-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WRHKv7NzXrHIW0lcxZGfgxYoU0b6sgMCwM7CKLewRf50j1ccA1wDrOtcP4Vabayl +FeUSJ4w+AlHyi33uAa+7A== 0000900092-05-000412.txt : 20050901 0000900092-05-000412.hdr.sgml : 20050901 20050901152126 ACCESSION NUMBER: 0000900092-05-000412 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050901 DATE AS OF CHANGE: 20050901 EFFECTIVENESS DATE: 20050901 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCURY FUNDS II CENTRAL INDEX KEY: 0000759829 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04182 FILM NUMBER: 051064692 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092820785 MAIL ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 FORMER COMPANY: FORMER CONFORMED NAME: MERCURY HW FUNDS DATE OF NAME CHANGE: 20001006 FORMER COMPANY: FORMER CONFORMED NAME: HOTCHKIS & WILEY FUNDS DATE OF NAME CHANGE: 19941018 N-CSR 1 ml7288.txt MERRILL LYNCH INTERNATIONAL VALUE FUND UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-04182 Name of Fund: Merrill Lynch International Value Fund of Mercury Funds II Fund Address: P.O. Box 9011 Princeton, NJ 08543-9011 Name and address of agent for service: Robert C. Doll, Jr., Chief Executive Officer, Merrill Lynch International Value Fund of Mercury Funds II, 800 Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011 Registrant's telephone number, including area code: (609) 282-2800 Date of fiscal year end: 06/30/05 Date of reporting period: 07/01/04 - 06/30/05 Item 1 - Report to Stockholders Merrill Lynch International Value Fund Of Mercury Funds II Annual Report June 30, 2005 (BULL LOGO) Merrill Lynch Investment Managers www.mlim.ml.com Mercury Advisors A Division of Merrill Lynch Investment Managers www.mercury.ml.com This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Fund unless accompanied or preceded by the Fund's current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. Investment in foreign securities involves special risks including fluctuating foreign exchange rates, foreign government regulations, differing degrees of liquidity and the possibility of substantial volatility due to adverse political, economic or other developments. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2) at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's Web site at http://www.sec.gov. Information about how the Fund voted proxies relating to securities held in the Fund's portfolio during the most recent 12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2) on the Securities and Exchange Commission's Web site at http://www.sec.gov. Merrill Lynch International Value Fund Of Mercury Funds II Box 9011 Princeton, NJ 08543-9011 (GO PAPERLESS LOGO) It's Fast, Convenient, & Timely! To sign up today, go to www.icsdelivery.com/live. Merrill Lynch International Value Fund Portfolio Information as of June 30, 2005 Percent of Ten Largest Equity Holdings Net Assets Total SA 3.3% Mitsubishi Tokyo Financial Group, Inc. 3.2 Royal Bank of Scotland Group Plc 3.1 RWE AG 2.7 HBOS Plc 2.5 Repsol YPF SA 2.2 GlaxoSmithKline Plc 2.1 ENI SpA 2.0 UniCredito Italiano SpA 2.0 Holcim Ltd. 2.0 Percent of Five Largest Industries++ Net Assets Commercial Banks 20.5% Oil, Gas & Consumable Fuels 9.9 Insurance 4.9 Automobiles 4.3 Food & Staples Retailing 4.2 ++ For Fund compliance purposes, "Industries" means any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease. Percent of Total Geographic Allocation Investments United Kingdom 20.6% Japan 18.6 France 11.1 Germany 8.4 Netherlands 7.4 Italy 7.2 Switzerland 5.7 Norway 3.7 Spain 2.3 Sweden 2.1 Belgium 1.9 Australia 1.6 Finland 1.6 Denmark 1.3 Portugal 1.2 Singapore 1.2 South Korea 0.9 Ireland 0.6 Hungary 0.5 Other* 2.1 * Includes portfolio holdings in short-term investments. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 A Letter From the President Dear Shareholder The financial markets continued to face a number of crosscurrents over the past several months. On June 30, 2005, the Federal Reserve Board (the Fed) increased the federal funds rate for the ninth consecutive time since June 2004, bringing the target short-term interest rate to 3.25%. During the same week, first quarter 2005 U.S. gross domestic product growth was revised upward to 3.8% - behind the 4.4% annualized growth rate recorded for all of 2004 but ahead of many economists' expectations. Signs of a slowing economy, coupled with easing inflationary fears, have prompted some observers to believe that the Fed may soon end its monetary tightening campaign. After ending 2004 in a strong rally, U.S. equity markets have struggled to record meaningful gains in 2005. Continued high oil prices and Fed interest rate hikes have exerted downward pressure on stocks. Offsetting this somewhat have been surprisingly strong corporate earnings and lower long-term bond yields. Outside U.S. borders, results have been mixed. Several European markets have been performing well despite ongoing economic problems. In Asia, many markets have benefited from higher economic growth rates and relatively attractive valuations, although Japanese stocks have struggled as a result of slowing exports and high oil prices. In the bond markets, the yield curve flattening "conundrum" continued. As short-term yields increased in concert with Fed interest rate hikes, yields on longer-term bonds declined (as their prices, which move opposite yields, increased). Over the past year, the two-year Treasury yield rose 96 basis points (.96%) while the 10-year Treasury yield declined 68 basis points. At period-end, the spread between two-year and 10-year Treasury yields was just 28 basis points. Amid these conditions, the major market benchmarks posted six-month and 12-month returns as follows:
Total Returns as of June 30, 2005 6-month 12-month U.S. equities (Standard & Poor's 500 Index) -0.81% + 6.32% Small-cap U.S. equities (Russell 2000 Index) -1.25% + 9.45% International equities (MSCI Europe Australasia Far East Index) -1.17% +13.65% Fixed income (Lehman Brothers Aggregate Bond Index) +2.51% + 6.80% Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +2.89% + 8.24% High yield bonds (Credit Suisse First Boston High Yield Index) +0.77% +10.10%
Entering the second half of 2005, we expect more of the same type of "muddle through" environment that has befallen financial markets in the first half of the year. Nevertheless, opportunities do exist and we encourage you to work with your financial advisor to diversify your portfolio among a variety of asset types. This can help to diffuse risk while also tapping into the potential benefits of a broader range of investment alternatives. We thank you for trusting Merrill Lynch Investment Managers with your investment assets, and we look forward to serving you in the months and years ahead. Sincerely, (Robert C. Doll, Jr.) Robert C. Doll, Jr. President and Trustee MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 A Discussion With Your Fund's Portfolio Managers Benefiting from positive stock selection and favorable sector allocations, the Fund provided highly competitive returns for the fiscal year relative to both its benchmark and its comparable Lipper category average. How did the Fund perform during the fiscal year in light of the existing market conditions? For the 12-month period ended June 30, 2005, Merrill Lynch International Value Fund's Class A, Class B, Class C, Class I and Class R Shares had total returns of +14.29%, +13.45%, +13.41%, +14.59% and +14.03%, respectively. (Fund results shown do not reflect sales charges and would be lower if sales charges were included. Complete performance information can be found on pages 6 - 10 of this report to shareholders.) Fund results closely aligned with the +13.65% return of the benchmark Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index and the +14.30% average return of the Lipper International Multi-Cap Value Funds category for the same period. (Funds in this Lipper category invest in a variety of market-capitalization ranges without concentrating 75% of their equity assets in any one market-cap range over an extended period of time. Multi-cap funds typically have a certain percentage of their assets invested in companies strictly outside the United States.) As the Fund's fiscal year began, international stock markets were largely range bound. Despite strong earnings growth during July and early August, investors feared that economic and earnings growth could be nearing their peak. These concerns, coupled with uncertainty surrounding the U.S. presidential election and continued fears of terrorism, gave investors sufficient reason to adopt a defensive stance. The market doldrums continued until November, when a clear conclusion to the presidential contest, a retreating oil price and a continued decline in the value of the U.S. dollar prompted a healthy equity market rally that lasted into early 2005. By the end of the first quarter, however, investor sentiment once again began to turn negative. This time, worries centered on the potential for slowing economic and corporate earnings growth, an