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: 06/30/06
Date of reporting period: 07/01/05 - 06/30/06
Item 1 - Report to Stockholders
Annual Report
June 30, 2006
Merrill Lynch
International Value Fund
Of Mercury Funds II
(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, Inc.
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
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company ("New BlackRock") that will be one of the world's largest
asset management firms with over $1 trillion in assets under management (based
on combined assets under management as of June 30, 2006) (the "Transaction").
The Transaction is expected to close at the end of the third quarter of 2006,
at which time the new company will operate under the BlackRock name. The
Fund's Board of Trustees has approved a new investment advisory agreement with
BlackRock Advisors, Inc. or its successor on substantially the same terms and
for the same advisory fee as the current investment advisory agreement with
the Investment Adviser. If the new agreement is approved by the Fund's
shareholders, BlackRock Advisors, Inc. or its successor is expected to become
the investment adviser of the Fund upon the closing of the Transaction.
Portfolio Information as of June 30, 2006
Percent of
Ten Largest Equity Holdings Net Assets
HSBC Holdings Plc 2.9%
Royal Dutch Shell Plc Class B 2.6
Vodafone Group Plc 2.5
Total SA 2.4
ENI SpA 2.2
ING Groep NV CVA 2.2
HBOS Plc 2.1
Siemens AG 2.1
Sumitomo Mitsui Financial Group, Inc. 2.1
UniCredito Italiano SpA 2.0
Percent of
Five Largest Industries Net Assets
Commercial Banks 23.7%
Oil, Gas & Consumable Fuels 12.4
Insurance 7.0
Automobiles 7.0
Capital Markets 4.4
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 such
industry sub-classifications for reporting ease.
Percent of
Total
Geographic Allocation Investments
Japan 21.2%
United Kingdom 17.6
France 11.5
Germany 10.7
Italy 8.0
Australia 3.8
Sweden 3.6
Switzerland 3.2
Taiwan 2.5
Netherlands 2.1
Singapore 2.1
Finland 1.8
Ireland 1.8
Spain 1.8
Norway 1.3
South Korea 1.1
United States 1.1
Hungary 1.0
Belgium 0.9
Other* 2.9
* Includes portfolio holdings in short-term investments.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
A Letter From the President
Dear Shareholder
By now, you have probably heard of the important changes unfolding at
Merrill Lynch Investment Managers ("MLIM"). We have been communicating
with shareholders, via letters like this and in a detailed proxy mailing,
about MLIM's impending union with another highly regarded investment
manager - BlackRock, Inc. ("BlackRock"). This transaction marks the next
chapter in MLIM's growth story and, we believe, will be a benefit to our
investors.
MLIM, a division of Merrill Lynch with over $583 billion in assets under
management, is a leading investment manager offering more than 100 investment
strategies in vehicles ranging from mutual funds to institutional portfolios.
BlackRock, with $464.1 billion in assets under management, is one of the
largest publicly traded investment management firms in the United States
managing assets on behalf of institutional and individual investors worldwide
through a variety of equity, fixed income, liquidity and alternative investment
products. At the completion of the transaction, which is expected by the end
of third quarter 2006, the resultant firm will be a top-10 investment manager
worldwide with over $1 trillion in assets under management.*
The combined company, to be known as BlackRock, will provide a wide selection
of high-quality investment solutions across a range of asset classes and
investment styles. The organization will have over 4,500 employees in 18
countries and a major presence in key markets worldwide. MLIM and BlackRock
possess complementary capabilities that together create a well-rounded
organization uniting some of the finest money managers in the industry. The
firms share similar values and beliefs - each strives for excellence in all
areas, and both make investment performance their single most important
mission. As such, our combination only reinforces our commitment to
shareholders.
Most of MLIM's investment products - including mutual funds, separately
managed accounts, annuities and variable insurance funds - eventually will
carry the "BlackRock" name. This will be reflected in newspaper and online
information sources beginning in October. Your account statements will reflect
the BlackRock name beginning with the October month-end reporting period.
Unless otherwise communicated via a proxy statement, your funds will maintain
the same investment objectives that they do today. Importantly, the
MLIM/BlackRock union will not affect your brokerage account or your
relationship with your financial advisor. If you are a client of Merrill
Lynch, you will remain a client of Merrill Lynch.
As always, we thank you for entrusting us with your investment assets. We look
forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.047 trillion in assets under management as of June 30, 2006.
Data, including assets under management, are as of June 30, 2006.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
A Discussion With Your Fund's Portfolio Managers
The Fund provided highly competitive double-digit returns for the fiscal year,
benefiting from effective stock selection across a range of countries.
How did the Fund perform during the fiscal year in light of the existing
market conditions?
For the 12-month period ended June 30, 2006, Merrill Lynch International Value
Fund's Class A, Class B, Class C, Class I and Class R Shares had total returns
of +26.84%. +25.84%, +25.86%,+27.18% and +26.52, respectively. (Fund results
shown do not reflect sales charges and would be lower if sales charges were
included. Complete performance information can be found on pages 6 - 8 of this
report to shareholders.) For the same period, the Fund's benchmark, the Morgan
Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index,
returned +26.56%, while the Lipper International Multi-Cap Value Funds
category posted an average return of +26.50%. (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 posted strong performance for the
12-month period ended June 30, 2006. During the third and fourth quarters of
2005, the Japanese market delivered surprisingly strong returns, driven
primarily 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,
benefiting from the healthy global economy, low interest rates, strong
corporate earnings and merger-and-acquisition activity.
However, during May and the first half of June 2006, the markets fell sharply
amid fears of rising inflation and global interest rates. Sharp increases in
volatility and investors' risk aversion resulted in a move away from cyclical
stocks, a sell-off in emerging markets and a sharp reversal in the returns of
stocks that had experienced strong appreciation year-to-date. The markets
rallied in the last several weeks of June, regaining approximately half of
their losses since the start of the mid-May correction.
What factors most influenced Fund performance?
During the fiscal year, Fund performance benefited from effective stock
selection across a range of countries, while sector allocation was slightly
negative. An underweight versus the benchmark in the strongly performing
materials sector and an overweight in the telecommunication services sector
hindered relative returns. Security selection in Japan also had a negative
effect, most notably in the fourth quarter of 2005, as the Japanese market
rose sharply and low-valuation shares underperformed.
The main stocks contributing positively to Fund performance were three
Japanese financial companies: Mitsubishi UFJ Financial Group Inc., Mitsubishi
UFJ Securities International Plc, and Sumitomo Mitsui Financial Group Inc.
These banks have benefited from the improving Japanese economy and domestic
reflation. The Fund's holdings in European financials also contributed
positively to returns, with strong performance from Italian bank UniCredito
Italiano SpA, French retail bank Credit Agricole SA, Dutch bank/insurer ING
Groep NV, and Swedish private equity company Investor AB.
The portfolio's positions in steel manufacturers Thyssenkrupp AG and POSCO
enhanced performance. These companies have benefited from robust global
demand, especially in the more profitable high-grade steel. In addition, the
proposed merger of Arcelor SA and Mittal Steel Co. NV, which was announced
during the period, has been viewed as a positive for the sector and, we
believe, should enable increased pricing power and potentially further
consolidation. Other stocks that contributed positively to Fund performance
included British transportation operator BAA Plc, which rose sharply following
the company's takeover by Grupo Ferrovial SA, a Spanish engineering and
construction firm; Fortum Corp., a Finnish electric power generator that has
benefited directly from the increase in wholesale electricity prices in much
of Europe; and BAE Systems Plc, a defense contractor in the United Kingdom.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Fund results were hindered by adverse stock selection in the retail sector,
with electronics retailer KESA Electricals Plc, Dutch food retailer Ahold NV.
and French hypermarket Carrefour SA all underperforming. The operating results
of Carrefour and KESA Electricals suffered amid a sluggish retail environment
in Europe that has led to increased competition and limited pricing power.
Shares of Ahold fell on concerns that the current restructuring in the
company's business operations in the United States would lead to a decline in
its profit margin. Also detracting from Fund performance were Belgacom SA, a
Belgian telecommunication services provider; Enel SpA, an Italian electric
utility company; and Takefuji Corp., a Japanese consumer finance company.
What changes were made to the portfolio during the period?
