. We
believe the company should be able to use its cash to create
substantial value for shareholders through capital restructuring or
acquisitions.
We sold our position in Japanese consumer lender Acom after the
announcement of merger discussions between MTFG and UFJ, based on
our belief that the merger could compromise the existing
relationship between MTFG and Acom. We also sold our position in
refiner and distributor Showa Shell Sekiyu K.K. after the stock
reached our target price.
In Europe, major purchases included Norwegian oil company Statoil
ASA, whose valuation we believed was not fully reflecting high oil
prices; Norwegian telecommunications company Telenor ASA, as we were
attracted to the company's cash-generation abilities and exposure to
Eastern European markets; Portuguese electric utility Energeias de
Portugal SA, which offered strong growth potential and a high
dividend yield; and DaimlerChrysler AG, which was attractively
valued following recent underperformance and offered the potential
for improving profit margins in its Mercedes line. These purchases
were funded primarily through the sales of German airline Deutsche
Lufthansa A6, which has struggled from its lack of hedging against
high fuel prices, and reducing our weighting in Telecom Italia SpA,
the Italian communications giant, which performed well after
announcing a merger with its mobile phone division.
In the United Kingdom, we established two attractively valued
positions in the financials sector: insurer Prudential Plc, which we
believed offered strong growth potential, and bank HBOS Plc, which
was repurchasing shares of its stock. We also added to our existing
position in pharmaceutical giant GlaxoSmithKline Plc, given its
attractive valuation and high dividend yield. We sold our holdings
in insurer AVIVA Plc and Den Norske Bank, both of which reached our
target prices.
How would you characterize the Fund's position at the close of the
period?
Our outlook for corporate Europe and Japan is generally positive,
and corporate restructuring and balance sheet repair should enable
companies to generate strong cash flows and profitability -
resulting in higher returns for shareholders through growing
dividends, share buybacks, and merger-and-acquisition activity.
Global monetary conditions are currently into their tightening
phase. In addition to the early tightening steps taken in the United
Kingdom, China and Australia, recent months have seen the start of a
cycle of interest rate increases in the United States following
firmer employment and inflation data. Still, it is worth reiterating
that monetary conditions remain extremely accommodative. The Bank of
Japan has reaffirmed its commitment to quantitative easing until
Japan has exited deflation in a meaningful way, while the European
Central Bank remains some way off tightening and there may even be
scope for further easing of European liquidity conditions.
At period-end, the Fund's largest sector weightings were in banks,
telecommunications and energy. Given our bottom-up approach, the
Fund's sector exposures are largely the result of stock selection
among undervalued equity investments rather than perceived
fundamentals in a given sector. Within the banking sector, we favor
domestically oriented consumer banks such as Capitalia SpA, Banca
Intesa SpA and Allied Irish Banks, which offer strong growth
prospects and a low risk profile. Other significant holdings in this
sector are BNP Paribas (France), Royal Bank of Scotland, Barclays
(U.K.) and MTFG. In telecommunications, we found several companies
trading at attractive valuations and offering strong free cash flow.
In the energy sector, we hold a number of cash-generative companies
with high dividend yields and that provide good portfolio
diversification.
The Fund has limited exposure to growth-oriented sectors such as
technology hardware, semiconductors, media and healthcare equipment,
areas where we are challenged to find compelling value
opportunities.
We continue to believe that fundamental factors such as earnings
growth and cash-flow generation will be increasingly important to
investors, and that the Fund is well positioned for future progress.
James A. Macmillan
Vice President and Portfolio Manager
January 20, 2005
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 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 (front-end
load) of 5.25% and an account maintenance fee of 0.25% per year (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% per year and an
account maintenance fee of 0.25% per year. These Shares
automatically convert to Class A Shares after approximately eight
years. All returns for periods greater than eight years reflect this
conversion.
* Class C Shares are subject to a distribution fee of 0.75% per year
and an account maintenance fee of 0.25% per year. In addition, Class
C Shares 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% per year and an account maintenance fee of
0.25% per year.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
performance data current to the most recent month-end. Performance
results do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
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, DECEMBER 31, 2004
Performance Data (continued)
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception
As of December 31, 2004 Total Return Total Return Total Return
ML International Value Fund--Class A Shares* +15.64% +21.49% + 44.33%
ML International Value Fund--Class B Shares* +15.20 +20.54 + 27.14
ML International Value Fund--Class C Shares* +15.22 +20.55 + 27.07
ML International Value Fund--Class I Shares* +15.81 +21.81 +151.61
ML International Value Fund--Class R Shares* +15.51 +21.15 + 65.05
MSCI EAFE Index** +15.00 +20.25 +72.73/+18.67/+7.27/+63.51
* Investment results shown do not reflect sales charges. Results shown would be lower if a sales charge
was included. Cumulative total investment returns are based on changes in 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 that measures the total returns of developed foreign stock markets in Europe,
Australasia and the Far East (in U.S. dollars). Ten-year/since inception total returns are for 10 years,
from 6/02/99, from 10/06/00 and from 1/03/03, respectively.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 12/31/04 +21.49% +15.11%
Five Years Ended 12/31/04 + 4.85 + 3.73
Inception (06/02/99)
through 12/31/04 + 6.80 + 5.77
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
Class B Shares*
One Year Ended 12/31/04 +20.54% +16.54%
Inception (10/06/00)
through 12/31/04 + 5.83 + 5.44
* Maximum contingent deferred sales charge is 4% and is reduced
to 0% after six years.
