UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-04182
Name of Fund: Merrill Lynch International Value Fund of Mercury Funds II
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., 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: 06/30/06
Date of reporting period: 07/01/05 - 12/31/05
Item 1 - Report to Stockholders
Merrill Lynch
International Value Fund
Of Mercury Funds II
Semi-Annual Report
December 31, 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 1-800-637-3863; (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 December 31, 2005
Percent of
Ten Largest Equity Holdings Net Assets
Toyota Motor Corp. 2.8%
Total SA 2.6
HBOs Plc 2.4
ENI SpA 2.4
Siemens AG 2.3
RWE AG 2.3
Fortum Oyj 2.3
E.ON AG 2.3
ING Groep NV CVA 2.3
UniCredito Italiano SpA 2.2
Percent of
Five Largest Industries Net Assets
Commercial Banks 22.9%
Oil, Gas & Consumable Fuels 10.0
Insurance 8.0
Electric Utilities 6.5
Automobiles 6.1
For Fund compliance purposes, the Fund's industry classifications
refer to 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
industry sub-classifications for reporting ease.
Percent of
Total
Geographic Allocation Investments
Japan 21.2%
United Kingdom 19.6
Germany 12.7
France 9.5
Italy 7.5
Switzerland 4.0
Australia 3.9
Netherlands 3.4
Norway 2.9
Taiwan 2.6
Finland 2.3
South Korea 2.2
Sweden 2.0
Singapore 1.7
Belgium 1.2
Hungary 1.2
Spain 1.1
Other* 1.0
* Includes portfolio holdings in short-term investments and
other interests.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
A Letter From the President
Dear Shareholder
On balance, 2005 was a year of "muddling through" for the U.S. financial
markets, as oil prices reached new record highs, the Federal Reserve Board
(the Fed) increased the target federal funds rate from 2.25% to 4.25%, the
housing market and the consumer finally showed some signs of slowing, and
Hurricanes Katrina and Rita ravaged the Gulf Coast, causing yet untold
economic damage.
Although they struggled, stocks managed to post their third straight year
of positive performance. The year was equally uncertain for fixed income
markets, which were bemused by a flattening yield curve and a number of
significant credit events that brought a slowdown in high yield market
returns. Notably, the one-year results for the major asset classes - stocks,
bonds and cash - were the closest they have been in more than 100 years. For
the 12- and six-month periods ended December 31, 2005, most of the major
market indexes managed to land in positive territory:
Total Returns as of December 31, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 5.77% + 4.91%
Small-cap U.S. equities (Russell 2000 Index) + 5.88 + 4.55
International equities (MSCI Europe Australasia Far East Index) +14.88 +13.54
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.08 + 2.43
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.60 + 3.51
High yield bonds (Credit Suisse First Boston High Yield Index) + 1.48 + 2.26
In hindsight, these numbers are reasonably good given the headwinds facing
the markets in 2005. U.S. equities found support in strong corporate earnings,
low core inflation and healthy company balance sheets. Strength in the
global economy and non-U.S. equity markets helped, as did robust dividend-
distribution, share-buyback and merger-and-acquisition activity. International
stocks had an excellent year, with many markets benefiting from strong
economic statistics, trade surpluses and solid finances. In the U.S. bond
market, long-term yields remained low and, at year-end, the Treasury curve
appeared ready to invert.
As 2006 begins, the largest question marks center on the Fed's future moves,
the U.S. consumer's ability (or inability) to continue spending, the direction
of the U.S. dollar following a year of appreciation and the potential for
continued strong economic and corporate earnings growth. As you turn the
calendar and consider how these factors might impact your investments, remember
that the new year is a good time to meet with your financial advisor to review
your financial goals, and to make portfolio changes where necessary. For
investing insights and timely "food for thought" for investors, we also invite
you to visit Shareholder magazine at www.mlim.ml.com/shareholdermagazine.
As always, we thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the new year
and beyond.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Trustee
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
A Discussion With Your Fund's Portfolio Managers
The Fund provided positive total returns for the period as we continued to
uncover attractive investment opportunities throughout Europe and Japan.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended December 31, 2005, Merrill Lynch International
Value Fund's Class A, Class B, Class C, Class I and Class R Shares had total
returns of +12.25%, +11.78%, +11.82%, +12.40% and +12.13%, 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 and 7
of this report to shareholders.) For the same period, the Fund's benchmark,
the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI
EAFE) Index, returned +14.88%, while the Lipper International Multi-Cap Value
Funds category posted an average return of +14.82%. (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. International multi-cap funds typically have a
certain percentage of their assets invested in companies strictly outside the
United States.)
International equity markets generally performed well during the second half
of 2005. After a slow start at the beginning of 2005, shares of Japanese
companies rallied strongly in the third quarter, driven by improved corporate
profitability and a recovery from all-time low valuations. The clear outcome
of the September re-election of Prime Minister Koizumi, with an even stronger
mandate for reform, was considered a roaring success by investors and led the
way for the strongest bull market Japan has seen in approximately 20 years.
European markets continued their upward trend amid the strong global economy,
low interest rates and robust corporate earnings.
What factors most influenced Fund performance?
Poor stock selection in Japan was the primary negative contributor to Fund
performance. The Japanese equity market rose more than 40% in the past six
months, recording its best performance since 1973. Most of the Fund's
underperformance occurred in the fourth quarter, as activity across the
Japanese market changed dramatically. Stocks with low valuations, which
significantly outperformed high-valuation shares in recent years and over the
past 30 years, became unfashionable. The market was largely dominated by the
stocks of relatively expensive and speculative companies. Consequently, the
performance of the Fund's holdings in Japan (which tend to be low valuation
shares) lagged in the fourth quarter.
From a sector perspective, the Fund's relative results were hindered by a
significant underweight position in the materials sector, which rose 28% as a
result of high commodity prices, and an overweight position in energy as oil
prices declined later in the period.
Fund performance also was hindered by adverse stock selection within the
retail sector, highlighted by disappointing performance on the part of KESA
Electricals Plc, an electronics retailer; Carrefour, SA, a French hypermarket;
and Koninklijke Ahold NV, a Dutch food retailer. KESA and Carrefour suffered
due to a sluggish retail environment in Europe that has led to increased
competition and limited pricing power. Shares of Koninklijke Ahold fell amid
concerns that the restructuring of its business in the United States would
reduce the company's profit margins. Also hampering performance relative to
the benchmark were the portfolio's holdings in Belgacom SA, a Belgian
telecommunications provider; Enel SpA., an Italian multi-utility; and Royal
Bank of Scotland.
