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 811-04182
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., Chief Executive
Officer, 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 - 06/30/05
Item 1 - Report to Stockholders
Merrill Lynch
International Value Fund
Of Mercury Funds II
Annual Report
June 30, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
This report is 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)
It's Fast, Convenient, & Timely!
To sign up today, go to www.icsdelivery.com/live.
Merrill Lynch International Value Fund
Portfolio Information as of June 30, 2005
Percent of
Ten Largest Equity Holdings Net Assets
Total SA 3.3%
Mitsubishi Tokyo Financial Group, Inc. 3.2
Royal Bank of Scotland Group Plc 3.1
RWE AG 2.7
HBOS Plc 2.5
Repsol YPF SA 2.2
GlaxoSmithKline Plc 2.1
ENI SpA 2.0
UniCredito Italiano SpA 2.0
Holcim Ltd. 2.0
Percent of
Five Largest Industries++ Net Assets
Commercial Banks 20.5%
Oil, Gas & Consumable Fuels 9.9
Insurance 4.9
Automobiles 4.3
Food & Staples Retailing 4.2
++ 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
United Kingdom 20.6%
Japan 18.6
France 11.1
Germany 8.4
Netherlands 7.4
Italy 7.2
Switzerland 5.7
Norway 3.7
Spain 2.3
Sweden 2.1
Belgium 1.9
Australia 1.6
Finland 1.6
Denmark 1.3
Portugal 1.2
Singapore 1.2
South Korea 0.9
Ireland 0.6
Hungary 0.5
Other* 2.1
* Includes portfolio holdings in short-term investments.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
A Letter From the President
Dear Shareholder
The financial markets continued to face a number of crosscurrents over the
past several months. On June 30, 2005, the Federal Reserve Board (the Fed)
increased the federal funds rate for the ninth consecutive time since June
2004, bringing the target short-term interest rate to 3.25%. During the same
week, first quarter 2005 U.S. gross domestic product growth was revised upward
to 3.8% - behind the 4.4% annualized growth rate recorded for all of 2004 but
ahead of many economists' expectations. Signs of a slowing economy, coupled
with easing inflationary fears, have prompted some observers to believe that
the Fed may soon end its monetary tightening campaign.
After ending 2004 in a strong rally, U.S. equity markets have struggled to
record meaningful gains in 2005. Continued high oil prices and Fed interest
rate hikes have exerted downward pressure on stocks. Offsetting this somewhat
have been surprisingly strong corporate earnings and lower long-term bond
yields. Outside U.S. borders, results have been mixed. Several European
markets have been performing well despite ongoing economic problems. In Asia,
many markets have benefited from higher economic growth rates and relatively
attractive valuations, although Japanese stocks have struggled as a result of
slowing exports and high oil prices.
In the bond markets, the yield curve flattening "conundrum" continued. As
short-term yields increased in concert with Fed interest rate hikes, yields on
longer-term bonds declined (as their prices, which move opposite yields,
increased). Over the past year, the two-year Treasury yield rose 96 basis
points (.96%) while the 10-year Treasury yield declined 68 basis points. At
period-end, the spread between two-year and 10-year Treasury yields was just
28 basis points.
Amid these conditions, the major market benchmarks posted six-month and
12-month returns as follows:
Total Returns as of June 30, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) -0.81% + 6.32%
Small-cap U.S. equities (Russell 2000 Index) -1.25% + 9.45%
International equities (MSCI Europe Australasia Far East Index) -1.17% +13.65%
Fixed income (Lehman Brothers Aggregate Bond Index) +2.51% + 6.80%
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +2.89% + 8.24%
High yield bonds (Credit Suisse First Boston High Yield Index) +0.77% +10.10%
Entering the second half of 2005, we expect more of the same type of "muddle
through" environment that has befallen financial markets in the first half of
the year. Nevertheless, opportunities do exist and we encourage you to work
with your financial advisor to diversify your portfolio among a variety of
asset types. This can help to diffuse risk while also tapping into the
potential benefits of a broader range of investment alternatives. 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,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Trustee
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
A Discussion With Your Fund's Portfolio Managers
Benefiting from positive stock selection and favorable sector allocations, the
Fund provided highly competitive returns for the fiscal year relative to both
its benchmark and its comparable Lipper category average.
How did the Fund perform during the fiscal year in light of the existing
market conditions?
For the 12-month period ended June 30, 2005, Merrill Lynch International Value
Fund's Class A, Class B, Class C, Class I and Class R Shares had total returns
of +14.29%, +13.45%, +13.41%, +14.59% and +14.03%, 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 - 10 of
this report to shareholders.) Fund results closely aligned with the +13.65%
return of the benchmark Morgan Stanley Capital International Europe,
Australasia, Far East (MSCI EAFE) Index and the +14.30% 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 market-cap
range over an extended period of time. Multi-cap funds typically have a
certain percentage of their assets invested in companies strictly outside the
United States.)
As the Fund's fiscal year began, international stock markets were largely
range bound. Despite strong earnings growth during July and early August,
investors feared that economic and earnings growth could be nearing their
peak. These concerns, coupled with uncertainty surrounding the U.S.
presidential election and continued fears of terrorism, gave investors
sufficient reason to adopt a defensive stance. The market doldrums continued
until November, when a clear conclusion to the presidential contest, a
retreating oil price and a continued decline in the value of the U.S. dollar
prompted a healthy equity market rally that lasted into early 2005. By the end
of the first quarter, however, investor sentiment once again began to turn
negative. This time, worries centered on the potential for slowing economic
and corporate earnings growth, an increasing oil price and heightened
inflation expectations, which caused some to fear that the Federal Reserve
Board might take a more aggressive approach in its interest rate-hiking
campaign. However, this concern proved short-lived and markets continued on an
upward trend during May and June.
Best-performing sectors during the fiscal year, as measured by the MSCI EAFE
Index, were the defensive areas of the market, including energy and utilities,
which provided respective returns of +31% and +27%. Other sectors that
performed well included materials, capital goods and banking. The worst-
performing sectors were technology, automobiles and household and personal
products.
What factors most influenced performance?
Stock selection and sector allocation both contributed to the Fund's results.