** Assuming payment of applicable contingent deferred sales charge.
Return Return
Without CDSC With CDSC**
Class C Shares*
One Year Ended 12/31/04 +20.55% +19.55%
Inception (10/06/00)
through 12/31/04 + 5.82 + 5.82
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after one year.
** Assuming payment of applicable contingent deferred sales charge.
Return Without Return With
Sales Charge Sales Charge**
Class I Shares*
One Year Ended 12/31/04 +21.81% +15.41%
Five Years Ended 12/31/04 + 5.11 + 3.98
Ten Years Ended 12/31/04 + 9.67 + 9.08
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Class R Shares Return
One Year Ended 12/31/04 +21.15%
Inception (1/03/03) through 12/31/04 +28.60
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Disclosure of Expenses
Shareholders of this Fund may incur the following charges:
(a) expenses related to transactions, including sales charges,
redemption fees and exchange fees; and (b) operating expenses
including advisory fees, distribution fees including 12(b)-1 fees
and other Fund expenses. The following example (which is based on a
hypothetical investment of $1,000 invested on July 1, 2004 and held
through December 31, 2004) is intended to assist shareholders both
in calculating expenses based on an investment in the Fund and in
comparing these expenses with similar costs of investing in other
mutual funds.
The first table below provides information about actual account
values and actual expenses. In order to estimate the expenses a
shareholder paid during the period covered by this report,
shareholders can divide their account value by $1,000 and then
multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before
expenses. In order to assist shareholders in comparing the ongoing
expenses of investing in this Fund and other funds, compare the 5%
hypothetical example with the 5% hypothetical examples that appear
in other funds' shareholder reports.
The expenses shown in the table are intended to highlight
shareholders ongoing costs only and do not reflect any transactional
expenses, such as sales charges, redemption fees or exchange fees.
Therefore, the second table is useful in comparing ongoing expenses
only, and will not help shareholders determine the relative total
expenses of owning different funds. If these transactional expenses
were included, shareholder expenses would have been higher.
Expenses Paid
Ending During the Period*
Beginning Account Value July 1, 2004 to
Account Value December 31, December 31,
July 1, 2004 2004 2004
Actual
Class A $1,000 $1,156.40 $ 7.07
Class B $1,000 $1,152.00 $11.34
Class C $1,000 $1,152.20 $11.34
Class I $1,000 $1,158.10 $ 5.77
Class R $1,000 $1,155.10 $ 8.47
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,018.65 $ 6.61
Class B $1,000 $1,014.67 $10.61
Class C $1,000 $1,014.67 $10.61
Class I $1,000 $1,019.86 $ 5.40
Class R $1,000 $1,017.34 $ 7.93
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.30% for Class A, 2.09% for Class B, 2.09% for Class C, 1.06% for Class I and 1.56% for Class R),
multiplied by the average account value over the period, multiplied by 184/365 (to reflect the
one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in the
most recent fiscal half-year divided by 365.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Schedule of Investments (in U.S. dollars)
Country Industry+++ Shares Held Common Stocks Value
Australia--1.8% Commercial Banks--1.0% 735,000 Australia & New Zealand Banking Group Ltd. $ 11,863,267
Oil & Gas--0.8% 1,473,396 Santos Ltd. 9,794,358
Total Common Stocks in Australia 21,657,625
Belgium--1.6% Diversified 431,666 ++Belgacom SA 18,658,392
Telecommunication
Services--1.6%
Total Common Stocks in Belgium 18,658,392
Finland--0.5% Paper & Forest 362,466 Stora Enso Oyj Class R 5,552,524
Products--0.5%
Total Common Stocks in Finland 5,552,524
France--13.8% Automobiles--1.1% 216,343 Peugeot SA 13,732,796
