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: 05/31/06
Date of reporting period: 06/01/05 - 05/31/06
Item 1 - Report to Stockholders
Annual Report
May 31, 2006
Merrill Lynch
International Fund
Of Mercury Funds, Inc.
Merrill Lynch International Fund
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company ("New BlackRock") that will be one of the world's largest
asset management firms with approximately $1 trillion in assets under management
(based on combined assets under management as of March 31, 2006) (the
"Transaction"). The Transaction is expected to close in the third quarter of
2006, at which time the new company will operate under the BlackRock name. The
Fund's/Trust's Board of Directors/Trustees has approved a new investment
advisory agreement with BlackRock Advisors, Inc. or its successor on
substantially the same terms and for the same advisory fee as the current
investment advisory agreement with the Investment Adviser. If the new agreement
is approved by the Fund's/Trust's shareholders, BlackRock Advisors, Inc. or its
successors is expected to become the investment adviser of the Fund/Trust upon
the closing of the Transaction.
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 10, 2005:
- -------------------------------------------------------------------------------
Qualified Dividend Income for Individuals ................. 100.00%
Foreign Source Income ..................................... 83.55%
Foreign Taxes Paid Per Share .............................. $ .021097
- -------------------------------------------------------------------------------
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.
2 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
A Letter From the President
Dear Shareholder
You may be aware that changes are on the horizon at Merrill Lynch Investment
Managers ("MLIM"). Earlier this year, Merrill Lynch announced plans to combine
its investment advisory business, including MLIM, with another highly regarded
investment manager -- BlackRock, Inc. ("BlackRock").
At the completion of the transaction, which is expected at the end of the third
quarter of this year (subject to regulatory and shareholder approvals), the
resultant firm will be a top-10 investment manager worldwide with approximately
$1 trillion in assets under management.* The combined company will provide a
wider selection of high-quality investment solutions across a range of asset
classes and investment styles. MLIM and BlackRock possess complementary
capabilities that together create a well-rounded organization uniting some of
the finest money managers in the industry. At the same time, the firms share
similar values and beliefs -- they are focused on delivering excellence on
behalf of clients, and both make investment performance their single most
important mission. In short, the combination only reinforces our commitment to
shareholders.
Most of MLIM's investment products -- including mutual funds, separately managed
accounts, annuities and variable insurance funds -- eventually will carry the
"BlackRock" name. As a shareholder in one or more MLIM-advised mutual funds, you
recently were mailed a proxy package asking you to vote on proposed changes that
affect those funds. The proposals vary based on the funds in which you invest.
However, all shareholders are asked to vote on a new investment advisory
agreement with BlackRock Advisors, Inc. Your Fund's Board of Directors has
approved, and recommends that you approve, the new agreement. Your Fund's Board
also has approved, and recommends that you approve, a contingent subadvisory
agreement that will serve to ensure that management services can continue during
the course of completing the transaction.
It is important that you exercise your right as a mutual fund shareholder by
voting on the proposals that are presented to you in your funds' proxy
statements. Your participation -- via phone, mail, online or in person -- is
critical. (Refer to your proxy card for detailed voting procedures and
deadlines.) You should know that your vote on these proposals will not affect
your brokerage account or change your relationship with your financial advisor.
If you are a client of Merrill Lynch, you will remain a client of Merrill Lynch.
Should you have any questions or concerns, please do not hesitate to call
1.866.752.6486.
As always, we thank you for entrusting us with your investment assets, and we
look forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.039 trillion in assets under management as of March 31, 2006.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 3
A Discussion With Your Fund's Portfolio Managers
We maintain a bias toward higher-quality stocks, as we expect investors
could become increasingly attracted to companies demonstrating sustainable
earnings strength, particularly as overall corporate earnings growth slows.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended May 31, 2006, Merrill Lynch International Fund's
Class A, Class B, Class C and Class I Shares had total returns of +24.51%,
+23.52%, +23.47% and +24.80%, respectively. (Fund results shown do not reflect
sales charges and would be lower if sales charges were included. Complete
performance information can be found on pages 6 and 7 of this report to
shareholders.) For the same period, the Fund's benchmark, the Morgan Stanley
Capital International Europe, Australasia, Far East (MSCI EAFE) Index, returned
+28.24% and its comparable Lipper category of International Large-Cap Core Funds
posted an average return of +27.87%. (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.)
The global economy withstood record oil prices and international equity markets
achieved healthy gains during the past 12 months. Corporate profits continued to
grow, creating a constructive environment for equity markets.
Across the developed regions, European equity markets were buoyed by strong
corporate earnings and improving economic sentiment. The European Central Bank
(ECB) raised interest rates by 50 basis points (.50%) over the period (and 25
basis points more on June 8 to 2.75%). In Japan, equity markets climbed as
investors were emboldened by the prospects for sustained economic recovery and
an end to deflation. The Bank of Japan announced that its ultra-loose monetary
policy would be tightened, but indicated that there would be no immediate
interest rate increase. Asian and emerging markets performed well, spurred by
robust global economic growth and, in some cases, improved domestic economic
policy and declining interest rates.
Equity markets corrected in the final month of the period. Investors became
concerned that inflationary pressures, particularly in the United States, may
cause central banks to raise interest rates more aggressively than anticipated,
and that this could ultimately lead to a sharp deceleration in corporate profit
growth. Those parts of the market that had led the rally earlier in the period,
such as emerging markets and commodity shares, suffered most.
What factors most influenced Fund performance?
The Fund rose strongly over the period but lagged the benchmark MSCI EAFE Index.
The Fund was well positioned to benefit from higher oil prices, given our
overweighting of the energy sector for most of the period. Holdings in Statoil
ASA and Petroleo Brasileiro SA performed especially well as investors recognized
the companies' production-growth potential.
Stock selection in the financials sector also contributed positively to
performance. Our overweighting of Japanese banks, such as Mitsubishi UFJ
Financial Group, Inc., proved beneficial as the economic recovery in Japan
bolstered investor expectations for loan growth and some normalization of
interest rates (that is, a slight rise from the current rate of zero). An
additional benefit came from our holding in Swiss insurer Zurich Financial
Services AG, which performed respectably after delivering better-than-expected
results, in part due to a stronger pricing environment. We subsequently
liquidated our position to realize gains. Elsewhere in the sector, our holding
of investment bank UBS AG benefited performance as investors acknowledged the
quality of the bank's private client and wealth management businesses.
The main drag on performance was stock-specific setbacks within the consumer
discretionary sector. In particular, our position in global satellite operator
SES Global suffered as investors expressed concern over the company's ability to
successfully implement a uniform digital platform for the German cable/satellite
market. In light of this disappointment, we sold our position given the
potential negative impact on the company's profitability and cash flow. A
further drag on performance came from cruise operator Carnival Plc after the
company lowered its earnings guidance for 2006. Nevertheless, our analysis
suggested that the underlying reasons are likely to prove transitory and the
market is undervaluing Carnival's medium-term earnings growth potential. We
therefore retained our position. A final detractor came from the materials
sector. While many of our investments in this sector performed well, the Fund's
results were hurt by our avoidance of certain metals and mining stocks, which
our analysis suggested were overvalued.
4 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
What changes were made to the portfolio during the period?
We increased our exposure to oil-related stocks during the period. Our analysis
suggested that demand/supply fundamentals would support a sustained high oil
price, an assumption that we believed was not fully discounted into share
prices. We favored oil exploration & production companies with strong long-term
production growth potential, such as Suncor Energy, Inc., and drilling services
company Weatherford International Ltd., which is expected to benefit from strong
demand. Within the materials sector, we bought global mining company BHP
Billiton Plc as we believe that commodity prices should continue to be shored up
by supply constraints and solid Asian demand.
Within the consumer staples sector, we initiated a position in British American
Tobacco Plc. Our analysis suggested the company's valuation did not reflect the
favorable growth opportunities available in emerging markets and the potential
to pass on incremental price increases to consumers. Also in consumer staples,
we initiated a position in InBev NV, an international brewing company
headquartered in Belgium. We anticipated that the company's share price could
benefit from strong growth in Latin American markets and management's efforts to
reduce operating costs in developed markets.
We increased our allocation to the information technology sector by establishing
a position in application software company SAP AG, which we believe has the
potential for market share gains given pivotal product enhancements. Conversely,
we trimmed exposure to the industrials sector. Even though a number of our
industrials holdings performed decently during the period, we considered them to
be fairly valued against a backdrop of expected slowing global economic growth.
Lastly, we eliminated our weightings in large cap pharmaceutical companies, as
we believe valuations generally reflected the relatively low level of earnings
growth and inherent risks that many of these companies' stocks face.
More recently, portfolio activity has centered on advancing our
highest-conviction investment ideas in the portfolio, which has resulted in an
overall reduction in the number of holdings.
How would you characterize the portfolio's position at the close of the period?