Our overweighting in energy benefited performance, as did our negligible
exposure to the poor-performing technology and media sectors. Detracting
slightly from relative results was our modest underweighting in utilities.
The Fund's top performers included Norwegian oil producer Statoil ASA (with an
absolute return of +69%) and Australian gas producer Santos Ltd. (+70%). Both
were supported by the high oil price, and Santos also benefited from a major
oil find. In the banking sector, Italian retail bank Capitalia SpA (+83%)
continued to reap rewards from a successful cost-cutting and restructuring
program and prospects for consolidation in the European banking industry.
Allied Irish Banks Plc (+39%) was further aided by strong growth from its
international branches and a healthy Irish economy. Other strong performers
included German construction company Hochtief AG (+52%), French construction
company Vinci SA (+71%) and Singapore shipping company Neptune Orient Lines
Ltd. (+89%).
Fund results were hindered by Japanese financial services provider Mitsubishi
Securities Co., Ltd. (-32%) and Japan-based Mitsubishi Tokyo Financial Group,
Inc. (MTFG). MTFG (-19%) fell as investors questioned the terms of its
proposed merger with UFJ Holdings, Inc., a liaison that would create a bank
with twice the assets of banking giant Citigroup. Japanese telecommunications
provider NTT DoCoMo, Inc. (-16%) also disappointed due to increased
competition in the Japanese mobile phone market. In Europe, U.K. retailer
Boots Group Plc (-8%) declined following a profit warning and lower-than-
expected guidance, and Swiss chemical company Clariant AG (-22%) fell after
announcing disappointing sales and profits as a result of slower demand and
higher raw materials costs.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
What changes were made to the portfolio during the year?
Our main transactions were the result of "bottom-up" stock picking, based on
our evaluation of companies' individual appreciation prospects. During the
past year, we also began to take profits in holdings that outperformed,
particularly our cyclical stocks that had reached our price targets. To that
end, in the United Kingdom, we reduced exposure to industrial conglomerate
Smiths Group Plc and aerospace & defense company BAE Systems Plc. In mainland
Europe, we sold our positions in Swiss electrical equipment company ABB Ltd.
and Finnish paper producer Stora Enso Oyj. We reduced exposure to Swedish
truck manufacturer Volvo AB and construction companies Hochtief and Vinci.
We invested some of the proceeds from our sales in the financials sector. In
the U.K., we increased exposure to Royal Bank of Scotland Group Plc, HBOS Plc
and Prudential Plc. We also added to Italian bank UniCredito Italiano SpA
after the company announced a proposed merger with German bank HVB.
Conversely, we sold Italian retail bank Banca Intesa and Allied Irish Banks,
both of which hit our price targets. In Japanese financials, we funded our
purchase of Takefuji Corp. with the sale of Promise Co., both consumer finance
companies. A recent restructuring has afforded Takefuji a wider shareholder
base, and the stock is trading at an attractive valuation.
In the energy sector, we sold U.K. oil and gas company Shell Transport &
Trading Co. Plc and U.K. integrated oil company BP. With the proceeds, we
purchased Repsol YPF SA, and Statoil, based on their relatively attractive
valuations. Also in energy, we purchased Hungarian oil refining company Mol
Magyar Olaj-es Gazipari Rt.
We also made a significant addition to our holding in Dutch food retailer
Ahold and purchased Italian utility company Enel SpA, which offers a high
dividend yield relative to current low bond yields. Additional sales worth
noting included Italian communications giant Telecom Italia SpA and French
hotel operator Accor SA, both of which hit our price targets.
How would you characterize the Fund's position at the close of the period?
As a result of our transactions, the Fund ended the period overweight in
financials, underweight in growth sectors and neutral in defensive sectors.
The overweight to financials comes primarily from our exposure to banking. We
have key overweights in U.K. banks, an area that has performed poorly recently
based on fears that a slowdown in U.K. consumer spending and the housing
market could lead to higher loan positions for these banks. We feel the fears
are overdone and find the banks to be trading at attractive valuations and
offering compelling dividend yields. We believe they could benefit from the
potential for U.K. interest rate cuts later this year. We also hold
domestically orientated retail banks, such as Capitalia, which offer strong
growth prospects and a low risk profile, as well as banks that we expect to
benefit from potential merger synergies, such as MTFG and Unicredito.
We also favor the utility sector for its defensive qualities, and believe
higher energy prices and low bond yields make for a positive environment for
utilities. The utility stocks in the portfolio offer attractive dividend
yields. The Fund also has relatively high exposure to telecommunication
services and, as a result of our recent transactions, has an increased
weighting in energy. We believe oil prices are likely to remain higher for
longer, and energy companies should benefit as a result. Within energy, we
hold highly cash-generative companies with strong dividend yields and, in
particular, we favor companies with exposure to refining. The Fund has limited
exposure to growth-oriented sectors, such as software and technology hardware,
where we struggle to find attractive valuations. We also have no exposure to
the media sector.
Generally speaking, we believe the corporate sector is in good shape following
years of drastic cost-cutting, restructuring and financial re-engineering. The
suspension of the proposed new EU constitution in the wake of its rejection in
France and the Netherlands has not had a negative impact on equity markets. In
fact, the recent weakening of the euro is beneficial for Europe's exporters.
In Japan, we are starting to see signs that the economy is breaking free from
its 10-year - 15-year slump. Corporate earnings results have been very good and
companies continue to benefit from restructuring. Asset write-offs are now
coming to an end, and with first quarter gross domestic product growth at 4.9%
(led by the domestic sectors of the economy), the outlook for earnings remains
positive.
James A. Macmillan
Vice President and Senior Portfolio Manager
Rob Weatherston
Vice President and Portfolio Manager
July 11, 2005
We are pleased to announce that Rob Weatherston has joined James Macmillan in
sharing responsibility for the day-to-day management of the Fund's portfolio
and the selection of its investments. Mr. Weatherston has been a portfolio
manager of the Fund since 2001. He has been a Director of MLIM since 2005 and
was a Vice President thereof from 1999 to 2005.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
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 are
subject to a 1% contingent deferred sales charge if redeemed within one year
of purchase.