Commercial Banks--2.0% 332,192 BNP Paribas 24,066,649
Commercial Services & 273,700 Societe BIC SA 13,764,986
Supplies--1.1%
Construction & 140,084 Vinci SA 18,812,422
Engineering--1.6%
Construction 162,946 Lafarge SA 15,725,385
Materials--1.3%
Food & Staples 120,884 Carrefour SA 5,757,476
Retailing--1.0% 73,320 Casino Guichard Perrachon SA 5,860,019
---------------
11,617,495
Hotels, Restaurants & 280,763 Accor SA (e) 12,292,206
Leisure--1.0%
Metals & Mining--1.3% 669,507 Arcelor 15,443,161
Oil & Gas--3.2% 177,189 Total SA 38,703,646
Pharmaceuticals--0.2% 21,739 Sanofi-Aventis 1,737,465
Total Common Stocks in France 165,896,211
Germany--7.6% Air Freight & 406,515 Deutsche Post AG 9,338,186
Logistics--0.7%
Automobiles--0.9% 228,788 DaimlerChrysler AG 10,965,156
Chemicals--0.2% 42,102 Linde AG 2,635,882
Construction & 536,325 Hochtief AG 17,488,700
Engineering--1.5%
Diversified 658,236 ++Deutsche Telekom AG 14,896,873
Telecommunication
Services--1.2%
Electric Utilities--2.1% 270,923 E.ON AG 24,694,979
Textiles, Apparel & 72,040 Adidas-Salomon AG 11,628,041
Luxury Goods--1.0%
Total Common Stocks in Germany 91,647,817
Ireland--1.3% Commercial Banks--1.3% 730,999 Allied Irish Banks Plc 15,251,916
Total Common Stocks in Ireland 15,251,916
Italy--9.1% Commercial Banks--3.9% 5,040,091 Banca Intesa SpA 24,251,627
4,837,424 Capitalia SpA 22,165,225
---------------
46,416,852
Diversified 2,109,590 Telecom Italia SpA (e) 8,631,053
Telecommunication
Services--0.7%
Electric Utilities--1.2% 1,524,040 Enel SpA 14,979,385
Insurance--1.3% 581,011 Fondiaria-Sai SpA 15,660,525
Oil & Gas--2.0% 943,701 ENI SpA 23,627,800
Total Common Stocks in Italy 109,315,615
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Schedule of Investments (continued) (in U.S. dollars)
Country Industry+++ Shares Held Common Stocks Value
Japan--20.8% Automobiles--3.4% 371,400 Honda Motor Co., Ltd. $ 19,245,965
530,500 Toyota Motor Corp. 21,588,611
---------------
40,834,576
Beverages--1.6% 1,531,000 Asahi Breweries Ltd. 18,960,076
Capital Markets--1.1% 1,163,000 Mitsubishi Securities Co., Ltd. (e) 12,734,322
Commercial Banks--2.9% 3,482 Mitsubishi Tokyo Financial Group Inc. 35,339,904
Commercial Services & 942,000 Toppan Printing Co., Ltd. 10,452,367
Supplies--0.9%
Consumer Finance--1.7% 280,100 Promise Co., Ltd. 20,009,095
Household Durables--1.2% 1,200,000 Sekisui House Ltd. 13,982,629
Leisure Equipment & 739,000 Yamaha Corp. 11,279,360
Products--0.9%
Machinery--0.5% 1,077,000 Amada Co., Ltd. 5,948,883
Pharmaceuticals--1.3% 304,000 Takeda Pharmaceutical Co., Ltd. 15,308,285
Software--0.7% 598,000 Namco Ltd. 7,849,224
Tobacco--1.9% 2,034 Japan Tobacco Inc. 23,224,163
Wireless Telecommunication 1,200 KDDI Corp. 6,464,331
Services--2.7% 14,504 NTT DoCoMo Inc. 26,751,791
---------------
33,216,122
Total Common Stocks in Japan 249,139,006
Netherlands-- Air Freight & 516,213 TPG NV 14,019,214
7.5% Logistics--1.2%
Commercial Services & 1,238,340 Buhrmann NV (e) 12,034,975
Supplies--1.8% 614,898 Vedior NV 10,021,241
---------------
22,056,216
Diversified Financial 502,387 ING Groep NV CVA 15,200,672
Services--1.3%
Food & Staples 1,185,333 ++Koninklijke Ahold NV 9,183,632
Retailing--0.9% 285,540 Koninklijke Ahold NV (a)(b) 2,107,714
---------------
11,291,346
Household Durables--1.2% 537,289 Koninklijke Philips Electronics NV 14,248,346
Insurance--1.1% 993,908 Aegon NV 13,550,221
Total Common Stocks in the Netherlands 90,366,015
Norway--2.2% Diversified 1,288,590 Telenor ASA 11,701,592
Telecommunication
Services--1.0%
Oil & Gas--1.2% 899,297 Statoil ASA 14,105,688
Total Common Stocks in Norway 25,807,280
Portugal--1.4% Electric Utilities--1.4% 5,686,885 Energias de Portugal SA 17,237,670
Total Common Stocks in Portugal 17,237,670
Singapore--1.2% Marine--1.2% 7,634,000 Neptune Orient Lines Ltd. 14,029,650
Total Common Stocks in Singapore 14,029,650
South Korea-- Diversified 518,200 ++KT Corp. (a) 11,301,942