Conversely, the Fund's best-performing stocks were two Japanese financial
companies, Mitsubishi UFJ Financial Group, Inc. (MUFG) and Sumitomo Mitsui
Financial Group, Inc. These banks benefited from an improving Japanese economy
and domestic reflation. The Fund's holdings in European financials also
enhanced relative returns, with robust performance from UniCredito Italiano
SpA, an Italian bank; Credit Suisse Group, an investment bank; and Investor
AB, a Swedish investment company. Unicredito performed well after its
operating results showed decent volume and loan growth, with the underlying
Italian business performing well. In addition, the market enthusiastically
received the company's acquisition of German bank HVB, which should enable the
bank to consolidate its strong position in the rapidly growing banking markets
in central and eastern Europe. Shares of Credit Suisse Group rose after the
company's solid results reflected the favorable trading environment and
continued improvement in its troubled investment bank arm, CSFB. Investor AB
benefited from the strong performance of its underlying portfolio of
investments. Other positive contributors to Fund performance included BAE
Systems Plc, a U.K. defense contractor; Arcelor, a steel producer in
Luxembourg; and Toyota Motor Corp., a Japanese automobile manufacturer.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
What changes were made to the portfolio during the period?
For the most part, portfolio transactions during the past six months were
driven by stock-specific considerations rather than an overriding investment
theme. We took profits in some holdings that had outperformed. Within the
materials sector, we exited positions in Arcelor, Holcim Ltd. and PaperlinX
Ltd. after they performed strongly and reached our price targets. We also
reduced the Fund's weighting in the commercial services and supplies sector by
taking profits in Buhrmann NV, a Dutch office stationary company; Toppan
Printing Co., Ltd. in Japan; and GlaxoSmithKline Plc in the pharmaceutical
sector.
During the period, we added to our holdings in the insurance sector through
the purchases of Allianz AG, Aviva Plc and Zurich Financial Services. In
addition, we established new positions in three Asian technology companies,
Lite-On Technology Corp., Samsung Electronics Co., Ltd. and Canon, Inc., given
the stocks' attractive valuations.
How would you characterize the Fund's position at the close of the period?
Relative to the benchmark MSCI EAFE Index, the Fund ended the period
overweight in financials, underweight in growth and cyclical stocks, and
neutral in defensive sectors. Specifically, the portfolio was overweight in
banks, insurance, diversified financials, energy, utilities and automobile
manufacturers, and underweight in pharmaceuticals, food, beverage & tobacco,
media and materials.
Business confidence has risen markedly in Continental Europe, recently
signaling that economic growth has picked up after the slowdown in the first
half of the year. The corporate sector is now in good shape after years of
restructuring (which is ongoing). Companies have been focused on cost cutting
and corporate efficiency but are increasingly looking for suitable acquisition
candidates now that they have regained balance sheet strength. Earnings growth
among European companies is still strong and earnings revisions remain
positive. Despite their strong performance, the valuations of European stocks
remain attractive, and in the absence of a shock from an external source, we
anticipate that European equities will continue to perform well.
The Japanese economy has delivered a series of positive surprises, with
capital spending, corporate profitability and employment pointing to a
sustained domestic recovery. Japanese government bond yields have risen in
anticipation of a stronger economy. While corporate profits were robust in the
first half of 2005, we are concerned that after three years of expansion,
companies' operating profit margins will begin to decline. This most likely
will reduce the pace of profit growth for companies through 2006. After the
40% rally in the Japanese market over the last six months of 2005, share
prices on average are no longer deeply undervalued, though they remain
inexpensive relative to bonds.
James A. Macmillan
Vice President and Senior Portfolio Manager
Rob Weatherston
Vice President and Portfolio Manager
January 19, 2006
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 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.
* Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or account
maintenance fees and are available only to eligible investors. Had the sales
charge been included, the Fund's Class I Shares' performance would have been
lower.
* 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.
The returns for Class A, Class B, Class C and Class R Shares, prior to their
respective inception dates (June 2, 1999, October 6, 2000, October 6, 2000 and
January 3, 2003), are based upon performance of the Fund's Class I Shares. The
returns for Class A, Class B, Class C and Class R Shares, however, are
adjusted to reflect the distribution and service (12b-1) fees and other fees
applicable to each class of shares.
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 or exchange. Performance data does not
reflect this potential fee. Figures shown in each of the following tables
assume reinvestment of all dividends and capital gain distributions, if any,
at net asset value on the ex-dividend date. Investment return and principal
value of shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class of shares
will vary because of the different levels of account maintenance, distribution
and transfer agency fees applicable to the classes, which are deducted from
the income available to be paid to shareholders.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Performance Data (concluded)
Recent Performance Results
6-Month 12-Month 10-Year
As of December 31, 2005 Total Return Total Return Total Return
ML International Value Fund--Class A Shares* +12.25% +10.95% +127.76%
ML International Value Fund--Class B Shares* +11.78 +10.08 +112.08
ML International Value Fund--Class C Shares* +11.82 +10.07 +111.94
ML International Value Fund--Class I Shares* +12.40 +11.22 +133.43
ML International Value Fund--Class R Shares* +12.13 +10.69 +123.38
MSCI EAFE Index** +14.88 +13.54 + 76.34
* 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.
** An unmanaged Index that measures the total returns of developed foreign stock markets in Europe,
Australasia and the Far East (in U.S. dollars).
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 12/31/05 +10.95% +5.12%
Five Years Ended 12/31/05 + 6.66 +5.51
Ten Years Ended 12/31/05 + 8.58 +8.00
Return Return
Without CDSC With CDSC++++++
Class B Shares++
One Year Ended 12/31/05 +10.08% +6.08%
Five Years Ended 12/31/05 + 5.84 +5.52
Ten Years Ended 12/31/05 + 7.81 +7.81
Return Return
Without CDSC With CDSC++++++
Class C Shares++++
One Year Ended 12/31/05 +10.07% +9.07%
Five Years Ended 12/31/05 + 5.88 +5.88
Ten Years Ended 12/31/05 + 7.80 +7.80
Class I Shares Return
One Year Ended 12/31/05 +11.22%
Five Years Ended 12/31/05 + 6.92
Ten Years Ended 12/31/05 + 8.85
Class R Shares Return
One Year Ended 12/31/05 +10.69%
Five Years Ended 12/31/05 + 6.51
Ten Years Ended 12/31/05 + 8.37
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
++ Maximum contingent deferred sales charge is 4% and is reduced
to 0% after six years.