* Class I Shares incur a maximum initial sales charge of 5.25% and bear no
ongoing distribution or 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. Prior to inception, Class R Share
performance results are those of Class I Shares (which have no distribution or
account maintenence fees) restated for Class R Share fees.
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 may charge 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, 2005
Performance Data (continued)
Recent Performance Results
10-Year/
6-Month 12-Month Since Inception
As of June 30, 2005 Total Return Total Return Total Return
ML International Value Fund--Class A Shares* -1.16% +14.29% + 42.65%
ML International Value Fund--Class B Shares* -1.52 +13.45 + 25.21
ML International Value Fund--Class C Shares* -1.57 +13.41 + 25.08
ML International Value Fund--Class I Shares* -1.05 +14.59 +129.66
ML International Value Fund--Class R Shares* -1.28 +14.03 +119.75
MSCI EAFE Index** -1.17 +13.65 +66.37/+17.28/+6.02
* 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 distributions at net
asset value on the ex-dividend date. The Fund's 10-year/since inception periods are for 10 years for
Class I & Class R Shares, from 6/02/99 for Class A Shares and from 10/06/00 for Class B and Class C 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 and
from 10/06/00.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
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
June 2005 $13,516.00
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
June 2005 $11,728.00
* 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 6/30/05 +14.29% +8.29%
Five Years Ended 6/30/05 + 3.91 +2.80
Inception (6/02/99) through
6/30/05 + 6.02 +5.08
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
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 $11,037.00
June 2005 $12,321.00
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
June 2005 $12,508.00
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
June 2005 $10,602.00
* 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 Return
Without CDSC With CDSC**
Class B Shares*
One Year Ended 6/30/05 +13.45% +9.45%
Inception (10/06/00) through
6/30/05 + 4.87 +4.51
* 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 6/30/05 +13.41% +12.41%
Inception (10/06/00) through
6/30/05 + 4.84 + 4.84
* 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, 2005
Performance Data (concluded)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
Class I & Class R Shares
A line graph illustrating the growth of a $10,000 investment in ML
International Value Fund++ Class I and Class R 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 1995 $ 9,475.00
June 1996 $11,238.00
June 1997 $13,664.00
June 1998 $14,726.00
June 1999 $15,347.00
June 2000 $17,743.00
June 2001 $16,361.00
June 2002 $16,175.00
June 2003 $14,172.00
June 2004 $18,990.00
June 2005 $21,761.00
ML International Value Fund++
Class R Shares*
Date Value
June 1995 $10,000.00
June 1996 $11,802.00
June 1997 $14,278.00
June 1998 $15,311.00
June 1999 $15,878.00
June 2000 $18,264.00
June 2001 $16,758.00
June 2002 $16,484.00
June 2003 $14,443.00
June 2004 $19,272.00
June 2005 $21,975.00
MSCI EAFE Index++++
Date Value
June 1995 $10,000.00
June 1996 $11,328.00
June 1997 $12,782.00
June 1998 $13,562.00
June 1999 $14,595.00
June 2000 $17,099.00
June 2001 $13,063.00
June 2002 $11,823.00
June 2003 $11,059.00
June 2004 $14,639.00
June 2005 $16,637.00
* 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 6/30/05 +14.59% +8.58%
Five Years Ended 6/30/05 + 4.17 +3.05
Ten Years Ended 6/30/05 + 8.67 +8.09
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Class R Shares Return
One Year Ended 6/30/05 +14.03%
Five Years Ended 6/30/05 + 3.77
Ten Years Ended 6/30/05 + 8.19
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
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 January 1, 2005
and held through June 30, 2005) is intended to assist shareholders both in
calculating expenses based on an investment in the Fund and in comparing these
expenses with similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during
the period covered by this report, shareholders can divide their account value
by $1,000 and then multiply the result by the number in the first line under
the heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders ongoing
costs only and do not reflect any transactional expenses, such as sales
charges, redemption fees or exchange fees. Therefore, the second table is
useful in comparing ongoing expenses only, and will not help shareholders
determine the relative total expenses of owning different funds. If these
transactional expenses were included, shareholder expenses would have been
higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value January 1, 2005
January 1, June 30, to June 30,
2005 2005 2005
Actual
Class A $1,000 $ 988.40 $ 6.66
Class B $1,000 $ 984.80 $10.53
Class C $1,000 $ 984.30 $10.53
Class I $1,000 $ 989.50 $ 5.43
Class R $1,000 $ 987.20 $ 7.88
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,018.10 $ 6.76
Class B $1,000 $1,014.18 $10.69
Class C $1,000 $1,014.18 $10.69
Class I $1,000 $1,019.34 $ 5.51
Class R $1,000 $1,016.86 $ 8.00
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.35% for Class A, 2.14% for Class B, 2.14% for Class C, 1.10% for Class I and 1.60% for Class R),
multiplied by the average account value over the period, multiplied by 181/365 (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 JUNE 30, 2005
Schedule of Investments (in U.S. dollars)
Shares
Country Industry++ Common Stocks Held Value
Australia--1.6%
Commercial Banks--1.0%
Australia & New Zealand Banking
Group Ltd. 792,307 $ 13,135,564
Paper Products--0.6%
PaperlinX Ltd. 3,204,000 7,351,144
Total Common Stocks in Australia 20,486,708
Belgium--1.9%
Diversified Telecommunication
Services--1.5%
Belgacom SA 576,473 19,715,935
Leisure Equipment &
Products--0.4%
AGFA-Gevaert NV 185,284 5,125,592
Total Common Stocks in Belgium 24,841,527
Denmark--1.3%
Commercial Banks--1.3%
Danske Bank A/S 574,956 17,303,884
Total Common Stocks in Denmark 17,303,884
Finland--1.6%
Electric Utilities--1.6%
Fortum Oyj 1,260,355 20,217,559
Total Common Stocks in Finland 20,217,559
France--11.1%
Automobiles--1.3%
Peugeot SA 287,636 17,056,188
Commercial Banks--1.9%
BNP Paribas 358,093 24,580,960