0.9% Telecommunication
Services--0.9%
Total Common Stocks in South Korea 11,301,942
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Schedule of Investments (continued) (in U.S. dollars)
Country Industry+++ Shares Held Common Stocks Value
Sweden--2.3% Diversified Financial 1,066,738 Investor AB $ 13,564,174
Services--1.1%
Machinery--1.2% 357,937 Volvo AB Class B 14,192,735
Total Common Stocks in Sweden 27,756,909
Switzerland-- Capital Markets--2.0% 581,728 ++Credit Suisse Group 24,453,960
6.0%
Construction 247,387 Holcim Ltd. 14,902,831
Materials--1.2%
Electrical 1,048,187 ++ABB Ltd. 5,853,476
Equipment--0.5%
Insurance--0.9% 74,438 Swiss Life Holding 10,834,130
Pharmaceuticals--1.3% 321,350 Novartis AG Registered Shares 16,193,259
Total Common Stocks in Switzerland 72,237,656
United Aerospace & 2,390,832 BAE Systems Plc 10,580,324
Kingdom-- 19.3% Defense--0.9%
Commercial Banks--5.4% 2,186,549 Barclays Plc 24,600,041
776,892 HBOS Plc 12,648,397
827,222 Royal Bank of Scotland Group Plc 27,825,000
---------------
65,073,438
Food & Staples 1,158,643 Boots Group Plc 14,581,471
Retailing--1.2%
Food Products--1.9% 1,185,568 Cadbury Schweppes Plc 11,039,444
1,276,154 Unilever Plc 12,532,212
---------------
23,571,656
Industrial 1,121,079 Smiths Group Plc 17,692,411
Conglomerates--1.5%
Insurance--1.3% 1,821,860 Prudential Plc 15,844,998
Oil & Gas--1.4% 2,044,265 Shell Transport & Trading Co. Plc 17,426,057
Pharmaceuticals--2.1% 1,056,325 GlaxoSmithKline Plc 24,782,651
Specialty Retail--1.2% 2,698,059 Kesa Electricals Plc 14,633,523
Transportation 1,249,634 BAA Plc 14,011,180
Infrastructure--1.2%
Wireless 5,241,374 Vodafone Group Plc 14,213,879
Telecommunication
Services--1.2%
Total Common Stocks in the United Kingdom 232,411,588
Total Investments in Common Stocks
(Cost--$878,662,265)--97.3% 1,168,267,816
Beneficial
Interest Other Interests (f)
United Electric $ 70,000 British Energy Plc Deferred Shares 0
Kingdom--0.0% Utilities--0.0%
Total Investments in Other Interests
(Cost--$0)--0.0% 0
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Schedule of Investments (concluded) (in U.S. dollars)
Face
Amount Short-Term Securities Value
Time Deposits $33,535,676 Brown Brothers Harriman & Co., 1.60% due
1/03/2005 $ 33,535,676
Beneficial
Interest
$24,609,560 Merrill Lynch Liquidity Series, LLC Money
Market Series (c)(d) 24,609,560
Total Investments in Short-Term Securities
(Cost--$58,145,236)--4.8% 58,145,236
Total Investments (Cost--$936,807,501*)--102.1% 1,226,413,052
Liabilities in Excess of Other Assets (2.1%) (25,804,998)
---------------
Net Assets--100.0% $ 1,200,608,054
===============
* The cost and unrealized appreciation/depreciation of investments as
of December 31, 2004, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 953,532,532
==============
Gross unrealized appreciation $ 276,230,987
Gross unrealized depreciation (3,350,467)
--------------
Net unrealized appreciation $ 272,880,520
==============
++ Non-income producing security.
+++ For Fund compliance purposes, "Industry" means any one or more of
the industry sub-classifications used by one or more widely recognized
market indexes or ratings group indexes, and/or as defined by Fund
management. This definition may not apply for purposes of this report,
which may combine such industry sub-classifications for reporting ease.
(a) Depositary Receipts.
(b) Restricted security as to resale:
Acquisition
Issue Date Cost Value
Koninklijke
Ahold NV* 12/11/2003 $1,696,449 $2,107,714
* Depositary Receipts.
(c) 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) were as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series,
LLC Cash Sweep Series I -- $ 9,745
Merrill Lynch Liquidity Series,
LLC Money Market Series $24,609,560 $ 17,271
(d) Security was purchased with the cash proceeds from securities loans.
(e) Security, or portion of security, is on loan.