Our main transactions during the period resulted from "bottom-up" stock
picking, based on our evaluation of companies' individual share price
appreciation prospects. We added to the portfolio's holdings in materials,
energy and capital goods. Within the materials sector, we increased the Fund's
exposure to the steel sector through the purchase of Sumitomo Metal Industries
Ltd., POSCO and Thyssenkrupp AG, and purchased shares of two German chemicals
companies, Bayer AG and BASF AG. We also added to selected names within the
capital goods sector, including Hochtief AG (Germany), Keppel Corp. Ltd.
(Singapore) and Sojitz Corp. (Japan). Within the energy sector, we initiated
holdings in two integrated oil and gas companies in the United Kingdom, BP Plc
and Royal Dutch Shell Plc, and exited our position in two other integrated oil
and gas companies, Repsol YPF SA (Spain) and Santos Ltd. (Australia).
We adopted a more defensive stance in the financial sector by reducing the
portfolio's exposure to stocks of companies leveraged to financial markets and
adding to larger-cap commercial banks operating in economies with strong
underlying fundamentals, such as Ireland, France, Japan and the United
Kingdom. We partially funded these purchases by reducing the Fund's exposure
to transportation through the sale of BAA Plc and taking profits in several
electric power utility stocks by selling our shares in E.On AG and reducing
our positions in RWE AG and Fortum Corp. We also decreased the portfolio's
weighting in food and staples retailing through the liquidation of our
holdings in Boots Group Plc (United Kingdom) and Ahold NV (Netherlands).
How would you characterize the Fund's position at the close of the period?
At the end of the period, the Fund was overweight relative to the benchmark
MSCI EAFE Index in financials (banks, diversified financials and insurance),
automobile manufacturers and energy, and was underweight in pharmaceutical,
food, beverage and tobacco, and media stocks. In terms of regional and country
allocation, the Fund was overweight in Germany, where we are increasingly
optimistic on the prospects for restructuring and reform at the company level.
A number of German companies in the portfolio are undergoing significant
restructuring. These include Siemens AG, RWE AG, BASF AG and Thyssenkrupp AG,
with drastic cost cutting and the disposal of non-core assets. Other
overweight country positions include Italy and France, predominately through
banks and energy companies. Within the Asian segment of the portfolio, there
were overweight positions in Singapore and Taiwan, and we maintain significant
exposure to Japan based on our positive outlook for that country's economic
recovery.
Business confidence in Europe continues to rise, with economic developments
generally surprising on the upside. European companies are in healthier
financial positions than they have been for many years, resulting in an
increased level of merger-and-acquisition activity across a range of sectors.
The Japanese economy has delivered a series of positive surprises to the
market, with capital spending, corporate profitability and employment
providing evidence of a sustained domestic recovery. Although the March 2006
earnings season was excellent, companies were conservative in their earnings
estimates, which could lead to upgrades through the remainder of the year.
Even if the Bank of Japan's extraordinarily easy money policy comes to an end,
we believe that monetary policy is likely to remain benign.
Therefore, we remain positive on the prospects for European and Asian equities
and believe that the combination of low financing rates, strong earnings
growth, attractive valuations and corporate restructuring should enable
markets to continue their upward trend. We intend to maintain our strategy of
investing in stocks that we believe have low valuations.
James A. Macmillan
Vice President and Senior Portfolio Manager
Rob Weatherston
Vice President and Portfolio Manager
July 14, 2006
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
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 JUNE 30, 2006
Performance Data (continued)
Recent Performance Results
6-Month 12-Month 10-Year
As of June 30, 2006 Total Return Total Return Total Return
ML International Value Fund--Class A Shares* +12.99% +26.84% +140.25%
ML International Value Fund--Class B Shares* +12.58 +25.84 +123.73
ML International Value Fund--Class C Shares* +12.55 +25.86 +123.51
ML International Value Fund--Class I Shares* +13.15 +27.18 +146.26
ML International Value Fund--Class R Shares* +12.84 +26.52 +135.59
MSCI EAFE Index** +10.16 +26.56 + 85.86
* 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).
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Performance Data (concluded)
Total Return Based on a $10,000 Investment
A line graph illustrating the growth of a $10,000 investment in ML
International Value Fund++ Class A, Class B, Class C, Class I and Class R
Shares* compared to a similar investment in the MSCI EAFE Index++++. Values
illustrated are as follows:
ML International Value Fund++
Class A Shares*
Date Value
June 1996 $ 9,475.00
June 1997 $11,492.00
June 1998 $12,354.00
June 1999 $12,841.00
June 2000 $14,811.00
June 2001 $13,626.00
June 2002 $13,433.00
June 2003 $11,747.00
June 2004 $15,702.00
June 2005 $17,947.00
June 2006 $22,763.00
ML International Value Fund++
Class B Shares*
Date Value
June 1996 $10,000.00
June 1997 $12,039.00
June 1998 $12,845.00
June 1999 $13,254.00
June 2000 $15,170.00
June 2001 $13,914.00
June 2002 $13,622.00
June 2003 $11,814.00
June 2004 $15,671.00
June 2005 $17,779.00
June 2006 $22,373.00
ML International Value Fund++
Class C Shares*
Date Value
June 1996 $10,000.00
June 1997 $12,039.00
June 1998 $12,845.00
June 1999 $13,254.00
June 2000 $15,170.00
June 2001 $13,899.00
June 2002 $13,607.00
June 2003 $11,811.00
June 2004 $15,659.00
June 2005 $17,759.00
June 2006 $22,351.00
ML International Value Fund++
Class I Shares*
Date Value
June 1996 $10,000.00
June 1997 $12,159.00
June 1998 $13,104.00
June 1999 $13,657.00
June 2000 $15,788.00
June 2001 $14,559.00
June 2002 $14,393.00
June 2003 $12,611.00
June 2004 $16,898.00
June 2005 $19,363.00
June 2006 $24,626.00
ML International Value Fund++
Class R Shares*
Date Value
June 1996 $10,000.00
June 1997 $12,099.00
June 1998 $12,974.00
June 1999 $13,454.00
June 2000 $15,476.00
June 2001 $14,200.00
June 2002 $13,968.00
June 2003 $12,238.00
June 2004 $16,330.00
June 2005 $18,620.00
June 2006 $23,559.00
MSCI EAFE Index++++
Date Value
June 1996 $10,000.00
June 1997 $11,284.00
June 1998 $11,972.00
June 1999 $12,883.00
June 2000 $15,094.00
June 2001 $11,531.00
June 2002 $10,436.00
June 2003 $ 9,762.00
June 2004 $12,922.00
June 2005 $14,686.00
June 2006 $18,586.00
* 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 A Shares*
One Year Ended 6/30/06 +26.84% +20.18%
Five Years Ended 6/30/06 +10.81 + 9.62
Ten Years Ended 6/30/06 + 9.16 + 8.57
Return Return
Without CDSC With CDSC++++++
Class B Shares++
One Year Ended 6/30/06 +25.84% +21.84%
Five Years Ended 6/30/06 + 9.96 + 9.69
Ten Years Ended 6/30/06 + 8.39 + 8.39
Return Return
Without CDSC With CDSC++++++
Class C Shares++++
One Year Ended 6/30/06 +25.86% +24.86%
Five Years Ended 6/30/06 + 9.97 + 9.97
Ten Years Ended 6/30/06 + 8.38 + 8.38
Class I Shares Return
One Year Ended 6/30/06 +27.18%
Five Years Ended 6/30/06 +11.08
Ten Years Ended 6/30/06 + 9.43
Class R Shares Return
One Year Ended 6/30/06 +26.52%
Five Years Ended 6/30/06 +10.66
Ten Years Ended 6/30/06 + 8.95
* 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 JUNE 30, 2006
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 January 1, 2006 and
held through June 30, 2006) 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, 2006 to
January 1, June 30, June 30,
2006 2006 2006
Actual
Class A $1,000 $1,129.90 $ 6.69
Class B $1,000 $1,125.80 $10.86
Class C $1,000 $1,125.50 $10.86
Class I $1,000 $1,131.50 $ 5.37
Class R $1,000 $1,128.40 $ 8.01
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,018.62 $ 6.34
Class B $1,000 $1,014.68 $10.30
Class C $1,000 $1,014.68 $10.30
Class I $1,000 $1,019.86 $ 5.09