Construction & Engineering--1.3%
Vinci SA 202,336 16,853,168
Food & Staples Retailing--1.8%
Carrefour SA 492,120 23,891,056
Metals & Mining--1.5%
Arcelor 956,722 18,786,962
Oil, Gas & Consumable
Fuels--3.3%
Total SA 179,962 42,332,465
Total Common Stocks in France 143,500,799
Germany--8.3%
Air Freight & Logistics--1.7%
Deutsche Post AG 961,346 22,485,720
Commercial Banks--1.5%
Deutsche Postbank AG 400,757 19,732,188
Construction & Engineering--1.1%
Hochtief AG 411,106 14,433,504
Electric Utilities--1.3%
E.ON AG 180,852 16,132,174
Multi-Utilities--2.7%
RWE AG 545,557 35,256,456
Total Common Stocks in Germany 108,040,042
Hungary--0.5%
Oil, Gas & Consumable Fuels--0.5%
Mol Magyar Olaj- es Gazipari Rt. 80,934 6,797,581
Total Common Stocks in Hungary 6,797,581
Shares
Country Industry++ Common Stocks Held Value
Ireland--0.6%
Commercial Banks--0.6%
Bank of Ireland 472,955 $ 7,626,829
Total Common Stocks in Ireland 7,626,829
Italy--7.1%
Commercial Banks--3.7%
Capitalia SpA 4,067,942 22,787,370
UniCredito Italiano SpA 4,883,122 25,822,611
---------------
48,609,981
Electric Utilities--0.2%
Enel SpA 315,866 2,753,311
Insurance--1.2%
Fondiaria-Sai SpA 551,365 14,945,596
Oil, Gas & Consumable
Fuels--2.0%
ENI SpA 1,017,281 26,244,864
Total Common Stocks in Italy 92,553,752
Japan--18.4%
Automobiles--3.0%
Honda Motor Co., Ltd. 132,500 6,540,700
Nissan Motor Co., Ltd. 1,223,600 12,124,472
Toyota Motor Corp. 572,200 20,500,262
---------------
39,165,434
Beverages--1.9%
Asahi Breweries Ltd. 2,108,600 25,156,296
Capital Markets--1.0%
Mitsubishi Securities Co., Ltd. 1,511,000 13,404,142
Commercial Banks--3.2%
Mitsubishi Tokyo Financial Group, Inc. 4,837 41,075,869
Commercial Services &
Supplies--0.8%
Toppan Printing Co., Ltd. 1,016,000 10,773,396
Consumer Finance--1.7%
Takefuji Corp. 332,900 22,531,811
Household Durables--1.0%
Sekisui House Ltd. 1,294,000 13,090,642
Leisure Equipment &
Products--1.0%
Yamaha Corp. 796,800 12,439,888
Pharmaceuticals--1.7%
Takeda Pharmaceutical Co., Ltd. 452,800 22,474,506
Software--0.7%
Namco Ltd. 644,800 8,588,799
Tobacco--0.1%
Japan Tobacco, Inc. 100 1,335,619
Wireless Telecommunication
Services--2.3%
KDDI Corp. 1,297 6,004,521
NTT DoCoMo, Inc. 15,670 23,191,770
---------------
29,196,291
Total Common Stocks in Japan 239,232,693
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Schedule of Investments (continued) (in U.S. dollars)
Shares
Country Industry++ Common Stocks Held Value
Netherlands--7.3%
Air Freight & Logistics--1.1%
TNT NV 556,462 $ 14,113,655
Commercial Services &
Supplies--1.3%
Buhrmann NV (e) 1,766,687 17,474,374
Diversified Financial
Services--1.3%
ING Groep NV CVA 594,951 16,832,936
Food & Staples Retailing--1.3%
Koninklijke Ahold NV (g) 1,832,378 15,084,952
Koninklijke Ahold NV (a)(b)(g) 285,540 2,218,931
---------------
17,303,883
Household Durables--1.2%
Koninklijke Philips Electronics NV 660,741 15,326,420
Insurance--1.1%
Aegon NV 1,071,402 13,891,907
Total Common Stocks in the
Netherlands 94,943,175
Norway--3.7%
Diversified Telecommunication
Services--1.8%
Telenor ASA 2,825,030 22,577,598
Oil, Gas & Consumable
Fuels--1.9%
Statoil ASA 1,228,039 25,076,204
Total Common Stocks in Norway 47,653,802
Portugal--1.2%
Electric Utilities--1.2%
Energias de Portugal SA 6,130,287 15,437,042
Total Common Stocks in Portugal 15,437,042
Singapore--1.2%
Marine--1.2%
Neptune Orient Lines Ltd. 6,795,000 15,222,604
Total Common Stocks in Singapore 15,222,604
South Korea--0.9%
Diversified Telecommunication
Services--0.9%
KT Corp. (a) 558,604 12,009,986
Total Common Stocks in
South Korea 12,009,986
Spain--2.2%
Oil, Gas & Consumable
Fuels--2.2%
Repsol YPF SA 1,135,951 29,100,149
Total Common Stocks in Spain 29,100,149
Sweden--2.1%
Diversified Financial
Services--1.4%
Investor AB 1,304,245 17,704,041
Machinery--0.7%
Volvo AB Class B 232,916 9,484,923
Total Common Stocks in Sweden 27,188,964
Shares
Country Industry++ Common Stocks Held Value
Switzerland--5.7%
Capital Markets--1.9%
Credit Suisse Group 627,085 $ 24,743,694
Chemicals--1.0%
Clariant AG (g) 971,107 12,924,342
Construction Materials--2.0%
Holcim Ltd. 421,536 25,665,294
Insurance--0.8%
Swiss Life Holding (g) 80,242 10,597,882
Total Common Stocks in Switzerland 73,931,212
United Kingdom--20.5%
Aerospace & Defense--1.9%
BAE Systems Plc 4,833,989 24,867,447
Commercial Banks--7.3%
Barclays Plc 2,357,032 23,468,924
HBOS Plc 2,079,780 32,078,342
Royal Bank of Scotland Group Plc 1,318,831 39,855,692
---------------
95,402,958
Food & Staples Retailing--1.1%
Boots Group Plc 1,248,982 13,633,806
Food Products--1.2%
Cadbury Schweppes Plc 1,613,221 15,412,203
Industrial Conglomerates--1.1%
Smiths Group Plc 906,060 14,925,061
Insurance--1.8%
Prudential Plc 2,553,055 22,709,330
Pharmaceuticals--2.1%
GlaxoSmithKline Plc 1,138,686 27,574,203
Specialty Retail--1.3%
Kesa Electricals Plc 3,227,604 16,169,839
Transportation
Infrastructure--1.3%
BAA Plc 1,563,447 17,374,747
Wireless Telecommunication
Services--1.4%
Vodafone Group Plc 7,293,619 17,779,750
Total Common Stocks in the
United Kingdom 265,849,344
Total Common Stocks
(Cost--$1,097,926,807)--97.2% 1,261,937,652
Beneficial
Other Interests (f) Interest
United Kingdom--0.0%
Electric Utilities--0.0%
British Energy Plc Deferred Shares $ 70,000 0
Total Other Interests
(Cost--$0)--0.0% 0
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Schedule of Investments (concluded) (in U.S. dollars)
Beneficial
Short-Term Securities Interest Value
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (c) $11,104,396 $ 11,104,396
Merrill Lynch Liquidity Series, LLC
Money Market Series (c)(d) 15,525,000 15,525,000
Face
Amount
Time Deposits
Brown Brothers Harriman & Co.,
2.67% due 6/30/2005 $ 47,525 47,525
Total Short-Term Securities
(Cost--$26,676,921)--2.0% 26,676,921
Total Investments
(Cost--$1,124,603,728*)--99.2% 1,288,614,573
Other Assets Less Liabilities--0.8% 10,112,502
---------------
Net Assets--100.0% $ 1,298,727,075
===============
* The cost and unrealized appreciation (depreciation) of investments as of June 30,
2005, as computed for federal income tax purposes, were as follows:
Aggregate cost $ 1,142,640,342
================
Gross unrealized appreciation $ 181,287,191
Gross unrealized depreciation (35,312,960)
----------------
Net unrealized appreciation $ 145,974,231
================