Given the gains made by stocks over the past 12 months, we were not altogether
surprised by the recent correction in equity markets. Our outlook for equity
markets remains unchanged. We continue to believe that core inflation will
remain low and central banks will not be compelled to undertake aggressive
interest rate hikes. We expect global economic growth to decelerate to trend
levels, which should still support sustained corporate profit growth, albeit at
a slower pace than we have witnessed in recent years.
Against this backdrop, we believe that fundamentals and valuations continue to
support a constructive outlook for international equities. However, returns are
likely to be lower than those experienced in recent years, amid higher
volatility. As aggregate corporate earnings growth slows, we expect that
investors could become increasingly attracted to companies that demonstrate
sustainable earnings strength. This is reflected in the portfolio's overall bias
toward growth.
Our investments are geared toward companies that we believe are likely to
benefit from sustained corporate spending such as software, office equipment and
investment banking companies. Concerns about high valuations have led us to
underweight health care, utilities and industrials stocks. Conversely,
attractive opportunities in energy, consumer staples and financials have led us
to establish overweightings in those areas.
Richard Turnill
Vice President and Portfolio Manager
Susan Chan
Vice President and Portfolio Manager
June 23, 2006
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 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 Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or
account maintenance fees and are available only to eligible investors. Had
the sales charge been included, the Fund's Class I Shares' performance
would have been lower.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain performance data current to the
most recent month-end. Performance results do not reflect the deduction of taxes
that a shareholder would pay on fund distributions or the redemption of fund
shares. The Fund may charge a 2% redemption fee for sales or exchanges of shares
within 30 days of purchase or exchange. Performance data does not reflect this
potential fee. Figures shown in each of the following tables assume reinvestment
of all dividends and capital gain distributions, if any, at net asset value on
the ex-dividend date. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer agency fees
applicable to 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, 2006 Total Return Total Return Total Return
=====================================================================================================
ML International Fund Class A Shares* +12.37% +24.51% +33.27%
- -----------------------------------------------------------------------------------------------------
ML International Fund Class B Shares* +12.01 +23.52 +25.62
- -----------------------------------------------------------------------------------------------------
ML International Fund Class C Shares* +12.01 +23.47 +25.57
- -----------------------------------------------------------------------------------------------------
ML International Fund Class I Shares* +12.55 +24.80 +35.87
- -----------------------------------------------------------------------------------------------------
MSCI Europe, Australasia and Far East Index** +15.30 +28.24 +63.91
- -----------------------------------------------------------------------------------------------------
* 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 commenced operations
on 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, 2006
Performance Data (concluded)
Total Return Based on a $10,000 Investment--Class A, Class B, Class C & Class I
Shares
A line graph depicting the growth of an investment in the Fund's Class A, Class
B, 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
2006.
ML International ML International ML International ML International MSCI Europe,
Fund +-- Fund +-- Fund +-- Fund +-- Australasia and
Class A Shares* Class B Shares* Class C Shares* Class I Shares* Far East Index++
10/30/98** $ 9,475 $10,000 $10,000 $10,000 $10,000
5/99 $ 9,854 $10,360 $10,360 $10,420 $10,934
5/00 $11,901 $12,399 $12,399 $12,608 $12,809
5/01 $ 9,624 $ 9,957 $ 9,957 $10,224 $10,602
5/02 $ 8,614 $ 8,837 $ 8,838 $ 9,166 $ 9,584
5/03 $ 7,483 $ 7,612 $ 7,612 $ 7,989 $ 8,405
5/04 $ 8,971 $ 9,072 $ 9,072 $ 9,608 $11,151
5/05 $10,141 $10,170 $10,170 $10,887 $12,781
5/06 $12,627 $12,562 $12,557 $13,587 $16,391
* 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 indicative of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
One Year Ended 5/31/06 +24.51% +17.97%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/06 + 5.58 + 4.45
- --------------------------------------------------------------------------------
Inception (10/30/98)
through 5/31/06 + 3.86 + 3.12
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC+
================================================================================
Class B Shares***
================================================================================
One Year Ended 5/31/06 +23.52% +19.52%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/06 + 4.76 + 4.42
- --------------------------------------------------------------------------------
Inception (10/30/98)
through 5/31/06 + 3.05 + 3.05
- --------------------------------------------------------------------------------
Return Return
Without CDSC With CDSC+
================================================================================
Class C Shares++
================================================================================
One Year Ended 5/31/06 +23.47% +22.47%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/06 + 4.75 + 4.75
- --------------------------------------------------------------------------------
Inception (10/30/98)
through 5/31/06 + 3.05 + 3.05
- --------------------------------------------------------------------------------
================================================================================
Class I Shares Return
================================================================================
One Year Ended 5/31/06 +24.80%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/06 + 5.85
- --------------------------------------------------------------------------------
Inception (10/30/98) through 5/31/06 + 4.13
- --------------------------------------------------------------------------------
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
*** Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
+ Assuming payment of applicable contingent deferred sales charge.
++ Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 7
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses related
to transactions, including sales charges, redemption fees and exchange fees; and
(b) operating expenses including advisory fees, distribution fees including
12b-1 fees, and other Fund expenses. The following example (which is based on a
hypothetical investment of $1,000 invested on December 1, 2005 and held through
May 31, 2006) is intended to assist shareholders both in calculating expenses
based on an investment in the Fund and in comparing these expenses with similar
costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during the
period covered by this report, shareholders can divide their account value by
$1,000 and then multiply the result by the number in the first line under the
heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders' ongoing
costs only and do not reflect any transactional expenses, such as sales charges,
redemption fees or exchange fees. Therefore, the second table is useful in
comparing ongoing expenses only, and will not help shareholders determine the
relative total expenses of owning different funds. If these transactional
expenses were included, shareholder expenses would have been higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value December 1, 2005
December 1, 2005 May 31, 2006 to May 31, 2006
====================================================================================================================
Actual
====================================================================================================================
Class A $ 1,000 $1,123.70 $ 10.27
- --------------------------------------------------------------------------------------------------------------------
Class B $ 1,000 $1,120.10 $ 14.32
- --------------------------------------------------------------------------------------------------------------------
Class C $ 1,000 $1,120.10 $ 14.38
- --------------------------------------------------------------------------------------------------------------------
Class I $ 1,000 $1,125.50 $ 8.96
====================================================================================================================
Hypothetical (5% annual return before expenses)**
====================================================================================================================
Class A $ 1,000 $1,015.23 $ 9.75
- --------------------------------------------------------------------------------------------------------------------
Class B $ 1,000 $1,011.39 $ 13.59
- --------------------------------------------------------------------------------------------------------------------
Class C $ 1,000 $1,011.34 $ 13.64
- --------------------------------------------------------------------------------------------------------------------
Class I $ 1,000 $1,016.47 $ 8.50
- --------------------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense
ratio for the class (1.94% for Class A, 2.71% for Class B, 2.72% 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 portfolio in which it
invests.
** Hypothetical 5% annual return before expenses is calculated by pro-rating
the number of days in the most recent fiscal half year divided by 365.
8 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Statement of Assets and Liabilities Merrill Lynch International Fund
As of May 31, 2006
===================================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in Merrill Lynch Master International Portfolio
(the "Portfolio"), at value (identified cost--$109,285,011) ................. $ 129,474,915
Prepaid expenses ............................................................. 34,436
-------------
Total assets ................................................................. 129,509,351
-------------
===================================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Payables:
Distributor ............................................................... $ 95,372
Other affiliates .......................................................... 81,670
Administrator ............................................................. 24,011 201,053
-------------
Accrued expenses ............................................................. 10,065
-------------
Total liabilities ............................................................ 211,118
-------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets ................................................................... $ 129,298,233
=============
===================================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Shares of Common Stock, $.0001 par value, 100,000,000 shares
authorized .................................................................. $ 178
Class B Shares of Common Stock, $.0001 par value, 100,000,000 shares
authorized .................................................................. 609
Class C Shares of Common Stock, $.0001 par value, 100,000,000 shares
authorized .................................................................. 200
Class I Shares of Common Stock, $.0001 par value, 100,000,000 shares
authorized .................................................................. 101
Paid-in capital in excess of par ............................................. 182,714,297
Undistributed investment income--net ......................................... $ 726,784
Accumulated realized capital losses allocated from the Portfolio--net ........ (74,333,840)
Unrealized appreciation allocated from the Portfolio--net .................... 20,189,904
-------------
Total accumulated losses--net ................................................ (53,417,152)
-------------
Net Assets ................................................................... $ 129,298,233
=============
===================================================================================================================================
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $21,806,829 and 1,779,018 shares
outstanding ................................................................. $ 12.26
=============
Class B--Based on net assets of $71,575,438 and 6,092,860 shares
outstanding ................................................................. $ 11.75
=============
Class C--Based on net assets of $23,463,357 and 1,997,412 shares
outstanding ................................................................. $ 11.75
=============
Class I--Based on net assets of $12,452,609 and 1,006,224 shares
outstanding ................................................................. $ 12.38
=============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 9
Statement of Operations Merrill Lynch International Fund
For the Year Ended May 31, 2006
===================================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income allocated from the Portfolio:
Dividends ................................................................. $ 3,110,135
Interest from affiliates .................................................. 13,777
Securities lending--net ................................................... 2,201
Expenses .................................................................. (1,243,061)
-------------
Total income ................................................................. 1,883,052
-------------
===================================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Account maintenance and distribution fees--Class B ........................... $ 718,629
Administration fees .......................................................... 317,627
Transfer agent fees--Class B ................................................. 300,305
Account maintenance and distribution fees--Class C ........................... 235,041
Transfer agent fees--Class C ................................................. 100,018
Transfer agent fees--Class A ................................................. 74,975
Printing and shareholder reports ............................................. 56,376
Account maintenance fees--Class A ............................................ 48,367
Transfer agent fees--Class I ................................................. 48,133
Registration fees ............................................................ 46,868
Professional fees ............................................................ 32,015
Other ........................................................................ 13,177
-------------
Total expenses ............................................................... 1,991,531
-------------
Investment loss--net ......................................................... (108,479)
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss) Allocated from the Portfolio--Net
- -----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net .......................................................... 29,750,543
Foreign currency transactions--net ........................................ (14,319) 29,736,224
-------------
Change in unrealized appreciation/depreciation on:
Investments--net .......................................................... (2,756,669)
Foreign currency transactions--net ........................................ (34,095) (2,790,764)
----------------------------------
Total realized and unrealized gain--net ...................................... 26,945,460
-------------
Net Increase in Net Assets Resulting from Operations ......................... $ 26,836,981
=============
See Notes to Financial Statements.