++++ 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 DECEMBER 31, 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 12b-1 fees, and other Fund expenses. The following example (which is
based on a hypothetical investment of $1,000 invested on July 1, 2005 and held
through December 31, 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 July 1, 2005 to
July 1, December 31, December 31,
2005 2005 2005
Actual
Class A $1,000 $1,122.50 $ 6.68
Class B $1,000 $1,117.80 $10.82
Class C $1,000 $1,118.20 $10.82
Class I $1,000 $1,124.00 $ 5.37
Class R $1,000 $1,121.30 $ 7.99
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,018.50 $ 6.36
Class B $1,000 $1,014.58 $10.29
Class C $1,000 $1,014.58 $10.29
Class I $1,000 $1,019.74 $ 5.11
Class R $1,000 $1,017.26 $ 7.60
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.27% for Class A, 2.06% for Class B, 2.06% for Class C, 1.02% for Class I and 1.52% 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 DECEMBER 31, 2005
Schedule of Investments (in U.S. dollars)
Shares
Country Industry Common Stocks Held Value
Australia--3.9%
Commercial Banks--1.0%
Australia & New Zealand Banking
Group Ltd. 792,307 $ 13,919,700
Food Products--1.0%
Goodman Fielder Ltd. (d) 9,281,227 14,229,268
Oil, Gas & Consumable Fuels--1.0%
Santos Ltd. 1,593,849 14,322,345
Real Estate--0.9%
Multiplex Group 5,740,000 13,263,352
Total Common Stocks in Australia 55,734,665
Belgium--1.2%
Diversified Telecommunication
Services--1.1%
Belgacom SA 495,835 16,112,971
Leisure Equipment & Products--0.1%
AGFA-Gevaert NV 53,230 967,555
Total Common Stocks in Belgium 17,080,526
Finland--2.3%
Electric Utilities--2.3%
Fortum Oyj 1,727,634 32,279,273
Total Common Stocks in Finland 32,279,273
France--9.5%
Automobiles--0.9%
Peugeot SA 229,255 13,169,358
Commercial Banks--3.2%
BNP Paribas 308,002 24,831,839
Credit Agricole SA 653,972 20,526,781
--------------
45,358,620
Construction & Engineering--1.1%
Vinci SA 187,286 16,049,362
Food & Staples Retailing--1.7%
Carrefour SA 505,693 23,609,107
Oil, Gas & Consumable Fuels--2.6%
Total SA 148,377 37,138,879
Total Common Stocks in France 135,325,326
Germany--12.8%
Air Freight & Logistics--2.0%
Deutsche Post AG 1,135,284 27,425,295
Commercial Banks--1.2%
Deutsche Postbank AG 288,663 16,684,148
Diversified Telecommunication
Services--1.2%
Deutsche Telekom AG 1,048,727 17,417,344
Electric Utilities--2.3%
E.ON AG 308,791 31,830,481
Industrial Conglomerates--2.4%
Siemens AG 391,787 33,458,419
Insurance--1.4%
Allianz AG Registered Shares 130,564 19,703,647
Multi-Utilities--2.3%
RWE AG 452,555 33,389,930
Total Common Stocks in Germany 179,909,264
Shares
Country Industry Common Stocks Held Value
Hungary--1.3%
Oil, Gas & Consumable
Fuels--1.3%
Mol Magyar Olaj- es Gazipari Rt. 188,346 $ 17,556,594
Total Common Stocks in Hungary 17,556,594
Italy--7.6%
Commercial Banks--3.3%
Capitalia SpA 2,730,722 15,750,820
UniCredito Italiano SpA 4,513,999 30,972,578
--------------
46,723,398
Electric Utilities--1.9%
Enel SpA 3,326,888 26,025,527
Oil, Gas & Consumable
Fuels--2.4%
ENI SpA 1,217,047 33,635,390
Total Common Stocks in Italy 106,384,315
Japan--21.4%
Automobiles--5.2%
Honda Motor Co., Ltd. 377,800 21,541,930
Nissan Motor Co., Ltd. 1,223,600 12,388,393
Toyota Motor Corp. 766,700 39,754,334
--------------
73,684,657
Beverages--1.8%
Asahi Breweries Ltd. 2,033,200 24,788,400
Capital Markets--1.6%
Mitsubishi UFJ Securities Co. 1,757,000 22,031,348
Commercial Banks--3.5%
Mitsubishi UFJ Financial Group, Inc. 2,044 27,708,210
Sumitomo Mitsui Financial Group, Inc. 2,061 21,827,078
--------------
49,535,288
Consumer Finance--1.1%
Takefuji Corp. 236,700 16,063,433
Household Durables--1.1%
Sekisui House Ltd. 1,294,000 16,269,559
Insurance--0.8%
Sompo Japan Insurance, Inc. 828,000 11,189,189
Leisure Equipment
& Products--1.6%
Namco Bandai Holdings, Inc. 644,800 9,418,243
Yamaha Corp. 796,800 13,238,370
--------------
22,656,613
Office Electronics--1.8%
Canon, Inc. 430,000 25,137,677
Pharmaceuticals--1.1%
Takeda Pharmaceutical Co., Ltd. 290,000 15,675,676
Wireless Telecommunication
Services--1.8%
KDDI Corp. 1,971 11,355,418
NTT DoCoMo, Inc. 8,800 13,420,317
--------------
24,775,735
Total Common Stocks in Japan 301,807,575
Netherlands--3.4%
Diversified Financial Services--2.3%
ING Groep NV CVA 920,016 31,796,538
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Shares
Country Industry Common Stocks Held Value
Netherlands (concluded)
Food & Staples Retailing--1.1%
Koninklijke Ahold NV (d) 1,913,938 $ 14,290,532
Koninklijke Ahold NV (a)(b)(d) 285,540 2,150,116
--------------
16,440,648
Total Common Stocks in the Netherlands 48,237,186
Norway--2.9%
Commercial Banks--1.3%
DNB NOR ASA 1,688,651 17,955,750
Oil, Gas & Consumable Fuels--1.6%
Statoil ASA 995,415 22,785,944
Total Common Stocks in Norway 40,741,694
Singapore--1.7%
Commercial Banks--1.0%
DBS Group Holdings Ltd. 1,418,000 14,070,844
Marine--0.7%
Neptune Orient Lines Ltd. 4,747,000 9,592,206
Total Common Stocks in Singapore 23,663,050
South Korea--2.2%
Diversified Telecommunication
Services--0.5%
KT Corp. (a) 326,926 7,045,255
Semiconductors & Semiconductor
Equipment--1.7%
Samsung Electronics Co., Ltd. (a) 48,604 15,990,716
Samsung Electronics Co., Ltd.