++ 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) Depositary Receipts.
(b) Restricted security as to resale, representing 0.2% of net assets, was as follows:
Acquisition
Issue Date Cost Value
Koninklijke Ahold NV* 12/11/2003 $1,696,449 $2,218,931
* 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 $11,104,396 $414,545
Merrill Lynch Liquidity Series, LLC
Money Market Series $15,525,000 $ 33,492
(d) Security was purchased with the cash proceeds from securities loans.
(e) Security, or a portion of security, is on loan.
(f) Other interests represent beneficial interest in liquidation trusts and other
reorganization entities and are non-income producing.
(g) Non-income producing security.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Statement of Assets and Liabilities
As of June 30, 2005
Assets
Investments in unaffiliated securities, at value (including securities loaned
of $14,836,560) (identified cost--$1,097,974,332) $ 1,261,985,177
Investments in affiliated securities, at value (identified cost--$26,629,396) 26,629,396
Foreign cash (cost--$10,164,382) 10,196,319
Cash 1,174
Receivables:
Securities sold $ 21,474,009
Capital shares sold 10,721,977
Dividends 5,456,500
Interest (including $913 from affiliates) 50,428
Securities lending 1,503 37,704,417
---------------
Prepaid expenses 37,939
---------------
Total assets 1,336,554,422
---------------
Liabilities
Collateral on securities loaned, at value 15,525,000
Payables:
Securities purchased 18,920,744
Capital shares redeemed 1,511,465
Investment adviser 708,971
Other affiliates 388,411
Distributor 240,269 21,769,860
---------------
Accrued expenses 532,487
---------------
Total liabilities 37,827,347
---------------
Net Assets
Net assets $ 1,298,727,075
===============
Net Assets Consist of
Paid-in capital $ 1,121,828,525
Undistributed investment income--net $ 21,122,795
Accumulated realized capital losses--net (8,128,660)
Unrealized appreciation--net 163,904,415
---------------
Total accumulated earnings--net 176,898,550
---------------
Net Assets $ 1,298,727,075
===============
Net Asset Value
Class A--Based on net assets of $254,206,732 and 9,653,936 shares outstanding++ $ 26.33
===============
Class B--Based on net assets of $62,261,288 and 2,400,609 shares outstanding++ $ 25.94
===============
Class C--Based on net assets of $164,317,251 and 6,387,599 shares outstanding++ $ 25.72
===============
Class I--Based on net assets of $800,990,451 and 30,325,916 shares outstanding++ $ 26.41
===============
Class R--Based on net assets of $16,951,353 and 647,214 shares outstanding++ $ 26.19
===============
++ Unlimited shares of no par value authorized.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Statement of Operations
For the Year Ended June 30, 2005
Investment Income
Dividends (net of $3,902,409 foreign withholding tax) $ 34,959,428
Interest (including $414,545 from affiliates) 613,610
Securities lending--net 33,492
---------------
Total income 35,606,530
---------------
Expenses
Investment advisory fees $ 8,272,184
Transfer agent fees--Class I 1,654,674
Account maintenance and distribution fees--Class C 1,098,250
Account maintenance fees--Class A 514,000
Account maintenance and distribution fees--Class B 475,414
Transfer agent fees--Class A 461,915
Accounting services 384,510
Custodian fees 309,135
Transfer agent fees--Class C 296,840
Transfer agent fees--Class B 127,913
Professional fees 125,780
Registration fees 109,680
Printing and shareholder reports 102,654
Account maintenance and distribution fees--Class R 56,763
Trustee's fees and expenses 36,371
Transfer agent fees--Class R 25,970
Pricing fees 14,933
Other 46,455
---------------
Total expenses 14,113,441
---------------
Investment income--net 21,493,089
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain on:
Investments--net 131,466,196
Foreign currency transactions--net 320,828 131,787,024
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 2,449,416
Foreign currency transactions--net (103,292) 2,346,124
--------------- ---------------
Total realized and unrealized gain--net 134,133,148
---------------
Net Increase in Net Assets Resulting from Operations $ 155,626,237
===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Statements of Changes in Net Assets
For the Year Ended
June 30,
Increase (Decrease) in Net Assets: 2005 2004
Operations
Investment income--net $ 21,493,089 $ 8,733,865
Realized gain--net 131,787,024 49,687,866
Change in unrealized appreciation/depreciation--net 2,346,124 115,375,042
--------------- ---------------
Net increase in net assets resulting from operations 155,626,237 173,796,773
--------------- ---------------
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 490,787,300 (13,809,390)
--------------- ---------------
Redemption Fees
Redemption fees 7,327 --
--------------- ---------------
Net Assets
Total increase in net assets 632,594,555 145,651,259
Beginning of year 666,132,520 520,481,261
--------------- ---------------
End of year* $ 1,298,727,075 $ 666,132,520
=============== ===============
* Undistributed investment income--net $ 21,122,795 $ 7,278,099
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Financial Highlights
Class A
The following per share data and ratios have been derived For the Year Ended June 30,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of year $ 23.48 $ 17.98 $ 20.55 $ 22.89 $ 27.27
---------- ---------- ---------- ---------- ----------
Investment income--net .50++ .25++ .39++ .23++ .31
Realized and unrealized gain (loss)--net 2.77** 5.70 (2.96) (.70) (2.41)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.27 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 year $ 26.33 $ 23.48 $ 17.98 $ 20.55 $ 22.89
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 14.29% 33.67% (12.55%) (1.42%) (8.00%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.33% 1.33% 1.32% 1.38% 1.31%
========== ========== ========== ========== ==========
Investment income--net 1.94% 1.20% 2.30% 1.19% 2.05%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 254,207 $ 42,238 $ 49,395 $ 97,769 $ 52,110
========== ========== ========== ========== ==========
Portfolio turnover 70% 75% 89% 45% 26%
========== ========== ========== ========== ==========
* Total investment returns exclude the effect of sales charges.
