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 811-08797
811-09049
Name of Fund: Merrill Lynch International Fund of Mercury Funds, Inc.
Merrill Lynch Master International Portfolio of Mercury Master
Trust
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 Fund of Mercury Funds, Inc. and
Merrill Lynch Master International Portfolio of Mercury Master Trust, 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: 05/31/05
Date of reporting period: 06/01/04 - 05/31/05
Item 1 - Report to Stockholders
Merrill Lynch
International Fund
Of Mercury Funds, Inc.
Annual Report
May 31, 2005
Merrill Lynch International Fund
Portfolio Information as of May 31, 2005
Merrill Lynch Master International Portfolio
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
Total SA .................................................... 4.0%
Royal Bank of Scotland Group Plc ............................ 2.5
UBS AG Registered Shares .................................... 2.4
Toyota Motor Corp. .......................................... 2.2
BNP Paribas ................................................. 1.9
Vodafone Group Plc .......................................... 1.9
Sanofi-Aventis .............................................. 1.9
AXA ......................................................... 1.8
Diageo Plc .................................................. 1.8
GlaxoSmithKline Plc ......................................... 1.8
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries* Net Assets
- --------------------------------------------------------------------------------
Commercial Banks ............................................ 16.2%
Oil, Gas & Consumable Fuels ................................. 8.6
Pharmaceuticals ............................................. 7.5
Wireless Telecommunication Services ......................... 5.5
Media ....................................................... 5.1
- --------------------------------------------------------------------------------
* For Portfolio compliance purposes, "Industries" means any one or more of
the industry sub-classifications used by one or more widely recognized
market indexes or ratings group indexes, and/or as defined by Portfolio
management. This definition may not apply for purposes of this report,
which may combine such industry sub-classifications for reporting ease.
Percent of
Geographic Allocation Total Investments
- --------------------------------------------------------------------------------
Europe (Ex United Kingdom) .................................. 41.7%
United Kingdom .............................................. 27.5
Japan ....................................................... 22.4
Pacific Basin/Asia (Ex Japan) ............................... 6.6
Latin America ............................................... 1.5
Other* ...................................................... 0.3
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments.
Percent of
Ten Largest Countries Net Assets
- --------------------------------------------------------------------------------
United Kingdom .............................................. 27.4%
Japan ....................................................... 22.3
France ...................................................... 10.7
Switzerland ................................................. 9.3
Germany ..................................................... 4.3
Netherlands ................................................. 3.8
Spain ....................................................... 3.3
Taiwan ...................................................... 3.2
Italy ....................................................... 2.2
Norway ...................................................... 2.0
- --------------------------------------------------------------------------------
Important Tax Information
The following information is provided with respect to the ordinary income
distribution paid by Merrill Lynch International Fund of Mercury Funds, Inc. to
shareholders of record on August 11, 2004:
- --------------------------------------------------------------------------------
Qualified Dividend Income for Individuals ................... 100.00%
Foreign Source Income ....................................... 96.80%
Foreign Taxes Paid Per Share ................................ $.095916
- --------------------------------------------------------------------------------
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.
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.
2 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
A Letter From the President
Dear Shareholder
After expanding at an annualized rate of 4.4% in 2004, U.S. gross domestic
product grew at an estimated 3.5% in the first quarter of 2005. The slowdown was
not entirely unexpected given last year's healthy growth and the evolution of
the economic cycle. The Federal Reserve Board -- with one eye firmly affixed on
the economic indicators and the other on inflationary measures -- has increased
the federal funds rate by 25 basis points (.25%) at each of its eight meetings
since June 2004. At period-end, the target short-term interest rate stood at 3%.
U.S. equity markets ended 2004 in a strong rally, but have struggled to record
meaningful gains in 2005. The potential for slowing economic and corporate
earnings growth, as well as volatile energy prices, have intermittently hampered
equity market progress. On the positive side, corporate transactions, such as
mergers and acquisitions, stock buy-backs and dividend payouts, have all
increased. In Asia, equities have continued to benefit from higher economic
growth prospects and valuations that appear inexpensive relative to other parts
of the world.
In the bond market, the yield curve flattening "conundrum" continued as
short-term and long-term yields moved still closer together. Over the past year,
the two-year Treasury yield increased 106 basis points while the 10-year
Treasury yield declined 66 basis points. At May 31, 2005, the two-year Treasury
note yielded 3.60% and the 10-year Treasury note yielded 4%. The falling
long-term rates may be partly attributed to foreign interest in U.S. assets and
increased issuance of short-term Treasury bonds to finance the federal deficit.
Notably, the government is considering the reissuance of the 30-year Treasury,
which was suspended in August 2001. This would allow the U.S. Treasury to adopt
a more flexible approach to borrowing, while providing investors with another
long-term fixed income option.
Amid these conditions, the major benchmarks posted six-month and 12-month
returns as follows:
Total Returns as of May 31, 2005 6-month 12-month
==========================================================================================
U.S. equities (Standard & Poor's 500 Index) +2.42% + 8.24%
- ------------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) -2.10% + 9.82%
- ------------------------------------------------------------------------------------------
International equities (MSCI Europe, Australasia and Far East Index) +1.81% +14.62%
- ------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +2.90% + 6.82%
- ------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +3.51% + 7.96%
- ------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) +0.60% + 9.97%
- ------------------------------------------------------------------------------------------
While the environment is likely to remain somewhat challenging, we believe
opportunities exist for investors. With this in mind, we encourage you to meet
with your financial advisor to review your goals and asset allocation and to
rebalance your portfolio, as necessary, to ensure it remains aligned with your
objectives and risk tolerance. As always, we thank you for trusting Merrill
Lynch Investment Managers with your investment assets, and we look forward to
serving you in the months and years ahead.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director/Trustee
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 3
A Discussion With Your Fund's Portfolio Manager
The Fund provided positive total returns for the fiscal year, outpacing
the average return of the Lipper International Large Cap Core Funds category in
an environment characterized by largely rising equity markets.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended May 31, 2005, Merrill Lynch International Fund's
Class A, Class B, Class C and Class I Shares had total returns of +13.04%,
+12.10%, +12.10% and +13.31%, 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
+14.62%. The Fund outperformed its comparable Lipper category of International
Large Cap Core Funds, which posted an average return of +11.85% for the 12-month
period. (Funds in this Lipper category invest at least 75% of their equity
assets in companies outside the United States with market capitalizations, on a
three-year weighted basis, greater than the 250th-largest company in the
S&P/Citigroup World ex-U.S. Broad Market Index.)
International equity markets rose over the period, despite a significant
increase in oil prices. Although investors were concerned about a deceleration
in global economic growth, U.S. data releases suggested that growth would
stabilize around trend levels. Relatively benign inflation readings also eased
concern over rising U.S. interest rates.
European economic performance continued to disappoint, particularly in Germany,
and there were concerns over the impact of the strengthening euro. However,
European equities rose as investors were encouraged by U.S. economic
performance, with the strengthening euro adding to returns for U.S.-dollar-based
investors. Japan was the worst-performing of the major regions in the MSCI EAFE
Index as investors worried that slowing global economic growth may derail the
domestic economic recovery.
Contributing most to Fund performance during the year was the financials sector,
where our holdings of European banks performed well. Allied Irish Banks Plc and
Bank of Ireland benefited from evidence that operating conditions in the Irish
market remained supportive. Italy's Banca Intesa SpA exceeded earnings
expectations, driven by lower operating costs and provisioning. We sold our
position in Banca Intesa at a profit in May, based on our concern that the
weakening Italian economy could restrain loan growth and impede further stock
price gains.
In the energy sector, our overweighting of oil companies benefited performance.
A number of holdings, including BP Plc in the U.K. and Statoil ASA in Norway,
made sharp gains on the back of rising oil prices. Stock selection within
industrials also contributed positively, with our positions in KONE Corporation
and Smiths Group Plc providing strong returns for the year. KONE, the Finnish
lift manufacturer, benefited as Asian demand led to strong growth in their
Cargotech business. Shares of U.K.-based Smiths benefited after the company
reported strong organic growth prospects in the medium-term, and also were aided
by a recovery in the commercial aerospace industry.
The main drag on Fund performance relative to the benchmark was our
underweighting of mining and metals stocks, which benefited from strong
commodity prices over the period. While we recognized the positive near-term
environment for these companies, we had concerns over rising costs and
increasing capacity in the medium term -- concerns that we felt were not
reflected in the stock prices.
More generally, the Fund's holdings of blue chip Japanese exporters were
impacted by anxieties over the weakening U.S. dollar, rising gasoline prices and
the health of U.S. consumer spending. Toyota Motor Corp. and Nissan Motor Co.,
Ltd. suffered despite continued sales strength and market share gains,
particularly in the United States. Our analysis suggests that the stocks remain
attractively valued given our expectation that a combination of superior
products and lean cost structures will sustain earnings growth.
4 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
What changes were made to the Portfolio during the year?
Within the energy sector, we increased our exposure to oil companies, such as
Statoil and France's Total SA, during the third quarter of 2004. Our analysis
suggested that the long-term oil price assumptions embedded into some stocks
were too low. We subsequently trimmed our overweighting of the sector toward the
end of the year following strong gains and, at period-end, we maintained a
neutral weighting in energy relative to the benchmark.