Class R $1,000 $1,017.37 $ 7.59
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.26% for Class A, 2.05% for Class B, 2.05% for Class C, 1.01% for Class I and 1.51% for Class R),
multiplied by the average account value over the period, multiplied by 182/365 (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, 2006
Schedule of Investments (in U.S. dollars)
Shares
Country Industry Common Stocks Held Value
Australia--3.8%
Commercial Banks--1.0%
Australia & New Zealand Banking
Group Ltd. 792,307 $ 15,652,006
Food & Staples Retailing--0.5%
AWB Ltd. 2,744,885 8,830,193
Food Products--0.4%
Goodman Fielder Ltd. (c) 4,213,674 6,699,353
Metals & Mining--0.5%
Iluka Resources Ltd. 1,530,000 7,445,449
Oil, Gas & Consumable Fuels--0.6%
Australian Worldwide Exploration
Ltd. (c) 3,954,170 10,047,074
Real Estate--0.8%
Multiplex Group 5,740,000 13,944,977
Total Common Stocks in Australia 62,619,052
Belgium--0.9%
Leisure Equipment & Products--0.9%
AGFA-Gevaert NV 626,305 15,167,717
Total Common Stocks in Belgium 15,167,717
Finland--1.8%
Electric Utilities--1.8%
Fortum Oyj 1,160,821 29,685,859
Total Common Stocks in Finland 29,685,859
France--11.6%
Automobiles--2.8%
Peugeot SA 310,614 19,322,274
Renault SA 247,531 26,586,628
----------------
45,908,902
Chemicals--0.0%
Arkema (c) 14,837 578,819
Commercial Banks--3.7%
BNP Paribas 338,802 32,425,908
Credit Agricole SA 736,978 28,034,697
----------------
60,460,605
Construction & Engineering--1.4%
Vinci SA 221,338 22,796,906
Food & Staples Retailing--1.3%
Carrefour SA 375,129 21,987,691
Oil, Gas & Consumable Fuels--2.4%
Total SA 593,508 39,045,081
Total Common Stocks in France 190,778,004
Germany--10.8%
Air Freight & Logistics--1.1%
Deutsche Post AG 671,262 17,990,271
Chemicals--2.4%
BASF AG 270,285 21,696,897
Bayer AG 393,903 18,101,799
----------------
39,798,696
Shares
Country Industry Common Stocks Held Value
Germany (concluded)
Construction & Engineering--1.0%
Hochtief AG 310,992 $ 17,293,902
Industrial Conglomerates--2.1%
Siemens AG 389,694 33,898,350
Insurance--0.9%
Allianz AG Registered Shares 90,292 14,260,703
Metals & Mining--1.8%
ThyssenKrupp AG 876,515 30,002,822
Multi-Utilities--1.5%
RWE AG 291,717 24,264,057
Total Common Stocks in Germany 177,508,801
Hungary--1.0%
Oil, Gas & Consumable Fuels--1.0%
Mol Magyar Olaj- es Gazipari Rt. 157,905 16,216,572
Total Common Stocks in Hungary 16,216,572
Ireland--1.8%
Commercial Banks--1.8%
Allied Irish Banks Plc 1,240,728 29,746,250
Total Common Stocks in Ireland 29,746,250
Italy--8.1%
Commercial Banks--3.1%
Capitalia SpA 2,131,301 17,487,640
UniCredito Italiano SpA 4,213,464 32,988,147
----------------
50,475,787
Diversified Telecommunication
Services--1.5%
Telecom Italia SpA (RNC) 9,438,740 24,379,218
Electric Utilities--1.3%
Enel SpA 2,606,571 22,467,164
Oil, Gas & Consumable Fuels--2.2%
ENI SpA 1,217,047 35,807,858
Total Common Stocks in Italy 133,130,027
Japan--21.4%
Automobiles--4.2%
Honda Motor Co., Ltd. 607,400 19,287,600
Nissan Motor Co., Ltd. 2,071,000 22,645,760
Toyota Motor Corp. 500,400 26,220,496
----------------
68,153,856
Beverages--1.7%
Asahi Breweries Ltd. 2,021,000 28,410,506
Capital Markets--1.2%
Mitsubishi UFJ Securities Co. 1,477,000 19,070,568
Commercial Banks--3.7%
Mitsubishi UFJ Financial Group, Inc. 1,875 26,243,275
Sumitomo Mitsui Financial Group, Inc. 3,300 34,929,799
----------------
61,173,074
Consumer Finance--0.9%
Takefuji Corp. 236,700 14,121,454
Household Durables--1.1%
Sekisui House Ltd. 1,376,000 18,909,994
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Schedule of Investments (continued) (in U.S. dollars)
Shares
Country Industry Common Stocks Held Value
Japan (concluded)
Insurance--1.6%
Sompo Japan Insurance, Inc. 1,848,000 $ 25,865,372
Leisure Equipment & Products--1.3%
Namco Bandai Holdings, Inc. 644,800 9,808,925
Yamaha Corp. 651,000 12,243,800
----------------
22,052,725
Metals & Mining--0.9%
Sumitomo Metal Industries Ltd. 3,685,000 15,215,151
Office Electronics--1.0%
Canon, Inc. 343,200 16,842,514
Oil, Gas & Consumable Fuels--1.0%
Nippon Mining Holdings, Inc. 1,901,000 16,014,198
Pharmaceuticals--1.3%
Takeda Pharmaceutical Co., Ltd. 331,000 20,616,017
Trading Companies &
Distributors--0.8%
Sojitz Corp. (c) 3,232,000 12,779,285
Wireless Telecommunication
Services--0.7%
KDDI Corp. 1,971 12,121,008
Total Common Stocks in Japan 351,345,722
Netherlands--2.2%
Diversified Financial Services--2.2%
ING Groep NV CVA 900,103 35,367,889
Total Common Stocks in the Netherlands 35,367,889
Norway--1.3%
Oil, Gas & Consumable Fuels--1.3%
Statoil ASA 780,684 22,143,594
Total Common Stocks in Norway 22,143,594
Singapore--2.1%
Commercial Banks--1.0%
DBS Group Holdings Ltd. 1,418,000 16,230,310
Industrial Conglomerates--1.1%
Keppel Corp. Ltd. 1,975,000 18,359,313
Total Common Stocks in Singapore 34,589,623
South Korea--1.1%
Metals & Mining--1.1%
POSCO 66,433 17,821,438
Total Common Stocks in South Korea 17,821,438
Spain--1.8%
Commercial Banks--1.8%
Banco Bilbao Vizcaya Argentaria SA 1,417,738 29,149,855
Total Common Stocks in Spain 29,149,855
Sweden--3.7%
Commercial Banks--1.2%
Svenska Handelsbanken Class A 778,261 20,041,427
Diversified Financial Services--1.6%
Investor AB 1,380,148 25,290,595
Diversified Telecommunication
Services--0.9%
TeliaSonera AB 2,662,077 15,114,834
Total Common Stocks in Sweden 60,446,856
Shares
Country Industry Common Stocks Held Value
Switzerland--3.2%
Capital Markets--2.0%
Credit Suisse Group 583,606 $ 32,586,653
Insurance--1.2%
Swiss Reinsurance Registered Shares 290,905 20,292,108
Total Common Stocks in Switzerland 52,878,761
Taiwan--2.6%
Computers & Peripherals--1.4%
Lite-On Technology Corp. 15,378,520 22,775,428
Semiconductors & Semiconductor
Equipment--0.6%
Vanguard International Semiconductor
Corporation 13,369,000 9,022,227
Wireless Telecommunication
Services--0.6%
Taiwan Cellular Corp. 10,381,000 10,324,249
Total Common Stocks in Taiwan 42,121,904
United Kingdom--17.7%
Aerospace & Defense--0.7%
BAE Systems Plc 1,560,099 10,669,107
Commercial Banks--6.4%
Barclays Plc 2,013,864 22,888,628
HBOS Plc 2,017,170 35,070,187
HSBC Holdings Plc 2,706,879 47,637,105
----------------
105,595,920
Insurance--3.3%
Aviva Plc 2,224,675 31,497,748
Prudential Plc 2,066,977 23,358,480
----------------
54,856,228
Oil, Gas & Consumable Fuels--3.9%
BP Plc 1,884,204 21,972,564
Royal Dutch Shell Plc Class B 1,217,763 42,591,411
----------------
64,563,975
Specialty Retail--0.9%
Kesa Electricals Plc 2,653,404 14,183,028
Wireless Telecommunication
Services--2.5%
Vodafone Group Plc 18,915,612 40,320,792
Total Common Stocks in the
United Kingdom 290,189,050
United States--1.1%
Capital Markets--1.1%
KKR Private Equity Investors LP (c)(f) 835,265 18,292,304
Total Common Stocks in the
United States 18,292,304
Total Common Stocks
(Cost--$1,280,944,948)--98.0% 1,609,199,278
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Schedule of Investments (concluded) (in U.S. dollars)
Shares
Country Industry Warrants (a) Held Value
United Kingdom--0.1%
Capital Markets--0.1%
Deutsche Bank AG (expires 9/15/2006)(f) 4,187,290 $ 968,079
Total Warrants
(Cost--$2,527,605)--0.1% 968,079
Beneficial
Other Interests (d) 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 Face
Securities Amount Value
Time Deposits
Brown Brothers Harriman & Co.,
4.50% due 7/03/2006 $ 128,684 $ 128,684
Beneficial
Interest
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I, 4.78% (b)(e) $ 47,905,845 47,905,845
Total Short-Term Securities
(Cost--$48,034,529)--2.9% 48,034,529
Total Investments (Cost--$1,331,507,082*)--101.0% 1,658,201,886
Liabilities in Excess of Other Assets--(1.0%) (15,924,951)
----------------
Net Assets--100.0% $ 1,642,276,935
================
* The cost and unrealized appreciation (depreciation) of investments
as of June 30, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 1,350,522,346
================
Gross unrealized appreciation $ 323,801,054
Gross unrealized depreciation (16,121,514)
----------------
Net unrealized appreciation $ 307,679,540
================
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number
of shares are subject to adjustment under certain conditions until the
expiration date.