(Preference Shares) 16,000 7,771,677
--------------
23,762,393
Total Common Stocks in South Korea 30,807,648
Spain--1.1%
Oil, Gas & Consumable Fuels--1.1%
Repsol YPF SA 544,652 15,849,117
Total Common Stocks in Spain 15,849,117
Sweden--2.0%
Diversified Financial Services--2.0%
Investor AB 1,653,352 28,876,427
Total Common Stocks in Sweden 28,876,427
Switzerland--4.1%
Capital Markets--2.0%
Credit Suisse Group 539,367 27,419,545
Insurance--2.1%
Zurich Financial Services AG 140,289 29,804,560
Total Common Stocks in Switzerland 57,224,105
Taiwan--2.6%
Commercial Banks--0.5%
SinoPac Financial Holdings Co., Ltd. 14,813,000 7,148,740
Computers & Peripherals--1.6%
Lite-On Technology Corp. 16,432,520 22,390,015
Semiconductors & Semiconductor
Equipment--0.5%
Vanguard International Semiconductor
Corporation 9,895,000 7,532,046
Total Common Stocks in Taiwan 37,070,801
Shares
Country Industry Common Stocks Held Value
United Kingdom--19.7%
Aerospace & Defense--1.9%
BAE Systems Plc 4,157,796 $ 27,248,732
Commercial Banks--7.9%
Barclays Plc 2,779,606 29,156,039
HBOS Plc 2,017,170 34,387,121
Lloyds TSB Group Plc 2,094,816 17,567,684
Royal Bank of Scotland Group Plc 983,970 29,645,791
---------------
110,756,635
Food & Staples Retailing--0.9%
Boots Group Plc 1,224,663 12,719,676
Food Products--1.0%
Cadbury Schweppes Plc 1,497,518 14,126,801
Insurance--3.7%
Aviva Plc 1,981,820 23,985,976
Prudential Plc 2,959,884 27,947,403
---------------
51,933,379
Specialty Retail--1.3%
Kesa Electricals Plc 4,110,505 18,347,318
Transportation
Infrastructure--1.1%
BAA Plc 1,514,181 16,298,566
Wireless Telecommunication
Services--1.9%
Vodafone Group Plc 12,511,261 26,955,593
Total Common Stocks in the
United Kingdom 278,386,700
Total Common Stocks
(Cost--$1,147,355,981)--99.7% 1,406,934,266
Beneficial
Other Interests (e) 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
Short-Term
Securities
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (c) $ 13,966,642 13,966,642
Face
Amount
Time Deposits
Brown Brothers Harriman & Co.,
3.30% due 1/03/2006 $ 12 12
Total Short-Term Securities
(Cost--$13,966,654)--1.0% 13,966,654
Total Investments
(Cost--$1,161,322,635*)--100.7% 1,420,900,920
Liabilities in Excess of Other Assets--(0.7%) (10,229,664)
---------------
Net Assets--100.0% $ 1,410,671,256
===============
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments as
of December 31, 2005, as computed for federal income tax purposes, were
as follows:
Aggregate cost $ 1,179,359,249
================
Gross unrealized appreciation $ 263,486,223
Gross unrealized depreciation (21,944,552)
----------------
Net unrealized appreciation $ 241,541,671
================
(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 $2,150,116
* Depositary Receipts.
(c) Investments in companies considered to be an affiliate of the Fund,
for purposes of 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 $ 2,862,246 $76,874
Merrill Lynch Liquidity Series, LLC
Money Market Series $(15,525,000) $ 5,175
(d) Non-income producing security.
(e) Other interests represent beneficial interest in liquidation trusts and
other reorganization entities and are non-income producing.
o For Fund compliance purposes, the Fund's industry classifications refer
to 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 industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
o Forward foreign exchange contracts as of December 31, 2005 were as follows:
Foreign Currency Settlement Unrealized
Purchased Date Depreciation
AUD 13,313,080 January 2006 $ (135,810)
------------
Total Unrealized Depreciation on Forward Foreign Exchange
Contracts--Net (USD Commitment--$9,900,272) $ (135,810)
============
Foreign Currency Settlement Unrealized
Sold Date Appreciation
EUR 237,133 January 2006 $ 945
------------
Total Unrealized Appreciation on Forward Foreign Exchange
Contracts--Net (USD Commitment--$280,718) $ 945
============
o Currency Abbreviations
AUD Australian Dollar
EUR Euro
USD U.S. Dollar
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Statement of Assets and Liabilities
As of December 31, 2005
Assets
Investments in unaffiliated securities, at value (identified cost--$1,147,355,993) $ 1,406,934,278
Investments in affiliated securities, at value (identified cost--$13,966,642) 13,966,642
Foreign cash (cost--$4,671,244) 4,671,821
Cash 5,443
Unrealized appreciation on forward foreign exchange contracts 945
Receivables:
Dividends $ 3,515,088
Capital shares sold 3,017,156
Securities sold 772,751 7,304,995
---------------
Prepaid expenses 37,939
---------------
Total assets 1,432,922,063
---------------
Liabilities
Unrealized depreciation on forward foreign exchange contracts 135,810
Payables:
Securities purchased 13,888,875
Capital shares redeemed 5,968,906
Investment adviser 808,014
Other affiliates 638,076
Distributor 287,949
Distributions to shareholders 2,307 21,594,127
---------------
Accrued expenses 520,870
---------------
Total liabilities 22,250,807
---------------
Net Assets
Net assets $ 1,410,671,256
===============
Net Assets Consist of
Paid-in capital $ 1,203,976,347
Accumulated distributions in excess of investment income--net $ (5,424,119)
Accumulated realized capital losses--net (47,387,461)
Unrealized appreciation--net 259,506,489
---------------
Total accumulated earnings--net 206,694,909
---------------
Net Assets $ 1,410,671,256
===============
Net Asset Value
Class A--Based on net assets of $279,109,511 and 10,360,021 shares outstanding++ $ 26.94
===============
Class B--Based on net assets of $69,594,402 and 2,622,000 shares outstanding++ $ 26.54
===============
Class C--Based on net assets of $203,438,612 and 7,737,875 shares outstanding++ $ 26.29
===============
Class I--Based on net assets of $834,678,309 and 30,912,465 shares outstanding++ $ 27.00
===============
Class R--Based on net assets of $23,850,422 and 890,056 shares outstanding++ $ 26.80
===============
++ Unlimited shares of no par value authorized.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Statement of Operations