We increased our exposure to the financials sector through selected
opportunities in diversified financials and insurance. In diversified
financials, we increased our holding in the Netherland's ING Groep NV. We
believe ING is positioned to benefit from the attractive growth potential in
direct banking and the commitment by its new management to address
underperforming areas of the business. Within insurance, we initiated a position
in U.K.-based Prudential Plc. We see improving prospects for the larger U.K.
life insurance and pension businesses, in light of growing regulatory
requirements and solid growth potential in Asia.
In the health care sector, we initiated positions in dental implant
manufacturers Nobel Biocare Holding AG and Straumann Holding AG, both based in
Switzerland. This specialized market is immature but growing rapidly as
technology improves and the procedures used to insert dental implants become
easier and quicker to perform. This enables general dentists to use implants,
opening up the opportunity for increased market penetration. We view this market
as a high growth area within health care and believe that investors are
underestimating the growth rate and earnings power of these companies.
We reduced our exposure to the industrials sector, where we found further upside
to be limited following strong gains from a number of stocks. Finally, we
increased our underweighting of the materials sector based on concerns regarding
overpriced valuations.
How would you characterize the Portfolio's position at the close of the period?
We expect global economic growth to decelerate toward trend levels against a
backdrop of gently rising U.S. interest rates and higher oil prices. In this
environment, we believe that investors will become more sensitive to valuations
and seek companies that have more sustainable earnings power. For that reason,
we retain our bias toward higher-quality franchises where valuations are
reasonable.
The Portfolio's current positioning reflects our view that economically
sensitive stocks are generally fully valued. We ended the period underweight
versus the benchmark in industrials, materials and technology. Conversely, we
have been able to find a number of attractively valued, growing companies in
consumer staples and health care, which accounts for our overweighting in these
sectors. Elsewhere, the Portfolio ended the period overweight in investment
banks and insurance companies and underweight in utility stocks.
In terms of geographic allocation, our bottom-up company preferences have led us
to an overweighting in Japanese and emerging market stocks and an underweighting
in European-listed stocks.
Ian Rowley
Vice President and Portfolio Manager
June 16, 2005
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 5
Performance Data
About Fund Performance
Investors are able to purchase shares of the Fund through multiple pricing
alternatives.
o 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).
o Class B Shares are subject to a maximum contingent deferred sales charge
of 4% declining to 0% after the sixth year. 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.
o Class C Shares are subject to a distribution fee of 0.75% per year and an
account maintenance fee of 0.25% per year. In addition, Class C Shares may
be subject to a 1% contingent deferred sales charge if redeemed within one
year of purchase.
o Class I Shares incur a maximum initial sales charge of 5.25% and bear no
ongoing distribution or account maintenance fees. Class I Shares are
available only to eligible investors.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain performance data current to the
most recent month-end. Performance results do not reflect the deduction of taxes
that a shareholder would pay on fund distributions or the redemption of fund
shares. The Fund may charge a 2% redemption fee for sales or exchanges of shares
within 30 days of purchase. Performance data does not reflect this potential
fee. Figures shown in each of the following tables assume reinvestment of all
dividends and capital gain distributions, if any, at net asset value on the
ex-dividend date. Investment return and principal value of shares will fluctuate
so that shares, when redeemed, may be worth more or less than their original
cost. Dividends paid to each class of shares will vary because of the different
levels of account maintenance, distribution and transfer agency fees applicable
to each class, which are deducted from the income available to be paid to
shareholders.
Recent Performance Results
6-Month 12-Month Since Inception
As of May 31, 2005 Total Return Total Return Total Return
==============================================================================================
ML International Fund Class A Shares* +1.43% +13.04% + 7.03%
- ----------------------------------------------------------------------------------------------
ML International Fund Class B Shares* +1.06 +12.10 + 1.70
- ----------------------------------------------------------------------------------------------
ML International Fund Class C Shares* +1.06 +12.10 + 1.70
- ----------------------------------------------------------------------------------------------
ML International Fund Class I Shares* +1.62 +13.31 + 8.87
- ----------------------------------------------------------------------------------------------
MSCI Europe, Australasia and Far East Index** +1.81 +14.62 +27.81
- ----------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would
be lower if sales charges were included. Cumulative total investment
returns are based on changes in the Fund's net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
at net asset value on the ex-dividend date. The Fund's inception date is
10/30/98.
** This unmanaged broad-based Index measures the total returns of developed
foreign stock markets in Europe, Australasia and the Far East. Since
inception total return is from 10/30/98.
6 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Performance Data (continued)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class A & Class
B Shares compared to growth of an investment in the MSCI Europe, Australasia and
Far East Index. Values are from October 30, 1998 to May 2005.:
10/30/98** 5/99 5/00 5/01 5/02 5/03 5/04 5/05
ML International
Fund+--Class A Shares* $9,475 $9,854 $11,901 $9,624 $8,614 $7,483 $8,971 $10,141
ML International
Fund+--Class B Shares* $10,000 $10,360 $12,399 $9,957 $8,837 $7,612 $9,072 $10,170
MSCI Europe,
Australasia and
Far East Index++ $10,000 $10,934 $12,809 $10,602 $9,584 $8,405 $11,151 $12,781
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ The Fund invests all of its assets in Merrill Lynch Master International
Portfolio. The Portfolio invests primarily in stocks of companies located
outside of the United States that its management believes are undervalued
or have good prospects for earnings growth.
++ This unmanaged broad-based Index measures the total returns of developed
foreign stock markets in Europe, Australasia and the Far East.
Past performance is not predictive of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 5/31/05 +13.04% +7.11%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/05 - 3.15 -4.19
- --------------------------------------------------------------------------------
Inception (10/30/98)
through 5/31/05 + 1.04 +0.21
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
One Year Ended 5/31/05 +12.10% +8.10%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/05 - 3.89 -4.25
- --------------------------------------------------------------------------------
Inception (10/30/98)
through 5/31/05 + 0.26 +0.26
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 7
Performance Data (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's Class C & Class
I Shares compared to growth of an investment in the MSCI Europe, Australasia and
Far East Index. Values are from October 30, 1998 to May 2005.:
10/30/98** 5/99 5/00 5/01 5/02 5/03 5/04 5/05
ML International
Fund+--Class C Shares* $10,000 $10,360 $12,399 $9,957 $8,838 $7,612 $9,072 $10,170
ML International
Fund+--Class I Shares* $9,475 $9,873 $11,946 $9,687 $8,684 $7,569 $9,104 $10,315
MSCI Europe,
Australasia and
Far East Index++ $10,000 $10,934 $12,809 $10,602 $9,584 $8,405 $11,151 $12,781
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
+ The Fund invests all of its assets in Merrill Lynch Master International
Portfolio. The Portfolio invests primarily in stocks of companies located
outside of the United States that its management believes are undervalued
or have good prospects for earnings growth.
++ This unmanaged broad-based Index measures the total returns of developed
foreign stock markets in Europe, Australasia and the Far East.
Past performance is not predictive of future results.
Average Annual Total Return
Return Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
One Year Ended 5/31/05 +12.10% +11.10%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/05 - 3.89 - 3.89
- --------------------------------------------------------------------------------
Inception (10/30/98)
through 5/31/05 + 0.26 + 0.26
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class I Shares*
================================================================================
One Year Ended 5/31/05 +13.31% +7.36%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/05 - 2.89 -3.93
- --------------------------------------------------------------------------------
Inception (10/30/98)
through 5/31/05 + 1.30 +0.47
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
8 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses related
to transactions, including sales charges, redemption fees and exchange fees; and
(b) operating expenses including advisory fees, distribution fees including
12(b)-1 fees, and other Fund expenses. The following example (which is based on
a hypothetical investment of $1,000 invested on December 1, 2004 and held
through May 31, 2005) is intended to assist shareholders both in calculating
expenses based on an investment in the Fund and in comparing these expenses with
similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders ongoing
costs only and do not reflect any transactional expenses, such as sales charges,
redemption fees or exchange fees. Therefore, the second table is useful in
comparing ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these transactional
expenses were included, shareholder expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value December 1, 2004 to
December 1, 2004 May 31, 2005 May 31, 2005
==========================================================================================================
Actual
==========================================================================================================
Class A $1,000 $1,014.30 $ 9.74
- ----------------------------------------------------------------------------------------------------------
Class B $1,000 $1,010.60 $13.63
- ----------------------------------------------------------------------------------------------------------
Class C $1,000 $1,010.60 $13.68
- ----------------------------------------------------------------------------------------------------------
Class I $1,000 $1,016.20 $ 8.50
==========================================================================================================
Hypothetical (5% annual return before expenses)**
==========================================================================================================
Class A $1,000 $1,015.26 $ 9.75
- ----------------------------------------------------------------------------------------------------------
Class B $1,000 $1,011.37 $13.64
- ----------------------------------------------------------------------------------------------------------
Class C $1,000 $1,011.32 $13.69
- ----------------------------------------------------------------------------------------------------------
Class I $1,000 $1,016.50 $ 8.50
- ----------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.94% for Class A, 2.72% for Class B, 2.73% for Class
C and 1.69% for Class I), multiplied by the average account value over the
period, multiplied by 182/365 (to reflect the one-half year period shown).