(b) 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 $ 36,801,449 $447,705
Merrill Lynch Liquidity Series, LLC
Money Market Series $(15,525,000) $ 5,175
(c) Non-income producing security.
(d) Other interests represent beneficial interest in liquidation trusts
and other reorganization entities, and are non-income producing.
(e) Represents the current yield as of 6/30/2006.
(f) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
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 such industry sub-classifications for
reporting ease. Industries are shown as a percent of net assets. These
industry classifications are unaudited.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Statement of Assets and Liabilities
As of June 30, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$1,283,601,237) $ 1,610,296,041
Investments in affiliated securities, at value (identified cost--$47,905,845) 47,905,845
Foreign cash (cost--$7,072,024) 7,132,675
Cash 34
Receivables:
Dividends $ 7,469,714
Investment adviser 2,589,321
Capital shares sold 2,526,646
Securities sold 2,045,762
Interest 32 14,631,475
---------------
Prepaid expenses 24,636
---------------
Total assets 1,679,990,706
---------------
Liabilities
Payables:
Securities purchased 30,530,565
Capital shares redeemed 5,282,122
Investment adviser 909,840
Distributor 334,562
Other affiliates 302,542 37,359,631
---------------
Accrued expenses 354,140
---------------
Total liabilities 37,713,771
---------------
Net Assets
Net assets $ 1,642,276,935
===============
Net Assets Consist of
Paid-in capital $ 1,250,396,989
Undistributed investment income--net $ 20,090,434
Undistributed realized capital gains--net 44,984,462
Unrealized appreciation--net 326,805,050
---------------
Total accumulated earnings--net 391,879,946
---------------
Net Assets $ 1,642,276,935
===============
Net Asset Value
Class A--Based on net assets of $320,926,154 and 10,541,452 shares outstanding* $ 30.44
===============
Class B--Based on net assets of $79,165,435 and 2,649,802 shares outstanding* $ 29.88
===============
Class C--Based on net assets of $244,930,530 and 8,276,500 shares outstanding* $ 29.59
===============
Class I--Based on net assets of $961,206,930 and 31,462,912 shares outstanding* $ 30.55
===============
Class R--Based on net assets of $36,047,886 and 1,191,934 shares outstanding* $ 30.24
===============
* Unlimited shares of no par value authorized.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Statement of Operations
For the Year Ended June 30, 2006
Investment Income
Dividends (net of $4,243,892 foreign withholding tax) $ 43,767,677
Interest (including $447,705 from affiliates) 461,069
Securities lending--net 5,175
---------------
Total income 44,233,921
---------------
Expenses
Investment advisory fees $ 11,026,324
Account maintenance and distribution fees--Class C 2,082,939
Transfer agent fees--Class I 1,457,016
Account maintenance fees--Class A 722,625
Account maintenance and distribution fees--Class B 708,273
Custodian fees 603,573
Transfer agent fees--Class A 480,605
Accounting services 450,470
Transfer agent fees--Class C 432,709
Transfer agent fees--Class B 147,972
Account maintenance and distribution fees--Class R 127,709
Registration fees 121,118
Printing and shareholder reports 95,523
Professional fees 68,997
Trustees' fees and expenses 49,522
Transfer agent fees--Class R 42,526
Pricing fees 17,046
Other 56,671
---------------
Total expenses 18,691,618
---------------
Investment income--net 25,542,303
---------------
Realized & Unrealized Gain--Net
Realized gain on:
Investments--net 151,202,358
Foreign currency transactions--net 17,591 151,219,949
---------------
Increase from payment by affiliate in order to resolve a regulatory issue
relating to an investment 2,589,321
Change in unrealized appreciation/depreciation on:
Investments--net 162,683,959
Foreign currency transactions--net 216,676 162,900,635
--------------- ---------------
Total realized and unrealized gain--net 316,709,905
---------------
Net Increase in Net Assets Resulting from Operations $ 342,252,208
===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Statements of Changes in Net Assets
For the Year Ended
June 30,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 25,542,303 $ 21,493,089
Realized gain--net 153,809,270 131,787,024
Change in unrealized appreciation/depreciation--net 162,900,635 2,346,124
--------------- ---------------
Net increase in net assets resulting from operations 342,252,208 155,626,237
--------------- ---------------
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 128,563,673 490,787,300
--------------- ---------------
Redemption Fees
Redemption fees 4,791 7,327
--------------- ---------------
Net Assets
Total increase in net assets 343,549,860 632,594,555
Beginning of year 1,298,727,075 666,132,520
--------------- ---------------
End of year* $ 1,642,276,935 $ 1,298,727,075
=============== ===============
* Undistributed investment income--net $ 20,090,434 $ 21,122,795
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Financial Highlights
The following per share data Class A Class B
and ratios have been derived
from information provided in For the Year Ended June 30, For the Year Ended June 30,
the financial statements. 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning
of year $ 26.33 $ 23.48 $ 17.98 $ 20.55 $ 22.89 $ 25.94 $ 23.24 $ 17.84 $ 20.57 $ 23.09
---------------------------------------------- ----------------------------------------------
Investment income--net** .49 .50 .25 .39 .23 .26 .32 .17 .29 .10
Realized and unrealized gain
(loss)--net 6.16* 2.77* 5.70 (2.96) (.70) 6.07* 2.74* 5.57 (3.02) (.71)
---------------------------------------------- ----------------------------------------------
Total from investment operations 6.65 3.27 5.95 (2.57) (.47) 6.33 3.06 5.74 (2.73) (.61)
---------------------------------------------- ----------------------------------------------
Less dividends and distributions:
Investment income--net (.55) (.42) (.45) -- (.70) (.40) (.36) (.34) -- (.74)
Realized gain--net (1.99) -- -- -- (1.17) (1.99) -- -- -- (1.17)
---------------------------------------------- ----------------------------------------------
Total dividends and distributions (2.54) (.42) (.45) -- (1.87) (2.39) (.36) (.34) -- (1.91)
---------------------------------------------- ----------------------------------------------
Net asset value, end of year $ 30.44 $ 26.33 $ 23.48 $ 17.98 $ 20.55 $ 29.88 $ 25.94 $ 23.24 $ 17.84 $ 20.57
============================================== ==============================================
Total Investment Return+
Based on net asset value
per share 26.84%++ 14.29% 33.67% (12.55%) (1.42%) 25.84%+++ 13.45% 32.65% (13.27%) (2.10%)
============================================== ==============================================
Ratios to Average Net Assets
Expenses 1.27% 1.33% 1.33% 1.32% 1.38% 2.06% 2.12% 2.11% 2.06% 2.12%
============================================== ==============================================
Investment income--net 1.75% 1.94% 1.20% 2.30% 1.19% .95% 1.27% .81% 1.74% .48%
============================================== ==============================================
Supplemental Data
Net assets, end of year
(in thousands) $ 320,926 $254,207 $ 42,238 $ 49,395 $ 97,769 $ 79,165 $ 62,261 $ 19,852 $ 5,343 $ 2,064
============================================== ==============================================
Portfolio turnover 81% 70% 75% 89% 45% 81% 70% 75% 89% 45%
============================================== ==============================================
* Includes a redemption fee, which is less than $.01 per share.