10 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Statements of Changes in Net Assets Merrill Lynch International Fund
For the Year Ended
May 31,
----------------------------------
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Investment loss--net ......................................................... $ (108,479) $ (69,382)
Realized gain--net ........................................................... 29,736,224 17,797,795
Change in unrealized appreciation/depreciation--net .......................... (2,790,764) (465,176)
----------------------------------
Net increase in net assets resulting from operations ......................... 26,836,981 17,263,237
----------------------------------
===================================================================================================================================
Dividends to Shareholders
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ................................................................... (164,109) (20,937)
Class B ................................................................... (205,455) --
Class C ................................................................... (58,117) --
Class I ................................................................... (159,545) (43,937)
----------------------------------
Net decrease in net assets resulting from dividends to shareholders .......... (587,226) (64,874)
----------------------------------
===================================================================================================================================
Capital Share Transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease in net assets derived from capital share transactions ........... (19,178,154) (41,513,114)
----------------------------------
===================================================================================================================================
Redemption Fees
- -----------------------------------------------------------------------------------------------------------------------------------
Redemption fees .............................................................. 697 144
----------------------------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ...................................... 7,072,298 (24,314,607)
Beginning of year ............................................................ 122,225,935 146,540,542
----------------------------------
End of year* ................................................................. $ 129,298,233 $ 122,225,935
==================================
* Undistributed investment income--net .................................... $ 726,784 $ 115,771
==================================
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 11
Financial Highlights Merrill Lynch International Fund
Class A
The following per share data -------------------------------------------------------------------------
and ratios have been derived For the Year Ended May 31,
from information provided in -------------------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ................ $ 9.94 $ 8.80 $ 7.34 $ 8.45 $ 9.44
-------------------------------------------------------------------------
Investment income (loss)--net* .................... .06 .03 .04 .03 --+
Realized and unrealized gain (loss)--net .......... 2.36@ 1.12@ 1.42 (1.14) (.99)
-------------------------------------------------------------------------
Total from investment operations .................. 2.42 1.15 1.46 (1.11) (.99)
-------------------------------------------------------------------------
Less dividends from investment income--net ........ (.10) (.01) -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ...................... $ 12.26 $ 9.94 $ 8.80 $ 7.34 $ 8.45
=========================================================================
================================================================================================================================
Total Investment Return**
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ................ 24.51% 13.04% 19.89% (13.14%) (10.49%)
=========================================================================
================================================================================================================================
Ratios to Average Net Assets++
- --------------------------------------------------------------------------------------------------------------------------------
Expenses .......................................... 1.98% 1.97% 2.00% 2.02% 1.87%
=========================================================================
Investment income (loss)--net ..................... .53% .30% .55% .48% .06%
=========================================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ............ $ 21,807 $ 18,058 $ 28,428 $ 27,838 $ 33,815
=========================================================================
Portfolio turnover of the Portfolio ............... 96.05% 48.76% 73.55% 132.93% 140.65%
=========================================================================
Class B
The following per share data -------------------------------------------------------------------------
and ratios have been derived For the Year Ended May 31,
from information provided in -------------------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ................ $ 9.54 $ 8.51 $ 7.14 $ 8.29 $ 9.34
-------------------------------------------------------------------------
Investment income (loss)--net* .................... (.03) (.02) (.02) (.02) (.06)
Realized and unrealized gain (loss)--net .......... 2.27@ 1.05@ 1.39 (1.13) (.99)
-------------------------------------------------------------------------
Total from investment operations .................. 2.24 1.03 1.37 (1.15) (1.05)
-------------------------------------------------------------------------
Less dividends from investment income--net ........ (.03) -- -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ...................... $ 11.75 $ 9.54 $ 8.51 $ 7.14 $ 8.29
=========================================================================
================================================================================================================================
Total Investment Return**
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ................ 23.52% 12.10% 19.19% (13.87%) (11.24%)
=========================================================================
================================================================================================================================
Ratios to Average Net Assets++
- --------------------------------------------------------------------------------------------------------------------------------
Expenses .......................................... 2.76% 2.75% 2.80% 2.82% 2.64%
=========================================================================
Investment income (loss)--net ..................... (.31%) (.24%) (.25%) (.36%) (.77%)
=========================================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ............ $ 71,575 $ 69,342 $ 76,727 $ 75,953 $ 112,586
=========================================================================
Portfolio turnover of the Portfolio ............... 96.05% 48.76% 73.55% 132.93% 140.65%
=========================================================================
* 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 and/or
investment income (loss)--net.
@ Includes redemption fee, which is less than $.01 per share.
See Notes to Financial Statements.
12 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Financial Highlights (concluded) Merrill Lynch International Fund
Class C
The following per share data -------------------------------------------------------------------------
and ratios have been derived For the Year Ended May 31,
from information provided in -------------------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ................ $ 9.54 $ 8.51 $ 7.14 $ 8.29 $ 9.34
-------------------------------------------------------------------------
Investment income (loss)--net* .................... (.03) (.02) (.02) (.03) (.07)
Realized and unrealized gain (loss)--net .......... 2.27@ 1.05@ 1.39 (1.12) (.98)
-------------------------------------------------------------------------
Total from investment operations .................. 2.24 1.03 1.37 (1.15) (1.05)
-------------------------------------------------------------------------
Less dividends from investment income--net ........ (.03) -- -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ...................... $ 11.75 $ 9.54 $ 8.51 $ 7.14 $ 8.29
=========================================================================
================================================================================================================================
Total Investment Return**
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ................ 23.47% 12.10% 19.19% (13.87%) (11.24%)
=========================================================================
================================================================================================================================
Ratios to Average Net Assets+
- --------------------------------------------------------------------------------------------------------------------------------
Expenses .......................................... 2.77% 2.76% 2.82% 2.82% 2.64%
=========================================================================
Investment income (loss)--net ..................... (.32%) (.27%) (.29%) (.42%) (.83%)
=========================================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ............ $ 23,463 $ 22,879 $ 27,485 $ 32,018 $ 56,945
=========================================================================
Portfolio turnover of the Portfolio ............... 96.05% 48.76% 73.55% 132.93% 140.65%
=========================================================================
Class I
The following per share data -------------------------------------------------------------------------
and ratios have been derived For the Year Ended May 31,
from information provided in -------------------------------------------------------------------------
the financial statements. 2006 2005 2004 2003 2002
================================================================================================================================
Per Share Operating Performance
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ................ $ 10.05 $ 8.90 $ 7.40 $ 8.49 $ 9.47
-------------------------------------------------------------------------
Investment income (loss)--net* .................... .08 .07 .06 .05 .02
Realized and unrealized gain (loss)--net .......... 2.39@ 1.11@ 1.44 (1.14) (1.00)
-------------------------------------------------------------------------
Total from investment operations .................. 2.47 1.18 1.50 (1.09) (.98)
-------------------------------------------------------------------------
Less dividends from investment income--net ........ (.14) (.03) -- -- --
-------------------------------------------------------------------------
Net asset value, end of year ...................... $ 12.38 $ 10.05 $ 8.90 $ 7.40 $ 8.49
=========================================================================
================================================================================================================================
Total Investment Return**
- --------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ................ 24.80% 13.31% 20.27% (12.84%) (10.35%)
=========================================================================
================================================================================================================================
Ratios to Average Net Assets+
- --------------------------------------------------------------------------------------------------------------------------------
Expenses .......................................... 1.74% 1.72% 1.77% 1.77% 1.61%
=========================================================================
Investment income (loss)--net ..................... .72% .76% .75% .67% .22%
=========================================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ............ $ 12,453 $ 11,946 $ 13,901 $ 15,957 $ 25,281
=========================================================================
Portfolio turnover of the Portfolio ............... 96.05% 48.76% 73.55% 132.93% 140.65%
=========================================================================
* Based on average shares outstanding.