Because the Fund is a feeder fund, the expense table example reflects the
expenses of both the feeder fund and the master fund in which it invests.
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most fiscal half-year divided by 365.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 9
Statement of Assets and Liabilities Merrill Lynch International Fund
As of May 31, 2005
=======================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------
Investment in Merrill Lynch Master International Portfolio
(the "Portfolio"), at value (identified cost--$99,419,946) . $ 122,400,614
Prepaid expenses ............................................ 48,783
-------------
Total assets ................................................ 122,449,397
-------------
=======================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------
Payables:
Other affiliates ......................................... $ 95,050
Distributor .............................................. 86,291
Administrator ............................................ 21,217 202,558
-------------
Accrued expenses ............................................ 20,904
-------------
Total liabilities ........................................... 223,462
-------------
=======================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Net assets .................................................. $ 122,225,935
=============
=======================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------
Class A Shares of Common Stock, $.0001 par value,
100,000,000 shares authorized .............................. $ 182
Class B Shares of Common Stock, $.0001 par value,
100,000,000 shares authorized .............................. 727
Class C Shares of Common Stock, $.0001 par value,
100,000,000 shares authorized .............................. 240
Class I Shares of Common Stock, $.0001 par value,
100,000,000 shares authorized .............................. 119
Paid-in capital in excess of par ............................ 201,891,574
Undistributed investment income--net ........................ $ 115,771
Accumulated realized capital losses allocated from the
Portfolio--net ............................................. (102,763,346)
Unrealized appreciation allocated from the Portfolio--net ... 22,980,668
-------------
Total accumulated losses--net ............................... (79,666,907)
-------------
Net Assets .................................................. $ 122,225,935
=============
=======================================================================================================================
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $18,058,250 and 1,816,209
shares outstanding ......................................... $ 9.94
=============
Class B--Based on net assets of $69,341,881 and 7,267,995
shares outstanding ......................................... $ 9.54
=============
Class C--Based on net assets of $22,879,443 and 2,399,025
shares outstanding ......................................... $ 9.54
=============
Class I--Based on net assets of $11,946,361 and 1,188,666
shares outstanding ......................................... $ 10.05
=============
See Notes to Financial Statements.
10 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Statement of Operations Merrill Lynch International Fund
For the Year Ended May 31, 2005
=======================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------
Net investment income allocated from the Portfolio:
Dividends (net of $378,282 foreign withholding tax) ...... $ 3,401,088
Securities lending--net .................................. 50,512
Interest from affiliates ................................. 2,352
Expenses ................................................. (1,331,726)
-------------
Total income ................................................ 2,122,226
=======================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------
Account maintenance and distribution fees--Class B .......... $ 751,633
Administration fees ......................................... 350,996
Transfer agent fees--Class B ................................ 334,359
Account maintenance and distribution fees--Class C .......... 255,328
Transfer agent fees--Class C ................................ 115,818
Transfer agent fees--Class A ................................ 108,898
Account maintenance fees--Class A ........................... 65,855
Printing and shareholder reports ............................ 65,162
Transfer agent fees--Class I ................................ 54,997
Registration fees ........................................... 43,054
Professional fees ........................................... 30,626
Other ....................................................... 14,882
-------------
Total expenses .............................................. 2,191,608
-------------
Investment loss--net ........................................ (69,382)
-------------
=======================================================================================================================
Realized & Unrealized Gain (Loss) Allocated from the Portfolio--Net
- -----------------------------------------------------------------------------------------------------------------------
Realized gain on investments and foreign currency
transactions--net .......................................... 17,797,795
Change in unrealized appreciation on investments and
foreign currency transactions--net ......................... (465,176)
-------------
Total realized and unrealized gain--net ..................... 17,332,619
-------------
Net Increase in Net Assets Resulting from Operations ........ $ 17,263,237
=============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 11
Statements of Changes in Net Assets Merrill Lynch International Fund
For the Year Ended
May 31,
-------------------------------
Increase (Decrease) in Net Assets: 2005 2004
=======================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------
Investment loss--net ........................................ $ (69,382) $ (15,554)
Realized gain--net .......................................... 17,797,795 15,981,361
Change in unrealized appreciation--net ...................... (465,176) 11,746,630
-------------------------------
Net increase in net assets resulting from operations ........ 17,263,237 27,712,437
-------------------------------
=======================================================================================================================
Dividends to Shareholders
- -----------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A .................................................. (20,937) --
Class I .................................................. (43,937) --
-------------------------------
Net decrease in net assets resulting from dividends to
shareholders ............................................... (64,874) --
-------------------------------
=======================================================================================================================
Capital Share Transactions
- -----------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from capital share
transactions ............................................... (41,513,114) (32,937,762)
-------------------------------
=======================================================================================================================
Redemption fees
- -----------------------------------------------------------------------------------------------------------------------
Redemption fees ............................................. 144 --
-------------------------------
=======================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets ................................ (24,314,607) (5,225,325)
Beginning of year ........................................... 146,540,542 151,765,867
-------------------------------
End of year* ................................................ $ 122,225,935 $ 146,540,542
===============================
* Undistributed investment income--net ................... $ 115,771 $ 65,411
===============================
See Notes to Financial Statements.
12 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Financial Highlights Merrill Lynch International Fund
Class A
---------------------------------------------------------------------
For the Year Ended May 31,
The following per share data and ratios have been derived ---------------------------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ..... $ 8.80 $ 7.34 $ 8.45 $ 9.44 $ 12.32
---------------------------------------------------------------------
Investment income (loss)--net* ......... .03 .04 .03 --+ (.01)
Realized and unrealized gain (loss)--net 1.12 1.42 (1.14) (.99) (2.24)
---------------------------------------------------------------------
Total from investment operations ....... 1.15 1.46 (1.11) (.99) (2.25)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.01) -- -- -- --
Realized gain--net .................. -- -- -- -- (.57)
In excess of realized gain--net ..... -- -- -- -- (.06)
---------------------------------------------------------------------
Total dividends and distributions ...... (.01) -- -- -- (.63)
---------------------------------------------------------------------
Net asset value, end of year ........... $ 9.94 $ 8.80 $ 7.34 $ 8.45 $ 9.44
=====================================================================
==================================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 13.04% 19.89% (13.14%) (10.49%) (19.13%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses++ ............................. 1.97% 2.00% 2.02% 1.87% 1.66%
=====================================================================
Investment income (loss)--net .......... .30% .55% .48% .06% (.07%)
=====================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) . $ 18,058 $ 28,428 $ 27,838 $ 33,815 $ 42,643
=====================================================================
Portfolio turnover of the Portfolio .... 48.76% 73.55% 132.93% 140.65% 88.01%
=====================================================================
* Based on average shares outstanding.
** Total investment returns exclude the effects of sales charges.
+ Amount is less than $.01 per share.
++ Includes the Fund's share of the Portfolio's allocated expenses.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 13
Financial Highlights (continued) Merrill Lynch International Fund
Class B
---------------------------------------------------------------------
For the Year Ended May 31,
The following per share data and ratios have been derived ---------------------------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ..... $ 8.51 $ 7.14 $ 8.29 $ 9.34 $ 12.24
---------------------------------------------------------------------
Investment loss--net* .................. (.02) (.02) (.02) (.06) (.10)
Realized and unrealized gain (loss)--net 1.05 1.39 (1.13) (.99) (2.21)
---------------------------------------------------------------------
Total from investment operations ....... 1.03 1.37 (1.15) (1.05) (2.31)
---------------------------------------------------------------------
Less distributions:
Realized gain--net .................. -- -- -- -- (.54)
In excess of realized gain--net ..... -- -- -- -- (.05)
---------------------------------------------------------------------
Total distributions .................... -- -- -- -- (.59)
---------------------------------------------------------------------
Net asset value, end of year ........... $ 9.54 $ 8.51 $ 7.14 $ 8.29 $ 9.34
=====================================================================
==================================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 12.10% 19.19% (13.87%) (11.24%) (19.69%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses+ .............................. 2.75% 2.80% 2.82% 2.64% 2.44%
=====================================================================
Investment loss--net ................... (.24%) (.25%) (.36%) (.77%) (.85%)
=====================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) . $ 69,342 $ 76,727 $ 75,953 $112,586 $167,788
=====================================================================
Portfolio turnover of the Portfolio .... 48.76% 73.55% 132.93% 140.65% 88.01%
=====================================================================
* Based on average shares outstanding.
** Total investment returns exclude the effects of sales charges.
+ Includes the Fund's share of the Portfolio's allocated expenses.
See Notes to Financial Statements.