For the Six Months Ended December 31, 2005
Investment Income
Dividends (net of $898,933 foreign withholding tax) $ 9,854,257
Interest (including $76,874 from affiliates) 87,932
Securities lending--net 5,175
---------------
Total income 9,947,364
---------------
Expenses
Investment advisory fees $ 5,116,920
Account maintenance and distribution fees--Class C 929,254
Transfer agent fees--Class I 744,254
Account maintenance fees--Class A 334,553
Account maintenance and distribution fees--Class B 328,608
Transfer agent fees--Class A 241,533
Accounting services 218,075
Transfer agent fees--Class C 208,905
Custodian fees 197,184
Transfer agent fees--Class B 74,194
Account maintenance and distribution fees--Class R 50,304
Printing and shareholder reports 48,859
Registration fees 45,021
Professional fees 34,071
Trustee's fees and expenses 23,098
Transfer agent fees--Class R 18,180
Pricing fees 8,318
Other 24,770
---------------
Total expenses 8,646,101
---------------
Investment income--net 1,301,263
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net 60,512,366
Foreign currency transactions--net (348,532) 60,163,834
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 95,567,440
Foreign currency transactions--net 34,634 95,602,074
--------------- ---------------
Total realized and unrealized gain--net 155,765,908
---------------
Net Increase in Net Assets Resulting from Operations $ 157,067,171
===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2005 2005
Operations
Investment income--net $ 1,301,263 $ 21,493,089
Realized gain--net 60,163,834 131,787,024
Change in unrealized appreciation/depreciation--net 95,602,074 2,346,124
--------------- ---------------
Net increase in net assets resulting from operations 157,067,171 155,626,237
--------------- ---------------
Dividends & Distributions to Shareholders
Investment income--net:
Class A (5,324,212) (953,888)
Class B (943,196) (353,852)
Class C (2,745,185) (890,953)
Class I (18,492,514) (11,510,390)
Class R (343,070) (117,226)
Realized gain--net:
Class A (19,528,047) --
Class B (4,826,983) --
Class C (13,774,731) --
Class I (59,837,586) --
Class R (1,455,288) --
--------------- ---------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (127,270,812) (13,826,309)
--------------- ---------------
Capital Share Transactions
Increase in net assets derived from net capital share transactions 82,145,491 490,787,300
--------------- ---------------
Redemption Fees
Redemption fees 2,331 7,327
--------------- ---------------
Net Assets
Total increase in net assets 111,944,181 632,594,555
Beginning of period 1,298,727,075 666,132,520
--------------- ---------------
End of period* $ 1,410,671,256 $ 1,298,727,075
=============== ===============
* Undistributed (accumulated distributions in excess of) investment income--net $ (5,424,119) $ 21,122,795
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Financial Highlights
Class A
For the Six
Months Ended
The following per share data and ratios have been derived December 31, For the Year Ended June 30,
from information provided in the financial statements. 2005 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 26.33 $ 23.48 $ 17.98 $ 20.55 $ 22.89
---------- ---------- ---------- ---------- ----------
Investment income--net** .03 .50 .25 .39 .23
Realized and unrealized gain (loss)--net 3.12*** 2.77*** 5.70 (2.96) (.70)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.15 3.27 5.95 (2.57) (.47)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.55) (.42) (.45) -- (.70)
Realized gain--net (1.99) -- -- -- (1.17)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (2.54) (.42) (.45) -- (1.87)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 26.94 $ 26.33 $ 23.48 $ 17.98 $ 20.55
========== ========== ========== ========== ==========
Total Investment Return++
Based on net asset value per share 12.25%+++ 14.29% 33.67% (12.55%) (1.42%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.27%* 1.33% 1.33% 1.32% 1.38%
========== ========== ========== ========== ==========
Investment income--net .19%* 1.94% 1.20% 2.30% 1.19%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 279,110 $ 254,207 $ 42,238 $ 49,395 $ 97,769
========== ========== ========== ========== ==========
Portfolio turnover 41% 70% 75% 89% 45%
========== ========== ========== ========== ==========
* Annualized.
** Based on average shares outstanding.
*** Includes redemption fees, which are less than $.01 per share.
++ Total investment returns exclude the effect of sales charges.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Financial Highlights (continued)
Class B
For the Six
Months Ended
The following per share data and ratios have been derived December 31, For the Year Ended June 30,
from information provided in the financial statements. 2005 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 25.94 $ 23.24 $ 17.84 $ 20.57 $ 23.09
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net** (.08) .32 .17 .29 .10
Realized and unrealized gain (loss)--net 3.07*** 2.74*** 5.57 (3.02) (.71)
---------- ---------- ---------- ---------- ----------
Total from investment operations 2.99 3.06 5.74 (2.73) (.61)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.40) (.36) (.34) -- (.74)
Realized gain--net (1.99) -- -- -- (1.17)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (2.39) (.36) (.34) -- (1.91)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 26.54 $ 25.94 $ 23.24 $ 17.84 $ 20.57
========== ========== ========== ========== ==========
Total Investment Return++
Based on net asset value per share 11.78%+++ 13.45% 32.65% (13.27%) (2.10%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.06%* 2.12% 2.11% 2.06% 2.12%
========== ========== ========== ========== ==========
Investment income (loss)--net (.61%)* 1.27% .81% 1.74% .48%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 69,594 $ 62,261 $ 19,852 $ 5,343 $ 2,064
========== ========== ========== ========== ==========
Portfolio turnover 41% 70% 75% 89% 45%
========== ========== ========== ========== ==========
* Annualized.