** Based on average shares outstanding.
+ Total investment returns exclude the effect of sales charges.
++ In 2006, approximately +.17% of the Fund's Class A Shares total investment return consisted of a payment
by the Investment Adviser in order to resolve a regulatory issue relating to an investment.
+++ In 2006, approximately +.21% of the Fund's Class B Shares total investment return consisted of a payment
by the Investment Adviser in order to resolve a regulatory issue relating to an investment.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Financial Highlights (continued)
The following per share data Class C Class I
and ratios have been derived
from information provided in For the Year Ended June 30, For the Year Ended June 30,
the financial statements. 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning
of year $ 25.72 $ 23.09 $ 17.70 $ 20.39 $ 22.91 $ 26.41 $ 23.54 $ 18.03 $ 20.63 $ 22.97
---------------------------------------------- ----------------------------------------------
Investment income--net** .28 .37 .29 .17 .09 .56 .52 .31 .30 .29
Realized and unrealized gain
(loss)--net 5.99* 2.65* 5.41 (2.86) (.70) 6.19* 2.83* 5.71 (2.85) (.70)
---------------------------------------------- ----------------------------------------------
Total from investment operations 6.27 3.02 5.70 (2.69) (.61) 6.75 3.35 6.02 (2.55) (.41)
---------------------------------------------- ----------------------------------------------
Less dividends and distributions:
Investment income--net (.41) (.39) (.31) -- (.74) (.62) (.48) (.51) (.05) (.76)
Realized gain--net (1.99) -- -- -- (1.17) (1.99) -- -- -- (1.17)
---------------------------------------------- ----------------------------------------------
Total dividends and
distributions (2.40) (.39) (.31) -- (1.91) (2.61) (.48) (.51) (.05) (1.93)
---------------------------------------------- ----------------------------------------------
Net asset value, end of year $ 29.59 $ 25.72 $ 23.09 $ 17.70 $ 20.39 $ 30.55 $ 26.41 $ 23.54 $ 18.03 $ 20.63
============================================== ==============================================
Total Investment Return+
Based on net asset value
per share 25.86%++ 13.41% 32.58% (13.19%) (2.10%) 27.18%+++ 14.59% 34.00% (12.38%) (1.14%)
============================================== ==============================================
Ratios to Average Net Assets
Expenses 2.06% 2.12% 2.14% 2.07% 2.06% 1.02% 1.08% 1.08% 1.07% 1.14%
============================================== ==============================================
Investment income--net 1.01% 1.45% 1.38% 1.02% .47% 1.97% 2.07% 1.47% 1.78% 1.42%
============================================== ==============================================
Supplemental Data
Net assets, end of year
(in thousands) $ 244,931 $164,317 $ 38,608 $ 2,672 $ 2,285 $961,207 $800,990 $559,530 $463,071 $617,289
============================================== ==============================================
Portfolio turnover 81% 70% 75% 89% 45% 81% 70% 75% 89% 45%
============================================== ==============================================
* Includes a redemption fee, which is less than $.01 per share.
** Based on average shares outstanding.
+ 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.
++ In 2006, approximately +.17% of the Fund's Class C Shares total investment return consisted of a payment
by the Investment Adviser in order to resolve a regulatory issue relating to an investment.
+++ In 2006, approximately +.21% of the Fund's Class I Shares total investment return consisted of a payment
by the Investment Adviser in order to resolve a regulatory issue relating to an investment.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Financial Highlights (concluded)
Class R
For the Period
January 3, 2003++
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. 2006 2005 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 26.19 $ 23.39 $ 17.98 $ 16.79
------------ ------------ ------------ ------------
Investment income--net** .50 .50 .52 .32
Realized and unrealized gain--net 6.04 2.70 5.38 .87
------------ ------------ ------------ ------------
Total from investment operations 6.54 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 $ 30.24 $ 26.19 $ 23.39 $ 17.98
============ ============ ============ ============
Total Investment Return
Based on net asset value per share 26.52%*** 14.03% 33.43% 7.09%+++
============ ============ ============ ============
Ratios to Average Net Assets
Expenses 1.52% 1.58% 1.60% 1.55%*
============ ============ ============ ============
Investment income--net 1.76% 1.96% 2.34% 3.04%*
============ ============ ============ ============
Supplemental Data
Net assets, end of period (in thousands) $ 36,048 $ 16,951 $ 5,905 --+++++
============ ============ ============ ============
Portfolio turnover 81% 70% 75% 89%
============ ============ ============ ============
* Annualized.
** Based on average shares outstanding.
*** In 2006, approximately +.16% of the Fund's Class R Shares total investment return consisted of a payment
by the Investment Adviser in order to resolve a regulatory issue relating to an investment.
++ 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, 2006
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. 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
eligible investors. 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.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Notes to Financial Statements (continued)
(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. Valuation of other short-term investment
vehicles is generally based on the net asset value of the underlying
investment vehicle or amortized cost.
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, 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.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Notes to Financial Statements (continued)
(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.
(h) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income
on the collateral. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, the Fund could experience
delays and costs in gaining access to the collateral. The Fund also could
suffer a loss where the value of the collateral falls below the market value
of the borrowed securities, in the event of borrower default or in the event
of losses on investments made with cash collateral.
(i) Reclassification--U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the
current year, $1,273,513 has been reclassified between undistributed net
realized capital gains and undistributed net investment income as a result of
permanent differences attributable to gains from the sale of stock of passive
foreign investment companies and net foreign currency transaction gains. This
reclassification has no effect on net assets or net asset values per share.
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"), an affiliate
of FAM. 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. Effective May 9, 2006, FAM has contractually agreed to
waive a portion of its fee so that the Fund pays a monthly fee at an annual
rate of .75% of the average daily value of the Fund's net assets not exceeding
$2 billion, .70% of the average daily value of the Fund's net assets in excess
of $2 billion but not exceeding $4 billion and .65% of the average daily value
of the Fund's net assets in excess of $4 billion. FAM has entered into sub-
advisory agreements for the Fund with Merrill Lynch Investment Managers
International Limited ("MLIMIL") 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.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Notes to Financial Statements (continued)
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at 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, 2006, 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 $ 25,893 $ 329,454
Class I $ 785 $ 404
For the year ended June 30, 2006, MLPF&S received contingent deferred sales
charges of $30,442 and $35,993 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 year ended June 30, 2006.
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 Merrill Lynch Investment Managers, L.P., ("MLIM"), an affiliate of
FAM. For the year ended June 30, 2006, 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.
MLIM reimbursed the Fund $2,589,321 in order to resolve a regulatory issue
relating to an investment.
For the year ended June 30, 2006, the Fund reimbursed FAM $31,262 for certain
accounting services.