14 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Financial Highlights (continued) Merrill Lynch International Fund
Class C
---------------------------------------------------------------------
For the Year Ended May 31,
The following per share data and ratios have been derived ---------------------------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ..... $ 8.51 $ 7.14 $ 8.29 $ 9.34 $ 12.24
---------------------------------------------------------------------
Investment loss--net* .................. (.02) (.02) (.03) (.07) (.10)
Realized and unrealized gain (loss)--net 1.05 1.39 (1.12) (.98) (2.21)
---------------------------------------------------------------------
Total from investment operations ....... 1.03 1.37 (1.15) (1.05) (2.31)
---------------------------------------------------------------------
Less distributions:
Realized gain--net .................. -- -- -- -- (.54)
In excess of realized gain--net ..... -- -- -- -- (.05)
---------------------------------------------------------------------
Total distributions .................... -- -- -- -- (.59)
---------------------------------------------------------------------
Net asset value, end of year ........... $ 9.54 $ 8.51 $ 7.14 $ 8.29 $ 9.34
=====================================================================
==================================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 12.10% 19.19% (13.87%) (11.24%) (19.70%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses+ .............................. 2.76% 2.82% 2.82% 2.64% 2.43%
=====================================================================
Investment loss--net ................... (.27%) (.29%) (.42%) (.83%) (.88%)
=====================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) . $ 22,879 $ 27,485 $ 32,018 $ 56,945 $109,170
=====================================================================
Portfolio turnover of the Portfolio .... 48.76% 73.55% 132.93% 140.65% 88.01%
=====================================================================
* Based on average shares outstanding.
** Total investment returns exclude the effects of sales charges.
+ Includes the Fund's share of the Portfolio's allocated expenses.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 15
Financial Highlights (concluded) Merrill Lynch International Fund
Class I
---------------------------------------------------------------------
For the Year Ended May 31,
The following per share data and ratios have been derived ---------------------------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ..... $ 8.90 $ 7.40 $ 8.49 $ 9.47 $ 12.34
---------------------------------------------------------------------
Investment income--net* ................ .07 .06 .05 .02 .02
Realized and unrealized gain (loss)--net 1.11 1.44 (1.14) (1.00) (2.25)
---------------------------------------------------------------------
Total from investment operations ....... 1.18 1.50 (1.09) (.98) (2.23)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net .............. (.03) -- -- -- --
Realized gain--net .................. -- -- -- -- (.59)
In excess of realized gain--net ..... -- -- -- -- (.05)
---------------------------------------------------------------------
Total dividends and distributions ...... (.03) -- -- -- (.64)
---------------------------------------------------------------------
Net asset value, end of year ........... $ 10.05 $ 8.90 $ 7.40 $ 8.49 $ 9.47
=====================================================================
==================================================================================================================================
Total Investment Return**
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ..... 13.31% 20.27% (12.84%) (10.35%) (18.91%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses+ .............................. 1.72% 1.77% 1.77% 1.61% 1.41%
=====================================================================
Investment income--net ................. .76% .75% .67% .22% .15%
=====================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) . $ 11,946 $ 13,901 $ 15,957 $ 25,281 $ 46,569
=====================================================================
Portfolio turnover of the Portfolio .... 48.76% 73.55% 132.93% 140.65% 88.01%
=====================================================================
* Based on average shares outstanding.
** Total investment returns exclude the effects of sales charges.
+ Includes the Fund's share of the Portfolio's allocated expenses.
See Notes to Financial Statements.
16 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Notes to Financial Statements Merrill Lynch International Fund
1. Significant Accounting Policies:
Merrill Lynch International Fund (the "Fund") is a series of Mercury Funds, Inc.
(the "Corporation"), which is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. The
Fund seeks to achieve its investment objective and strategies by investing all
of its assets in Merrill Lynch Master International Portfolio (the "Portfolio")
of Mercury Master Trust (the "Trust"), which has the same investment objective
and strategies as the Fund. The value of the Fund's investment in the Portfolio
reflects the Fund's proportionate interest in the net assets of the Portfolio.
The performance of the Fund is directly affected by the performance of the
Portfolio. The financial statements of the Portfolio, including the Schedule of
Investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements. 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 percentage of the Portfolio
owned by the Fund at May 31, 2005 was 100%. The Fund offers multiple classes of
shares. Shares of Class A and Class I are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class A, Class B,
and Class C Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain expenses related
to the distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to its account maintenance and distribution
expenditures (except that Class B shareholders may vote on certain changes to
the Class A distribution plan). Income, expenses (other than expenses
attributable to a specific class) and realized and unrealized gains and losses
are allocated daily to each class based on its relative net assets. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- The Fund records its investment in the Portfolio
at fair value. Valuation of securities held by the Portfolio is discussed in
Note 1(a) of the Portfolio's Notes to Financial Statements, which are included
elsewhere in this report.
(b) Investment income and expenses -- The Fund records daily its proportionate
share of the Portfolio's income, expenses and realized and unrealized gains and
losses. In addition, the Fund accrues its own expenses.
(c) 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 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.
(d) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(e) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(f) Investment transactions -- Investment transactions in the Portfolio are
accounted for on a trade date basis.
(g) 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, $184,616 has been reclassified between accumulated net realized capital
losses and undistributed net investment income as a result of permanent
differences attributable to foreign currency transactions and gains from the
sale of passive foreign investment companies. This reclassification has no
effect on net assets or net asset values per share.
2. Transactions with Affiliates:
The Corporation has entered into an Administration Agreement 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 Fund pays a monthly fee at an annual
rate of .25% of the Fund's average daily net assets for the performance of
administrative services (other than investment advice and related portfolio
activities) necessary for the operation of the Fund.
The Corporation has also entered into a Distribution Agreement and Distribution
Plan with FAM Distributors, Inc. ("FAMD" or the "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc. Pursuant to the Distribution Plan
adopted by the Corporation in accordance with Rule 12b-1 under the Investment
Company Act, the Fund pays the Distributor ongoing account maintenance and
distribution fees. The
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 17
Notes to Financial Statements (continued) Merrill Lynch International Fund
fees are accrued daily and paid monthly at annual rates based upon the average
daily net assets of the shares as follows:
- --------------------------------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- --------------------------------------------------------------------------------
Class A ................................ .25% --
Class B ................................ .25% .75%
Class C ................................ .25% .75%
- --------------------------------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), an affiliate of FAM, also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B, and Class C shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended May 31, 2005, FAMD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class I Shares as
follows:
- --------------------------------------------------------------------------------
FAMD MLPF&S
- --------------------------------------------------------------------------------
Class A .............................. $ 277 $2,555
Class I .............................. -- $ 3
- --------------------------------------------------------------------------------
For the year ended May 31, 2005, MLPF&S received contingent deferred sales
charges of $72,768 and $555 relating to transactions in Class B and Class C
Shares, respectively.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Certain officers and/or directors of the Corporation are officers and/or
directors or trustees of the Trust, FAM, PSI, FAMD, FDS, and/or ML & Co.
3. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$41,513,114 and $32,937,762 for the years ended May 31, 2005 and May 31, 2004,
respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended May 31, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 837,025 $ 8,105,322
Automatic conversion of shares ......... 138,466 1,278,915
Shares issued to shareholders
in reinvestment of dividends ........ 2,364 20,213
--------------------------------
Total issued ........................... 977,855 9,404,450
Shares redeemed ........................ (2,390,353) (23,663,416)
--------------------------------
Net decrease ........................... (1,412,498) $(14,258,966)
================================
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended May 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 3,738,359 $ 28,685,371
Automatic conversion of shares ......... 120,023 1,048,446
--------------------------------
Total issued ........................... 3,858,382 29,733,817
Shares redeemed ........................ (4,424,278) (34,529,136)
--------------------------------
Net decrease ........................... (565,896) $ (4,795,319)
================================
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended May 31, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 1,787,227 $ 16,682,347
--------------------------------
Automatic conversion of shares ......... (143,674) (1,278,915)
Shares redeemed ........................ (3,393,776) (31,449,828)
--------------------------------
Total redeemed ......................... (3,537,450) (32,728,743)
--------------------------------
Net decrease ........................... (1,750,223) $(16,046,396)
================================
- --------------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended May 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 2,272,860 $ 18,123,747
--------------------------------
Automatic conversion of shares ......... (123,953) (1,048,446)
Shares redeemed ........................ (3,763,426) (30,148,823)
--------------------------------
Total redeemed ......................... (3,887,379) (31,197,269)
--------------------------------
Net decrease ........................... (1,614,519) $(13,073,522)
================================
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended May 31, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 62,743 $ 580,449
Shares redeemed ........................ (895,180) (8,161,700)
--------------------------------
Net decrease ........................... (832,437) $ (7,581,251)
================================
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended May 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 132,070 $ 1,048,865
Shares redeemed ........................ (1,383,797) (11,091,658)
--------------------------------
Net decrease ........................... (1,251,727) $(10,042,793)
================================
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended May 31, 2005 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 29,555 $ 287,720
Shares issued to shareholders
in reinvestment of dividends ........ 4,361 37,592
--------------------------------
Total issued ........................... 33,916 325,312
Shares redeemed ........................ (407,184) (3,951,813)
--------------------------------
Net decrease ........................... (373,268) $ (3,626,501)
================================
18 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Notes to Financial Statements (concluded) Merrill Lynch International Fund
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended May 31, 2004 Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 178,069 $ 1,395,217
Shares redeemed ........................ (773,737) (6,421,345)
--------------------------------
Net decrease ........................... (595,668) $ (5,026,128)
================================
The Fund charges a 2% redemption fee on the proceeds (calculated at market
value) of a redemption (either by sale or exchange) of Fund shares made within
30 days of purchase. The redemption fee is paid to the Fund and is intended to
offset the trading costs, market impact and other costs associated with
short-term trading into and out of the Fund.
5. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended May 31,
2005 and May 31, 2004 was as follows:
- --------------------------------------------------------------------------------
5/31/2005 5/31/2004
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income .............................. $64,874 --
------------------------
Total taxable distributions .................... $64,874 --
========================
As of May 31, 2005, the components of accumulated losses on a tax basis were as
follows:
- ------------------------------------------------------------------------------
Undistributed ordinary income--net ..................... $ 587,217
Undistributed long-term capital gains--net ............. --
-------------
Total undistributed earnings--net ...................... 587,217
Capital loss carryforward .............................. (102,092,795)*
Unrealized gains--net .................................. 21,838,671**
-------------
Total accumulated losses--net .......................... $ (79,666,907)
=============
* On May 31, 2005, the Fund had a net capital loss carryforward of
$102,092,795, of which $55,329,743 expires in 2010 and $46,763,052 expires
in 2011. This amount will be available to offset like amounts of any
future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales, the
realization for tax purposes of unrealized gains on investments in passive
foreign investment companies and the realization for tax purposes of
unrealized gains (losses) on certain foreign currency contracts.
Report of Independent Registered Public Accounting Firm
Merrill Lynch International Fund
To the Shareholders and Board of Directors of
Mercury Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch International Fund, one of the series constituting Mercury Funds, Inc.
("Mercury"), as of May 31, 2005, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of Mercury'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. Mercury
is not required to have, nor were we engaged to perform, an audit of its
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 Mercury'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, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch International Fund of Mercury Funds, Inc. as of May 31, 2005, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and its financial highlights
for each of the five years in the period then ended, in conformity with U.S.
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 19, 2005
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 19
Schedule of Investments Merrill Lynch Master International Portfolio
Value
Europe Industry* Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
Denmark--0.9% Pharmaceuticals--0.9% 21,200 Novo-Nordisk A/S B $ 1,093,844
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Denmark 1,093,844
====================================================================================================================================
Finland--1.3% Machinery--0.9% 13,828 Kone Oyj B Shares 1,146,528
----------------------------------------------------------------------------------------------------------
Paper & Forest Products--0.4% 33,798 Stora Enso Oyj Class R 446,534
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Finland 1,593,062
====================================================================================================================================
France--10.7% Chemicals--1.1% 7,402 Air Liquide 1,291,429
----------------------------------------------------------------------------------------------------------
Commercial Banks--1.9% 35,020 BNP Paribas 2,363,119
----------------------------------------------------------------------------------------------------------
Insurance--1.8% 92,422 AXA 2,260,680
----------------------------------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--4.0% 22,230 Total SA 4,927,008
----------------------------------------------------------------------------------------------------------
Pharmaceuticals--1.9% 25,222 Sanofi-Aventis 2,282,773
----------------------------------------------------------------------------------------------------------
Total Common Stocks in France 13,125,009
====================================================================================================================================
Germany--4.3% Commercial Banks--1.3% 65,028 Bayerische Hypo- und Vereinsbank AG (b) 1,608,276
----------------------------------------------------------------------------------------------------------
Diversified Financial 16,421 Deutsche Boerse AG 1,211,482
Services--1.0%
----------------------------------------------------------------------------------------------------------
Electric Utilities--0.9% 12,158 E.On AG 1,056,402
----------------------------------------------------------------------------------------------------------
Health Care Equipment & 5,800 Fresenius AG 627,352
Supplies--0.5%
----------------------------------------------------------------------------------------------------------
Media--0.2% 6,279 Premiere AG (b) 219,643
----------------------------------------------------------------------------------------------------------
Thrifts & Mortgage Finance--0.4% 11,966 Hypo Real Estate Holding AG 473,983
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Germany 5,197,138
====================================================================================================================================
Ireland--1.4% Commercial Banks--1.4% 84,531 Allied Irish Banks Plc 1,758,714
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Ireland 1,758,714
====================================================================================================================================
Italy--2.2% Commercial Banks--0.9% 123,686 Banca Intesa SpA (RNC) 522,613
27,979 Banco Popolare di Verona e Novara Scrl 508,568
------------
1,031,181
----------------------------------------------------------------------------------------------------------
Electric Utilities--1.3% 179,170 Enel SpA 1,614,981
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Italy 2,646,162
====================================================================================================================================
Luxembourg--0.8% Media--0.8% 66,830 SES Global 928,332
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Luxembourg 928,332
====================================================================================================================================
Netherlands--3.8% Air Freight & Logistics--0.8% 38,309 TNT NV 981,518
----------------------------------------------------------------------------------------------------------
Commercial Banks--1.6% 82,698 ABN AMRO Holding NV 1,925,821
----------------------------------------------------------------------------------------------------------
Diversified Financial 61,500 ING Groep NV CVA 1,707,068
Services--1.4%
----------------------------------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--0.0% 10 Royal Dutch Petroleum Co. 584
----------------------------------------------------------------------------------------------------------
Total Common Stocks in the Netherlands 4,614,991
====================================================================================================================================
Norway--2.0% Commercial Banks--0.5% 57,300 DNB NOR ASA 558,771
----------------------------------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--1.5% 103,620 Statoil ASA 1,826,929
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Norway 2,385,700
====================================================================================================================================
Poland--0.4% Oil, Gas & Consumable Fuels--0.4% 24,240 Polski Koncern Naftowy Orlen SA (a) 667,633
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Poland 667,633
====================================================================================================================================
Spain--3.3% Diversified Telecommunication 130,455 Telefonica SA 2,192,291
Services--1.8%
----------------------------------------------------------------------------------------------------------
Media--0.4% 20,182 Gestevision Telecinco SA 469,488
----------------------------------------------------------------------------------------------------------
Tobacco--1.1% 33,696 Altadis SA 1,386,317
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Spain 4,048,096
====================================================================================================================================
20 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Schedule of Investments (continued)
Merrill Lynch Master International Portfolio
Value
Europe Industry* Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
Sweden--1.0% Machinery--1.0% 27,768 SKF AB (b) $ 93,378
111,072 SKF AB Class B 1,147,539
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Sweden 1,240,917
====================================================================================================================================
Switzerland--9.3% Biotechnology--0.7% 1,384 Serono SA 846,519
----------------------------------------------------------------------------------------------------------
Capital Markets--3.5% 31,770 Credit Suisse Group 1,275,904
38,760 UBS AG Registered Shares 2,996,506
------------
4,272,410
----------------------------------------------------------------------------------------------------------
Construction Materials--1.0% 19,690 Holcim Ltd. 1,200,378
----------------------------------------------------------------------------------------------------------
Health Care Equipment & 2,118 Nobel Biocare Holding AG 423,430
Supplies--0.6% 1,624 Straumann Holding AG Registered Shares 328,061
------------
751,491
----------------------------------------------------------------------------------------------------------
Insurance--1.5% 29,710 Swiss Reinsurance Registered Shares 1,844,645
----------------------------------------------------------------------------------------------------------
Machinery--0.6% 1,943 Schindler Holding AG Participation
Certificates 699,948
----------------------------------------------------------------------------------------------------------
Pharmaceuticals--1.4% 36,315 Novartis AG Registered Shares 1,777,831
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Switzerland 11,393,222
====================================================================================================================================
United Kingdom-- Aerospace & Defense--1.1% 52,806 Cobham Plc 1,356,048
27.4% ----------------------------------------------------------------------------------------------------------
Beverages--1.8% 154,930 Diageo Plc 2,232,124
----------------------------------------------------------------------------------------------------------
Commercial Banks--4.1% 212,931 Barclays Plc 2,023,830
102,405 Royal Bank of Scotland Group Plc 3,016,084
------------
5,039,914
----------------------------------------------------------------------------------------------------------
Food Products--1.7% 209,500 Cadbury Schweppes Plc 2,046,585
----------------------------------------------------------------------------------------------------------
Hotels, Restaurants & 124,000 William Hill Plc 1,117,555
Leisure--0.9%
----------------------------------------------------------------------------------------------------------
Household Products--1.3% 52,358 Reckitt Benckiser Plc 1,603,146
----------------------------------------------------------------------------------------------------------
Industrial Conglomerates--1.1% 82,900 Smiths Group Plc 1,329,591
----------------------------------------------------------------------------------------------------------
Insurance--1.2% 165,066 Prudential Plc 1,469,613
----------------------------------------------------------------------------------------------------------
Media--3.2% 62,714 British Sky Broadcasting Plc 623,505
55,454 Johnston Press Plc 476,030
177,553 Reed Elsevier Plc 1,698,901
103,334 WPP Group Plc 1,107,392
------------
3,905,828
----------------------------------------------------------------------------------------------------------
Multi-Utilities--1.2% 144,965 National Grid Transco Plc 1,420,112
----------------------------------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels--2.7% 149,428 BG Group Plc 1,134,981
247,820 Shell Transport & Trading Co. Plc 2,156,704
------------
3,291,685
----------------------------------------------------------------------------------------------------------
Pharmaceuticals--3.3% 41,462 AstraZeneca Plc 1,764,485
89,800 GlaxoSmithKline Plc 2,225,851
------------
3,990,336