** Based on average shares outstanding.
*** Includes redemption fees, which are less than $.01 per share.
++ Total investment returns exclude the effect of sales charges.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Financial Highlights (continued)
Class C
For the Six
Months Ended
The following per share data and ratios have been derived December 31, For the Year Ended June 30,
from information provided in the financial statements. 2005 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 25.72 $ 23.09 $ 17.70 $ 20.39 $ 22.91
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net** (.08) .37 .29 .17 .09
Realized and unrealized gain (loss)--net 3.05*** 2.65*** 5.41 (2.86) (.70)
---------- ---------- ---------- ---------- ----------
Total from investment operations 2.97 3.02 5.70 (2.69) (.61)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.41) (.39) (.31) -- (.74)
Realized gain--net (1.99) -- -- -- (1.17)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (2.40) (.39) (.31) -- (1.91)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 26.29 $ 25.72 $ 23.09 $ 17.70 $ 20.39
========== ========== ========== ========== ==========
Total Investment Return++
Based on net asset value per share 11.82%+++ 13.41% 32.58% (13.19%) (2.10%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 2.06%* 2.12% 2.14% 2.07% 2.06%
========== ========== ========== ========== ==========
Investment income (loss)--net (.60%)* 1.45% 1.38% 1.02% .47%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 203,439 $ 164,317 $ 38,608 $ 2,672 $ 2,285
========== ========== ========== ========== ==========
Portfolio turnover 41% 70% 75% 89% 45%
========== ========== ========== ========== ==========
* Annualized.
** Based on average shares outstanding.
*** Includes redemption fees, which are less than $.01 per share.
++ Total investment returns exclude the effect of sales charges.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Financial Highlights (continued)
Class I
For the Six
Months Ended
The following per share data and ratios have been derived December 31, For the Year Ended June 30,
from information provided in the financial statements. 2005 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 26.41 $ 23.54 $ 18.03 $ 20.63 $ 22.97
---------- ---------- ---------- ---------- ----------
Investment income--net** .06 .52 .31 .30 .29
Realized and unrealized gain (loss)--net 3.14*** 2.83*** 5.71 (2.85) (.70)
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.20 3.35 6.02 (2.55) (.41)
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.62) (.48) (.51) (.05) (.76)
Realized gain--net (1.99) -- -- -- (1.17)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (2.61) (.48) (.51) (.05) (1.93)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 27.00 $ 26.41 $ 23.54 $ 18.03 $ 20.63
========== ========== ========== ========== ==========
Total Investment Return++++
Based on net asset value per share 12.40%++ 14.59% 34.00% (12.38%) (1.14%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.02%* 1.08% 1.08% 1.07% 1.14%
========== ========== ========== ========== ==========
Investment income--net .44%* 2.07% 1.47% 1.78% 1.42%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 834,678 $ 800,990 $ 559,530 $ 463,071 $ 617,289
========== ========== ========== ========== ==========
Portfolio turnover 41% 70% 75% 89% 45%
========== ========== ========== ========== ==========
* Annualized.
** Based on average shares outstanding.
*** Includes redemption fees, which are less than $.01 per share.
++ Aggregate total investment return.
++++ Total investment returns exclude the effect of sales charges. Effective December 28, 2005,
Class I Shares are no longer subject to any front-end sales charge.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Financial Highlights (concluded)
Class R
For the Six For the Period
Months Ended For the Year Ended January 3, 2003++
The following per share data and ratios have been derived December 31, June 30, to June 30,
from information provided in the financial statements. 2005 2005 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 26.19 $ 23.39 $ 17.98 $ 16.79
---------- ---------- ---------- ----------
Investment income (loss)--net** (.01) .50 .52 .32
Realized and unrealized gain--net 3.11*** 2.70*** 5.38 .87
---------- ---------- ---------- ----------
Total from investment operations 3.10 3.20 5.90 1.19
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.50) (.40) (.49) --
Realized gain--net (1.99) -- -- --
---------- ---------- ---------- ----------
Total dividends and distributions (2.49) (.40) (.49) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 26.80 $ 26.19 $ 23.39 $ 17.98
========== ========== ========== ==========
Total Investment Return
Based on net asset value per share 12.13%+++ 14.03% 33.43% 7.09%+++
========== ========== ========== ==========
Ratios to Average Net Assets
Expenses 1.52%* 1.58% 1.60% 1.55%*
========== ========== ========== ==========
Investment income (loss)--net (.06%)* 1.96% 2.34% 3.04%*
========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 23,850 $ 16,951 $ 5,905 --+++++
========== ========== ========== ==========
Portfolio turnover 41% 70% 75% 89%
========== ========== ========== ==========
* Annualized.
** Based on average shares outstanding.
*** Includes redemption fees, which are less than $.01 per share.
++ Commencement of operations.
+++ Aggregate total investment return.
+++++ Amount is less than $1,000.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 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. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to present a fair statement of the results for the
interim period. All such adjustments are of a normal, recurring nature. The
Fund offers multiple classes of shares. Effective December 28, 2005, Class I
Shares are no longer subject to any front-end sales charge. Class A 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 I Shares are sold only to certain
retirement plans and investment programs and existing Class I shareholders.
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 based upon quoted fair
valuations received daily by the Fund from a pricing service or counterparty.
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.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Notes to Financial Statements (continued)
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities 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.
(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. The Fund invests in foreign securities, which may involve a
number of risk factors and special considerations not present with investments
in securities of U.S. corporations.
(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.
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.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Notes to Financial Statements (continued)
FAM is responsible for the management of the Fund's investments and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of .75% of the average daily value of the Fund's
net assets. FAM has entered into Sub-Advisory agreements for the Fund with
Merrill Lynch Investment Managers International Limited and Merrill Lynch
Asset Management U.K. Limited ("MLAM U.K."), affiliated investment advisers
that are indirect subsidiaries of ML & Co. The Sub-Advisory arrangements are
for investment research, recommendations and other investment-related services
to be provided to the Fund. There is no increase in aggregate fees paid by the
Fund for these services.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at the annual rates based upon the average daily net assets
of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Class R .25% .25%
Pursuant to a sub-agreement with the Distributor, selected dealers also
provide account maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates the Distributor and selected dealers for
providing account maintenance services to Class A, Class B, Class C and Class
R shareholders. The ongoing distribution fee compensates the Distributor and
selected dealers for providing shareholder and distribution-related services
to Class B, Class C and Class R shareholders.
For the six months ended December 31, 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 $ 10,096 $ 138,908
Class I $ 786 $ 404
For the six months ended December 31, 2005, MLPF&S received contingent
deferred sales charges of $14,583 and $20,024 relating to transactions in
Class B and Class C Shares, respectively.