(f) 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 VALUE FUND, DECEMBER 31, 2004
Statement of Assets and Liabilities
As of December 31, 2004
Assets
Investments in unaffiliated securities, at value (including securities
loaned of $23,418,805) (identified cost--$912,197,941) $ 1,201,803,492
Investments in affiliated securities, at value (identified cost--$24,609,560) 24,609,560
Cash 51,948
Receivables:
Capital shares sold $ 2,278,025
Dividends 2,047,225
Interest 4,471
Securities lending 4,469 4,334,190
---------------
Prepaid expenses and other assets 263,286
---------------
Total assets 1,231,062,476
---------------
Liabilities
Collateral on securities loaned, at value 24,609,560
Payables:
Capital shares redeemed 4,131,068
Investment adviser 831,830
Other affiliates 326,373
Distributor 188,527
Dividends 93 5,477,891
---------------
Accrued expenses and other liabilities 366,971
---------------
Total liabilities 30,454,422
---------------
Net Assets
Net assets $ 1,200,608,054
===============
Net Assets Consist of
Paid-in capital $ 1,009,098,408
Accumulated distributions in excess of investment income--net $ (5,308,145)
Accumulated realized capital losses--net (92,932,944)
Unrealized appreciation--net 289,750,735
---------------
Total accumulated earnings--net 191,509,646
---------------
Net Assets $ 1,200,608,054
===============
Net Asset Value
Class A--Based on net assets of $239,627,942 and 8,994,982
shares outstanding++ $ 26.64
===============
Class B--Based on net assets of $50,504,498 and 1,917,218
shares outstanding++ $ 26.34
===============
Class C--Based on net assets of $117,259,481 and 4,487,835
shares outstanding++ $ 26.13
===============
Class I--Based on net assets of $781,470,911 and 29,280,659
shares outstanding++ $ 26.69
===============
Class R--Based on net assets of $11,745,222 and 442,700
shares outstanding++ $ 26.53
===============
++ Unlimited shares of no par value authorized.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Statement of Operations
For the Six Months Ended December 31, 2004
Investment Income
Dividends (net of $750,615 foreign withholding tax) $ 6,921,933
Interest ($9,745 from affiliates) 193,554
Securities lending--net 17,271
---------------
Total income 7,132,758
---------------
Expenses
Investment advisory fees $ 3,592,031
Transfer agent fees--Class I 716,276
Account maintenance and distribution fees--Class C 389,653
Account maintenance fees--Class A 208,276
Account maintenance and distribution fees--Class B 188,324
Transfer agent fees--Class A 171,987
Accounting services 161,488
Custodian fees 119,970
Transfer agent fees--Class C 97,715
Printing and shareholder reports 47,465
Transfer agent fees--Class B 47,313
Registration fees 42,314
Professional fees 35,267
Account maintenance and distribution fees--Class R 21,182
Trustees' fees and expenses 14,923
Transfer agent fees--Class R 9,001
Pricing fees 6,915
Other 22,593
---------------
Total expenses 5,892,693
---------------
Investment income--net 1,240,065
---------------
Realized & Unrealized Gain--Net
Realized gain on:
Investments--net 40,486,109
Foreign currency transactions--net 404,446 40,890,555
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 128,044,122
Foreign currency transactions--net 184,467 128,228,589
--------------- ---------------
Total realized and unrealized gain--net 169,119,144
---------------
Net Increase in Net Assets Resulting from Operations $ 170,359,209
===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2004 2004
Operations
Investment income--net $ 1,240,065 $ 8,733,865
Realized gain--net 40,890,555 49,687,866
Change in unrealized appreciation/depreciation--net 128,228,589 115,375,042
--------------- ---------------
Net increase in net assets resulting from operations 170,359,209 173,796,773
--------------- ---------------
Dividends to Shareholders
Investment income--net:
Class A (953,888) (1,333,430)
Class B (353,852) (125,031)
Class C (890,953) (66,820)
Class I (11,510,390) (12,804,694)
Class R (117,226) (6,149)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (13,826,309) (14,336,124)
--------------- ---------------
Capital Share Transactions
Increase (decrease) in net assets derived from net capital share transactions 377,938,409 (13,809,390)
--------------- ---------------
Redemption fees
Redemption fees 4,225 --
--------------- ---------------
Net Assets
Total increase in net assets 534,475,534 145,651,259
Beginning of year 666,132,520 520,481,261
--------------- ---------------
End of year* $ 1,200,608,054 $ 666,132,520
=============== ===============
* Undistributed (accumulated distributions in excess of)
investment income--net $ (5,308,145) $ 7,278,099
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Financial Highlights
Class A
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
December 31, For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 23.48 $ 17.98 $ 20.55 $ 22.89 $ 27.27
---------- ---------- ---------- ---------- ----------
Investment income--net .01++ .25++ .39++ .23++ .31
Realized and unrealized gain (loss)--net 3.57 5.70 (2.96) (.70) (2.41)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.58 5.95 (2.57) (.47) (2.10)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.42) (.45) -- (.70) (.47)
Realized gain--net -- -- -- (1.17) (1.81)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.42) (.45) -- (1.87) (2.28)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 26.64 $ 23.48 $ 17.98 $ 20.55 $ 22.89
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 15.64%++++ 33.67% (12.55%) (1.42%) (8.00%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.30%** 1.33% 1.32% 1.38% 1.31%
========== ========== ========== ========== ==========
Investment income--net .09%** 1.20% 2.30% 1.19% 2.05%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 239,628 $ 42,238 $ 49,395 $ 97,769 $ 52,110
========== ========== ========== ========== ==========
Portfolio turnover 36% 75% 89% 45% 26%
========== ========== ========== ========== ==========
* Total investment returns exclude the effect of sales charges.