----------------------------------------------------------------------------------------------------------
Real Estate--0.3% 13,826 Land Securities Group Plc 359,837
----------------------------------------------------------------------------------------------------------
Software--0.2% 9,600 NDS Group Plc (a)(b) 302,688
----------------------------------------------------------------------------------------------------------
Tobacco--1.4% 63,368 Imperial Tobacco Group Plc 1,719,672
----------------------------------------------------------------------------------------------------------
Wireless Telecommunication 927,268 Vodafone Group Plc 2,344,872
Services--1.9%
----------------------------------------------------------------------------------------------------------
Total Common Stocks in the United Kingdom 33,529,606
==========================================================================================================
Total Common Stocks in Europe--68.8% 84,222,426
==========================================================================================================
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 21
Schedule of Investments (continued)
Merrill Lynch Master International Portfolio
Value
Latin America Industry* Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
Brazil--1.5% Metals & Mining--1.5% 74,085 Cia Vale do Rio Doce (a) $ 1,828,418
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Latin America--1.5% 1,828,418
====================================================================================================================================
Pacific Basin/Asia
====================================================================================================================================
Australia--1.9% Commercial Banks--1.4% 75,339 Australia & New Zealand Banking Group Ltd. 1,224,704
31,370 Westpac Banking Corp. 466,917
------------
1,691,621
----------------------------------------------------------------------------------------------------------
Media--0.5% 170,700 APN News & Media Ltd. 659,763
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Australia 2,351,384
====================================================================================================================================
Hong Kong--0.7% Real Estate--0.7% 100,860 Cheung Kong Holdings Ltd. 920,528
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Hong Kong 920,528
====================================================================================================================================
Japan--22.3% Auto Components--1.8% 49,800 Denso Corp. 1,141,322
18,800 Toyota Industries Corp. 511,102
133,000 The Yokohama Rubber Co. Ltd. 552,856
------------
2,205,280
----------------------------------------------------------------------------------------------------------
Automobiles--3.3% 133,800 Nissan Motor Co., Ltd. 1,324,654
75,600 Toyota Motor Corp. 2,707,641
------------
4,032,295
----------------------------------------------------------------------------------------------------------
Beverages--0.8% 76,700 Asahi Breweries Ltd. 940,113
----------------------------------------------------------------------------------------------------------
Building Products--0.5% 101,000 Central Glass Co., Ltd. 648,499
----------------------------------------------------------------------------------------------------------
Chemicals--0.3% 19,500 Tokyo Ohka Kogyo Co., Ltd. 388,100
----------------------------------------------------------------------------------------------------------
Commercial Banks--3.1% 137,000 The Bank of Yokohama Ltd. (b) 793,208
248 Mitsubishi Tokyo Financial Group, Inc. 2,082,487
139 Sumitomo Mitsui Financial Group, Inc. 909,255
------------
3,784,950
----------------------------------------------------------------------------------------------------------
Commercial Services & 13,500 Secom Co., Ltd. 574,948
Supplies--0.5%
----------------------------------------------------------------------------------------------------------
Construction & Engineering--1.2% 77,000 COMSYS Holdings Corp. 657,295
160,000 Obayashi Corp. 819,485
------------
1,476,780
----------------------------------------------------------------------------------------------------------
Consumer Finance--1.3% 8,800 ORIX Corp. 1,279,480
6,000 Takefuji Corp. 375,226
------------
1,654,706
----------------------------------------------------------------------------------------------------------
Food & Staples Retailing--0.4% 18,900 FamilyMart Co., Ltd. 552,401
----------------------------------------------------------------------------------------------------------
Food Products--0.4% 41,000 Ajinomoto Co., Inc. 457,648
----------------------------------------------------------------------------------------------------------
Gas Utilities--0.5% 145,000 Tokyo Gas Co., Ltd. 573,138
----------------------------------------------------------------------------------------------------------
Health Care Providers & 9,700 Kobayashi Pharmaceutical Co., Ltd. 256,507
Services--0.2%
----------------------------------------------------------------------------------------------------------
Household Durables--0.8% 9,700 Funai Electric Co., Ltd. 1,025,126
----------------------------------------------------------------------------------------------------------
Household Products--0.5% 14,000 Uni-Charm Corp. 574,159
----------------------------------------------------------------------------------------------------------
Leisure Equipment & 20,700 Bandai Co., Ltd. 431,190
Products--0.4%
----------------------------------------------------------------------------------------------------------
Machinery--0.2% 9,600 THK Co., Ltd. 195,964
----------------------------------------------------------------------------------------------------------
22 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Schedule of Investments (concluded)
Merrill Lynch Master International Portfolio
Value
Pacific Basin/Asia Industry* Shares Held Common Stocks (in U.S. dollars)
====================================================================================================================================
Japan Office Electronics--3.3% 62,000 Brother Industries Ltd. $ 574,122
(concluded) 35,800 Canon, Inc. 1,959,824
91,000 Ricoh Co., Ltd. 1,498,724
------------
4,032,670
----------------------------------------------------------------------------------------------------------
Semiconductors & Semiconductor 4,300 Rohm Co., Ltd. 406,161
Equipment--0.3%
----------------------------------------------------------------------------------------------------------
Software--0.2% 10,100 Sumisho Computer Systems Corp. 242,250
----------------------------------------------------------------------------------------------------------
Textiles, Apparel & Luxury 37,000 Onward Kashiyama Co., Ltd. 454,540
Goods--0.4%
----------------------------------------------------------------------------------------------------------
Trading Companies & 98,000 Mitsui & Co., Ltd. 886,569
Distributors--0.7%
----------------------------------------------------------------------------------------------------------
Wireless Telecommunication 105 KDDI Corp. 485,177
Services--1.2% 638 NTT DoCoMo, Inc. 964,918
------------
1,450,095
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Japan 27,244,089
====================================================================================================================================
Singapore--0.8% Wireless Telecommunication 786,970 MobileOne Ltd. 970,370
Services--0.8%
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Singapore 970,370
====================================================================================================================================
Taiwan--3.2% Computers & Peripherals--0.4% 105,700 Compal Electronics Inc. (a) 507,286
----------------------------------------------------------------------------------------------------------
Diversified Telecommunication 70,915 Chunghwa Telecom Co. Ltd. (a) 1,476,450
Services--1.2%
----------------------------------------------------------------------------------------------------------
Wireless Telecommunication 1,486,000 Far EasTone Telecommunications Co., Ltd. 1,897,868
Services--1.6%
----------------------------------------------------------------------------------------------------------
Total Common Stocks in Taiwan 3,881,604
==========================================================================================================
Total Common Stocks in the Pacific
Basin/Asia--28.9% 35,367,975
==========================================================================================================
Total Common Stocks
(Cost--$98,501,420)--99.2% 121,418,819
==========================================================================================================
Beneficial Interest Short-Term Securities
==========================================================================================================
$ 368,534 Merrill Lynch Liquidity Series, LLC Cash
Sweep Series I (c) 368,534
----------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$368,534)--0.3% 368,534
==========================================================================================================
Total Investments (Cost--$98,869,954**)--99.5% 121,787,353
Other Assets Less Liabilities--0.5% 613,261
------------
Net Assets--100.0% $122,400,614
============
* For Portfolio compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Portfolio
management. This definition may not apply for purposes of this report,
which may combine such industry sub-classifications for reporting ease.
These industry classifications are unaudited.
** The cost and unrealized appreciation (depreciation) of investments as of
May 31, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost ....................................... $100,011,626
============
Gross unrealized appreciation ........................ $ 24,208,607
Gross unrealized depreciation ........................ (2,432,880)
------------
Net unrealized appreciation .......................... $ 21,775,727
============
(a) Depositary Receipts.
(b) Non-income producing security.
(c) Investments in companies considered to be an affiliate of the Portfolio
(such companies are defined as "Affiliated Companies" in Section 2(a)(3)
of the Investment Company Act of 1940) were as follows:
--------------------------------------------------------------------------
Interest/
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $ 368,534 $ 2,352
Merrill Lynch Liquidity Series, LLC
Money Market Series $(8,123,737) $50,012
Merrill Lynch Premier
Institutional Fund (2,707,913) $ 500
--------------------------------------------------------------------------
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 23
Statement of Assets and Liabilities
Merrill Lynch Master International Portfolio
As of May 31, 2005
=======================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$98,501,420) ............................. $ 121,418,819
Investments in affiliated securities
(identified cost--$368,534) ................................ 368,534
Cash ........................................................ 82,693
Receivables:
Dividends ................................................ $ 1,203,065
Contributions ............................................ 80,042
Securities lending ....................................... 13,769
Interest from affiliates ................................. 413 1,297,289
-------------
Prepaid expenses ............................................ 557
-------------
Total assets ................................................ 123,167,892
-------------
=======================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------
Payables:
Withdrawals .............................................. 403,474
Securities purchased ..................................... 232,043
Investment adviser ....................................... 63,742
Other affiliates ......................................... 1,250 700,509
-------------
Accrued expenses and other liabilities ...................... 66,769
-------------
Total liabilities ........................................... 767,278
-------------
=======================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Net assets .................................................. $ 122,400,614
=============
=======================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------
Investor's capital .......................................... $ 99,419,946
Unrealized appreciation--net ................................ 22,980,668
-------------
Net Assets .................................................. $ 122,400,614
=============
See Notes to Financial Statements.