** Includes redemption fees, which are less than $.01 per share.
++ Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Financial Highlights (continued)
Class B
For the Period
Oct. 6, 2000++
The following per share data and ratios have been derived For the Year Ended June 30, to June,30,
from information provided in the financial statements. 2005 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--net .32++++ .17++++ .29++++ .10++++ .39
Realized and unrealized gain (loss)--net 2.74*** 5.57 (3.02) (.71) (.82)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.06 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 $ 25.94 $ 23.24 $ 17.84 $ 20.57 $ 23.09
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 13.45% 32.65% (13.27%) (2.10%) (2.01%)+++
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.12% 2.11% 2.06% 2.12% 2.18%*
========== ========== ========== ========== ==========
Investment income--net 1.27% .81% 1.74% .48% 1.49%*
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 62,261 $ 19,852 $ 5,343 $ 2,064 $ 1,016
========== ========== ========== ========== ==========
Portfolio turnover 70% 75% 89% 45% 26%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Includes redemption fees, which are less than $.01 per share.
++ Commencement of operations.
++++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Financial Highlights (continued)
Class C
For the Period
Oct. 6, 2000++
The following per share data and ratios have been derived For the Year Ended June 30, to June,30,
from information provided in the financial statements. 2005 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--net .37++++ .29++++ .17++++ .09++++ .60
Realized and unrealized gain (loss)--net 2.65*** 5.41 (2.86) (.70) (1.05)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.02 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 $ 25.72 $ 23.09 $ 17.70 $ 20.39 $ 22.91
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 13.41% 32.58% (13.19%) (2.10%) (2.11%)+++
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.12% 2.14% 2.07% 2.06% 1.70%*
========== ========== ========== ========== ==========
Investment income--net 1.45% 1.38% 1.02% .47% 1.76%*
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 164,317 $ 38,608 $ 2,672 $ 2,285 $ 762
========== ========== ========== ========== ==========
Portfolio turnover 70% 75% 89% 45% 26%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Includes redemption fees, which are less than $.01 per share.
++ Commencement of operations.
++++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Financial Highlights (continued)
Class I
The following per share data and ratios have been derived For the Year Ended June 30,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of year $ 23.54 $ 18.03 $ 20.63 $ 22.97 $ 27.33
---------- ---------- ---------- ---------- ----------
Investment income--net .52++ .31++ .30++ .29++ .48
Realized and unrealized gain (loss)--net 2.83** 5.71 (2.85) (.70) (2.53)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.35 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 year $ 26.41 $ 23.54 $ 18.03 $ 20.63 $ 22.97
========== ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share 14.59% 34.00% (12.38%) (1.14%) (7.79%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.08% 1.08% 1.07% 1.14% 1.06%
========== ========== ========== ========== ==========
Investment income--net 2.07% 1.47% 1.78% 1.42% 1.78%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of year (in thousands) $ 800,990 $ 559,530 $ 463,071 $ 617,289 $1,024,993
========== ========== ========== ========== ==========
Portfolio turnover 70% 75% 89% 45% 26%
========== ========== ========== ========== ==========
* Total investment returns exclude the effect of sales charges.