increasing oil price and heightened inflation expectations, which caused some to fear that the Federal Reserve Board might take a more aggressive approach in its interest rate-hiking campaign. However, this concern proved short-lived and markets continued on an upward trend during May and June. Best-performing sectors during the fiscal year, as measured by the MSCI EAFE Index, were the defensive areas of the market, including energy and utilities, which provided respective returns of +31% and +27%. Other sectors that performed well included materials, capital goods and banking. The worst- performing sectors were technology, automobiles and household and personal products. What factors most influenced performance? Stock selection and sector allocation both contributed to the Fund's results. Our overweighting in energy benefited performance, as did our negligible exposure to the poor-performing technology and media sectors. Detracting slightly from relative results was our modest underweighting in utilities. The Fund's top performers included Norwegian oil producer Statoil ASA (with an absolute return of +69%) and Australian gas producer Santos Ltd. (+70%). Both were supported by the high oil price, and Santos also benefited from a major oil find. In the banking sector, Italian retail bank Capitalia SpA (+83%) continued to reap rewards from a successful cost-cutting and restructuring program and prospects for consolidation in the European banking industry. Allied Irish Banks Plc (+39%) was further aided by strong growth from its international branches and a healthy Irish economy. Other strong performers included German construction company Hochtief AG (+52%), French construction company Vinci SA (+71%) and Singapore shipping company Neptune Orient Lines Ltd. (+89%). Fund results were hindered by Japanese financial services provider Mitsubishi Securities Co., Ltd. (-32%) and Japan-based Mitsubishi Tokyo Financial Group, Inc. (MTFG). MTFG (-19%) fell as investors questioned the terms of its proposed merger with UFJ Holdings, Inc., a liaison that would create a bank with twice the assets of banking giant Citigroup. Japanese telecommunications provider NTT DoCoMo, Inc. (-16%) also disappointed due to increased competition in the Japanese mobile phone market. In Europe, U.K. retailer Boots Group Plc (-8%) declined following a profit warning and lower-than- expected guidance, and Swiss chemical company Clariant AG (-22%) fell after announcing disappointing sales and profits as a result of slower demand and higher raw materials costs. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 What changes were made to the portfolio during the year? Our main transactions were the result of "bottom-up" stock picking, based on our evaluation of companies' individual appreciation prospects. During the past year, we also began to take profits in holdings that outperformed, particularly our cyclical stocks that had reached our price targets. To that end, in the United Kingdom, we reduced exposure to industrial conglomerate Smiths Group Plc and aerospace & defense company BAE Systems Plc. In mainland Europe, we sold our positions in Swiss electrical equipment company ABB Ltd. and Finnish paper producer Stora Enso Oyj. We reduced exposure to Swedish truck manufacturer Volvo AB and construction companies Hochtief and Vinci. We invested some of the proceeds from our sales in the financials sector. In the U.K., we increased exposure to Royal Bank of Scotland Group Plc, HBOS Plc and Prudential Plc. We also added to Italian bank UniCredito Italiano SpA after the company announced a proposed merger with German bank HVB. Conversely, we sold Italian retail bank Banca Intesa and Allied Irish Banks, both of which hit our price targets. In Japanese financials, we funded our purchase of Takefuji Corp. with the sale of Promise Co., both consumer finance companies. A recent restructuring has afforded Takefuji a wider shareholder base, and the stock is trading at an attractive valuation. In the energy sector, we sold U.K. oil and gas company Shell Transport & Trading Co. Plc and U.K. integrated oil company BP. With the proceeds, we purchased Repsol YPF SA, and Statoil, based on their relatively attractive valuations. Also in energy, we purchased Hungarian oil refining company Mol Magyar Olaj-es Gazipari Rt. We also made a significant addition to our holding in Dutch food retailer Ahold and purchased Italian utility company Enel SpA, which offers a high dividend yield relative to current low bond yields. Additional sales worth noting included Italian communications giant Telecom Italia SpA and French hotel operator Accor SA, both of which hit our price targets. How would you characterize the Fund's position at the close of the period? As a result of our transactions, the Fund ended the period overweight in financials, underweight in growth sectors and neutral in defensive sectors. The overweight to financials comes primarily from our exposure to banking. We have key overweights in U.K. banks, an area that has performed poorly recently based on fears that a slowdown in U.K. consumer spending and the housing market could lead to higher loan positions for these banks. We feel the fears are overdone and find the banks to be trading at attractive valuations and offering compelling dividend yields. We believe they could benefit from the potential for U.K. interest rate cuts later this year. We also hold domestically orientated retail banks, such as Capitalia, which offer strong growth prospects and a low risk profile, as well as banks that we expect to benefit from potential merger synergies, such as MTFG and Unicredito. We also favor the utility sector for its defensive qualities, and believe higher energy prices and low bond yields make for a positive environment for utilities. The utility stocks in the portfolio offer attractive dividend yields. The Fund also has relatively high exposure to telecommunication services and, as a result of our recent transactions, has an increased weighting in energy. We believe oil prices are likely to remain higher for longer, and energy companies should benefit as a result. Within energy, we hold highly cash-generative companies with strong dividend yields and, in particular, we favor companies with exposure to refining. The Fund has limited exposure to growth-oriented sectors, such as software and technology hardware, where we struggle to find attractive valuations. We also have no exposure to the media sector. Generally speaking, we believe the corporate sector is in good shape following years of drastic cost-cutting, restructuring and financial re-engineering. The suspension of the proposed new EU constitution in the wake of its rejection in France and the Netherlands has not had a negative impact on equity markets. In fact, the recent weakening of the euro is beneficial for Europe's exporters. In Japan, we are starting to see signs that the economy is breaking free from its 10-year - 15-year slump. Corporate earnings results have been very good and companies continue to benefit from restructuring. Asset write-offs are now coming to an end, and with first quarter gross domestic product growth at 4.9% (led by the domestic sectors of the economy), the outlook for earnings remains positive. James A. Macmillan Vice President and Senior Portfolio Manager Rob Weatherston Vice President and Portfolio Manager July 11, 2005 We are pleased to announce that Rob Weatherston has joined James Macmillan in sharing responsibility for the day-to-day management of the Fund's portfolio and the selection of its investments. Mr. Weatherston has been a portfolio manager of the Fund since 2001. He has been a Director of MLIM since 2005 and was a Vice President thereof from 1999 to 2005. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Performance Data About Fund Performance Investors are able to purchase shares of the Fund through multiple pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 5.25% and an account maintenance fee of 0.25% per year (but no distribution fee). * Class B Shares are subject to a maximum contingent deferred sales charge of 4% declining to 0% after six years. In addition, Class B Shares are subject to a distribution fee of 0.75% per year and an account maintenance fee of 0.25% per year. These shares automatically convert to Class A Shares after approximately eight years. All returns for periods greater than eight years reflect this conversion. * Class C Shares are subject to a distribution fee of 0.75% per year and an account maintenance fee of 0.25% per year. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. * Class I Shares incur a maximum initial sales charge of 5.25% and bear no ongoing distribution or account maintenance fees. Class I Shares are available only to eligible investors. * Class R Shares do not incur a maximum sales charge (front-end load) or deferred sales charge. These shares are subject to a distribution fee of 0.25% per year and an account maintenance fee of 0.25% per year. Class R Shares are available only to certain retirement plans. Prior to inception, Class R Share performance results are those of Class I Shares (which have no distribution or account maintenence fees) restated for Class R Share fees. None of the past results shown should be considered a representation of future performance. Current performance may be lower or higher than the performance data quoted. Refer to www.mlim.ml.com to obtain performance data current to the most recent month-end. Performance results do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The Fund may charge a 2% redemption fee for sales or exchanges of shares within 30 days of purchase. Performance data does not reflect this potential fee. Figures shown in each of the following tables assume reinvestment of all dividends and capital gain distributions, if any, at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to the classes, which are deducted from the income available to be paid to shareholders. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Performance Data (continued) Recent Performance Results