24 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Statement of Operations Merrill Lynch Master International Portfolio
For the Year Ended May 31, 2005
=======================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------
Dividends (net of $378,282 foreign withholding tax) ......... $ 3,401,088
Securities lending--net ..................................... 50,512
Interest from affiliates .................................... 2,352
-------------
Total income ................................................ 3,453,952
-------------
=======================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------
Investment advisory fees .................................... $ 1,054,311
Custodian fees .............................................. 102,843
Accounting services ......................................... 101,718
Professional fees ........................................... 37,021
Trustees' fees and expenses ................................. 16,574
Pricing fees ................................................ 9,811
Other ....................................................... 9,448
-------------
Total expenses .............................................. 1,331,726
-------------
Investment income--net ...................................... 2,122,226
-------------
=======================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -----------------------------------------------------------------------------------------------------------------------
Realized gain on:
Investments--net ......................................... 17,682,370
Foreign currency transactions--net ....................... 115,425 17,797,795
-------------
Change in unrealized appreciation on:
Investments--net ......................................... (262,035)
Foreign currency transactions--net ....................... (203,141) (465,176)
-------------------------------
Total realized and unrealized gain--net ..................... 17,332,619
-------------
Net Increase in Net Assets Resulting from Operations ........ $ 19,454,845
=============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 25
Statements of Changes in Net Assets
Merrill Lynch Master International Portfolio
For the Year Ended
May 31,
-------------------------------
Increase (Decrease) in Net Assets: 2005 2004
=======================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------
Investment income--net ...................................... $ 2,122,226 $ 2,456,062
Realized gain--net .......................................... 17,797,795 15,981,361
Change in unrealized appreciation--net ...................... (465,176) 11,746,630
-------------------------------
Net increase in net assets resulting from operations ........ 19,454,845 30,184,053
-------------------------------
=======================================================================================================================
Capital Transactions
- -----------------------------------------------------------------------------------------------------------------------
Proceeds from contributions ................................. 25,713,643 49,253,200
Fair value of withdrawals ................................... (69,493,760) (84,683,709)
-------------------------------
Net decrease in net assets derived from capital transactions (43,780,117) (35,430,509)
-------------------------------
=======================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets ................................ (24,325,272) (5,246,456)
Beginning of year ........................................... 146,725,886 151,972,342
-------------------------------
End of year ................................................. $ 122,400,614 $ 146,725,886
===============================
See Notes to Financial Statements.
Financial Highlights Merrill Lynch Master International Portfolio
For the Year Ended May 31,
The following ratios have been derived from ---------------------------------------------------------------------------
information provided in the financial statements. 2005 2004 2003 2002 2001
===================================================================================================================================
Total Investment Return*
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 14.08% 21.12% (11.64%) (9.27%) --
===========================================================================
===================================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses ............................. .95% .94% .97% .94% .89%
===========================================================================
Investment income--net ............... 1.51% 1.60% 1.48% .92% .68%
===========================================================================
===================================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 122,401 $ 146,726 $ 151,972 $ 229,126 $ 366,720
===========================================================================
Portfolio turnover ................... 48.76% 73.55% 132.93% 140.65% 88.01%
===========================================================================
* Total return is required to be disclosed for fiscal years beginning after
December 15, 2000.
See Notes to Financial Statements.
26 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Notes to Financial Statements Merrill Lynch Master International Portfolio
1. Significant Accounting Policies:
Merrill Lynch Master International Portfolio (the "Portfolio") is a series of
Mercury Master Trust (the "Trust"). The Trust is registered under the Investment
Company Act of 1940, as amended, and is organized as a Delaware statutory trust.
The Declaration of Trust permits the Trustees to issue nontransferable interest
in the Portfolio, subject to certain limitations. The Portfolio'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 following is a summary of
significant accounting policies followed by the Portfolio.
(a) Valuation of investments -- Equity securities that are held by the Portfolio
that are traded on stock exchanges or the Nasdaq National Market are valued at
the last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available asked
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Trustees of the Trust.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Trustees of the Trust. Short positions traded in the OTC market are valued at
the last available asked price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Portfolio
employs pricing services to provide certain securities prices for the Portfolio.
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 Portfolio, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are reviewed
by the officers of the Trust under the general supervision of the Trust's Board
of Trustees. Such valuations and procedures will be reviewed periodically by the
Board of Trustees of the Trust.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the New York Stock Exchange ("NYSE").
The values of such securities used in computing the net assets of the
Portfolio'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
Portfolio's net assets. 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 Portfolio may engage in various
portfolio investment strategies both to increase the return of the Portfolio and
to hedge, or protect, its exposure to interest rate movements and movements in
the securities market. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
o Financial futures contracts -- The Portfolio may purchase or sell
financial futures contracts and options on such futures contracts. Futures
contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Portfolio deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is effected.
Pursuant to the contract, the
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 27
Notes to Financial Statements (continued)
Merrill Lynch Master International Portfolio
Portfolio agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Portfolio
as unrealized gains or losses. When the contract is closed, the Portfolio
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Options -- The Portfolio may purchase and write call and put options. When
the Portfolio writes an option, an amount equal to the premium received by
the Portfolio is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the
current market value of the option written. When a security is purchased
or sold through an exercise of an option, the related premium paid (or
received) is added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds of the security sold.
When an option expires (or the Portfolio enters into a closing
transaction), the Portfolio realizes a gain or loss on the option to the
extent of the premiums received or paid (or a gain or loss to the extent
that the cost of the closing transaction exceeds the premium paid or
received).
Written and purchased options are non-income producing investments.
o Forward foreign exchange contracts -- The Portfolio 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 Portfolio as an unrealized gain
or loss. When the contract is closed, the Portfolio 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.
o Foreign currency options and futures -- The Portfolio may purchase or sell
listed or over-the-counter foreign currency options, foreign currency
futures and related options on foreign currency futures as a short or long
hedge against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-U.S.
dollar-denominated securities owned by the Portfolio, sold by the
Portfolio but not yet delivered, or committed or anticipated to be
purchased by the Portfolio.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
(d) Income taxes -- The Portfolio is considered as a "pass through" entity for
federal income tax purposes. As such, each investor in the Portfolio is treated
as owner of its proportionate share of the net assets, income, expenses and
realized and unrealized gains and losses of the Portfolio. Therefore, no federal
income tax provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital gains at
various rates. It is intended that the Portfolio's assets will be managed so an
investor in the Portfolio can satisfy the requirements of subchapter M of the
Internal Revenue Code.
(e) Security transactions and investment income -- Security transactions are
accounted for on the date the securities are purchased or sold (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 Portfolio has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
(f) Securities lending -- The Portfolio 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 Portfolio and any additional required collateral is delivered to the
Portfolio on the next business day. Where the Portfolio receives securities as
collateral for the loaned securities, it collects a fee from the borrower. The
Portfolio typically receives the income on the loaned securities but does not
receive the income on the collateral. Where the Portfolio 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 Portfolio may pay reasonable
finder's, lending
28 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Notes to Financial Statements (concluded)
Merrill Lynch Master International Portfolio
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 Portfolio could experience
delays and costs in gaining access to the collateral. The Portfolio 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.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers International Limited ("MLIMIL"), an affiliate of 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.
MLIMIL is responsible for the management of the Portfolio's investments and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Portfolio. For such services, the
Portfolio pays a monthly fee based upon the average daily value of the
Portfolio's net assets at the following annual rates: .75% of the Portfolio's
average daily net assets not exceeding $500 million and .70% of average daily
net assets in excess of $500 million. The Trust has entered into a Sub-Advisory
Agreement with FAM with respect to the Portfolio, pursuant to which FAM provides
investment advisory services with respect to the Portfolio's daily cash assets.
MLIMIL has agreed to pay FAM a fee in an amount to be determined from time to
time by both parties but in no event in excess of the amount that MLIMIL
actually receives for providing services to the Trust pursuant to the Investment
Advisory Agreement.
The Portfolio has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of MLIMIL, or its
affiliates. Pursuant to that order, the Portfolio also has retained Merrill
Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIMIL, 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 Portfolio, invest cash
collateral received by the Portfolio for such loans, among other things, in a
private investment company managed by MLIM, LLC or in registered money market
funds advised by MLIMIL or its affiliates. For the year ended May 31, 2005,
MLIM, LLC received $21,445 in securities lending agent fees.
In addition, MLPF&S received $10,898 in commissions on the execution of
portfolio security transactions for the Portfolio for the year ended May 31,
2005.
For the year ended May 31, 2005, the Portfolio reimbursed MLIMIL $3,107 for
certain accounting services.
Certain officers and/or trustees of the Trust are officers and/or directors of
Mercury Funds, Inc., MLIMIL, FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended May 31, 2005 were $67,922,309 and $108,950,309, respectively.
4. Commitments:
At May 31, 2005, the Portfolio had entered into foreign exchange contracts under
which it had agreed to purchase foreign currency with an approximate value of
$232,000.