In addition, MLPF&S received $41,068 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended December
31, 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 six months ended December 31, 2005,
MLIM, LLC received $2,130 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 six months ended December 31, 2005, the Fund reimbursed FAM $13,846
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.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
six months ended December 31, 2005 were $557,645,086 and $568,728,253,
respectively.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Notes to Financial Statements (continued)
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$82,145,491 and $490,787,300 for the six months ended December 31, 2005 and
for the year ended, June 30, 2005, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
December 31, 2005 Shares Amount
Shares sold 1,191,309 $ 31,786,182
Automatic conversion of shares 157,039 4,181,760
Shares issued to shareholders in
reinvestment of dividends and
distributions 884,011 23,605,077
--------------- ---------------
Total issued 2,232,359 59,573,019
Shares redeemed (1,526,274) (40,583,398)
--------------- ---------------
Net increase 706,085 $ 18,989,621
=============== ===============
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 B Shares for the
Six Months Ended Dollar
December 31, 2005 Shares Amount
Shares sold 616,379 $ 16,181,897
Shares issued to shareholders in
reinvestment of dividends and
distributions 205,987 5,424,023
--------------- ---------------
Total issued 822,366 21,605,920
--------------- ---------------
Automatic conversion of shares (159,465) (4,181,760)
Shares redeemed (441,510) (11,622,665)
--------------- ---------------
Total redeemed (600,975) (15,804,425)
--------------- ---------------
Net increase 221,391 $ 5,801,495
=============== ===============
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 C Shares for the
Six Months Ended Dollar
December 31, 2005 Shares Amount
Shares sold 1,605,250 $ 41,758,101
Shares issued to shareholders in
reinvestment of dividends and
distributions 587,241 15,322,598
--------------- ---------------
Total issued 2,192,491 57,080,699
Shares redeemed (842,215) (21,932,964)
--------------- ---------------
Net increase 1,350,276 $ 35,147,735
=============== ===============
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 I Shares for the
Six Months Ended Dollar
December 31, 2005 Shares Amount
Shares sold 2,598,390 $ 69,340,218
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,828,499 75,709,098
--------------- ---------------
Total issued 5,426,889 145,049,316
Shares redeemed (4,840,340) (129,268,265)
--------------- ---------------
Net increase 586,549 $ 15,781,051
=============== ===============
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Notes to Financial Statements (concluded)
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 R Shares for the
Six Months Ended Dollar
December 31, 2005 Shares Amount
Shares sold 289,752 $ 7,663,702
Shares issued to shareholders in
reinvestment of dividends and
distributions 67,458 1,792,621
--------------- ---------------
Total issued 357,210 9,456,323
Shares redeemed (114,368) (3,030,734)
--------------- ---------------
Net increase 242,842 $ 6,425,589
=============== ===============
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
=============== ===============
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 or exchange. 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. The Fund may borrow under the credit agreement to fund
shareholder redemptions and for other lawful purposes other than for leverage.
The Fund may borrow up to the maximum amount allowable under the Fund's
current prospectus and statement of additional information, subject to various
other legal, regulatory or contractual limits. The Fund pays a commitment fee
of .07% per annum based on the Fund's pro rata share of the unused portion of
the credit agreement. Amounts borrowed under the credit agreement bear
interest at a rate equal to, at each Fund's election, the federal funds rate
plus .50% or a base rate as defined in the credit agreement. The Fund did not
borrow under the credit agreement during the six months ended December 31,
2005. On November 23, 2005, the credit agreement was renewed for one year
under substantially the same terms.
6. Commitments:
At December 31, 2005, the Fund had entered into foreign exchange contracts, in
addition to the contracts listed on the schedule of investments, under which
it had agreed to sell a foreign currency with an approximate value of
$499,000.
7. Capital Loss Carryforward:
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.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Fund's Board of Directors is a non-interested
director as that term is defined in the Investment Company Act of 1940, whose
only association with Fund Asset Management, L.P., (the "Investment Adviser")
or other Merrill Lynch affiliates is as a director of the Fund, and of certain
other funds advised by the Investment Adviser or its affiliates. The Co-
chairmen of the Board are independent directors. New Director nominees are
chosen as nominees by a Nominating Committee comprised of independent
directors. All independent directors also are members of the Board's Audit
Committee. The independent directors meet in executive session at each regular
Board meeting. The Board and the Board's Audit Committee meet in person for at
least two days each quarter and conduct other in-person and telephone meetings
throughout the year, some of which are formal Board meetings and some of which
are informational meetings. The independent counsel to the independent
directors attends all in-person Board and Audit Committee meetings and other
meetings at the request of the independent directors.
Investment Advisory Agreements--Matters Considered by the Board
Every year, the Board considers approval of the investment advisory agreement
with respect to the Fund (the "Investment Advisory Agreement") and throughout
each year, reviews and evaluates the performance of and services provided by
the Investment Adviser. The Board also annually reviews and considers approval
of the sub-advisory agreement between the Investment Adviser and Merrill Lynch
Asset Management U.K. Limited (the "sub-adviser"). The Board assesses the
nature, scope and quality of the services provided to the Fund by the
personnel of the Investment Adviser, the sub-adviser and their affiliates,
including administrative services, shareholder services, oversight of fund
accounting, marketing services and assistance in meeting legal and regulatory
requirements. The Board also receives and assesses information regarding the
services provided to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates, including the sub-adviser. Among the
matters considered with respect to the Fund are: (a) fees (in addition to
management fees) paid to the Investment Adviser and its affiliates by the
Fund, such as transfer agency fees and fees for marketing and distribution;
(b) Fund operating expenses paid to third parties; (c) the resources devoted
to and compliance reports relating to the Fund's investment objective,
policies and restrictions, and its compliance with its Code of Ethics and the
Investment Adviser's compliance policies and procedures; and (d) the nature,
cost and character of non-investment management services provided by the
Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be of high quality. The Board also believes that the
Investment Adviser is financially sound and well managed and notes that the
Investment Adviser is affiliated with one of America's largest financial
firms. The Board works closely with the Investment Adviser in overseeing the
Investment Adviser's efforts to achieve good performance. As part of this
effort, the Board discusses portfolio manager effectiveness and, when
performance is not satisfactory, discusses with the Investment Adviser taking
steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement and the sub-advisory agreement, the Board requests and
receives materials specifically relating to the Investment Advisory Agreement
and/or the sub-advisory agreement. These materials include (a) information
compiled by Lipper Inc. ("Lipper") on the fees and expenses and the investment
performance of the Fund as compared to a comparable group of funds as
classified by Lipper; (b) sales and redemption data for the Fund; (c) a
discussion by the Fund's portfolio management team regarding investment
strategies used by the Fund during its most recent fiscal year; (d)
information on the profitability to the Investment Adviser and its affiliates
of the Investment Advisory Agreement, the sub-advisory agreement and other
relationships with the Fund; and (e) information provided by the Investment
Adviser concerning investment advisory fees charged to institutional clients
under similar investment mandates. Since the sub-advisory services are
provided by an affiliate of the Investment Adviser, and no additional fee is
paid for these services, the Board considered the sub-advisory agreement and
Investment Advisory Agreement together. The Board also considers other matters
it deems important to the approval process such as payments made to the
Investment Adviser or its affiliates relating to the distribution of Fund
shares, services related to the valuation and pricing of portfolio holdings,
allocation of brokerage fees of the Fund (including the related benefits to
the Investment Adviser of "soft dollars"), the portfolio turnover statistics
of the Fund, and direct and indirect benefits to the Investment Adviser, the
sub-adviser and their affiliates from their relationship with the Fund.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Disclosure of Investment Advisory Agreement (concluded)
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement and sub-advisory agreement, in November 2005, the independent
directors' and Board's review included the following:
The Investment Adviser's Services and Fund Performance--The Board reviewed the
nature, extent and quality of services provided by the Investment Adviser and
sub-adviser, including the investment advisory services and the resulting
performance of the Fund. The Board focused primarily on the Investment
Adviser's investment advisory services and the Fund's investment performance.