10-Year/ 6-Month 12-Month Since Inception As of June 30, 2005 Total Return Total Return Total Return ML International Value Fund--Class A Shares* -1.16% +14.29% + 42.65% ML International Value Fund--Class B Shares* -1.52 +13.45 + 25.21 ML International Value Fund--Class C Shares* -1.57 +13.41 + 25.08 ML International Value Fund--Class I Shares* -1.05 +14.59 +129.66 ML International Value Fund--Class R Shares* -1.28 +14.03 +119.75 MSCI EAFE Index** -1.17 +13.65 +66.37/+17.28/+6.02 * Investment results shown do not reflect sales charges. Results shown would be lower if a sales charge was included. Cumulative total investment returns are based on changes in the Fund's net asset values for the periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. The Fund's 10-year/since inception periods are for 10 years for Class I & Class R Shares, from 6/02/99 for Class A Shares and from 10/06/00 for Class B and Class C Shares. ** An unmanaged Index that measures the total returns of developed foreign stock markets in Europe, Australasia and the Far East (in U.S. dollars). Ten-year/since inception total returns are for 10 years, from 6/02/99 and from 10/06/00.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Performance Data (continued) Total Return Based on a $10,000 Investment Class A Shares A line graph illustrating the growth of a $10,000 investment in ML International Value Fund++ Class A Shares* compared to a similar investment in MSCI EAFE Index++++. Values illustrated are as follows: ML International Value Fund++ Class A Shares* Date Value 6/02/1999** $ 9,475.00 June 1999 $ 9,671.00 June 2000 $11,155.00 June 2001 $10,262.00 June 2002 $10,117.00 June 2003 $ 8,847.00 June 2004 $11,826.00 June 2005 $13,516.00 MSCI EAFE Index++++ Date Value 6/02/1999** $10,000.00 June 1999 $10,288.00 June 2000 $12,053.00 June 2001 $ 9,208.00 June 2002 $ 8,334.00 June 2003 $ 7,795.00 June 2004 $10,319.00 June 2005 $11,728.00 * Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. ** Commencement of operations. ++ The Fund invests primarily in stocks of companies located outside of the United States. ++++ This unmanaged Index measures the total returns of developed foreign stock markets in Europe, Australasia and the Far East (in U.S. dollars). Past performance is not indicative of future results. Average Annual Total Return Return Without Return With Sales Charge Sales Charge** Class A Shares* One Year Ended 6/30/05 +14.29% +8.29% Five Years Ended 6/30/05 + 3.91 +2.80 Inception (6/02/99) through 6/30/05 + 6.02 +5.08 * Maximum sales charge is 5.25%. ** Assuming maximum sales charge. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Performance Data (continued) TOTAL RETURN BASED ON A $10,000 INVESTMENT Class B & Class C Shares A line graph illustrating the growth of a $10,000 investment in ML International Value Fund++ Class B and Class C Shares* compared to a similar investment in MSCI EAFE Index++++. Values illustrated are as follows: ML International Value Fund++ Class B Shares* Date Value 10/06/2000** $10,000.00 June 2001 $ 9,799.00 June 2002 $ 9,594.00 June 2003 $ 8,320.00 June 2004 $11,037.00 June 2005 $12,321.00 ML International Value Fund++ Class C Shares* Date Value 10/06/2000** $10,000.00 June 2001 $ 9,789.00 June 2002 $ 9,583.00 June 2003 $ 8,319.00 June 2004 $11,028.00 June 2005 $12,508.00 MSCI EAFE Index++++ Date Value 10/06/2000** $10,000.00 June 2001 $ 8,324.00 June 2002 $ 7,534.00 June 2003 $ 7,047.00 June 2004 $ 9,328.00 June 2005 $10,602.00 * Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. ** Commencement of operations. ++ The Fund invests primarily in stocks of companies located outside of the United States. ++++ This unmanaged Index measures the total returns of developed foreign stock markets in Europe, Australasia and the Far East (in U.S. dollars). Past performance is not indicative of future results. Average Annual Total Return Return Return Without CDSC With CDSC** Class B Shares* One Year Ended 6/30/05 +13.45% +9.45% Inception (10/06/00) through 6/30/05 + 4.87 +4.51 * Maximum contingent deferred sales charge is 4% and is reduced to 0% after six years. ** Assuming payment of applicable contingent deferred sales charge. Return Return Without CDSC With CDSC** Class C Shares* One Year Ended 6/30/05 +13.41% +12.41% Inception (10/06/00) through 6/30/05 + 4.84 + 4.84 * Maximum contingent deferred sales charge is 1% and is reduced to 0% after one year. ** Assuming payment of applicable contingent deferred sales charge. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Performance Data (concluded) TOTAL RETURN BASED ON A $10,000 INVESTMENT Class I & Class R Shares A line graph illustrating the growth of a $10,000 investment in ML International Value Fund++ Class I and Class R Shares* compared to a similar investment in MSCI EAFE Index++++. Values illustrated are as follows: ML International Value Fund++ Class I Shares* Date Value June 1995 $ 9,475.00 June 1996 $11,238.00 June 1997 $13,664.00 June 1998 $14,726.00 June 1999 $15,347.00 June 2000 $17,743.00 June 2001 $16,361.00 June 2002 $16,175.00 June 2003 $14,172.00 June 2004 $18,990.00 June 2005 $21,761.00 ML International Value Fund++ Class R Shares* Date Value June 1995 $10,000.00 June 1996 $11,802.00 June 1997 $14,278.00 June 1998 $15,311.00 June 1999 $15,878.00 June 2000 $18,264.00 June 2001 $16,758.00 June 2002 $16,484.00 June 2003 $14,443.00 June 2004 $19,272.00 June 2005 $21,975.00 MSCI EAFE Index++++ Date Value June 1995 $10,000.00 June 1996 $11,328.00 June 1997 $12,782.00 June 1998 $13,562.00 June 1999 $14,595.00 June 2000 $17,099.00 June 2001 $13,063.00 June 2002 $11,823.00 June 2003 $11,059.00 June 2004 $14,639.00 June 2005 $16,637.00 * Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. ++ The Fund invests primarily in stocks of companies located outside of the United States. ++++ This unmanaged Index measures the total returns of developed foreign stock markets in Europe, Australasia and the Far East (in U.S. dollars). Past performance is not indicative of future results. Average Annual Total Return Return Without Return With Sales Charge Sales Charge** Class I Shares* One Year Ended 6/30/05 +14.59% +8.58% Five Years Ended 6/30/05 + 4.17 +3.05 Ten Years Ended 6/30/05 + 8.67 +8.09 * Maximum sales charge is 5.25%. ** Assuming maximum sales charge. Class R Shares Return One Year Ended 6/30/05 +14.03% Five Years Ended 6/30/05 + 3.77 Ten Years Ended 6/30/05 + 8.19 MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Disclosure of Expenses Shareholders of this Fund may incur the following charges: (a) expenses related to transactions, including sales charges, redemption fees and exchange fees; and (b) operating expenses including advisory fees, distribution fees including 12(b)-1 fees, and other Fund expenses. The following example (which is based on a hypothetical investment of $1,000 invested on January 1, 2005 and held through June 30, 2005) is intended to assist shareholders both in calculating expenses based on an investment in the Fund and in comparing these expenses with similar costs of investing in other mutual funds. The first table below provides information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 and then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Period." The second table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses. In order to assist shareholders in comparing the ongoing expenses of investing in this Fund and other funds, compare the 5% hypothetical example with the 5% hypothetical examples that appear in other funds' shareholder reports. The expenses shown in the table are intended to highlight shareholders ongoing costs only and do not reflect any transactional expenses, such as sales charges, redemption fees or exchange fees. Therefore, the second table is useful in comparing ongoing expenses only, and will not help shareholders determine the relative total expenses of owning different funds. If these transactional expenses were included, shareholder expenses would have been higher.