5. Short-Term Borrowings:
The Portfolio, along with certain other funds managed by MLIMIL and its
affiliates, is a party to a $500,000,000 credit agreement with a group of
lenders. The Portfolio may borrow under the credit agreement to fund shareholder
redemptions and for other lawful purposes other than for leverage. The Portfolio
may borrow up to the maximum amount allowable under the Portfolio's current
prospectus and statement of additional information, subject to various other
legal, regulatory or contractual limits. The Portfolio pays a commitment fee of
..07% per annum based on the Portfolio'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 Portfolio's election, the federal funds rate plus
..50% or a base rate as defined in the credit agreement. The Portfolio did not
borrow under the credit agreement during the year ended May 31, 2005.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 29
Report of Independent Registered Public Accounting Firm
Merrill Lynch Master International Portfolio
To the Investor and Board of Trustees of
Mercury Master Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Master International Portfolio,
one of the series constituting Mercury Master Trust (the "Trust"), as of May 31,
2005 and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Trust'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. The Trust
is not required to have, nor were we engaged to perform, an audit of its
internal control of financial reporting. Our audits included consideration over
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 Trust'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, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of May 31, 2005, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. 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 Master International Portfolio of Mercury Master Trust as of May
31, 2005, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and its
financial highlights for each of the five years in the period then ended, in
conformity with U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 19, 2005
Officers and Directors/Trustees (unaudited)
Number of
Portfolios in Other Public
Fund Complex Directorships
Position(s) Length of Overseen by Held by
Held with Time Director/ Director/
Name Address & Age Fund/Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Director/Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to President of the MLIM/FAM-advised funds since 2005; 125 Funds None
Doll, Jr.* Princeton, NJ and present President of MLIM and FAM since 2001; Co-Head 169 Portfolios
08543-9011 Director/ (Americas Region) thereof from 2000 to 2001 and
Age: 50 Trustee Senior 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 Oppenheimer
Funds, Inc. in 1999 and Executive Vice President
thereof from 1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which MLIM or
FAM acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company Act, of the
Fund based on his current positions with MLIM, FAM, Princeton Services and Princeton Administrators.
Directors/Trustees serve until their resignation, removal or death, or until December 31 of the year in which they
turn 72. As Fund/Trust President, Mr. Doll serves at the pleasure of the Board of Directors/Trustees.
30 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005
Officers and Directors/Trustees (unaudited) (concluded)
Number of
Portfolios in Other Public
Fund Complex Directorships
Position(s) Length of Overseen by Held by
Held with Time Director/ Director/
Name Address & Age Fund/Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Directors/Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
David O. P.O. Box 9095 Director/ 1998 to Professor of Finance and Economics at the Columbia 16 Funds None
Beim Princeton, NJ Trustee present University Graduate School of Business since 1991; 21 Portfolios
08543-9095 Chairman of Outward Bound USA from 1997 to
Age: 64 2001; Chairman of Wave Hill, Inc. since 1990;
Trustee of Phillips Exeter Academy from 2002 to
present.
- ------------------------------------------------------------------------------------------------------------------------------------
James T. P.O. Box 9095 Director/ 1998 to Chief Financial Officer of JPMorgan & Co., Inc. 16 Funds None
Flynn Princeton, NJ Trustee present from 1990 to 1995 and an employee of JPMorgan 21 Portfolios
08543-9095 in various capacities from 1967 to 1995.
Age: 65
- ------------------------------------------------------------------------------------------------------------------------------------
W. Carl P.O. Box 9095 Director/ 1998 to Mizuho Financial Group, Professor of Finance; 16 Funds None
Kester Princeton, NJ Trustee present Senior Associate Dean and Chairman of the MBA 21 Portfolios
08543-9095 Program of Harvard Business School since 1999;
Age: 53 Member of the faculty of Harvard Business School
since 1981; Independent consultant since 1978.
- ------------------------------------------------------------------------------------------------------------------------------------
Karen P. P.O. Box 9095 Director/ 1998 to President of Robards & Company, a financial 16 Funds None
Robards Princeton, NJ Trustee present advisory firm, since 1987; formerly an investment 21 Portfolios
08543-9095 banker with Morgan Stanley for more than ten
Age: 55 years; Director of Enable Medical Corp. since 1996;
Director of AtriCure, Inc. since 2000; Director of
CineMuse Inc. from 1996 to 2000; Director of
the Cooke Center for Learning and Development,
a not-for-profit organization, since 1987.
------------------------------------------------------------------------------------------------------------------------
* Directors/Trustees serve until their resignation, removal or death, or until December 31 of the year in which they
turn 72.
- ------------------------------------------------------------------------------------------------------------------------------------
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
08543-9011 and and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999; Vice
Age: 45 Treasurer 1999 to President of MLIM and FAM from 1990 to1997; Director of Taxation of MLIM from 1990
present to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
Ian Rowley P.O. Box 9011 Vice 2002 to Managing Director of MLIM since 2003; Director (Equities) of MLIM from 2001 to
Princeton, NJ President present 2003; Head of Global Equity Strategy at UBS Asset Management from 1988 to 2001.
08543-9011
Age: 43
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
08543-9011 Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Age: 53 Investment Management from 2002 to 2004; Managing 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 Commission's Division of
Enforcement in Washington, D.C. from 1990 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD and
08543-9011 Princeton Services since 2004.
Age: 45
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors/Trustees.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Fund's Officers and Directors/Trustees is available in the Fund's Statement of Additional
Information, which can be obtained without charge by calling 1-800-MER-FUND.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2005 31
[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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch International Fund
Of Mercury Funds, Inc.
Box 9011
Princeton, NJ
08543-9011
#MLINTL -- 5/05
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) David O. Beim, (2) W. Carl
Kester, (3) James T. Flynn and (4) Karen P. Robards.
The registrant's board of directors has determined that David O. Beim, W.
Carl Kester and Karen P. Robards qualify as financial experts pursuant to
Item 3(c)(4) of Form N-CSR.
Mr. Beim has a thorough understanding of generally accepted accounting
principles, financial statements and internal control over financial
reporting as well as audit committee functions. For 25 years, Mr. Beim was
an investment banker actively engaged in financial analysis for securities
transactions and mergers. These transactions presented a breadth and level
of complexity of accounting issues that are generally comparable to the
breadth and complexity of issues that can reasonably be expected to be
raised by the Registrant's financial statements. Mr. Beim has also been a
professor of finance and economics at the Columbia University Graduate
School of Business for the past 12 years.
Prof. Kester has a thorough understanding of generally accepted accounting
principles, financial statements and internal control over financial
reporting as well as audit committee functions. Prof. Kester has been
involved in providing valuation and other financial consulting services to
corporate clients since 1978. Prof. Kester's financial consulting services
present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the Registrant's financial
statements.
Ms. Robards has a thorough understanding of generally accepted accounting
principles, financial statements and internal control over financial
reporting as well as audit committee functions. Ms. Robards has been
President of Robards & Company, a financial advisory firm, since 1987. Ms.
Robards was formerly an investment banker for more than 10 years where she
was responsible for evaluating and assessing the performance of companies
based on their financial results. Ms. Robards has over 30 years of
experience analyzing financial statements. She also is the member of the
Audit Committees of two privately held companies and a non-profit
organization.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees -
Merrill Lynch International Fund
Fiscal Year Ending May 31, 2005 - $6,500
Fiscal Year Ending May 31, 2004 - $6,200
Merrill Lynch Master International Portfolio
Fiscal Year Ending May 31, 2005 - $32,000
Fiscal Year Ending May 31, 2004 - $30,000
(b) Audit-Related Fees -
Merrill Lynch International Fund
Fiscal Year Ending May 31, 2005 - $0
Fiscal Year Ending May 31, 2004 - $0
Merrill Lynch Master International Portfolio
Fiscal Year Ending May 31, 2005 - $0
Fiscal Year Ending May 31, 2004 - $0
(c) Tax Fees -
Merrill Lynch International Fund
Fiscal Year Ending May 31, 2005 - $5,700
Fiscal Year Ending May 31, 2004 - $5,200
Merrill Lynch Master International Portfolio
Fiscal Year Ending May 31, 2005 - $0
Fiscal Year Ending May 31, 2004 - $0
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees -
Merrill Lynch International Fund
Fiscal Year Ending May 31, 2005 - $0
Fiscal Year Ending May 31, 2004 - $0
Merrill Lynch Master International Portfolio
Fiscal Year Ending May 31, 2005 - $0
Fiscal Year Ending May 31, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of these
non-audit services that the Committee believes are a) consistent with the
SEC's auditor independence rules and b) routine and recurring services
that will not impair the independence of the independent accountants may
be approved by the Committee without consideration on a specific
case-by-case basis ("general pre-approval"). However, such services will
only be deemed pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for all of the
registrants the Committee oversees. Any proposed services exceeding the
pre-approved cost levels will require specific pre-approval by the
Committee, as will any other services not subject to general pre-approval
(e.g., unanticipated but permissible services). The Committee is informed
of each service approved subject to general pre-approval at the next
regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending May 31, 2005 - $9,030,943
Fiscal Year Ending May 31, 2004 - $16,581,086
(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) - $945,000, 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 Fund of Mercury Funds, Inc. and Merrill Lynch
Master International Portfolio of Mercury Master Trust
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch International Fund of Mercury Funds, Inc. and
Merrill Lynch Master International Portfolio of Mercury Master Trust
Date: July 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch International Fund of Mercury Funds, Inc. and
Merrill Lynch Master International Portfolio of Mercury Master Trust
Date: July 15, 2005
By: /s/ Donald C. Burke
-------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch International Fund of Mercury Funds, Inc. and
Merrill Lynch Master International Portfolio of Mercury Master Trust
Date: July 15, 2005