The Board compared the Fund's performance - both including and excluding the
effects of the fees and expenses of the Fund - to the performance of a
comparable group of mutual funds, and the performance of a relevant index or
combination of indexes. While the Board reviews performance data at least
quarterly, consistent with the Investment Adviser's investment goals, the
Board attaches more importance to performance over relatively long periods of
time, typically three to five years. For the periods ended August 31, 2005,
the Fund's performance after fees and expenses ranked in the second quintile
for each of the one- and five-year periods and in the fourth quintile for the
three-year period. Considering these factors, the Board concluded that the
nature and quality of these services supported the continuation of the
Investment Advisory Agreements.
The Investment Adviser's Personnel and Investment Process--The Board reviewed
the investment objectives and strategies of the Fund. The Board discussed with
senior management of the Investment Adviser responsible for investment
operations and the senior management of the Investment Adviser's equity
investing group the strategies being used to achieve the stated objectives.
Among other things, the Board considered the size, education and experience of
the Investment Adviser's investment staff, its use of technology, and the
Investment Adviser's approach to training and retaining portfolio managers and
other research, advisory and management personnel. The Board also reviews the
Investment Adviser's compensation policies and practices with respect to the
Fund's portfolio managers. The Board also considered the experience of the
Fund's portfolio managers and noted that Mr. Macmillan has more than ten
years' experience and Mr. Weatherston has more than five years' experience
analyzing and investing in equity securities; moreover, the Investment Adviser
and its investment staff have extensive experience in analyzing and managing
the types of investments used by the Fund. The Board concluded that the Fund
benefits from that expertise.
Management Fees and Other Expenses--The Board reviewed the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels - the actual rate includes advisory and
administrative service fees and the effects of any fee waivers - compared to
the other funds in its Lipper category. It also compared the Fund's total
expenses to those of other comparable funds. The Board considered the services
provided to and the fees charged by the Investment Adviser to institutional
clients with similar investment mandates and noted that the fees charged by
the Investment Adviser to the institutional clients were less than those being
charged to the Fund, but determined that the Investment Adviser provided less
extensive services to the institutional clients. The Board noted that Fund's
contractual and actual management fee rates were equal to the median
management fees charged by comparable funds, as determined by Lipper, while
total expenses were higher than the median total expenses charged by such
comparable funds. The Board has concluded that the Fund's management fee rate
and overall expense ratio are reasonable when compared to those of other
comparable funds.
Profitability--The Board considered the cost of the services provided to the
Fund by the Investment Adviser and the Investment Adviser's and its
affiliates' profits relating to the management and distribution of the Fund
and the MLIM/FAM-advised funds. As part of its analysis, the Board reviewed
the Investment Adviser's methodology in allocating its costs to the management
of the Fund and concluded that there was a reasonable basis for the
allocation. The Board considered federal court decisions discussing an
investment adviser's profitability and profitability levels considered to be
reasonable in those decisions. The Board believes the Investment Adviser's
profits are acceptable in relation to the nature and quality of services
provided.
Economies of Scale--The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable
the Fund to participate in these economies of scale. The Board noted that
while there was no evidence that the Fund's assets had reached a level where
such economies are effectively available, and the Board will continue to seek
information relating to economies of scale.
Conclusion
After the independent directors deliberated in executive session, the Board of
the Fund including all of the independent directors, approved the renewal of
the existing Investment Advisory Agreement and sub-advisory agreement,
concluding that the advisory fee was reasonable in relation to the services
provided and that a contract renewal was in the best interests of the
shareholders.
MERRILL LYNCH INTERNATIONAL VALUE FUND DECEMBER 31, 2005
Officers and Trustees
Robert C. Doll, Jr., President and Trustee
James H. Bodurtha, Trustee
Kenneth A. Froot, Trustee
Joe Grills, Trustee
Herbert I. London, Trustee
Roberta Cooper Ramo, Trustee
Robert S. Salomon, Jr., Trustee
Stephen B. Swensrud, Trustee
Donald C. Burke, Vice President and Treasurer
James A. Macmillan, Vice President and Senior
Portfolio Manager
Rob Weatherston, Vice President and Portfolio Manager
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
Effective January 1, 2006, Stephen B. Swensrud retired as Trustee of Merrill
Lynch International Value Fund of Mercury Funds II. The Fund's Board of
Trustees wishes Mr. Swensrud well in his retirement.
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 DECEMBER 31, 2005
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-
annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined
that the registrant's disclosure controls and procedures are
effective based on our evaluation of these controls and procedures
as of a date within 90 days prior to the filing date of this
report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch International Value Fund of Mercury Funds II
By: /s/ Robert C. Doll, Jr.
-----------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch International Value Fund of Mercury Funds II
Date: February 21, 2006
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: February 21, 2006
By: /s/ Donald C. Burke
-----------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch International Value Fund of Mercury Funds II
Date: February 21, 2006