** Annualized.
++ Based on average shares outstanding.
++++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Financial Highlights (continued)
Class B
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Oct. 6, 2000++
December 31, For the Year Ended June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 23.24 $ 17.84 $ 20.57 $ 23.09 $ 25.65
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net (.08)++++ .17++++ .29++++ .10++++ .39
Realized and unrealized gain (loss)--net 3.54 5.57 (3.02) (.71) (.82)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.46 5.74 (2.73) (.61) (.43)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.36) (.34) -- (.74) (.32)
Realized gain--net -- -- -- (1.17) (1.81)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.36) (.34) -- (1.91) (2.13)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 26.34 $ 23.24 $ 17.84 $ 20.57 $ 23.09
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 15.20%+++ 32.65% (13.27%) (2.10%) (2.01%)+++
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.09%* 2.11% 2.06% 2.12% 2.18%*
========== ========== ========== ========== ==========
Investment income (loss)--net (.62%)* .81% 1.74% .48% 1.49%*
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 50,504 $ 19,852 $ 5,343 $ 2,064 $ 1,016
========== ========== ========== ========== ==========
Portfolio turnover 36% 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, DECEMBER 31, 2004
Financial Highlights (continued)
Class C
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended Oct. 6, 2000++
December 31, For the Year Ended June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 23.09 $ 17.70 $ 20.39 $ 22.91 $ 25.65
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net (.07)++++ .29++++ .17++++ .09++++ .60
Realized and unrealized gain (loss)--net 3.50 5.41 (2.86) (.70) (1.05)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.43 5.70 (2.69) (.61) (.45)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.39) (.31) -- (.74) (.48)
Realized gain--net -- -- -- (1.17) (1.81)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.39) (.31) -- (1.91) (2.29)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 26.13 $ 23.09 $ 17.70 $ 20.39 $ 22.91
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 15.22%+++ 32.58% (13.19%) (2.10%) (2.11%)+++
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.09%* 2.14% 2.07% 2.06% 1.70%*
========== ========== ========== ========== ==========
Investment income (loss)--net (.60%)* 1.38% 1.02% .47% 1.76%*
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 117,259 $ 38,608 $ 2,672 $ 2,285 $ 762
========== ========== ========== ========== ==========
Portfolio turnover 36% 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, DECEMBER 31, 2004
Financial Highlights (continued)
Class I
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
December 31, For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 23.54 $ 18.03 $ 20.63 $ 22.97 $ 27.33
---------- ---------- ---------- ---------- ----------
Investment income--net .05++++ .31++++ .30++++ .29++++ .48
Realized and unrealized gain (loss)--net 3.58 5.71 (2.85) (.70) (2.53)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.63 6.02 (2.55) (.41) (2.05)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.48) (.51) (.05) (.76) (.50)
Realized gain--net -- -- -- (1.17) (1.81)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (.48) (.51) (.05) (1.93) (2.31)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 26.69 $ 23.54 $ 18.03 $ 20.63 $ 22.97
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 15.81%++ 34.00% (12.38%) (1.14%) (7.79%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.06%** 1.08% 1.07% 1.14% 1.06%
========== ========== ========== ========== ==========
Investment income--net .45%** 1.47% 1.78% 1.42% 1.78%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 781,471 $ 559,530 $ 463,071 $ 617,289 $1,024,993
========== ========== ========== ========== ==========
Portfolio turnover 36% 75% 89% 45% 26%
========== ========== ========== ========== ==========
* Total investment returns exclude the effect of sales charges.
** Annualized.
++ Aggregate total investment return.
++++ Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Financial Highlights (concluded)
Class R
The following per share data and ratios have been derived For the Six For the For the Period
from information provided in the financial statements. Months Ended Year Ended January 3, 2003++
December 31, June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2004 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 23.39 $ 17.98 $ 16.79
---------- ---------- ----------
Investment income (loss)--net*** --++++ .52 .32
Realized and unrealized gain--net 3.54 5.38 .87
---------- ---------- ----------
Total from investment operations 3.54 5.90 1.19
---------- ---------- ----------
Less dividends from investment income--net (.40) (.49) --
---------- ---------- ----------
Net asset value, end of period $ 26.53 $ 23.39 $ 17.98
========== ========== ==========
Total Investment Return**
Based on net asset value per share 15.51%+++ 33.43% 7.09%+++
========== ========== ==========
Ratios to Average Net Assets
Expenses 1.56%* 1.60% 1.55%*
========== ========== ==========
Investment income (loss)--net (.04%)* 2.34% 3.04%*
========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 11,745 $ 5,905 $ --+++++
========== ========== ==========
Portfolio turnover 36% 75% 89%
========== ========== ==========
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Based on average shares outstanding.