Expenses Paid Beginning Ending During the Period* Account Value Account Value January 1, 2005 January 1, June 30, to June 30, 2005 2005 2005 Actual Class A $1,000 $ 988.40 $ 6.66 Class B $1,000 $ 984.80 $10.53 Class C $1,000 $ 984.30 $10.53 Class I $1,000 $ 989.50 $ 5.43 Class R $1,000 $ 987.20 $ 7.88 Hypothetical (5% annual return before expenses)** Class A $1,000 $1,018.10 $ 6.76 Class B $1,000 $1,014.18 $10.69 Class C $1,000 $1,014.18 $10.69 Class I $1,000 $1,019.34 $ 5.51 Class R $1,000 $1,016.86 $ 8.00 * For each class of the Fund, expenses are equal to the annualized expense ratio for the class (1.35% for Class A, 2.14% for Class B, 2.14% for Class C, 1.10% for Class I and 1.60% for Class R), multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period shown). ** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in the most recent fiscal half-year divided by 365.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Schedule of Investments (in U.S. dollars)
Shares Country Industry++ Common Stocks Held Value Australia--1.6% Commercial Banks--1.0% Australia & New Zealand Banking Group Ltd. 792,307 $ 13,135,564 Paper Products--0.6% PaperlinX Ltd. 3,204,000 7,351,144 Total Common Stocks in Australia 20,486,708 Belgium--1.9% Diversified Telecommunication Services--1.5% Belgacom SA 576,473 19,715,935 Leisure Equipment & Products--0.4% AGFA-Gevaert NV 185,284 5,125,592 Total Common Stocks in Belgium 24,841,527 Denmark--1.3% Commercial Banks--1.3% Danske Bank A/S 574,956 17,303,884 Total Common Stocks in Denmark 17,303,884 Finland--1.6% Electric Utilities--1.6% Fortum Oyj 1,260,355 20,217,559 Total Common Stocks in Finland 20,217,559 France--11.1% Automobiles--1.3% Peugeot SA 287,636 17,056,188 Commercial Banks--1.9% BNP Paribas 358,093 24,580,960 Construction & Engineering--1.3% Vinci SA 202,336 16,853,168 Food & Staples Retailing--1.8% Carrefour SA 492,120 23,891,056 Metals & Mining--1.5% Arcelor 956,722 18,786,962 Oil, Gas & Consumable Fuels--3.3% Total SA 179,962 42,332,465 Total Common Stocks in France 143,500,799 Germany--8.3% Air Freight & Logistics--1.7% Deutsche Post AG 961,346 22,485,720 Commercial Banks--1.5% Deutsche Postbank AG 400,757 19,732,188 Construction & Engineering--1.1% Hochtief AG 411,106 14,433,504 Electric Utilities--1.3% E.ON AG 180,852 16,132,174 Multi-Utilities--2.7% RWE AG 545,557 35,256,456 Total Common Stocks in Germany 108,040,042 Hungary--0.5% Oil, Gas & Consumable Fuels--0.5% Mol Magyar Olaj- es Gazipari Rt. 80,934 6,797,581 Total Common Stocks in Hungary 6,797,581 Shares Country Industry++ Common Stocks Held Value Ireland--0.6% Commercial Banks--0.6% Bank of Ireland 472,955 $ 7,626,829 Total Common Stocks in Ireland 7,626,829 Italy--7.1% Commercial Banks--3.7% Capitalia SpA 4,067,942 22,787,370 UniCredito Italiano SpA 4,883,122 25,822,611 --------------- 48,609,981 Electric Utilities--0.2% Enel SpA 315,866 2,753,311 Insurance--1.2% Fondiaria-Sai SpA 551,365 14,945,596 Oil, Gas & Consumable Fuels--2.0% ENI SpA 1,017,281 26,244,864 Total Common Stocks in Italy 92,553,752 Japan--18.4% Automobiles--3.0% Honda Motor Co., Ltd. 132,500 6,540,700 Nissan Motor Co., Ltd. 1,223,600 12,124,472 Toyota Motor Corp. 572,200 20,500,262 --------------- 39,165,434 Beverages--1.9% Asahi Breweries Ltd. 2,108,600 25,156,296 Capital Markets--1.0% Mitsubishi Securities Co., Ltd. 1,511,000 13,404,142 Commercial Banks--3.2% Mitsubishi Tokyo Financial Group, Inc. 4,837 41,075,869 Commercial Services & Supplies--0.8% Toppan Printing Co., Ltd. 1,016,000 10,773,396 Consumer Finance--1.7% Takefuji Corp. 332,900 22,531,811 Household Durables--1.0% Sekisui House Ltd. 1,294,000 13,090,642 Leisure Equipment & Products--1.0% Yamaha Corp. 796,800 12,439,888 Pharmaceuticals--1.7% Takeda Pharmaceutical Co., Ltd. 452,800 22,474,506 Software--0.7% Namco Ltd. 644,800 8,588,799 Tobacco--0.1% Japan Tobacco, Inc. 100 1,335,619 Wireless Telecommunication Services--2.3% KDDI Corp. 1,297 6,004,521 NTT DoCoMo, Inc. 15,670 23,191,770 --------------- 29,196,291 Total Common Stocks in Japan 239,232,693
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Schedule of Investments (continued) (in U.S. dollars)
Shares Country Industry++ Common Stocks Held Value Netherlands--7.3% Air Freight & Logistics--1.1% TNT NV 556,462 $ 14,113,655 Commercial Services & Supplies--1.3% Buhrmann NV (e) 1,766,687 17,474,374 Diversified Financial Services--1.3% ING Groep NV CVA 594,951 16,832,936 Food & Staples Retailing--1.3% Koninklijke Ahold NV (g) 1,832,378 15,084,952 Koninklijke Ahold NV (a)(b)(g) 285,540 2,218,931 --------------- 17,303,883 Household Durables--1.2% Koninklijke Philips Electronics NV 660,741 15,326,420 Insurance--1.1% Aegon NV 1,071,402 13,891,907 Total Common Stocks in the Netherlands 94,943,175 Norway--3.7% Diversified Telecommunication Services--1.8% Telenor ASA 2,825,030 22,577,598 Oil, Gas & Consumable Fuels--1.9% Statoil ASA 1,228,039 25,076,204 Total Common Stocks in Norway 47,653,802 Portugal--1.2% Electric Utilities--1.2% Energias de Portugal SA 6,130,287 15,437,042 Total Common Stocks in Portugal 15,437,042 Singapore--1.2% Marine--1.2% Neptune Orient Lines Ltd. 6,795,000 15,222,604 Total Common Stocks in Singapore 15,222,604 South Korea--0.9% Diversified Telecommunication Services--0.9% KT Corp. (a) 558,604 12,009,986 Total Common Stocks in South Korea 12,009,986 Spain--2.2% Oil, Gas & Consumable Fuels--2.2% Repsol YPF SA 1,135,951 29,100,149 Total Common Stocks in Spain 29,100,149 Sweden--2.1% Diversified Financial Services--1.4% Investor AB 1,304,245 17,704,041 Machinery--0.7% Volvo AB Class B 232,916 9,484,923 Total Common Stocks in Sweden 27,188,964 Shares Country Industry++ Common Stocks Held Value Switzerland--5.7% Capital Markets--1.9% Credit Suisse Group 627,085 $ 24,743,694 Chemicals--1.0% Clariant AG (g) 971,107 12,924,342 Construction Materials--2.0% Holcim Ltd. 421,536 25,665,294 Insurance--0.8% Swiss Life Holding (g) 80,242 10,597,882 Total Common Stocks in Switzerland 73,931,212 United Kingdom--20.5% Aerospace & Defense--1.9% BAE Systems Plc 4,833,989 24,867,447 Commercial Banks--7.3% Barclays Plc 2,357,032 23,468,924 HBOS Plc 2,079,780 32,078,342 Royal Bank of Scotland Group Plc 1,318,831 39,855,692 --------------- 95,402,958 Food & Staples Retailing--1.1% Boots Group Plc 1,248,982 13,633,806 Food Products--1.2% Cadbury Schweppes Plc 1,613,221 15,412,203 Industrial Conglomerates--1.1% Smiths Group Plc 906,060 14,925,061 Insurance--1.8% Prudential Plc 2,553,055 22,709,330 Pharmaceuticals--2.1% GlaxoSmithKline Plc 1,138,686 27,574,203 Specialty Retail--1.3% Kesa Electricals Plc 3,227,604 16,169,839 Transportation Infrastructure--1.3% BAA Plc 1,563,447 17,374,747 Wireless Telecommunication Services--1.4% Vodafone Group Plc 7,293,619 17,779,750 Total Common Stocks in the United Kingdom 265,849,344 Total Common Stocks (Cost--$1,097,926,807)--97.2% 1,261,937,652 Beneficial Other Interests (f) Interest United Kingdom--0.0% Electric Utilities--0.0% British Energy Plc Deferred Shares $ 70,000 0 Total Other Interests (Cost--$0)--0.0% 0
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Schedule of Investments (concluded) (in U.S. dollars)
Beneficial Short-Term Securities Interest Value Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (c) $11,104,396 $ 11,104,396 Merrill Lynch Liquidity Series, LLC Money Market Series (c)(d) 15,525,000 15,525,000 Face Amount Time Deposits Brown Brothers Harriman & Co., 2.67% due 6/30/2005 $ 47,525 47,525 Total Short-Term Securities (Cost--$26,676,921)--2.0% 26,676,921 Total Investments (Cost--$1,124,603,728*)--99.2% 1,288,614,573 Other Assets Less Liabilities--0.8% 10,112,502 --------------- Net Assets--100.0% $ 1,298,727,075 =============== * The cost and unrealized appreciation (depreciation) of investments as of June 30, 2005, as computed for federal income tax purposes, were as follows: Aggregate cost $ 1,142,640,342 ================ Gross unrealized appreciation $ 181,287,191 Gross unrealized depreciation (35,312,960) ---------------- Net unrealized appreciation $ 145,974,231 ================ ++ For Fund compliance purposes, "Industry" means any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease. These industry classifications are unaudited. (a) Depositary Receipts. (b) Restricted security as to resale, representing 0.2% of net assets, was as follows: Acquisition Issue Date Cost Value Koninklijke Ahold NV* 12/11/2003 $1,696,449 $2,218,931 * Depositary Receipts. (c) Investments in companies considered to be an affiliate of the Fund (such companies are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940) were as follows: Net Interest Affiliate Activity Income Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $11,104,396 $414,545 Merrill Lynch Liquidity Series, LLC Money Market Series $15,525,000 $ 33,492 (d) Security was purchased with the cash proceeds from securities loans. (e) Security, or a portion of security, is on loan. (f) Other interests represent beneficial interest in liquidation trusts and other reorganization entities and are non-income producing. (g) Non-income producing security. See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Statement of Assets and Liabilities
As of June 30, 2005 Assets Investments in unaffiliated securities, at value (including securities loaned of $14,836,560) (identified cost--$1,097,974,332) $ 1,261,985,177 Investments in affiliated securities, at value (identified cost--$26,629,396) 26,629,396 Foreign cash (cost--$10,164,382) 10,196,319 Cash 1,174 Receivables: Securities sold $ 21,474,009 Capital shares sold 10,721,977 Dividends 5,456,500 Interest (including $913 from affiliates) 50,428 Securities lending 1,503 37,704,417 --------------- Prepaid expenses 37,939 --------------- Total assets 1,336,554,422 --------------- Liabilities Collateral on securities loaned, at value 15,525,000 Payables: Securities purchased 18,920,744 Capital shares redeemed 1,511,465 Investment adviser 708,971 Other affiliates 388,411 Distributor 240,269 21,769,860 --------------- Accrued expenses 532,487 --------------- Total liabilities 37,827,347 --------------- Net Assets Net assets $ 1,298,727,075 =============== Net Assets Consist of Paid-in capital $ 1,121,828,525 Undistributed investment income--net $ 21,122,795 Accumulated realized capital losses--net (8,128,660) Unrealized appreciation--net 163,904,415 --------------- Total accumulated earnings--net 176,898,550 --------------- Net Assets $ 1,298,727,075 =============== Net Asset Value Class A--Based on net assets of $254,206,732 and 9,653,936 shares outstanding++ $ 26.33 =============== Class B--Based on net assets of $62,261,288 and 2,400,609 shares outstanding++ $ 25.94 =============== Class C--Based on net assets of $164,317,251 and 6,387,599 shares outstanding++ $ 25.72 =============== Class I--Based on net assets of $800,990,451 and 30,325,916 shares outstanding++ $ 26.41 =============== Class R--Based on net assets of $16,951,353 and 647,214 shares outstanding++ $ 26.19 =============== ++ Unlimited shares of no par value authorized. See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Statement of Operations