Certain officers and/or trustees of the Trust are officers and/or directors of
FAM, PSI, FAMD, FDS, ML & Co., MLIM, MLIMIL, and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction is expected
to close at the end of the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended June 30, 2006 were $1,213,077,230 and $1,178,731,825, respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$128,563,673 and $490,787,300 for the years ended June 30, 2006 and June 30,
2005, respectively.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Notes to Financial Statements (continued)
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended June 30, 2006 Shares Amount
Shares sold 2,343,423 $ 65,898,332
Automatic conversion of shares 262,948 7,296,422
Shares issued to shareholders in
reinvestment of dividends and
distributions 884,011 23,605,077
--------------- ---------------
Total issued 3,490,382 96,799,831
Shares redeemed (2,602,866) (72,617,918)
--------------- ---------------
Net increase 887,516 $ 24,181,913
=============== ===============
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 Year Dollar
Ended June 30, 2006 Shares Amount
Shares sold 1,288,052 $ 35,806,069
Shares issued to shareholders in
reinvestment of dividends and
distributions 205,987 5,424,023
--------------- ---------------
Total issued 1,494,039 41,230,092
--------------- ---------------
Automatic conversion of shares (267,121) (7,296,422)
Shares redeemed (977,725) (27,177,426)
--------------- ---------------
Total redeemed (1,244,846) (34,473,848)
--------------- ---------------
Net increase 249,193 $ 6,756,244
=============== ===============
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 Year Dollar
Ended June 30, 2006 Shares Amount
Shares sold 3,395,024 $ 93,383,656
Shares issued to shareholders in
reinvestment of dividends and
distributions 587,241 15,322,598
--------------- ---------------
Total issued 3,982,265 108,706,254
Shares redeemed (2,093,364) (58,042,166)
--------------- ---------------
Net increase 1,888,901 $ 50,664,088
=============== ===============
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 Year Dollar
Ended June 30, 2006 Shares Amount
Shares sold 7,769,376 $ 223,022,198
Shares issued to shareholders in
reinvestment of dividends and
distributions 2,828,499 75,709,098
--------------- ---------------
Total issued 10,597,875 298,731,296
Shares redeemed (9,460,879) (267,112,761)
--------------- ---------------
Net increase 1,136,996 $ 31,618,535
=============== ===============
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 Year Dollar
Ended June 30, 2006 Shares Amount
Shares sold 788,684 $ 22,354,493
Shares issued to shareholders in
reinvestment of dividends and
distributions 67,457 1,792,621
--------------- ---------------
Total issued 856,141 24,147,114
Shares redeemed (311,421) (8,804,221)
--------------- ---------------
Net increase 544,720 $ 15,342,893
=============== ===============
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
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
=============== ===============
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, which expires November 2006. 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, 2006.
6. Commitments:
At June 30, 2006, the Fund had entered into foreign exchange contracts, under
which it had agreed to purchase and sell various foreign currencies with an
approximate value of $31,012,000 and $2,085,000, respectively.
7. Distribution to Shareholders:
The tax character of distributions paid during the fiscal years ended
June 30, 2006 and June 30, 2005 was as follows:
6/30/2006 6/30/2005
Distributions paid from:
Ordinary income $ 27,848,177 $ 13,826,309
Net long-term capital gain 99,422,635 --
--------------- ---------------
Total taxable distributions $ 127,270,812 $ 13,826,309
=============== ===============
As of June 30, 2006, the components of accumulated earnings on a tax
basis were as follows:
Undistributed ordinary income--net $ 71,125,248
Undistributed long-term capital gains--net 53,123,207
---------------
Total undistributed earnings--net 124,248,455
Capital loss carryforward (42,315,428)*
Unrealized gains--net 309,946,919**
---------------
Total accumulated earnings--net $ 391,879,946
===============
* On June 30, 2006, the Fund had a net capital loss carryforward of
$42,315,428, all of which expires in 2010. Subject to limitations,
this amount will be available to offset like amounts of future
taxable gains.
** The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on wash
sales, the realization for tax purposes of unrealized gains on certain
foreign currency contracts, the realization for tax purposes of unrealized
gains on investments in passive foreign investment companies, and other
book/tax temporary differences.
8. Change in Independent Registered Public Accounting Firm:
Effective August 28, 2006, Ernst & Young LLP ("E&Y") resigned as Independent
Registered Public Accounting Firm of the Fund.
E&Y's report on the financial statements of the Fund for the past five fiscal
years did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principles.
In connection with its audits for the two most recent fiscal years and through
June 30, 2006 (1) there were no disagreements with E&Y on any matter of
accounting principle or practices, financial statement disclosure or auditing
scope or procedure, whereby such disagreements, if not resolved to the
satisfaction of E&Y, would have caused them to make reference to the subject
matter of the disagreements in connection with their report on the financial
statements for such years; and (2) there have been no reportable events (as
defined in Item 304(a)(1)(v) of Regulation S-K).
The Fund engaged Deloitte & Touche LLP as the Fund's Independent Registered
Public Accounting Firm for the fiscal year ending June 30, 2007.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
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 (the "Fund") (one of the portfolios comprising Mercury Funds II) as of
June 30, 2006, the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
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,
and evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of June 30, 2006, by
correspondence with the custodian and brokers. 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, 2006, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the indicated periods in conformity with U.S. generally accepted accounting
principles.
(Ernst & Young LLP)
Philadelphia, Pennsylvania
August 9, 2006
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, 2006:
Record Date August 10, 2005 December 13, 2005
Payable Date August 16, 2005 December 19, 2005
Qualified Dividend Income for Individuals 100.00%* 100.00%*
Foreign Source Income 87.73%* 84.50%*
Foreign Taxes Paid Per Share $ .054742 $ .018941
* Expressed as a percentage of the cash distribution grossed-up for
foreign taxes.
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.
Additionally, the Fund paid long-term capital gain distributions of $1.329751
and $.662840 per share to shareholders of record on August 10, 2005 and
December 13, 2005, respectively.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement--Matters Considered by the Board
In connection with the Transaction between Merrill Lynch and BlackRock, the
Fund's Board of Trustees considered a new investment advisory agreement (the
"New Investment Advisory Agreement") between the Fund and BlackRock Advisors,
Inc. or its successor ("BlackRock Advisors"). If the New Investment Advisory
Agreement is approved by the Fund's shareholders, it will become effective
upon the closing of the Transaction, which is expected in the third quarter of
2006.
The Board discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent trustees, approved the New Investment Advisory Agreement at a
meeting held on May 9, 2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent trustees, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the New Investment Advisory
Agreement. The additional information was provided in advance of the May 9,
2006 meeting. In addition, the independent trustees consulted with their
counsel and Fund counsel on numerous occasions, discussing, among other things,
the legal standards and certain other considerations relevant to the trustees'
deliberations.
At the Board meetings, the trustees discussed with Merrill Lynch management
and certain BlackRock representatives the Transaction, its strategic rationale
and BlackRock's general plans and intentions regarding the Fund. At these
Board meetings, representatives of Merrill Lynch and BlackRock made
presentations to and responded to questions from the Board. The trustees also
inquired about the plans for and anticipated roles and responsibilities of
certain employees and officers of the Investment Adviser and certain
affiliates being transferred to BlackRock in connection with the Transaction.
The independent trustees of the Board also conferred separately and with their
counsel about the Transaction and other matters related to the Transaction on
a number of occasions, including in connection with the April and May 2006
meetings. After the presentations and after reviewing the written materials
provided, the independent trustees met in executive sessions with their
counsel to consider the New Investment Advisory Agreement.
In connection with the Board's review of the New Investment Advisory
Agreement, Merrill Lynch and/or BlackRock advised the trustees about a variety
of matters. The advice included the following, among other matters:
* that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Fund and its shareholders by BlackRock
Advisors, including compliance services;
* that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented professionals;
* that the Fund should benefit from having access to BlackRock's state of the
art technology and risk management analytic tools, including investment
tools, provided under the BlackRock Solutions (R) brand name;
* that BlackRock has no present intention to alter any applicable expense
waivers or reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of the Board
before making any changes;
* that BlackRock and Merrill Lynch will enter into an agreement, for an
initial three-year period and automatically renewable from year to year
thereafter, in connection with the Transaction under which Merrill Lynch-
affiliated broker-dealers will continue to offer the Fund as an investment
product;
* that BlackRock Advisors will have substantially the same access to the
Merrill Lynch sales force when distributing shares of the Fund as is
currently provided to the Investment Adviser and that other arrangements
between the Investment Adviser and Merrill Lynch sales channels will be
preserved;
* that the Fund will have access to BlackRock's network of third party
brokers, retirement plan platforms and registered investment advisers;
* that in connection with the Transaction, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in compliance
with the conditions of Section 15(f) of the Investment Company Act of 1940
(the "1940 Act") in relation to any public funds advised by BlackRock or
the Investment Adviser (or its affiliates), respectively; and
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Disclosure of New Investment Advisory Agreement (continued)
* that Merrill Lynch and BlackRock would derive benefits from the Transaction
and that, as a result, they have a different financial interest in the
matters that were being considered than do Fund shareholders.