** Includes redemption fees, which are less than $.01 per share.
++ Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Financial Highlights (concluded)
Class R
For the Period
For the Year Ended January 3, 2003++
The following per share data and ratios have been derived June 30, to June 30,
from information provided in the financial statements. 2005 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 23.39 $ 17.98 $ 16.79
------------ ------------ ------------
Investment income--net*** .50 .52 .32
Realized and unrealized gain--net 2.70 5.38 .87
------------ ------------ ------------
Total from investment operations 3.20 5.90 1.19
------------ ------------ ------------
Less dividends from investment income--net (.40) (.49) --
------------ ------------ ------------
Net asset value, end of period $ 26.19 $ 23.39 $ 17.98
============ ============ ============
Total Investment Return**
Based on net asset value per share 14.03% 33.43% 7.09%+++
============ ============ ============
Ratios to Average Net Assets
Expenses 1.58% 1.60% 1.55%*
============ ============ ============
Investment income--net 1.96% 2.34% 3.04%*
============ ============ ============
Supplemental Data
Net assets, end of period (in thousands) $ 16,951 $ 5,905 --+++++
============ ============ ============
Portfolio turnover 70% 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, 2005
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch International Value Fund (the "Fund") is a series 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 shareholders
may vote on certain changes to the Class A distribution plan). Income,
expenses (other than expenses attributable to a specific class) and realized
and unrealized gains and losses are allocated daily to each class based on its
relative net assets. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available
asked price for short positions. In cases where equity securities are traded
on more than one exchange, the securities are valued on the exchange
designated as the primary market by or under the authority of the Board of
Trustees of the Trust. Long positions traded in the over-the-counter ("OTC")
market, Nasdaq Small Cap or Bulletin Board are valued at the last available
bid price or yield equivalent obtained from one or more dealers or pricing
services approved by the Board of Trustees of the Trust. Short positions
traded in the OTC market are valued at the last available asked price.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
Options written are valued at the last sale price in the case of exchange-
traded options or, in the case of options traded in the OTC market, the last
asked price. Options purchased are valued at their last sale price in the case
of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Swap agreements are valued 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, 2005
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, $6,168,142 has been reclassified between accumulated realized
loss and undistributed net investment income and $82,484 has been reclassified
between paid-in capital 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, 2005
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, 2005, FAMD earned underwriting discounts and
direct commissions and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), an affiliate of FAM, earned dealer concessions on sales of the
Fund's Class A and Class I Shares as follows:
FAMD MLPF&S
Class A $ 29,840 $ 365,596
Class I $ 870 $ 1,479
For the year ended June 30, 2005, MLPF&S received contingent deferred sales
charges of $26,242 and $25,251 relating to transactions in Class B and Class C
Shares, respectively.
In addition, MLPF&S received $15,225 in commissions on the execution of
portfolio security transactions for the Fund for the year ended June 30, 2005.
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, 2005, MLIM, LLC
received $14,565 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.
For the year ended June 30, 2005, the Fund reimbursed FAM $25,676 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, ML & Co., and/or MLIM, LLC.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Notes to Financial Statements (continued)
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 2005 were $1,201,063,935 and $743,447,821, respectively.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share transactions
was $490,787,300 and $(13,809,390) for the years ended June 30, 2005 and June
30, 2004, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
Shares sold 3,016,135 $ 76,038,050
Automatic conversion of shares 185,640 4,674,577
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 9,930,985 231,183,392
Shares redeemed (2,076,121) (52,055,114)
--------------- ---------------
Net increase 7,854,864 $ 179,128,278
=============== ===============
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 Year Dollar
Ended June 30, 2005 Shares Amount
Shares sold 1,667,483 $ 41,690,456
Shares issued resulting from
reorganization 683,941 15,152,519
Shares issued to shareholders in
reinvestment of dividends 15,432 335,808
--------------- ---------------
Total issued 2,366,856 57,178,783
--------------- ---------------
Automatic conversion of shares (187,857) (4,674,577)
Shares redeemed (632,514) (15,904,272)
--------------- ---------------
Total redeemed (820,371) (20,578,849)
--------------- ---------------
Net increase 1,546,485 $ 36,599,934
=============== ===============
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 Year Dollar
Ended June 30, 2005 Shares Amount
Shares sold 5,094,114 $ 125,104,120
Shares issued resulting from
reorganization 522,287 11,476,831
Shares issued to shareholders in
reinvestment of dividends 38,730 835,790
--------------- ---------------
Total issued 5,655,131 137,416,741
Shares redeemed (939,322) (23,474,119)
--------------- ---------------
Net increase 4,715,809 $ 113,942,622
=============== ===============
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 I Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
Shares sold 7,976,396 $ 203,555,648
Shares issued resulting from
reorganization 5,054,773 113,227,053
Shares issued to shareholders in
reinvestment of dividends 491,341 10,991,995
--------------- ---------------
Total issued 13,522,510 327,774,696
Shares redeemed (6,964,707) (176,506,186)
--------------- ---------------
Net increase 6,557,803 $ 151,268,510
=============== ===============
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, 2005
Notes to Financial Statements (concluded)
Class R Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
Shares sold 586,056 $ 14,728,902
Shares issued to shareholders in
reinvestment of dividends 5,354 117,095
--------------- ---------------
Total issued 591,410 14,845,997
Shares redeemed (196,639) (4,998,041)
--------------- ---------------
Net increase 394,771 $ 9,847,956
=============== ===============
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.
5. Short-Term Borrowings:
The Trust, on behalf of 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, which expires November 2005. 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 year ended June 30, 2005.
6. Commitments:
At June 30, 2005, the Fund had entered into foreign exchange contracts, under
which it had agreed to purchase and sell various foreign currencies with
approximate values of $3,440,000 and $14,257,000, respectively.
7. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended June 30,
2005 and June 30, 2004 was as follows:
6/30/2005 6/30/2004
Distributions paid from:
Ordinary income $ 13,826,309 $ 14,336,124
--------------- ---------------
Total taxable distributions $ 13,826,309 $ 14,336,124
=============== ===============
As of June 30, 2005, the components of accumulated earnings on a tax basis
were as follows:
Undistributed ordinary income--net $ 24,502,247
Undistributed long-term capital gains--net 65,463,929
---------------
Total undistributed earnings--net 89,966,176
Capital loss carryforward (58,864,370)*
Unrealized gains--net 145,796,744**
---------------
Total accumulated earnings--net $ 176,898,550
===============
* On June 30, 2005, the Fund had a capital loss carryforward
of $58,864,370, of which $16,139,328 expires in 2009 and
$42,725,042 expires in 2010. Subject to limitations, this amount
will be available to offset like amounts of future 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 forward foreign currency contracts, the realization for tax
purposes of unrealized gains on investments in passive foreign investment
companies and the limitation on the utilization of capital loss
carryforwards for tax purposes.
8. 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 $24,714,400
of net unrealized appreciation, $88,197,407 of accumulated net realized
capital losses and $72,710 of distributions in excess of net investment
income, 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 JUNE 30, 2005
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, 2005,
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the periods then ended.
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.
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. We were not engaged to perform an audit of the Fund's internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes
of expressing an opinion on the effectiveness of the Fund's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. Our
procedures included confirmation of securities owned as of June 30, 2005, by
correspondence with the custodian and others. 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, 2005, 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 five years in the periods then ended in conformity with U.S. generally
accepted accounting principles.