** Total investment returns exclude the effects of sales charges. Effective
December 28, 2005, Class I Shares are no longer subject to any front-end
sales charge.
+ Includes the Fund's share of the Portfolio's allocated expenses and/or
investment income (loss)--net.
@ Includes redemption fee, which is less than $.01 per share.
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 13
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 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, 2006 was 100%. The Fund offers multiple classes of
shares. Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class A Shares are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. Class I Shares are sold only to certain eligible investors. 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, $1,306,718 has been reclassified between accumulated net realized capital
losses allocated from the Portfolio and accumulated net investment loss as a
result of permanent differences attributable to gains from the sale of stock of
passive foreign investment companies and foreign currency transactions.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 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%
- --------------------------------------------------------------------------------
14 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Notes to Financial Statements (continued) Merrill Lynch International Fund
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, 2006, FAMD earned underwriting discounts and direct
commissions 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 ............................ $ 1,168 $12,709
Class I ............................ $ 123 $ 21
- --------------------------------------------------------------------------------
For the year ended May 31, 2006, MLPF&S received contingent deferred sales
charges of $23,507 and $480 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 of FAM, PSI, FAMD, FDS, and/or ML & Co.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction is expected to
close in the third quarter of 2006.
3. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$19,178,154 and $41,513,114 for the years ended May 31, 2006 and May 31, 2005,
respectively.
Transactions in capital shares for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended May 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 481,721 $ 5,517,472
Automatic conversion of shares ......... 143,844 1,637,982
Shares issued to shareholders in
reinvestment of dividends ............ 14,746 156,453
---------------------------------
Total issued ........................... 640,311 7,311,907
Shares redeemed ........................ (677,502) (7,483,932)
---------------------------------
Net decrease ........................... (37,191) $ (172,025)
=================================
- -------------------------------------------------------------------------------
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 B Shares for the Year Dollar
Ended May 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 1,708,097 $ 18,774,817
Shares issued to shareholders in
reinvestment of dividends ............ 18,187 186,233
---------------------------------
Total issued ........................... 1,726,284 18,961,050
---------------------------------
Automatic conversion of shares ......... (149,589) (1,637,982)
Shares redeemed ........................ (2,751,830) (30,006,235)
---------------------------------
Total redeemed ......................... (2,901,419) (31,644,217)
---------------------------------
Net decrease ........................... (1,175,135) $(12,683,167)
=================================
- -------------------------------------------------------------------------------
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 C Shares for the Year Dollar
Ended May 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 97,471 $ 1,088,956
Shares issued to shareholders in
reinvestment of dividends ............ 4,860 49,761
---------------------------------
Total issued ........................... 102,331 1,138,717
Shares redeemed ........................ (503,944) (5,420,187)
---------------------------------
Net decrease ........................... (401,613) $ (4,281,470)
=================================
- -------------------------------------------------------------------------------
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 I Shares for the Year Dollar
Ended May 31, 2006 Shares Amount
- -------------------------------------------------------------------------------
Shares sold ............................ 242,923 $ 2,839,804
Shares issued to shareholders in
reinvestment of dividends ............ 13,226 141,516
---------------------------------
Total issued ........................... 256,149 2,981,320
Shares redeemed ........................ (438,591) (5,022,812)
---------------------------------
Net decrease ........................... (182,442) $ (2,041,492)
=================================
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 15
Notes to Financial Statements (concluded) Merrill Lynch International Fund
- -------------------------------------------------------------------------------
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)
=================================
The Fund charges a 2% redemption fee on the proceeds (calculated at market
value) of a redemption (either by sale or exchange) of Fund shares made within
30 days of purchase or exchange. The redemption fee is paid to the Fund and is
intended to offset the trading costs, market impact and other costs associated
with short-term trading into and out of the Fund.
5. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended May 31,
2006 and May 31, 2005 was as follows:
- --------------------------------------------------------------------------------
5/31/2006 5/31/2005
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income .......................... $587,226 $ 64,874
--------------------------
Total taxable distributions ................ $587,226 $ 64,874
==========================
As of May 31, 2006, the components of accumulated losses on a tax basis were as
follows:
- -----------------------------------------------------------------------------
Undistributed ordinary income -- net .................... $ 998,443
Undistributed long-term capital gains -- net ............ --
------------
Total undistributed earnings -- net ..................... 998,443
Capital loss carryforward ............................... (74,080,866)*
Unrealized gains -- net ................................. 19,665,271**
------------
Total accumulated losses -- net ......................... $(53,417,152)
============
* On May 31, 2006, the Fund had a net capital loss carryforward of
$74,080,866, of which $27,317,814 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, 2006, 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, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and 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 20, 2006
16 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Portfolio Information as of May 31, 2006
Merrill Lynch Master International Portfolio
Percent of
Ten Largest Equity Holdings Net Assets
- --------------------------------------------------------------------------------
Banco Bilbao Vizcaya Argentaria SA ........................... 4.2%
UBS AG Registered Shares ..................................... 4.1
BNP Paribas .................................................. 3.9
SAP AG ....................................................... 3.9
British American Tobacco Plc ................................. 3.8
Toyota Motor Corp. ........................................... 3.8
Credit Suisse Group .......................................... 3.7
Canon, Inc. .................................................. 3.4
InBev NV ..................................................... 3.4
Allied Irish Banks Plc ....................................... 3.3
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
- --------------------------------------------------------------------------------
Commercial Banks ............................................. 23.8%
Oil, Gas & Consumable Fuels .................................. 13.4
Capital Markets .............................................. 7.8
Beverages .................................................... 6.1
Software ..................................................... 5.8
- --------------------------------------------------------------------------------
For Portfolio compliance purposes, the Portfolio's industry
classifications refer to any one or more of the industry
sub-classifications used by one or more widely recognized market indexes
or ratings group indexes, and/or as defined by 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 (Excluding United Kingdom) ............................ 35.5%
Japan ........................................................ 29.6
United Kingdom ............................................... 19.7
North America ................................................ 12.1
Latin America ................................................ 3.1
- --------------------------------------------------------------------------------
Percent of
Ten Largest Countries Net Assets
- --------------------------------------------------------------------------------
Japan ........................................................ 29.6%
United Kingdom ............................................... 19.7
France ....................................................... 9.8
Canada ....................................................... 8.8
Switzerland .................................................. 7.8
Spain ........................................................ 4.2
Germany ...................................................... 3.8
Belgium ...................................................... 3.3
Ireland ...................................................... 3.3
United States ................................................ 3.3
- --------------------------------------------------------------------------------
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 17
Schedule of Investments Merrill Lynch Master International Portfolio
(in U.S. dollars)
Shares
Industry Common Stocks Held Value
================================================================================
Europe
- --------------------------------------------------------------------------------
Belgium--3.3%
Beverages--3.3%
InBev NV 90,000 $ 4,337,385
--------------------------------------------------------------------
Total Common Stocks in Belgium 4,337,385
================================================================================
France--9.8%
Chemicals--2.6%
Air Liquide 16,162 3,369,203
--------------------------------------------------------------------
Commercial Banks--3.9%
BNP Paribas 53,699 5,021,947
--------------------------------------------------------------------
Oil, Gas & Consumable
Fuels--3.3%
Total SA 65,200 4,239,137
--------------------------------------------------------------------
Total Common Stocks in France 12,630,287
================================================================================