For the Year Ended June 30, 2005 Investment Income Dividends (net of $3,902,409 foreign withholding tax) $ 34,959,428 Interest (including $414,545 from affiliates) 613,610 Securities lending--net 33,492 --------------- Total income 35,606,530 --------------- Expenses Investment advisory fees $ 8,272,184 Transfer agent fees--Class I 1,654,674 Account maintenance and distribution fees--Class C 1,098,250 Account maintenance fees--Class A 514,000 Account maintenance and distribution fees--Class B 475,414 Transfer agent fees--Class A 461,915 Accounting services 384,510 Custodian fees 309,135 Transfer agent fees--Class C 296,840 Transfer agent fees--Class B 127,913 Professional fees 125,780 Registration fees 109,680 Printing and shareholder reports 102,654 Account maintenance and distribution fees--Class R 56,763 Trustee's fees and expenses 36,371 Transfer agent fees--Class R 25,970 Pricing fees 14,933 Other 46,455 --------------- Total expenses 14,113,441 --------------- Investment income--net 21,493,089 --------------- Realized & Unrealized Gain (Loss)--Net Realized gain on: Investments--net 131,466,196 Foreign currency transactions--net 320,828 131,787,024 --------------- Change in unrealized appreciation/depreciation on: Investments--net 2,449,416 Foreign currency transactions--net (103,292) 2,346,124 --------------- --------------- Total realized and unrealized gain--net 134,133,148 --------------- Net Increase in Net Assets Resulting from Operations $ 155,626,237 =============== See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Statements of Changes in Net Assets
For the Year Ended June 30, Increase (Decrease) in Net Assets: 2005 2004 Operations Investment income--net $ 21,493,089 $ 8,733,865 Realized gain--net 131,787,024 49,687,866 Change in unrealized appreciation/depreciation--net 2,346,124 115,375,042 --------------- --------------- Net increase in net assets resulting from operations 155,626,237 173,796,773 --------------- --------------- Dividends to Shareholders Investment income--net: Class A (953,888) (1,333,430) Class B (353,852) (125,031) Class C (890,953) (66,820) Class I (11,510,390) (12,804,694) Class R (117,226) (6,149) --------------- --------------- Net decrease in net assets resulting from dividends to shareholders (13,826,309) (14,336,124) --------------- --------------- Capital Share Transactions Increase (decrease) in net assets derived from net capital share transactions 490,787,300 (13,809,390) --------------- --------------- Redemption Fees Redemption fees 7,327 -- --------------- --------------- Net Assets Total increase in net assets 632,594,555 145,651,259 Beginning of year 666,132,520 520,481,261 --------------- --------------- End of year* $ 1,298,727,075 $ 666,132,520 =============== =============== * Undistributed investment income--net $ 21,122,795 $ 7,278,099 =============== =============== See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Financial Highlights
Class A The following per share data and ratios have been derived For the Year Ended June 30, from information provided in the financial statements. 2005 2004 2003 2002 2001 Per Share Operating Performance Net asset value, beginning of year $ 23.48 $ 17.98 $ 20.55 $ 22.89 $ 27.27 ---------- ---------- ---------- ---------- ---------- Investment income--net .50++ .25++ .39++ .23++ .31 Realized and unrealized gain (loss)--net 2.77** 5.70 (2.96) (.70) (2.41) ---------- ---------- ---------- ---------- ---------- Total from investment operations 3.27 5.95 (2.57) (.47) (2.10) ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.42) (.45) -- (.70) (.47) Realized gain--net -- -- -- (1.17) (1.81) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (.42) (.45) -- (1.87) (2.28) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 26.33 $ 23.48 $ 17.98 $ 20.55 $ 22.89 ========== ========== ========== ========== ========== Total Investment Return* Based on net asset value per share 14.29% 33.67% (12.55%) (1.42%) (8.00%) ========== ========== ========== ========== ========== Ratios to Average Net Assets Expenses 1.33% 1.33% 1.32% 1.38% 1.31% ========== ========== ========== ========== ========== Investment income--net 1.94% 1.20% 2.30% 1.19% 2.05% ========== ========== ========== ========== ========== Supplemental Data Net assets, end of year (in thousands) $ 254,207 $ 42,238 $ 49,395 $ 97,769 $ 52,110 ========== ========== ========== ========== ========== Portfolio turnover 70% 75% 89% 45% 26% ========== ========== ========== ========== ========== * Total investment returns exclude the effect of sales charges. ** Includes redemption fees, which are less than $.01 per share. ++ Based on average shares outstanding. See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Financial Highlights (continued)
Class B For the Period Oct. 6, 2000++ The following per share data and ratios have been derived For the Year Ended June 30, to June,30, from information provided in the financial statements. 2005 2004 2003 2002 2001 Per Share Operating Performance Net asset value, beginning of period $ 23.24 $ 17.84 $ 20.57 $ 23.09 $ 25.65 ---------- ---------- ---------- ---------- ---------- Investment income--net .32++++ .17++++ .29++++ .10++++ .39 Realized and unrealized gain (loss)--net 2.74*** 5.57 (3.02) (.71) (.82) ---------- ---------- ---------- ---------- ---------- Total from investment operations 3.06 5.74 (2.73) (.61) (.43) ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.36) (.34) -- (.74) (.32) Realized gain--net -- -- -- (1.17) (1.81) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (.36) (.34) -- (1.91) (2.13) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 25.94 $ 23.24 $ 17.84 $ 20.57 $ 23.09 ========== ========== ========== ========== ========== Total Investment Return** Based on net asset value per share 13.45% 32.65% (13.27%) (2.10%) (2.01%)+++ ========== ========== ========== ========== ========== Ratios to Average Net Assets Expenses 2.12% 2.11% 2.06% 2.12% 2.18%* ========== ========== ========== ========== ========== Investment income--net 1.27% .81% 1.74% .48% 1.49%* ========== ========== ========== ========== ========== Supplemental Data Net assets, end of period (in thousands) $ 62,261 $ 19,852 $ 5,343 $ 2,064 $ 1,016 ========== ========== ========== ========== ========== Portfolio turnover 70% 75% 89% 45% 26% ========== ========== ========== ========== ========== * Annualized. ** Total investment returns exclude the effect of sales charges. *** Includes redemption fees, which are less than $.01 per share. ++ Commencement of operations. ++++ Based on average shares outstanding. +++ Aggregate total investment return. See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Financial Highlights (continued)
Class C For the Period Oct. 6, 2000++ The following per share data and ratios have been derived For the Year Ended June 30, to June,30, from information provided in the financial statements. 2005 2004 2003 2002 2001 Per Share Operating Performance Net asset value, beginning of period $ 23.09 $ 17.70 $ 20.39 $ 22.91 $ 25.65 ---------- ---------- ---------- ---------- ---------- Investment income--net .37++++ .29++++ .17++++ .09++++ .60 Realized and unrealized gain (loss)--net 2.65*** 5.41 (2.86) (.70) (1.05) ---------- ---------- ---------- ---------- ---------- Total from investment operations 3.02 5.70 (2.69) (.61) (.45) ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.39) (.31) -- (.74) (.48) Realized gain--net -- -- -- (1.17) (1.81) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (.39) (.31) -- (1.91) (2.29) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 25.72 $ 23.09 $ 17.70 $ 20.39 $ 22.91 ========== ========== ========== ========== ========== Total Investment Return** Based on net asset value per share 13.41% 32.58% (13.19%) (2.10%) (2.11%)+++ ========== ========== ========== ========== ========== Ratios to Average Net Assets Expenses 2.12% 2.14% 2.07% 2.06% 1.70%* ========== ========== ========== ========== ========== Investment income--net 1.45% 1.38% 1.02% .47% 1.76%* ========== ========== ========== ========== ========== Supplemental Data Net assets, end of period (in thousands) $ 164,317 $ 38,608 $ 2,672 $ 2,285 $ 762 ========== ========== ========== ========== ========== Portfolio turnover 70% 75% 89% 45% 26% ========== ========== ========== ========== ========== * Annualized. ** Total investment returns exclude the effect of sales charges. *** Includes redemption fees, which are less than $.01 per share. ++ Commencement of operations. ++++ Based on average shares outstanding. +++ Aggregate total investment return. See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Financial Highlights (continued)
Class I The following per share data and ratios have been derived For the Year Ended June 30, from information provided in the financial statements. 2005 2004 2003 2002 2001 Per Share Operating Performance Net asset value, beginning of year $ 23.54 $ 18.03 $ 20.63 $ 22.97 $ 27.33 ---------- ---------- ---------- ---------- ---------- Investment income--net .52++ .31++ .30++ .29++ .48 Realized and unrealized gain (loss)--net 2.83** 5.71 (2.85) (.70) (2.53) ---------- ---------- ---------- ---------- ---------- Total from investment operations 3.35 6.02 (2.55) (.41) (2.05) ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.48) (.51) (.05) (.76) (.50) Realized gain--net -- -- -- (1.17) (1.81) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (.48) (.51) (.05) (1.93) (2.31) ---------- ---------- ---------- ---------- ---------- Net asset value, end of year $ 26.41 $ 23.54 $ 18.03 $ 20.63 $ 22.97 ========== ========== ========== ========== ========== Total Investment Return* Based on net asset value per share 14.59% 34.00% (12.38%) (1.14%) (7.79%) ========== ========== ========== ========== ========== Ratios to Average Net Assets Expenses 1.08% 1.08% 1.07% 1.14% 1.06% ========== ========== ========== ========== ========== Investment income--net 2.07% 1.47% 1.78% 1.42% 1.78% ========== ========== ========== ========== ========== Supplemental Data Net assets, end of year (in thousands) $ 800,990 $ 559,530 $ 463,071 $ 617,289 $1,024,993 ========== ========== ========== ========== ========== Portfolio turnover 70% 75% 89% 45% 26% ========== ========== ========== ========== ========== * Total investment returns exclude the effect of sales charges. ** Includes redemption fees, which are less than $.01 per share. ++ Based on average shares outstanding. See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Financial Highlights (concluded)