(Ernst & Young LLP)
Philadelphia, Pennsylvania
August 16, 2005
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 during the fiscal year ended June 30, 2005:
Record Date August 11, 2004 December 14, 2004
Payable Date August 17, 2004 December 17, 2004
Qualified Dividend Income for Individuals 72.58%* 95.52%*
Foreign Source Income 72.58% 95.52%
Foreign Taxes Paid Per Share $0.059101 $0.021816
* The Fund hereby designates the percentage indicated above or the maximum amount
allowable by law.
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.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Officers and Trustees
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
Interested Trustee
Robert C. Doll, Jr.* President 2005 to President of the MLIM/FAM-advised funds since 125 Funds None
P.O. Box 9011 and present 2005; President of MLIM and FAM since 2001; 169 Portfolios
Princeton, Trustee Co-Head (Americas Region) thereof from 2000
NJ 08543-9011 to 2001 and Senior Vice President from 1999
Age: 50 to 2001; President and Director of Princeton
Services, Inc. ("Princeton Services") since 2001;
President of Princeton Administrators, L.P.
("Princeton Administrators") since 2001; Chief
Investment Officer of Oppenheimer Funds, Inc.
in 1999 and Executive Vice President thereof
from 1991 to 1999.
* Mr. Doll is a director, trustee or member of an advisory board of certain
other investment companies for which MLIM or FAM acts as investment adviser.
Mr. Doll is an "interested person," as defined in the Investment Company Act,
of the Fund based on his current positions with MLIM, FAM, Princeton Services
and Princeton Administrators. Trustees serve until their resignation, removal
or death, or until December 31 of the year in which they turn 72. As Fund
President, Mr. Doll serves at the pleasure of the Board of Trustees.
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 the
NJ 08543-9095 Board, Berkshire Holding Corporation since
Age: 61 1980; Partner, Squire, Sanders & Dempsey from
1980 to 1993.
Kenneth A. Froot Trustee 2005 to Professor, Harvard University since 1992; 38 Funds None
P.O. Box 9095 present Professor, Massachusetts Institute of 55 Portfolios
Princeton, Technology from 1986 to 1992.
NJ 08543-9095
Age: 47
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: 70 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 University Management
Company from 1992 to 2004, Vice Chairman
thereof since 1998 to 2004 and Director Emeritus
thereof since 2004; 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; Vice Chairman thereof from
2002 to 2005 and Chairman thereof since 2005;
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.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Officers and Trustees (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
Independent Trustees* (concluded)
Herbert I. London Trustee 2002 to John M. Olin Professor of Humanities, New York 38 Funds None
P.O. Box 9095 present University since 1993 and Professor thereof 55 Portfolios
Princeton, since 1980; President, Hudson Institute since
NJ 08543-9095 1997 and Trustee thereof since 1980; Dean,
Age: 66 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.
Roberta Cooper Ramo Trustee 2002 to Shareholder, Modrall, Sperling, Roehl, Harris & 38 Funds None
P.O. Box 9095 present Sisk, P.A. since 1993; President, American Bar 55 Portfolios
Princeton, Association from 1995 to 1996 and Member of
NJ 08543-9095 the Board of Governors thereof from 1994 to 1997;
Age: 62 Shareholder, Poole, Kelly & Ramo, Attorneys at Law,
P.C. from 1977 to 1993; 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; Vice President,
American Law Institute since 2004.
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 1992
NJ 08543-9095 to 1995; Chairman of Salomon Brothers Equity
Age: 68 Mutual Funds from 1992 to 1995; regular
columnist with Forbes Magazine from 1992 to
2002; Director of Stock Research and U.S. Equity
Strategist at Salomon Brothers, Inc. from 1975 to
1991; Trustee, Commonfund from 1980 to 2001.
Stephen B. Swensrud Trustee 2002 to Chairman of Fernwood Advisors, Inc. (investment 39 Funds None
P.O. Box 9095 present adviser) since 1996; Principal, Fernwood 56 Portfolios
Princeton, Associates (financial consultants) since 1975;
NJ 08543-9095 Chairman of R.P.P. Corporation (manufacturing
Age: 72 company) since 1978; Director of International
Mobile Communications, Incorporated (telecom-
munications company) since 1998.
* Trustees serve until their resignation, removal or death, or until December 31 of the year
in which they turn 72.
** Co-Chairman of the Board and the Audit Committee.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005
Officers and Trustees (concluded)
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 1996 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
P.O. Box 9011 President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
Princeton, and and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999; Vice
NJ 08543-9011 Treasurer 1999 to President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from
Age: 45 present 1990 to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004.
James A. Macmillan Vice 2000 to Managing Director of MLIM since January 2001; Director (Equity Fund Management)
P.O. Box 9011 President present of an affiliate of MLIM since 1999.
Princeton,
NJ 08543-9011
Age: 40
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
P.O. Box 9011 Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief
Princeton, Officer Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
NJ 08543-9011 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Age: 53 Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance Officer
at Prudential Financial from 1995 to 2000; Senior Counsel in the Commission's
Division of Enforcement in Washington, D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
P.O. Box 9011 present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
Princeton, and Princeton Services since 2004.
NJ 08543-9011
Age: 45
* Officers of the Fund serve at the pleasure of the Board of Trustees.
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
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.
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 JUNE 30, 2005
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 (resigned as of October 1, 2004), (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, 2005 - $34,000
Fiscal Year Ending June 30, 2004 - $30,000
(b) Audit-Related Fees - Fiscal Year Ending June 30, 2005 - $0
Fiscal Year Ending June 30, 2004 - $0
(c) Tax Fees - Fiscal Year Ending June 30, 2005 - $5,700
Fiscal Year Ending June 30, 2004 - $5,200
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending June 30, 2005 - $0
Fiscal Year Ending June 30, 2004 - $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, 2005 - $5,700
Fiscal Year Ending June 30, 2004 - $5,200
(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) - $0, 0%
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch International Value Fund of Mercury Funds II
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch International Value Fund of Mercury Funds II
Date: August 19, 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.,
Chief Executive Officer of
Merrill Lynch International Value Fund of Mercury Funds II
Date: August 19, 2005
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch International Value Fund of Mercury Funds II
Date: August 19, 2005