Germany--3.8%
Software--3.8%
SAP AG 23,650 4,986,982
--------------------------------------------------------------------
Total Common Stocks in Germany 4,986,982
================================================================================
Ireland--3.3%
Commercial Banks--3.3%
Allied Irish Banks Plc 178,611 4,287,481
--------------------------------------------------------------------
Total Common Stocks in Ireland 4,287,481
================================================================================
Luxembourg--0.8%
Media--0.8%
SES Global 75,035 1,045,873
--------------------------------------------------------------------
Total Common Stocks
in Luxembourg 1,045,873
================================================================================
Netherlands--2.5%
Commercial Banks--2.5%
ABN AMRO Holding NV 115,738 3,205,043
--------------------------------------------------------------------
Total Common Stocks
in the Netherlands 3,205,043
================================================================================
Spain--4.2%
Commercial Banks--4.2%
Banco Bilbao Vizcaya Argentaria SA 260,100 5,406,938
--------------------------------------------------------------------
Total Common Stocks in Spain 5,406,938
================================================================================
Switzerland--7.8%
Capital Markets--7.8%
Credit Suisse Group 81,650 4,736,044
UBS AG Registered Shares 46,710 5,308,654
--------------------------------------------------------------------
Total Common Stocks
in Switzerland 10,044,698
================================================================================
United Kingdom--19.7%
Beverages--2.8%
SABMiller Plc 196,000 3,666,663
--------------------------------------------------------------------
Commercial Banks--2.1%
HBOS Plc 158,800 2,717,801
--------------------------------------------------------------------
Hotels, Restaurants &
Leisure--1.4%
Carnival Plc 45,600 1,851,898
--------------------------------------------------------------------
Internet Software &
Services--1.7%
NDS Group Plc (a)(b) 42,900 2,180,607
--------------------------------------------------------------------
Metals & Mining--2.4%
BHP Billiton Plc 156,100 3,050,963
--------------------------------------------------------------------
Oil, Gas & Consumable
Fuels--3.8%
BG Group Plc 223,588 2,978,199
Cairn Energy Plc (b) 47,400 1,951,402
------------
4,929,601
--------------------------------------------------------------------
Tobacco--3.8%
British American Tobacco Plc 198,800 4,974,013
--------------------------------------------------------------------
Wireless Telecommunication
Services--1.7%
Vodafone Group Plc 937,868 2,160,414
--------------------------------------------------------------------
Total Common Stocks in the United Kingdom 25,531,960
====================================================================
Total Common Stocks in Europe--55.2% 71,476,647
================================================================================
================================================================================
Latin America
- --------------------------------------------------------------------------------
Brazil--3.1%
Metals & Mining--1.4%
Companhia Vale do Rio Doce
(Preference 'A' Shares) (a) 46,985 1,832,885
--------------------------------------------------------------------
Oil, Gas & Consumable
Fuels--1.7%
Petroleo Brasileiro SA 99,000 2,125,329
--------------------------------------------------------------------
Total Common Stocks in Latin America--3.1% 3,958,214
================================================================================
================================================================================
North America
- --------------------------------------------------------------------------------
Canada--8.8%
Food & Staples Retailing--3.0%
Shoppers Drug Mart Corp. 99,900 3,811,072
--------------------------------------------------------------------
Metals & Mining--1.2%
Teck Cominco Ltd. Class B 25,100 1,598,174
--------------------------------------------------------------------
Oil, Gas & Consumable
Fuels--4.6%
EnCana Corp. 33,200 1,675,455
Nexen, Inc. 24,000 1,335,211
Suncor Energy, Inc. 15,700 1,267,465
Talisman Energy, Inc. 91,800 1,671,820
------------
5,949,951
--------------------------------------------------------------------
Total Common Stocks in Canada 11,359,197
================================================================================
18 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Schedule of Investments (concluded)
Merrill Lynch Master International Portfolio (in U.S. dollars)
Shares
Industry Common Stocks Held Value
================================================================================
North America (concluded)
- --------------------------------------------------------------------------------
United States--3.3%
Energy Equipment & Services--1.3%
Weatherford International Ltd. (b) 32,900 $ 1,712,116
--------------------------------------------------------------------
Software--2.0%
Amdocs Ltd. (b) 68,400 2,562,948
--------------------------------------------------------------------
Total Common Stocks in the United States 4,275,064
====================================================================
Total Common Stocks in North America--12.1% 15,634,261
================================================================================
================================================================================
Pacific Basin/Asia
- --------------------------------------------------------------------------------
Japan--29.6%
Auto Components--4.8%
Denso Corp. 119,900 4,208,337
Toyota Industries Corp. 18,800 766,735
The Yokohama Rubber Co. Ltd. 246,000 1,154,556
------------
6,129,628
--------------------------------------------------------------------
Automobiles--3.8%
Toyota Motor Corp. 92,100 4,947,526
--------------------------------------------------------------------
Chemicals--1.4%
JSR Corp. 70,100 1,854,573
--------------------------------------------------------------------
Commercial Banks--7.8%
The Bank of Yokohama Ltd. 382,000 2,739,572
Mitsubishi UFJ Financial Group, Inc. 308 4,248,562
Sumitomo Mitsui Financial Group, Inc. 303 3,108,993
------------
10,097,127
--------------------------------------------------------------------
Construction & Engineering--3.1%
COMSYS Holdings Corp. 118,000 1,399,658
Kyowa Exeo Corporation 110,000 1,414,757
Obayashi Corp. 161,000 1,146,946
------------
3,961,361
--------------------------------------------------------------------
Food & Staples Retailing--1.5%
FamilyMart Co., Ltd. 68,600 1,971,232
--------------------------------------------------------------------
Office Electronics--3.4%
Canon, Inc. 62,800 4,413,201
--------------------------------------------------------------------
Specialty Retail--0.9%
EDION Corp. 55,100 1,200,179
--------------------------------------------------------------------
Textiles, Apparel & Luxury
Goods--0.8%
Onward Kashiyama Co., Ltd. 72,000 1,065,584
--------------------------------------------------------------------
Wireless Telecommunication
Services--2.1%
KDDI Corp. 432 2,720,703
--------------------------------------------------------------------
Total Common Stocks in Japan 38,361,114
====================================================================
Total Common Stocks in the
Pacific Basin/Asia--29.6% 38,361,114
================================================================================
Total Investments
(Cost--$109,269,506*)--100.0% 129,430,236
Other Assets Less Liabilities--0.0% 44,679
------------
Net Assets--100.0% $129,474,915
============
* The cost and unrealized appreciation (depreciation) of investments as of
May 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost .............................. $ 109,794,515
=============
Gross unrealized appreciation ............... $ 21,711,230
Gross unrealized depreciation ............... (2,075,509)
-------------
Net unrealized appreciation ................. $ 19,635,721
=============
(a) Depositary receipts.
(b) Non-income producing security.
o For Portfolio compliance purposes, the Portfolio's industry
classifications refer to any one or more of the industry
sub-classifications used by one or more widely recognized market indexes
or ratings group indexes, and/or as defined by Portfolio management. This
definition may not apply for purposes of this report, which may combine
such industry sub-classifications for reporting ease. Industries are shown
as a percent of net assets. These industry classifications are unaudited.
o Investments in companies considered to be an affiliate of the Portfolio,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $(368,534) $13,777
Merrill Lynch Liquidity Series, LLC
Money Market Series -- $ 2,201
--------------------------------------------------------------------------
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 19
Statement of Assets and Liabilities
Merrill Lynch Master International Portfolio
As of May 31, 2006
===================================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$109,269,506) ......................................... $ 129,430,236
Foreign cash (cost--$51,801) ............................................. 50,612
Receivables:
Dividends ............................................................. $ 688,272
Securities sold ....................................................... 673,113
Contributions ......................................................... 99,956 1,461,341
-------------
Prepaid expenses and other assets ........................................ 1,416
-------------
Total assets ............................................................. 130,943,605
-------------
===================================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Bank overdraft ........................................................... 895,080
Payables:
Withdrawals ........................................................... 427,145
Investment adviser .................................................... 72,092
Other affiliates ...................................................... 1,085 500,322
-------------
Accrued expenses ......................................................... 73,288
-------------
Total liabilities ........................................................ 1,468,690
-------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets ............................................................... $ 129,474,915
=============
===================================================================================================================================
Net Assets Consist of
- -----------------------------------------------------------------------------------------------------------------------------------
Investor's capital ....................................................... $ 109,285,011
Unrealized appreciation--net ............................................. 20,189,904
-------------
Net Assets ............................................................... $ 129,474,915
=============
See Notes to Financial Statements.