The trustees considered the information provided by Merrill Lynch and
BlackRock above, and, among other factors, the following:
* the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies of
scale and access to investment opportunities;
* the potential for expanding distribution of Fund shares through improved
access to third party distribution;
* the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength and
resources of New BlackRock;
* the compliance policies and procedures of BlackRock Advisors;
* the terms and conditions of the New Investment Advisory Agreement,
including the fact that the Fund's advisory fee schedule will not increase
by virtue of the New Investment Advisory Agreement and, because breakpoints
were added to the Fund's advisory fee schedule, will lower the Fund's
average fee rate if the Fund grows in size;
* that in November 2005, the Board performed a full annual review of the
investment advisory agreement currently in effect for the Fund (the
"Current Investment Advisory Agreement") as required by the 1940 Act and
has determined that the Investment Adviser has the capabilities, resources
and personnel necessary to provide the advisory and administrative services
currently provided to the Fund; and that the advisory and/or management
fees paid by the Fund, taking into account any applicable agreed-upon fee
waivers and breakpoints, represent reasonable compensation to the
Investment Adviser in light of the services provided, the costs to the
Investment Adviser of providing those services, economies of scale, the
fees and other expenses paid by similar funds (including information
provided by Lipper Inc. ["Lipper"]), and such other matters as the trustees
have considered relevant in the exercise of their reasonable judgment; and
* that Merrill Lynch agreed to pay all expenses of the Fund in connection
with the Board's consideration of the New Investment Advisory Agreement and
related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Fund would bear no costs
in obtaining shareholder approval of the New Investment Advisory Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed the
nature, scope and quality of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting, marketing
services and assistance in meeting legal and regulatory requirements. In its
review of the New Investment Advisory Agreement, the Board also considered a
range of information in connection with its oversight of the services to be
provided by BlackRock Advisors and its affiliates. Among the matters
considered were: (a) fees (in addition to management fees) to be paid to
BlackRock Advisors and its affiliates by the Fund; (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 BlackRock Advisors' compliance
policies and procedures; and (d) the nature, cost and character of non-
investment management services to be provided by BlackRock Advisors and its
affiliates.
In the period prior to the Board meetings to consider renewal of the Current
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the Current Investment Advisory Agreement. These
materials included (a) information compiled by 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) a discussion by the Fund's portfolio
management team on investment strategies used by the Fund during its most
recent fiscal year; (c) information on the profitability to the Investment
Adviser of the Current Investment Advisory Agreement and other payments
received by the Investment Adviser and its affiliates from the Fund; and (d)
information provided by the Investment Adviser concerning services related to
the valuation and pricing of Fund portfolio holdings, allocation of Fund
brokerage fees, the Fund's portfolio turnover statistics, and direct and
indirect benefits to the Investment Adviser and its affiliates from their
relationship with the Fund.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
In their deliberations, the trustees considered information received in
connection with their most recent continuation of the Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the New Investment Advisory Agreement. The trustees did not
identify any particular information that was all-important or controlling. The
trustees, including a majority of the independent trustees, concluded that the
terms of the New Investment Advisory Agreement are appropriate, that the fees
to be paid are reasonable in light of the services to be provided to the Fund,
and that the New Investment Advisory Agreement should be approved and
recommended to Fund shareholders.
Nature, Quality and Extent of Services Provided--The Board reviewed the
nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of
the Fund, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. The Board focused primarily on the Investment
Adviser's investment advisory services and the Fund's investment performance,
but also considered certain areas in which both the Investment Adviser and the
Fund receive services as part of the Merrill Lynch complex. The Board compared
the Fund's performance - both including and excluding the effects of fees and
expenses - 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.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the New Investment Advisory Agreement, the trustees
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of New BlackRock and how it
would affect the Fund; the ability of BlackRock Advisors to perform its duties
after the Transaction; and any anticipated changes to the current investment
and other practices of the Fund.
The trustees were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the
art technology and risk management analytic tools, including the investment
tools provided under the BlackRock Solutions brand name.
The trustees were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund will continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch
affiliates (for example, transactions with a Merrill Lynch broker-dealer
acting as principal) absent revised or new regulatory relief. The trustees
were advised that a revision of existing regulatory relief with respect to
these restrictions was being sought from the Securities and Exchange
Commission and were advised of the possibility of receipt of such revised
regulatory relief. There can be no assurance that such relief will be
obtained.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the trustees
determined that the nature and quality of services to be provided to the Fund
under the New Investment Advisory Agreement were expected to be as good or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in
personnel following the Transaction and the combination of the operations of
the Investment Adviser and its affiliates with those of BlackRock. The
trustees noted that if current portfolio managers or other personnel cease to
be available, the Board would consider all available options, which could
include seeking the investment advisory or other services of BlackRock
affiliates. Accordingly, the trustees concluded that, overall, they were
satisfied at the present time with assurances from BlackRock and BlackRock
Advisors as to the expected nature, extent and quality of the services to be
provided to the Fund under the New Investment Advisory Agreement.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Disclosure of New Investment Advisory Agreement (concluded)
Costs of Services Provided and Profitability--It was noted that, in
conjunction with the recent review of the Current Investment Advisory
Agreement, the trustees had received, among other things, a report from Lipper
comparing the Fund's fees, expenses and performance to those of a peer group
selected by Lipper, and information as to the fees charged by the Investment
Adviser or its affiliates to other registered investment company clients for
investment management services. 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 fees and the
effects of any fee waivers - compared to the other funds in its Lipper
category. They also compared the Fund's total expenses to those of other
comparable funds. The information showed that the Fund had fees and expenses
within the range of fees and expenses of comparable funds. The Board concluded
that the Fund's management fee and fee rate and overall expense ratio are
reasonable compared to those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, the trustees considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on their review of the materials provided and the
fact that the New Investment Advisory Agreement is substantially similar to
the Current Investment Advisory Agreement in all material respects, including
the rate of compensation, the trustees determined that the Transaction should
not increase the total fees payable, including any fee waivers or after any
expense caps or expense reimbursements, for advisory and administrative
services. The trustees noted that it was not possible to predict how the
Transaction would affect BlackRock Advisors' profitability from its
relationship with the Fund.
The trustees discussed with BlackRock Advisors its general methodology to be
used in determining its profitability with respect to its relationship with
the Fund and noted that they expect to receive profitability information from
BlackRock Advisors on at least an annual basis.
Fees and 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.
Breakpoints were added to the Fund's fee schedule that would have the effect
of lowering the Fund's average fee rates if the Fund grows in size. Otherwise,
the Board determined that changes were not currently necessary and that the
Fund appropriately participated in these economies of scale.
In reviewing the Transaction, the trustees considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the trustees determined
that as a result of the Transaction, the Fund's total advisory fees would be
no higher than the fees under its Current Investment Advisory Agreement. The
trustees concluded that, because the rates for advisory fees for the Fund
would be no higher than its current fee rates, the proposed management fee
structure, including any fee waivers and the addition of breakpoints that
would have the effect of lowering the Fund's average fee rates if the Fund
grows in size, was reasonable and that no additional changes were currently
necessary.
Fall-Out Benefits--The trustees considered whether the Fund would generate any
fall-out benefits to BlackRock Advisors. Fall-out benefits are indirect
profits from other activities that accrue to the adviser or its affiliates
solely because of the existence of the Fund. In evaluating the fall-out
benefits to be received by BlackRock Advisors under the New Investment
Advisory Agreement, the trustees considered whether the Transaction would have
an impact on the fall-out benefits received by the Investment Adviser by
virtue of the Current Investment Advisory Agreement. Based on their review of
the materials provided, including materials received in connection with their
most recent approval or continuance of the Current Investment Advisory
Agreement, and their discussions with management of the Investment Adviser and
BlackRock, the trustees determined that those benefits could include increased
ability for BlackRock to distribute shares of its funds and other investment
products and to obtain research services using the Fund's portfolio
transaction brokerage commissions. The trustees noted that any such benefits
were difficult to quantify with certainty at this time, and indicated that
they would continue to evaluate them going forward.
Investment Performance--The trustees considered investment performance for the
Fund. The trustees compared the Fund's performance - both including and
excluding the effects of fees and expenses - to the performance of a
comparable group of mutual funds, and the performance of a relevant index or
combination of indexes. The comparative information received from Lipper
showed Fund performance at various levels within the range of performance of
comparable funds over different time periods. The trustees believed the Fund's
performance was satisfactory. The Board noted BlackRock's considerable
investment management experience and capabilities, but was unable to predict
what effect, if any, consummation of the Transaction would have on the future
performance of the Fund.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Conclusion--After the independent trustees of the Fund deliberated in
executive session, the entire Board, including the independent trustees,
approved the New Investment Advisory Agreement, concluding that the advisory
fee rate was reasonable in relation to the services provided and that the New
Investment Advisory Agreement was in the best interests of the shareholders.