Class R For the Period For the Year Ended January 3, 2003++ The following per share data and ratios have been derived June 30, to June 30, from information provided in the financial statements. 2005 2004 2003 Per Share Operating Performance Net asset value, beginning of period $ 23.39 $ 17.98 $ 16.79 ------------ ------------ ------------ Investment income--net*** .50 .52 .32 Realized and unrealized gain--net 2.70 5.38 .87 ------------ ------------ ------------ Total from investment operations 3.20 5.90 1.19 ------------ ------------ ------------ Less dividends from investment income--net (.40) (.49) -- ------------ ------------ ------------ Net asset value, end of period $ 26.19 $ 23.39 $ 17.98 ============ ============ ============ Total Investment Return** Based on net asset value per share 14.03% 33.43% 7.09%+++ ============ ============ ============ Ratios to Average Net Assets Expenses 1.58% 1.60% 1.55%* ============ ============ ============ Investment income--net 1.96% 2.34% 3.04%* ============ ============ ============ Supplemental Data Net assets, end of period (in thousands) $ 16,951 $ 5,905 --+++++ ============ ============ ============ Portfolio turnover 70% 75% 89% ============ ============ ============ * Annualized. ** Total investment returns exclude the effect of sales charges. *** Based on average shares outstanding. ++ Commencement of operations. +++ Aggregate total investment return. +++++ Amount is less than $1,000. See Notes to Financial Statements.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Notes to Financial Statements 1. Significant Accounting Policies: Merrill Lynch International Value Fund (the "Fund") is a series of Mercury Funds II (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company, which is organized as a Massachusetts business trust. The Fund's financial statements are prepared in conformity with U.S. generally accepted accounting principles, which may require the use of management accruals and estimates. Actual results may differ from these estimates. The Fund offers multiple classes of shares. Class A and Class I Shares are sold with a front- end sales charge. Class B and Class C Shares may be subject to a contingent deferred sales charge. Class R Shares are sold only to certain retirement plans. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class A, Class B, Class C and Class R Shares bear certain expenses related to the account maintenance of such shares, and Class B, Class C and Class R Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures (except that Class B shareholders may vote on certain changes to the Class A distribution plan). Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses are allocated daily to each class based on its relative net assets. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Equity securities that are held by the Fund that are traded on stock exchanges or the Nasdaq National Market are valued at the last sale price or official close price on the exchange, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price for long positions, and at the last available asked price for short positions. In cases where equity securities are traded on more than one exchange, the securities are valued on the exchange designated as the primary market by or under the authority of the Board of Trustees of the Trust. Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap or Bulletin Board are valued at the last available bid price or yield equivalent obtained from one or more dealers or pricing services approved by the Board of Trustees of the Trust. Short positions traded in the OTC market are valued at the last available asked price. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market. Options written are valued at the last sale price in the case of exchange- traded options or, in the case of options traded in the OTC market, the last asked price. Options purchased are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Swap agreements are valued daily based upon quotations from market makers. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges. Obligations with remaining maturities of 60 days or less are valued at amortized cost unless the Investment Adviser believes that this method no longer produces fair valuations. Repurchase agreements are valued at cost plus accrued interest. The Fund employs pricing services to provide certain securities prices for the Fund. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Trustees of the Trust, including valuations furnished by the pricing services retained by the Fund, which may use a matrix system for valuations. The procedures of a pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Trust's Board of Trustees. Such valuations and procedures will be reviewed periodically by the Board of Trustees of the Trust. Generally, trading in foreign securities, as well as U.S. government securities and money market instruments, is substantially completed each day at various times prior to the close of business on the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates also are generally determined prior to the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that may not be reflected in the computation of the Fund's net asset value. If events (for example, a company announcement, market volatility or a natural disaster) occur during such periods that are expected to materially affect the value of such securities, those securities may be valued at their fair value as determined in good faith by the Trust's Board of Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trust's Board of Trustees. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Notes to Financial Statements (continued) (b) Derivative financial instruments--The Fund may engage in various portfolio investment strategies both to increase the return of the Fund and to hedge, or protect, its exposure to interest rate movements and movements in the securities markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Forward foreign exchange contracts--The Fund may enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. The contract is marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. (c) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into U.S. dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. Under the applicable foreign tax law, withholding taxes may be imposed on interest, dividends and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income is recognized on the accrual basis. (f) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and distributions--Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. (h) Securities lending--The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the U.S. government as collateral, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. Where the Fund receives securities as collateral for the loaned securities, it collects a fee from the borrower. The Fund typically receives the income on the loaned securities but does not receive the income on the collateral. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder's, lending agent, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral. The Fund also could suffer a loss where the value of the collateral falls below the market value of the borrowed securities, in the event of borrower default or in the event of losses on investments made with cash collateral. (i) Reclassifications--U.S. generally accepted accounting principles require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, during the current year, $6,168,142 has been reclassified between accumulated realized loss and undistributed net investment income and $82,484 has been reclassified between paid-in capital and undistributed net investment income as a result of permanent differences attributable to gains from the sale of stock of passive foreign investment companies, foreign currency transaction gains/losses and non-deductible expenses. These reclassifications have no effect on net assets or net asset values per share. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Notes to Financial Statements (continued) 2. Investment Advisory Agreement and Transactions with Affiliates: The Trust has entered into an Investment Advisory Agreement for the Fund with Fund Asset Management L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Trust, on behalf of the Fund, has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), a wholly- owned subsidiary of Merrill Lynch Group, Inc. FAM is responsible for the management of the Fund's investments and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at an annual rate of .75% of the average daily value of the Fund's net assets. FAM has entered into Sub-Advisory agreements for the Fund with Merrill Lynch Investment Managers International Limited and Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), affiliated investment advisers that are indirect subsidiaries of ML & Co. The Sub-Advisory arrangements are for investment research, recommendations and other investment-related services to be provided to the Fund. There is no increase in aggregate fees paid by the Fund for these services. Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at the annual rates based upon the average daily net assets of the shares as follows: Account Maintenance Distribution Fee Fee Class A .25% -- Class B .25% .75% Class C .25% .75% Class R .25% .25% Pursuant to a sub-agreement with the Distributor, selected dealers also provide account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and selected dealers for providing account maintenance services to Class A, Class B, Class C and Class R shareholders. The ongoing distribution fee compensates the Distributor and selected dealers for providing shareholder and distribution-related services to Class B, Class C and Class R shareholders. For the year ended June 30, 2005, FAMD earned underwriting discounts and direct commissions and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, earned dealer concessions on sales of the Fund's Class A and Class I Shares as follows: FAMD MLPF&S Class A $ 29,840 $ 365,596 Class I $ 870 $ 1,479 For the year ended June 30, 2005, MLPF&S received contingent deferred sales charges of $26,242 and $25,251 relating to transactions in Class B and Class C Shares, respectively. In addition, MLPF&S received $15,225 in commissions on the execution of portfolio security transactions for the Fund for the year ended June 30, 2005. The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to MLPF&S or its affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending agent for a fee based on a share of the returns on investment of cash collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by MLIM, LLC or in registered money market funds advised by FAM or its affiliates. For the year ended June 30, 2005, MLIM, LLC received $14,565 in security lending agent fees. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Certain authorized agents of the Fund charge a fee for accounting and shareholder services that they provide to the Fund on behalf of certain shareholders; the portion of this fee paid by the Fund is included within transfer agent fees in the Statement of Operations. For the year ended June 30, 2005, the Fund reimbursed FAM $25,676 for certain accounting services. Certain officers and/or trustees of the Trust are officers and/or directors of FAM, PSI, MLAM U.K., FAMD, FDS, ML & Co., and/or MLIM, LLC. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Notes to Financial Statements (continued) 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended June 30, 2005 were $1,201,063,935 and $743,447,821, respectively. 4. Capital Share Transactions: Net increase (decrease) in net assets derived from capital share transactions was $490,787,300 and $(13,809,390) for the years ended June 30, 2005 and June 30, 2004, respectively. Transactions in capital shares for each class were as follows: Class A Shares for the Year Dollar Ended June 30, 2005 Shares Amount Shares sold 3,016,135 $ 76,038,050 Automatic conversion of shares 185,640 4,674,577 Shares issued resulting from reorganization 6,689,495 149,572,748 Shares issued to shareholders in reinvestment of dividends 39,715 898,017 --------------- --------------- Total issued 9,930,985 231,183,392 Shares redeemed (2,076,121) (52,055,114) --------------- --------------- Net increase 7,854,864 $ 179,128,278 =============== =============== Class A Shares for the Year Dollar Ended June 30, 2004 Shares Amount Shares sold 8,800,514 $ 164,996,795 Automatic conversion of shares 41,692 962,246 Shares issued to shareholders in reinvestment of dividends 57,445 1,097,605 --------------- --------------- Total issued 8,899,651 167,056,646 Shares redeemed (9,848,355) (187,909,481) --------------- --------------- Net decrease (948,704) $ (20,852,835) =============== =============== Class B Shares for the Year Dollar Ended June 30, 2005 Shares Amount Shares sold 1,667,483 $ 41,690,456 Shares issued resulting from reorganization 683,941 15,152,519 Shares issued to shareholders in reinvestment of dividends 15,432 335,808 --------------- --------------- Total issued 2,366,856 57,178,783 --------------- --------------- Automatic conversion of shares (187,857) (4,674,577) Shares redeemed (632,514) (15,904,272) --------------- --------------- Total redeemed (820,371) (20,578,849) --------------- --------------- Net increase 1,546,485 $ 36,599,934 =============== =============== Class B Shares for the Year Dollar Ended June 30, 2004 Shares Amount Shares sold 933,567 $ 19,761,164 Shares issued to shareholders in reinvestment of dividends 6,323 119,861 --------------- --------------- Total issued 939,890 19,881,025 --------------- --------------- Automatic conversion of shares (42,007) (962,246) Shares redeemed (343,196) (6,939,516) --------------- --------------- Total redeemed (385,203) (7,901,762) --------------- --------------- Net increase 554,687 $ 11,979,263 =============== =============== Class C Shares for the Year Dollar Ended June 30, 2005 Shares Amount Shares sold 5,094,114 $ 125,104,120 Shares issued resulting from reorganization 522,287 11,476,831 Shares issued to shareholders in reinvestment of dividends 38,730 835,790 --------------- --------------- Total issued 5,655,131 137,416,741 Shares redeemed (939,322) (23,474,119) --------------- --------------- Net increase 4,715,809 $ 113,942,622 =============== =============== Class C Shares for the Year Dollar Ended June 30, 2004 Shares Amount Shares sold 1,746,815 $ 38,013,548 Shares issued to shareholders in reinvestment of dividends 3,249 62,793 --------------- --------------- Total issued 1,750,064 38,076,341 Shares redeemed (229,268) (4,694,572) --------------- --------------- Net increase 1,520,796 $ 33,381,769 =============== =============== Class I Shares for the Year Dollar Ended June 30, 2005 Shares Amount Shares sold 7,976,396 $ 203,555,648 Shares issued resulting from reorganization 5,054,773 113,227,053 Shares issued to shareholders in reinvestment of dividends 491,341 10,991,995 --------------- --------------- Total issued 13,522,510 327,774,696 Shares redeemed (6,964,707) (176,506,186) --------------- --------------- Net increase 6,557,803 $ 151,268,510 =============== =============== Class I Shares for the Year Dollar Ended June 30, 2004 Shares Amount Shares sold 18,148,648 $ 357,808,494 Shares issued to shareholders in reinvestment of dividends 629,110 12,134,608 --------------- --------------- Total issued 18,777,758 369,943,102 Shares redeemed (20,695,248) (413,913,322) --------------- --------------- Net decrease (1,917,490) $ (43,970,220) =============== =============== MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Notes to Financial Statements (concluded) Class R Shares for the Year Dollar Ended June 30, 2005 Shares Amount Shares sold 586,056 $ 14,728,902 Shares issued to shareholders in reinvestment of dividends 5,354 117,095 --------------- --------------- Total issued 591,410 14,845,997 Shares redeemed (196,639) (4,998,041) --------------- --------------- Net increase 394,771 $ 9,847,956 =============== =============== Class R Shares for the Year Dollar Ended June 30, 2004 Shares Amount Shares sold 331,464 $ 7,449,954 Shares issued to shareholders in reinvestment of dividends 288 6,142 --------------- --------------- Total issued 331,752 7,456,096 Shares redeemed (79,315) (1,803,463) --------------- --------------- Net increase 252,437 $ 5,652,633 =============== =============== The Fund charges a 2% redemption fee on the proceeds (calculated at market value) of a redemption (either by sale or exchange) of Fund shares made within 30 days of purchase. The redemption fee is paid to the Fund and is intended to offset the trading costs, market impact and other costs associated with short- term trading into and out of the Fund. 5. Short-Term Borrowings: The Trust, on behalf of the Fund, along with certain other funds managed by FAM and its affiliates, is a party to a $500,000,000 credit agreement with a group of lenders, which expires November 2005. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of .07% per annum based on the Fund's pro rata share of the unused portion of the credit agreement. Amounts borrowed under the credit agreement bear interest at a rate equal to, at each Fund's election, the federal funds rate plus .50% or a base rate as defined in the credit agreement. The Fund did not borrow under the credit agreement during the year ended June 30, 2005. 6. Commitments: At June 30, 2005, the Fund had entered into foreign exchange contracts, under which it had agreed to purchase and sell various foreign currencies with approximate values of $3,440,000 and $14,257,000, respectively. 7. Distributions to Shareholders: The tax character of distributions paid during the fiscal years ended June 30, 2005 and June 30, 2004 was as follows: 6/30/2005 6/30/2004 Distributions paid from: Ordinary income $ 13,826,309 $ 14,336,124 --------------- --------------- Total taxable distributions $ 13,826,309 $ 14,336,124 =============== =============== As of June 30, 2005, the components of accumulated earnings on a tax basis were as follows: Undistributed ordinary income--net $ 24,502,247 Undistributed long-term capital gains--net 65,463,929 --------------- Total undistributed earnings--net 89,966,176 Capital loss carryforward (58,864,370)* Unrealized gains--net 145,796,744** --------------- Total accumulated earnings--net $ 176,898,550 =============== * On June 30, 2005, the Fund had a capital loss carryforward of $58,864,370, of which $16,139,328 expires in 2009 and $42,725,042 expires in 2010. Subject to limitations, this amount will be available to offset like amounts of future gains. ** The difference between book-basis and tax-basis net unrealized gains is attributable primarily to the tax deferral of losses on wash sales, the realization for tax purposes of unrealized gains (losses) on certain forward foreign currency contracts, the realization for tax purposes of unrealized gains on investments in passive foreign investment companies and the limitation on the utilization of capital loss carryforwards for tax purposes. 8. Acquisition of Merrill Lynch International Equity Fund: On August 23, 2004, the Fund acquired substantially all of the assets and liabilities of Merrill Lynch International Equity Fund pursuant to a plan of reorganization. The acquisition was accomplished by a tax-free exchange of 34,884,255 shares of Common Stock of Merrill Lynch International Equity Fund for 12,950,496 shares of Common Stock of the Fund. Merrill Lynch International Equity Fund's net assets on that date of $289,429,151, including $24,714,400 of net unrealized appreciation, $88,197,407 of accumulated net realized capital losses and $72,710 of distributions in excess of net investment income, were combined with those of the Fund. The aggregate net assets immediately after the acquisition amounted to $828,276,008. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Report of Independent Registered Public Accounting Firm To the Board of Trustees of Mercury Funds II and Shareholders of Merrill Lynch International Value Fund: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Merrill Lynch International Value Fund (one of the portfolios comprising Mercury Funds II) as of June 30, 2005, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the periods then ended. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of June 30, 2005, by correspondence with the custodian and others. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Merrill Lynch International Value Fund at June 30, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the periods then ended in conformity with U.S. generally accepted accounting principles. (Ernst & Young LLP) Philadelphia, Pennsylvania August 16, 2005 Important Tax Information (unaudited) The following information is provided with respect to the ordinary income distributions paid by Merrill Lynch International Value Fund of Mercury Funds II during the fiscal year ended June 30, 2005:
Record Date August 11, 2004 December 14, 2004 Payable Date August 17, 2004 December 17, 2004 Qualified Dividend Income for Individuals 72.58%* 95.52%* Foreign Source Income 72.58% 95.52% Foreign Taxes Paid Per Share $0.059101 $0.021816 * The Fund hereby designates the percentage indicated above or the maximum amount allowable by law.