20 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Statement of Operations Merrill Lynch Master International Portfolio
For the Year Ended May 31, 2006
===================================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends (net of $340,847 foreign withholding tax) ...................... $ 3,110,135
Interest from affiliates ................................................. 13,777
Securities lending--net .................................................. 2,201
-------------
Total income ............................................................. 3,126,113
-------------
===================================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ................................................. $ 953,803
Custodian fees ........................................................... 110,822
Accounting services ...................................................... 104,212
Professional fees ........................................................ 39,962
Trustees' fees and expenses .............................................. 17,386
Pricing fees ............................................................. 7,351
Printing and shareholder reports ......................................... 618
Other .................................................................... 8,907
-------------
Total expenses ........................................................... 1,243,061
-------------
Investment income--net ................................................... 1,883,052
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ...................................................... 29,750,543
Foreign currency transactions--net .................................... (14,319) 29,736,224
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ...................................................... (2,756,669)
Foreign currency transactions--net .................................... (34,095) (2,790,764)
------------------------------------
Total realized and unrealized gain--net .................................. 26,945,460
-------------
Net Increase in Net Assets Resulting from Operations ..................... $ 28,828,512
=============
See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 21
Statements of Changes in Net Assets
Merrill Lynch Master International Portfolio
For the Year Ended
May 31,
------------------------------------
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ................................................... $ 1,883,052 $ 2,122,226
Realized gain--net ....................................................... 29,736,224 17,797,795
Change in unrealized appreciation/depreciation--net ...................... (2,790,764) (465,176)
------------------------------------
Net increase in net assets resulting from operations ..................... 28,828,512 19,454,845
------------------------------------
===================================================================================================================================
Capital Transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Proceeds from contributions .............................................. 28,221,049 25,713,643
Fair value of withdrawals ................................................ (49,975,260) (69,493,760)
------------------------------------
Net decrease in net assets derived from capital transactions ............. (21,754,211) (43,780,117)
------------------------------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets .................................. 7,074,301 (24,325,272)
Beginning of year ........................................................ 122,400,614 146,725,886
------------------------------------
End of year .............................................................. $ 129,474,915 $ 122,400,614
====================================
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. 2006 2005 2004 2003 2002
================================================================================================================================
Total Investment Return
- --------------------------------------------------------------------------------------------------------------------------------
Total investment return .............. 25.58% 14.08% 21.12% (11.64%) (9.27%)
==========================================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses ............................. .98% .95% .94% .97% .94%
==========================================================================
Investment income--net ............... 1.48% 1.51% 1.60% 1.48% .92%
==========================================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 129,475 $ 122,401 $ 146,726 $ 151,972 $ 229,126
==========================================================================
Portfolio turnover ................... 96.05% 48.76% 73.55% 132.93% 140.65%
==========================================================================
See Notes to Financial Statements.
22 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
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 interests
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 quoted fair
valuations received daily by the Portfolio from a pricing service or
counterparty. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations. Valuation of other short-term investment
vehicles is generally based on the net asset value of the underlying investment
vehicle or amortized cost.
Repurchase agreements are valued at cost plus accrued interest. The 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 and certain fixed income securities, is
substantially completed each day at various times prior to the close of business
on the New York Stock Exchange ("NYSE"). The values of such securities used in
computing the net 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 Portfolio agrees to receive from or pay to
the broker an
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 23
Notes to Financial Statements (continued)
Merrill Lynch Master International Portfolio
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.
The Portfolio invests in foreign securities, which may involve a number of risk
factors and special considerations not present with investments in securities of
U.S. corporations.
(d) Income taxes -- 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.
24 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Notes to Financial Statements (continued)
Merrill Lynch Master International Portfolio
(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 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.
(g) Bank overdraft -- The Portfolio recorded a bank overdraft, which resulted
from management estimates of available cash.
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 an indirect, wholly-owned
subsidiary of ML & Co.
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 Merrill Lynch Investment Managers, L.P. ("MLIM"), an affiliate
of MLIMIL.
In addition, MLPF&S received $10,836 in commissions on the execution of
portfolio security transactions for the Portfolio for the year ended May 31,
2006.
For the year ended May 31, 2006, the Portfolio reimbursed MLIMIL $2,749 for
certain accounting services.
Certain officers and/or trustees of the Trust are officers and/or directors of
MLIMIL, FAM, PSI, ML & Co., MLIM, and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction is expected to
close in the third quarter of 2006.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 25
Notes to Financial Statements (concluded)
Merrill Lynch Master International Portfolio
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended May 31, 2006 were $121,355,109 and $140,330,625, respectively.
4. Commitments:
At May 31, 2006, the Portfolio had entered into foreign exchange contracts under
which it had agreed to sell various foreign currencies with an approximate value
of $312,000.
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, which expires November 2006. 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, 2006.
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,
2006 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 over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes
of expressing an opinion on the effectiveness of the 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, 2006, by correspondence with the custodian. 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, 2006, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and 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 20, 2006
26 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement -- Matters Considered by each Board
In connection with the Transaction between Merrill Lynch and BlackRock, the
Board of Directors of the Fund and the Board of Trustees of Mercury Master Trust
considered a new investment advisory agreement (the "New Investment Advisory
Agreement") between the Trust on behalf of its series, Merrill Lynch Master
International Portfolio, and BlackRock Advisors, Inc. or its successor
("BlackRock Advisors"). If the New Investment Advisory Agreement is approved by
the shareholders of the Fund and Trust, it will become effective upon the
closing of the Transaction, which is expected in the third quarter of 2006.
The Boards discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Boards, including the
independent directors/trustees, approved the New Investment Advisory Agreement
at a meeting held on May 10, 2006.
To assist each Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent directors/trustees, through their independent legal
counsel, also requested and received additional information from Merrill Lynch
and BlackRock in connection with their consideration of the New Investment
Advisory Agreement. The additional information was provided in advance of the
May 10, 2006 meetings. In addition, the independent directors/trustees consulted
with their counsel and counsel for the Fund and Trust on numerous occasions,
discussing, among other things, the legal standards and certain other
considerations relevant to each Board's deliberations.
At each Board meeting, the directors/trustees discussed with Merrill Lynch
management and certain BlackRock representatives the Transaction, its strategic
rationale and BlackRock's general plans and intentions regarding the Fund and
the Trust. At these Board meetings, representatives of Merrill Lynch and
BlackRock made presentations to and responded to questions from each Board. Each
Board also inquired about the plans for and anticipated roles and
responsibilities of certain employees and officers of the Investment Adviser and
certain affiliates being transferred to BlackRock in connection with the
Transaction. The independent directors/trustees also conferred separately and
with their counsel about the Transaction and other matters related to the
Transaction on a number of occasions, including in connection with the April and
May 2006 meetings. After the presentations and after reviewing the written
materials provided, the independent directors/trustees met in executive sessions
with their counsel to consider the New Investment Advisory Agreement.
In connection with each Board's review of the New Investment Advisory Agreement,
Merrill Lynch and/or BlackRock advised the Board about a variety of matters. The
advice included the following, among other matters:
o that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Fund and the Trust and their
shareholders by BlackRock Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented
professionals;
o that the Fund and Trust should benefit from having access to BlackRock's
state of the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions(R) brand name;
o that BlackRock has no present intention to alter any applicable expense
waivers or reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of each Board
before making any changes;
o that BlackRock and Merrill Lynch will enter into an agreement, for an
initial three-year period and automatically renewable from year to year
thereafter, in connection with the Transaction under which Merrill
Lynch-affiliated broker-dealers will continue to offer the Fund as an
investment product;
o that BlackRock Advisors will have substantially the same access to the
Merrill Lynch sales force when distributing shares of the Fund as is
currently provided to the Investment Adviser and that other arrangements
between the Investment Adviser and Merrill Lynch sales channels will be
preserved;
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 27
Disclosure of New Investment Advisory Agreement (continued)
o that the Fund will have access to BlackRock's network of third party
brokers, retirement plan platforms and registered investment advisers;
o that under the Transaction Agreement, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Investment Adviser (or its affiliates), respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Fund or Trust
shareholders;
Each Board considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
o the potential benefits to Fund and Trust shareholders from being part of a
combined fund family with BlackRock-sponsored funds, including possible
economies of scale and access to investment opportunities;
o the potential for expanding distribution of Fund shares through improved
access to third party distribution;
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Fund's/Trust's total advisory
and administrative fees will not increase by virtue of the New Investment
Advisory Agreement, but will remain the same;
o that within the past year each Board performed a full annual review of the
investment advisory agreement currently in effect for the Fund/Trust (the
"Current Investment Advisory Agreement") as required by the 1940 Act, and
has determined that the Investment Adviser has the capabilities, resources
and personnel necessary to provide the advisory and administrative
services currently provided to the Fund/Trust; and that the advisory
and/or management fees paid by the Fund/Trust, taking into account any
applicable agreed-upon fee waivers and breakpoints, represent reasonable
compensation to the Investment Adviser in light of the services provided,
the costs to the Investment Adviser of providing those services, economies
of scale, the fees and other expenses paid by similar funds (including
information provided by Lipper, Inc. ["Lipper"]), and such other matters
as the directors/trustees have considered relevant in the exercise of
their reasonable judgment (each Board had most recently performed a full
annual review of the Current Investment Advisory Agreement in November
2005); and
o that Merrill Lynch agreed to pay all expenses of the Fund and Trust in
connection with each Board's consideration of the New Investment Advisory
Agreement and related agreements and all costs of shareholder approval of
the New Investment Advisory Agreement and as a result neither the Fund nor
Trust would bear costs in obtaining shareholder approval of the New
Investment Advisory Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, each Board assessed the
nature, scope and quality of the services to be provided to the Fund and the
Trust by the personnel of BlackRock Advisors and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory requirements.