In approving the New Investment Advisory Agreement, the Board noted that it
anticipated reviewing the continuance of the agreement in advance of the
expiration of the initial two-year period.
Contingent BlackRock Subadvisory Agreement--Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at
which the Board of Trustees discussed and approved the New Investment Advisory
Agreement, the Board, including the independent trustees, also discussed and
approved a contingent subadvisory agreement (the "Contingent Subadvisory
Agreement") between the Investment Adviser and BlackRock Advisors (the
"BlackRock Subadviser"). The Contingent Subadvisory Agreement is intended to
ensure that the Fund operate with efficient portfolio management services
until the closing of the Transaction, in the event that the Board deems it
necessary and in the best interests of the Fund and its shareholders that the
BlackRock Subadviser assist in managing the operations of the Fund during the
interim period until the closing of the Transaction. If shareholders approve
the Contingent Subadvisory Agreement, it will take effect only upon
recommendation from the Investment Adviser and upon subsequent approval of the
Board in the period up to the closing of the Transaction. The effectiveness of
the Contingent Subadvisory Agreement, therefore, would be contingent on
further Board approval after shareholders approve it. Pursuant to the
Contingent Subadvisory Agreement, the BlackRock Subadviser would receive a
monthly fee from the Investment Adviser equal to 50% of the advisory fee
received by the Investment Adviser. The Investment Adviser would pay the
BlackRock Subadviser out of its own resources. There would be no increase in
Fund expenses as a result of the Contingent Subadvisory Agreement.
In making its approval at the May in-person meeting, the Board considered the
Contingent Subadvisory Agreement in conjunction with the New Investment
Advisory Agreement and reviewed the same information and factors discussed
above, and came to the same conclusions. The Board also considered in
conjunction with the Contingent Subadvisory Agreement the necessity of
ensuring that the Fund operate with effective management services until the
closing of the Transaction. In reviewing the subadvisory fee rate provided in
the Contingent Subadvisory Agreement, the Board took note of the fact that
both the Investment Adviser and the BlackRock Subadviser would have
significant responsibilities under their respective advisory agreements. The
Investment Adviser would remain responsible for oversight of the Fund's
operations and administration and the BlackRock Subadviser would provide
advisory services to the Fund under the Contingent Subadvisory Agreement. The
Board also took into account the expected short duration of the term of any
Contingent Subadvisory Agreement and the fact that total advisory fees paid by
the Fund would not increase as a result of the Contingent Subadvisory
Agreement. Under all of the circumstances, the Board concluded that it was a
reasonable allocation of fees for the BlackRock Subadviser to receive 50% of
the advisory fee paid by the Fund to the Investment Adviser.
After the independent trustees deliberated in executive session, the entire
Board, including the independent trustees, approved the Contingent Subadvisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Subadvisory Agreement was in the
best interests of shareholders.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
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 131 Funds None
P.O. Box 9011 and present 2005; President and Chief Investment Officer 178 Portfolios
Princeton, Trustee of MLIM and FAM since 2001; Co-Head (Americas
NJ 08543-9011 Region) thereof from 2000 to 2001 and Senior
Age: 51 Vice President from 1999 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
OppenheimerFunds 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 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.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
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*
James H. Bodurtha** Trustee 2002 to Director, The China Business Group, Inc. since 39 Funds None
P.O. Box 9095 present 1996 and Executive Vice President thereof from 59 Portfolios
Princeton, 1996 to 2003; Chairman of the Board, Berkshire
NJ 08543-9095 Holding Corporation since 1980; Partner, Squire,
Age: 62 Sanders & Dempsey from 1980 to 1993.
Kenneth A. Froot Trustee 2005 to Professor, Harvard University since 1992; 39 Funds None
P.O. Box 9095 present Professor, Massachusetts Institute of 59 Portfolios
Princeton, Technology from 1986 to 1992.
NJ 08543-9095
Age: 48
Joe Grills** Trustee 1996 to Member of the Committee of Investment of 39 Funds Kimco Realty
P.O. Box 9095 present Employee Benefit Assets of the Association 59 Portfolios Corporation
Princeton, of Financial Professionals ("CIEBA") since
NJ 08543-9095 1986; Member of CIEBA's Executive Committee
Age: 71 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 from 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, 2006
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 Chairman of the Board of Directors of Vigilant 39 Funds None
P.O. Box 9095 present Research, Inc. since 2006; Director of Reflex 59 Portfolios
Princeton, Security since 2006; Director of Cerego, LLC
NJ 08543-9095 since 2006; Director of InnoCentive, Inc. since
Age: 67 2006; Professor Emeritus, New York University
since 2005; John M. Olin Professor of Humanities,
New York University from 1993 to 2005; and
Professor thereof from 1980 to 2005; President,
Hudson Institute since 1997 and Trustee thereof
since 1980; Dean, Gallatin Division of New York
University from 1976 to 1993; Distinguished
Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon Corp.
from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993.
Roberta Cooper Ramo Trustee 2002 to Shareholder, Modrall, Sperling, Roehl, Harris 39 Funds None
P.O. Box 9095 present & Sisk, P.A. since 1993; President, American 59 Portfolios
Princeton, Bar Association from 1995 to 1996 and Member
NJ 08543-9095 of the Board of Governors thereof from 1994
Age: 63 to 1997; Shareholder, Poole, Kelly and Ramo,
Attorneys at Law P.C. from 1977 to 1993;
Director of 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 39 Funds None
P.O. Box 9095 present adviser) from 1994 to 2005; Chairman and CEO 59 Portfolios
Princeton, of Salomon Brothers Asset Management Inc.
NJ 08543-9095 from 1992 to 1995; Chairman of Salomon Brothers
Age: 69 Equity 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.
* 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 of Trustees and the Audit Committee.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
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 Managing Director of MLIM and FAM since 2006 and Treasurer thereof since 1999;
P.O. Box 9011 President present First Vice President of MLIM and FAM from 1997 to 2005; Senior Vice President
Princeton, and and and Treasurer of Princeton Services since 1999 and Director since 2004; Vice
NJ 08543-9011 Treasurer 1999 to President of FAM Distributors, Inc. ("FAMD") since 1999 and Director since
Age: 46 present 2004; Vice President of MLIM and FAM from 1990 to 1997; Director of Taxation
of MLIM from 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 2000; Director of MLIM from 1993 to 2000.
P.O. Box 9011 President present
Princeton,
NJ 08543-9011
Age: 41
Rob Weatherston Vice 2005 to Director of MLIM since 2005; Vice President MLIM from 1999 to 2005.
P.O. Box 9011 President present
Princeton,
NJ 08543-9011
Age: 32
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice
P.O. Box 9011 Compliance present President and Chief Compliance Officer of MLIM (Americas Region) since 2004;
Princeton, Officer Chief Compliance Officer of the IQ Funds since 2004; Global Director of
NJ 08543-9011 Compliance at Morgan Stanley Investment Management from 2002 to 2004; Managing
Age: 54 Director and 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 Securities and Exchange 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
P.O. Box 9011 present to 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
Princeton, and Princeton Services since 2004.
NJ 08543-9011
Age: 46
* Officers of the Fund serve at the pleasure of the Board of Trustees.
Further information about the Fund's Officers and Trustees is available in
the Fund's Statement of Additional Information, which can be obtained without
charge by calling 1-800-637-3863.
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2006
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, 2006
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) Robert S. Salomon, Jr., and (3) Stephen B. Swensrud
(retired as of December 31, 2005).
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending June 30, 2006 - $36,000
Fiscal Year Ending June 30, 2005 - $34,000
(b) Audit-Related Fees - Fiscal Year Ending June 30, 2006 - $0
Fiscal Year Ending June 30, 2005 - $0
(c) Tax Fees - Fiscal Year Ending June 30, 2006 - $6,000
Fiscal Year Ending June 30, 2005 - $5,700
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending June 30, 2006 - $0
Fiscal Year Ending June 30, 2005 - $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, 2006 - $6,000
Fiscal Year Ending June 30, 2005 - $5,700
(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 23, 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: August 23, 2006
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch International Value Fund of Mercury Funds II
Date: August 23, 2006