++ Commencement of operations.
++++ Amount is less than $(.01) per share.
+++ Aggregate total investment return.
+++++ Amount is less than $1,000.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 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. These
unaudited financial statements reflect all adjustments, which are,
in the opinion of management, necessary to present a fair statement
of the results of the interim period. All such adjustments are of a
normal, recurring nature. The Fund offers multiple classes of
shares. Class A and Class I Shares are sold with a front-end sales
charge. Class B and Class C Shares may be subject to a contingent
deferred sales charge. Class R Shares are sold only to certain
retirement plans. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class A, Class B, Class C and Class R Shares
bear certain expenses related to the account maintenance of such
shares, and Class B, Class C and Class R Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures (except that Class
B shareholders may vote on certain changes to the Class A
distribution plan). Income, expenses (other than expenses
attributable to a specific class) and realized and unrealized gains
and losses on investments and foreign currency transactions are
allocated daily to each class based on its relative net assets. The
following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Equity securities that are held by the
Fund that are traded on stock exchanges or the Nasdaq National
Market are valued at the last sale price or official close price on
the exchange, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for
short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange
designated as the primary market by or under the authority of the
Board of Trustees of the Trust. Long positions traded in the over-
the-counter ("OTC") market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price or yield equivalent obtained
from one or more dealers or pricing services approved by the Board
of Trustees of the Trust. Short positions traded in the OTC market
are valued at the last available ask price. Portfolio securities
that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC
market, the last ask price. Options purchased are valued at their
last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last bid price. Swap
agreements are valued daily based upon quotations from market
makers. Financial futures contracts and options thereon, which are
traded on exchanges, are valued at their last sale price as of the
close of such exchanges. Obligations with remaining maturities of
60 days or less are valued at amortized cost unless the Investment
Adviser believes that this method no longer produces fair
valuations.
Repurchase agreements are valued at cost plus accrued interest. The
Fund employs pricing services to provide certain securities prices
for the Fund. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good
faith by or under the direction of the Board of Trustees of the
Trust, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations.
The procedures of a pricing service and its valuations are reviewed
by the officers of the Trust under the general supervision of the
Trust's Board of Trustees. Such valuations and procedures will be
reviewed periodically by the Board of Trustees of the Trust.
Generally, trading in foreign securities, as well as U.S. government
securities and money market instruments, is substantially completed
each day at various times prior to the close of business on the New
York Stock Exchange ("NYSE"). The values of such securities used in
computing the net asset value of the Fund's shares are determined as
of such times. Foreign currency exchange rates also are generally
determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and
the close of business on the NYSE that may not be reflected in the
computation of the Fund's net asset value. If events (for example, a
company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value
of such securities, those securities may be valued at their fair
value as determined in good faith by the Trust's Board of Trustees
or by the Investment Adviser using a pricing service and/or
procedures approved by the Trust's Board of Trustees.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 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.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 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 six months ended December 31, 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 $12,064 $149,445
Class I $ 762 $ 670
For the six months ended December 31, 2004, MLPF&S received
contingent deferred sales charges of $13,949 and $7,862 relating to
transactions in Class B and Class C Shares, respectively.
The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
MLPF&S or its affiliates. Pursuant to that order, the Fund also has
retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an
affiliate of FAM, as the securities lending agent for a fee based on
a share of the returns on investment of cash collateral. MLIM, LLC
may, on behalf of the Fund, invest cash collateral received by the
Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates. For the six months ended December
31, 2004, MLIM, LLC received $7,702 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, DECEMBER 31, 2004
Notes to Financial Statements (continued)
For the six months ended December 31, 2004, the Fund reimbursed FAM
$9,476 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 six months ended December 31, 2004 were $399,403,950 and
$327,062,395, respectively.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $377,938,409 and $(13,809,390) for the six months
ended December 31, 2004 and for the year ended June 30, 2004,
respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
December 31, 2004 Shares Amount
Shares sold 1,517,493 $ 36,354,843
Automatic conversion of shares 98,646 2,355,630
Shares issued resulting from
reorganization 6,689,495 149,572,748
Shares issued to shareholders
in reinvestment of dividends 39,715 898,017
-------------- ---------------
Total issued 8,345,349 189,181,238
Shares redeemed (1,149,439) (27,502,962)
-------------- ---------------
Net increase 7,195,910 $ 161,678,276