In its review of the New Investment Advisory Agreement, each Board also
considered a range of information in connection with its
28 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
oversight of the services to be provided by BlackRock Advisors and its
affiliates. Among the matters considered were: (a) fees (in addition to
management fees) to be paid to BlackRock Advisors and its affiliates by the Fund
and Trust; (b) Fund and Trust operating expenses paid to third parties; (c) the
resources devoted to and compliance reports relating to the Fund's and Trust's
investment objectives, policies and restrictions, and their compliance with
their Code of Ethics and BlackRock Advisors' compliance policies and procedures;
and (d) the nature, cost and character of non-investment management services to
be provided by BlackRock Advisors and its affiliates.
In the period prior to the Board meetings to consider renewal of the Current
Investment Advisory Agreement, each Board had requested and received materials
specifically relating to the agreement. These materials included (a) information
compiled by Lipper on the fees and expenses and the investment performance of
the Fund as compared to a comparable group of funds as classified by Lipper; (b)
a discussion by the Trust's portfolio management team on investment strategies
used by the Trust during its most recent fiscal year; (c) information on the
profitability to the Investment Adviser of the Current Investment Advisory
Agreement and other payments received by the Investment Adviser and its
affiliates from the Fund and the Trust; and (d) information provided by the
Investment Adviser concerning services related to the valuation and pricing of
Trust portfolio holdings, allocation of Trust brokerage fees, the Trust's
portfolio turnover statistics, and direct and indirect benefits to the
Investment Adviser and its affiliates from their relationship with the Fund and
the Trust.
In its deliberations, each Board considered information received in connection
with its most recent continuation of the Current Investment Advisory Agreement,
in addition to information provided by BlackRock and BlackRock Advisors in
connection with its evaluation of the terms and conditions of the New Investment
Advisory Agreement. The directors/ trustees did not identify any particular
information that was all-important or controlling, and each director/trustee
attributed different weights to the various factors. Each Board, including a
majority of the Board's independent directors/trustees, concluded that the terms
of the New Investment Advisory Agreement are appropriate, that the fees to be
paid are reasonable in light of the services to be provided to the Fund/Trust,
and that the New Investment Advisory Agreement should be approved and
recommended to Fund/Trust shareholders.
Nature, Quality and Extent of Services Provided -- Each Board reviewed the
nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of the
Fund and Trust, as well as the nature, quality and extent of services expected
to be provided by BlackRock Advisors. Each Board focused primarily on the
Investment Adviser's investment advisory services and the investment performance
of the Fund and Trust, but also considered certain areas in which both the
Investment Adviser and the Fund/Trust receive services as part of the Merrill
Lynch complex. Each Board compared the performance of the Fund -- both including
and excluding the effects of the Fund's fees and expenses -- to the performance
of a comparable group of mutual funds, and the performance of a relevant index
or combination of indexes. While each Board reviews performance data at least
quarterly, consistent with the Investment Adviser's investment goals, the Board
attaches more importance to performance over relatively long periods of time,
typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors, each Board considered, among other things, the expected
impact of the Transaction on the operations, facilities, organization and
personnel of BlackRock Advisors and how it would affect the Fund and the Trust;
the ability of BlackRock Advisors to perform its duties after the Transaction;
and any anticipated changes to the current investment and other practices of the
Fund or Trust.
Each Board was given information with respect to the potential benefits to the
Fund and Trust and their shareholders from having access to BlackRock's state of
the art technology and risk management analytic tools, including the investment
tools provided under the BlackRock Solutions brand name.
Each Board was advised that, as a result of Merrill Lynch's equity interest in
BlackRock after the Transaction, the Fund and Trust will continue to be subject
to restrictions concerning certain transactions involving Merrill Lynch
affiliates (for example, transactions with a Merrill Lynch broker-dealer acting
as principal) absent revised or new regulatory relief. Each Board was advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief. There can be no
assurance that such relief will be obtained.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 29
Disclosure of New Investment Advisory Agreement (continued)
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the
directors/trustees determined that the nature and quality of services to be
provided to the Fund/Trust under the New Investment Advisory Agreement were
expected to be as good or better than that provided under the Trust's Current
Investment Advisory Agreement. It was noted, however, that it is expected that
there will be changes in personnel following the Transaction and the combination
of the operations of the Investment Adviser and its affiliates with those of
BlackRock. Each Board noted that if current portfolio managers or other
personnel cease to be available, the Board would consider all available options,
which could include seeking the investment advisory or other services of
BlackRock affiliates. Accordingly, each Board concluded that, overall, the Board
was satisfied at the present time with assurances from BlackRock and BlackRock
Advisors as to the expected nature, extent and quality of the services to be
provided to the Fund/Trust under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Current Investment Advisory Agreement,
each Board had received, among other things, a report from Lipper comparing the
Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser or its
affiliates to other registered investment company clients for investment
management services. Each Board reviewed the Fund's/Trust's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds in the Fund's Lipper category. They also compared the Fund's
total expenses to those of other comparable funds. The information showed that
the Fund had fees and expenses within the range of fees and expenses of
comparable funds. Each Board considered the services to be provided by and the
fees to be charged by BlackRock Advisors to other funds with similar investment
mandates and noted that the fees charged by BlackRock Advisors in those cases,
including fee waivers and expense reimbursements, were generally comparable to
those being charged to the Fund/Trust. Each Board also noted that, as a general
matter, according to the information provided by BlackRock, fees charged to
institutional clients were lower than the fees charged to the Fund, but
BlackRock Advisors provided less extensive services to such clients. Each Board
concluded that the Fund's/Trust's management fee and fee rate and overall
expense ratio are reasonable compared to those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, each Board considered, among other
things, whether advisory and administrative fees or other expenses would change
as a result of the Transaction. Based on its review of the materials provided
and the fact that the New Investment Advisory Agreement and administration
agreement are substantially similar to the Current Investment Advisory Agreement
and administration agreement in all material respects, including the rate of
compensation, each Board determined that the Transaction should not increase the
total fees payable, including any fee waivers and expense reimbursements, for
advisory and administrative services. Each Board noted that it was not possible
to predict with certainty New BlackRock's future profitability from its
relationship with the Fund and Trust.
Each Board discussed with BlackRock Advisors its general methodology to be used
in determining New BlackRock's profitability with respect to its relationship
with the Fund and Trust. Each Board noted that the Board expects to receive
profitability information from New BlackRock on at least an annual basis and
thus be in a position to evaluate whether any adjustments in fees and/or fee
breakpoints would be appropriate.
Fees and Economies of Scale -- Each Board considered the extent to which
economies of scale might be realized as the assets of the Fund and Trust
increase and whether there should be changes in the management fee rate or
structure in order to enable the Fund and Trust to participate in these
economies of scale. Each Board determined that changes were not currently
necessary and that the Fund and Trust appropriately participated in these
economies of scale.
30 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
In reviewing the Transaction, each Board considered, among other things, whether
advisory and administrative fees or other expenses would change as a result of
the Transaction. Based on the fact that the New Investment Advisory Agreement
and administration agreement are substantially similar to the Current Investment
Advisory Agreement and administration agreement in all material respects,
including the rate of compensation, each Board determined that as a result of
the Transaction, the Fund's/Trust's total advisory and administrative fees would
be no higher than the fees under the Current Investment Advisory Agreement. Each
Board noted that in conjunction with the Board's most recent deliberations
concerning the Current Investment Advisory Agreement, the Board had determined
that the total fees for advisory and administrative services for the Fund and
Trust were reasonable in light of the services provided. It was noted that in
conjunction with the recent review of the Current Investment Advisory Agreement,
each Board had received, among other things, a report from Lipper comparing the
Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser to
other registered investment company clients for investment management services.
Each Board concluded that, because the rates for advisory and administrative
fees for the Fund/Trust would be no higher than current fee rates, the proposed
management fee structure, including any fee waivers, was reasonable and that no
additional changes were currently necessary.
Fall-Out Benefits -- In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, each Board
considered whether the Transaction would have an impact on the fall-out benefits
received by the Investment Adviser by virtue of the Current Investment Advisory
Agreement. Based on their review of the materials provided, including materials
received in connection with their most recent approval or continuance of the
Current Investment Advisory Agreement, and their discussions with management of
the Investment Adviser and BlackRock, the directors/trustees determined that
those benefits could include increased ability for BlackRock to distribute
shares of its funds and other investment products and, where applicable, to
obtain research services using the Trust's portfolio transaction brokerage
commissions. The directors also considered possible benefits stemming from the
proposal that PFPC Financial Services, an affiliate of BlackRock, serve as
transfer agent for the Fund following the Transaction. Each Board noted that any
benefits were difficult to quantify with certainty at this time, and indicated
that the Board would continue to evaluate them going forward.
Investment Performance -- Each Board considered investment performance for the
Fund and Trust. Each Board compared the performance of the Fund and Trust --
both including and excluding the effects of fees and expenses -- to the
performance of a comparable group of mutual funds, and the performance of a
relevant index or combination of indexes. The comparative information received
from Lipper showed Fund performance at various levels within the range of
performance of comparable funds over different time periods. While each Board
reviews performance data at least quarterly, consistent with the Investment
Adviser's investment goals, the Board attaches more importance over relatively
long periods of time, typically three to five years. Each Board believed the
Fund's and Trust's performance was satisfactory. Also, each Board took into
account the investment performance of funds currently advised by BlackRock
Advisors. Each Board considered comparative information from Lipper which showed
that the performance of the funds advised by BlackRock Advisors was within the
range of performance of comparable funds over different time periods. Each Board
noted BlackRock's considerable investment management experience and
capabilities, but were unable to predict what effect, if any, consummation of
the Transaction would have on the future performance of the Fund and Trust.
Conclusion -- After the independent directors of the Fund and independent
trustees of the Trust deliberated in executive session, each entire Board,
including the independent directors/trustees, approved the New Investment
Advisory Agreement, concluding that the advisory fee rate was reasonable in
relation to the services provided and that the New Investment Advisory Agreement
was in the best interests of the shareholders. In approving the New Investment
Advisory Agreement, each Board noted that it anticipated reviewing the
continuance of the agreement in advance of the expiration of the initial
two-year period.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 31
Disclosure of New Investment Advisory Agreement (concluded)
Contingent BlackRock Subadvisory Agreement -- Matters Considered by each Board
At the telephonic and in-person meetings held during April and May 2006 at which
the Boards discussed and approved the New Investment Advisory Agreement, the
Trust's Board, including the independent trustees, also discussed and approved a
contingent subadvisory agreement (the "Contingent Subadvisory Agreement")
between the Investment Adviser and BlackRock Advisors (the "BlackRock
Subadviser"). The Contingent Subadvisory Agreement is intended to ensure that
the Trust operates with efficient portfolio management services until the
closing of the Transaction, in the event that each Board deems it necessary and
in the best interests of the Fund and Trust and their shareholders that the
BlackRock Subadviser assist in managing the operations of the Trust during the
interim period until the closing of the Transaction. If shareholders approve the
Contingent Subadvisory Agreement, it will take effect only upon recommendation
from the Investment Adviser and upon subsequent approval of each Board in the
period up to the closing of the Transaction. The effectiveness of the Contingent
Subadvisory Agreement, therefore, would be contingent on further Board approval
after shareholders approve it. Pursuant to the Contingent Subadvisory Agreement,
the BlackRock Subadviser would receive a monthly fee from the Investment Adviser
equal to 50% of the advisory fee received by the Investment Adviser. The
Investment Adviser would pay the BlackRock Subadviser out of its own resources.
There would be no increase in Fund or Trust expenses as a result of the
Contingent Subadvisory Agreement.
In making its approval, each Board considered the Contingent Subadvisory
Agreement in conjunction with the New Investment Advisory Agreement and reviewed
the same information and factors discussed above. Each Board also considered in
conjunction with the Contingent Subadvisory Agreement the necessity of ensuring
that the Trust operates with effective management services until the closing of
the Transaction. In reviewing the subadvisory fee rate provided in the
Contingent Subadvisory Agreement, each Board took note of the fact that both the
Investment Adviser and the BlackRock Subadviser would have significant
responsibilities under their respective advisory agreements. The Investment
Adviser would remain responsible for oversight of the operations and
administration of the Fund and Trust, and the BlackRock Subadviser would provide
advisory services to the Trust under the Contingent Subadvisory Agreement. Each
Board also took into account the expected short duration of the term of any
Contingent Subadvisory Agreement and the fact that total advisory fees paid by
the Fund and Trust would not increase as a result of the Contingent Subadvisory
Agreement. Under all of the circumstances, each Board concluded that it was a
reasonable allocation of fees for the BlackRock Subadviser to receive 50% of the
advisory fee paid by the Trust to the Investment Adviser.
After the independent trustees deliberated in executive session, the entire
Board, including the independent trustees, approved the Contingent Subadvisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Subadvisory Agreement was in the best
interests of shareholders.
32 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Officers and Directors/Trustees
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; 131 Funds None
Doll, Jr.* Princeton, NJ and present President of MLIM and FAM since 2001; Co-Head 177 Portfolios
08543-9011 Director/ (Americas Region) thereof from 2000 to 2001 and
Age: 51 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 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.
====================================================================================================================================
Independent Directors/Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
David O. P.O. Box 9095 Director/ 1998 to Professor of Finance and Economics at the Columbia 20 Funds None
Beim** Princeton, NJ Trustee present University Graduate School of Business since 1991; 26 Portfolios
08543-9095 Chairman of Outward Bound USA from 1997 to 2001;
Age: 65 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. from 20 Funds None
Flynn Princeton, NJ Trustee present 1990 to 1995 and an employee of JPMorgan in various 26 Portfolios
08543-9095 capacities from 1967 to 1995.
Age: 66
- ------------------------------------------------------------------------------------------------------------------------------------
W. Carl P.O. Box 9095 Director/ 1998 to Mizuho Financial Group, Professor of Finance, 21 Funds None
Kester Princeton, NJ Trustee present Harvard Business School, Unit Head, Finance since 27 Portfolios
08543-9095 2005; Senior Associate Dean and Chairman of the MBA
Age: 54 Program of Harvard Business School, 1999 to 2005;
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 advisory 20 Funds None
Robards*** Princeton, NJ Trustee present firm since 1987; formerly an investment banker with 26 Portfolios
08543-9095 Morgan Stanley for more than ten years; Director of
Age: 56 Enable Medical Corp. from 1996 to 2005; Director of
AtriCure, Inc. since 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.
** Chairman of the Audit Committee.
*** Chair of the Board of Trustees.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 33
Officers and Directors/Trustees (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to Managing Director of MLIM and FAM since 2006 and Treasurer thereof since 1999;
Burke Princeton, NJ President present First Vice President of MLIM and FAM from 1997 to 2005; Senior Vice President and
08543-9011 and and Treasurer of Princeton Services since 1999 and Director since 2004; Vice President
Age: 45 Treasurer 1999 to of FAM Distributors, Inc. ("FAMD") since 1999 and Director since 2004; Vice
present President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from 1990
to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
Susan Chan P.O. Box 9011 Vice 2005 to Director of MLIM since 2003; Vice President of MLIM from 2002 to 2003; Assistant
Princeton, NJ President present Vice President of MLIM from 2000 to 2002.
08543-9011
Age: 37
- ------------------------------------------------------------------------------------------------------------------------------------
Richard P.O. Box 9011 Vice 2005 to Head of the Investment Adviser's Global Equity Team since December 2005; Managing
Turnill Princeton, NJ President present Director of MLIM since 1999.
08543-9011
Age: 36
- ------------------------------------------------------------------------------------------------------------------------------------
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: 54 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 Securities and
Exchange 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: 46
------------------------------------------------------------------------------------------------------------------------
* 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 1-800-637-3863.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
34 MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MERRILL LYNCH INTERNATIONAL FUND MAY 31, 2006 35
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
- --------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Investment in foreign securities involves special risks including fluctuating
foreign exchange rates, foreign government regulations, differing degrees of
liquidity and the possibility of substantial volatility due to adverse
political, economic or other developments.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's Web
site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch International Fund
Of Mercury Funds, Inc.
Box 9011
Princeton, NJ 08543-9011
#MLINTL -- 5/06
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, 2006 - $6,600
Fiscal Year Ending May 31, 2005 - $6,500
Merrill Lynch Master International Portfolio
Fiscal Year Ending May 31, 2006 - $32,000
Fiscal Year Ending May 31, 2005 - $32,000
(b) Audit-Related Fees -
Merrill Lynch International Fund
Fiscal Year Ending May 31, 2006 - $0
Fiscal Year Ending May 31, 2005 - $0
Merrill Lynch Master International Portfolio
Fiscal Year Ending May 31, 2006 - $0
Fiscal Year Ending May 31, 2005 - $0
(c) Tax Fees -
Merrill Lynch International Fund
Fiscal Year Ending May 31, 2006 - $6,000
Fiscal Year Ending May 31, 2005 - $5,700
Merrill Lynch Master International Portfolio
Fiscal Year Ending May 31, 2006 - $0
Fiscal Year Ending May 31, 2005 - $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, 2006 - $0
Fiscal Year Ending May 31, 2005 - $0
Merrill Lynch Master International Portfolio
Fiscal Year Ending May 31, 2006 - $0
Fiscal Year Ending May 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending May 31, 2006 - $3,124,717
Fiscal Year Ending May 31, 2005 - $9,030,943
(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 21, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch International Fund of Mercury Funds, Inc. and Merrill Lynch
Master International Portfolio of Mercury Master Trust
Date: July 21, 2006
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 21, 2006