============== ===============
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 B Shares for the
Six Months Ended Dollar
December 31, 2004 Shares Amount
Shares sold 742,998 $ 17,476,751
Shares issued resulting from
reorganization 683,941 15,152,519
Shares issued to shareholders
in reinvestment of dividends 15,432 335,808
-------------- ---------------
Total issued 1,442,371 32,965,078
-------------- ---------------
Automatic conversion of shares (99,690) (2,355,630)
Shares redeemed (279,587) (6,678,873)
-------------- ---------------
Total redeemed (379,277) (9,034,503)
-------------- ---------------
Net increase 1,063,094 $ 23,930,575
============== ===============
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)
-------------- ---------------
Total redeemed (385,203) (7,901,762)
-------------- ---------------
Net increase 554,687 $ 11,979,263
============== ===============
Class C Shares for the
Six Months Ended Dollar
December 31, 2004 Shares Amount
Shares sold 2,658,348 $ 61,968,697
Shares issued resulting from
reorganization 522,287 11,476,831
Shares issued to shareholders
in reinvestment of dividends 38,730 835,790
-------------- ---------------
Total issued 3,219,365 74,281,318
Shares redeemed (403,320) (9,600,268)
-------------- ---------------
Net increase 2,816,045 $ 64,681,050
============== ===============
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
============== ===============
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Notes to Financial Statements (concluded)
Class I Shares for the
Six Months Ended Dollar
December 31, 2004 Shares Amount
Shares sold 3,372,603 $ 81,289,145
Shares issued resulting from
reorganization 5,054,773 113,227,053
Shares issued to shareholders
in reinvestment of dividends 491,341 10,991,994
-------------- ---------------
Total issued 8,918,717 205,508,192
Shares redeemed (3,406,171) (82,302,951)
-------------- ---------------
Net increase 5,512,546 $ 123,205,241
============== ===============
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)
============== ===============
Class R Shares for the
Six Months Ended Dollar
December 31, 2004 Shares Amount
Shares sold 287,112 $ 6,833,990
Shares issued to shareholders
in reinvestment of dividends 5,354 117,096
-------------- ---------------
Total issued 292,466 6,951,086
Shares redeemed (102,209) (2,507,819)
-------------- ---------------
Net increase 190,257 $ 4,443,267
============== ===============
Class R Shares for the Year 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
============== ===============
The Fund charges a 2% redemption fee on the proceeds (calculated at
market value) of a redemption (either by sale or exchange) of Fund
shares made within 30 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. For the six months ended December 31, 2004, the
Fund charged redemption fees of $4,225.
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by FAM and its
affiliates, is a party to a $500,000,000 credit agreement with a
group of 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 .07% 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 defined in the credit
agreement. The Fund did not borrow under the credit agreement during
the six months ended December 31, 2004. On November 26, 2004, the
credit agreement was renewed for one year under substantially the
same terms.
6. Capital Loss Carryforward:
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.
7. Acquisition of Merrill Lynch International Equity Fund:
On August 23, 2004, the Fund acquired substantially all of the
assets and liabilities of Merrill Lynch International Equity Fund
pursuant to a plan of reorganization. The acquisition was
accomplished by a tax-free exchange of 34,884,255 shares of Common
Stock of Merrill Lynch International Equity Fund for 12,950,496
shares of Common Stock of the Fund. Merrill Lynch International
Equity Fund's net assets on that date of $289,429,151 including
$24,678,255 of net unrealized appreciation and $88,273,364 of
accumulated net realized capital losses were combined with those of
the Fund. The aggregate net assets immediately after the acquisition
amounted to $828,276,008.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Officers and Trustees
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Joe Grills, Trustee
Herbert I. London, Trustee
Roberta Cooper Ramo, Trustee
Robert S. Salomon, Jr., Trustee
Stephen B. Swensrud, Trustee
Robert C. Doll, Jr., Senior Vice President
James A. Macmillan, Vice President and Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
Andre F. Perold resigned as a Trustee of Merrill Lynch International
Value Fund effective October 22, 2004.
Effective January 1, 2005, Terry K. Glenn retired as President and
Trustee of the Fund. The Fund's Board of Trustees wishes Mr. Glenn
well in his retirement.
Effective January 1, 2005, Robert C. Doll, Jr. became President and
Trustee of the Fund.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are
available on the SEC's Web site at http://www.sec.gov. The Fund's
Forms N-Q may also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
MERRILL LYNCH INTERNATIONAL VALUE FUND, DECEMBER 31, 2004
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this
semi-annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to
this semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment
Companies - Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably
designed such disclosure controls and procedures to ensure material
information relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
11(b) - There were no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual
report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Merrill Lynch International Value Fund of Mercury Funds II
By: _/s/ Robert C. Doll, Jr._______
Robert C. Doll, Jr.,
President of
Merrill Lynch International Value Fund of Mercury Funds II
Date: February 24, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: _/s/ Robert C. Doll, Jr.________
Robert C. Doll, Jr.,
President of
Merrill Lynch International Value Fund of Mercury Funds II
Date: February 24, 2005
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch International Value Fund of Mercury Funds II
Date: February 24, 2005