The foreign taxes paid represent taxes incurred by the Fund on income received by the Fund from foreign sources. Foreign taxes paid may be included in taxable income with an offsetting deduction from gross income or may be taken as a credit for taxes paid to foreign governments. You should consult your tax adviser regarding the appropriate treatment of foreign taxes paid. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Officers and Trustees
Number of Portfolios in Other Public Position(s) Length of Fund Complex Directorships Held with Time Overseen by Held by Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee Interested Trustee Robert C. Doll, Jr.* President 2005 to President of the MLIM/FAM-advised funds since 125 Funds None P.O. Box 9011 and present 2005; President of MLIM and FAM since 2001; 169 Portfolios Princeton, Trustee Co-Head (Americas Region) thereof from 2000 NJ 08543-9011 to 2001 and Senior Vice President from 1999 Age: 50 to 2001; President and Director of Princeton Services, Inc. ("Princeton Services") since 2001; President of Princeton Administrators, L.P. ("Princeton Administrators") since 2001; Chief Investment Officer of Oppenheimer Funds, Inc. in 1999 and Executive Vice President thereof from 1991 to 1999. * Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which MLIM or FAM acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company Act, of the Fund based on his current positions with MLIM, FAM, Princeton Services and Princeton Administrators. Trustees serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund President, Mr. Doll serves at the pleasure of the Board of Trustees. Independent Trustees* James H. Bodurtha** Trustee 2002 to Director, The China Business Group, Inc. 38 Funds None P.O. Box 9095 present since 1996 and Executive Vice President 55 Portfolios Princeton, thereof from 1996 to 2003; Chairman of the NJ 08543-9095 Board, Berkshire Holding Corporation since Age: 61 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993. Kenneth A. Froot Trustee 2005 to Professor, Harvard University since 1992; 38 Funds None P.O. Box 9095 present Professor, Massachusetts Institute of 55 Portfolios Princeton, Technology from 1986 to 1992. NJ 08543-9095 Age: 47 Joe Grills** Trustee 1996 to Member of the Committee of Investment of 38 Funds Kimco Realty P.O. Box 9095 present Employee Benefit Assets of the Association 55 Portfolios Corporation Princeton, of Financial Professionals ("CIEBA") since NJ 08543-9095 1986; Member of CIEBA's Executive Committee Age: 70 since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Corporation ("IBM") and Chief Investment Officer of IBM Retirement Funds from 1986 to 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund since 1989; Member of the Investment Advisory Committee of the Howard Hughes Medical Institute from 1997 to 2000; Director, Duke University Management Company from 1992 to 2004, Vice Chairman thereof since 1998 to 2004 and Director Emeritus thereof since 2004; Director, LaSalle Street Fund from 1995 to 2001; Director, Kimco Realty Corporation since 1997; Member of the Investment Advisory Committee of the Virginia Retirement System since 1998; Vice Chairman thereof from 2002 to 2005 and Chairman thereof since 2005; Director, Montpelier Foundation since 1998 and its Vice Chairman since 2000; Member of the Investment Committee of the Woodberry Forest School since 2000; Member of the Investment Committee of the National Trust for Historic Preservation since 2000.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Officers and Trustees (continued)
Number of Portfolios in Other Public Position(s) Length of Fund Complex Directorships Held with Time Overseen by Held by Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee Independent Trustees* (concluded) Herbert I. London Trustee 2002 to John M. Olin Professor of Humanities, New York 38 Funds None P.O. Box 9095 present University since 1993 and Professor thereof 55 Portfolios Princeton, since 1980; President, Hudson Institute since NJ 08543-9095 1997 and Trustee thereof since 1980; Dean, Age: 66 Gallatin Division of New York University from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Director, Damon Corp. from 1991 to 1995; Overseer, Center for Naval Analyses from 1983 to 1993. Roberta Cooper Ramo Trustee 2002 to Shareholder, Modrall, Sperling, Roehl, Harris & 38 Funds None P.O. Box 9095 present Sisk, P.A. since 1993; President, American Bar 55 Portfolios Princeton, Association from 1995 to 1996 and Member of NJ 08543-9095 the Board of Governors thereof from 1994 to 1997; Age: 62 Shareholder, Poole, Kelly & Ramo, Attorneys at Law, P.C. from 1977 to 1993; Director, ECMC Group (service provider to students, schools and lenders) since 2001; Director, United New Mexico Bank (now Wells Fargo) from 1983 to 1988; Director, First National Bank of New Mexico (now Wells Fargo) from 1975 to 1976; Vice President, American Law Institute since 2004. Robert S. Salomon, Jr. Trustee 2002 to Principal of STI Management (investment 38 Funds None P.O. Box 9095 present adviser) since 1994; Chairman and CEO of 55 Portfolios Princeton, Salomon Brothers Asset Management from 1992 NJ 08543-9095 to 1995; Chairman of Salomon Brothers Equity Age: 68 Mutual Funds from 1992 to 1995; regular columnist with Forbes Magazine from 1992 to 2002; Director of Stock Research and U.S. Equity Strategist at Salomon Brothers, Inc. from 1975 to 1991; Trustee, Commonfund from 1980 to 2001. Stephen B. Swensrud Trustee 2002 to Chairman of Fernwood Advisors, Inc. (investment 39 Funds None P.O. Box 9095 present adviser) since 1996; Principal, Fernwood 56 Portfolios Princeton, Associates (financial consultants) since 1975; NJ 08543-9095 Chairman of R.P.P. Corporation (manufacturing Age: 72 company) since 1978; Director of International Mobile Communications, Incorporated (telecom- munications company) since 1998. * Trustees serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. ** Co-Chairman of the Board and the Audit Committee.
MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Officers and Trustees (concluded)
Position(s) Length of Held with Time Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Fund Officers* Donald C. Burke Vice 1996 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999; P.O. Box 9011 President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director Princeton, and and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999; Vice NJ 08543-9011 Treasurer 1999 to President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from Age: 45 present 1990 to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004. James A. Macmillan Vice 2000 to Managing Director of MLIM since January 2001; Director (Equity Fund Management) P.O. Box 9011 President present of an affiliate of MLIM since 1999. Princeton, NJ 08543-9011 Age: 40 Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President P.O. Box 9011 Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Princeton, Officer Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at NJ 08543-9011 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and Age: 53 Global Director of Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the Commission's Division of Enforcement in Washington, D.C. from 1990 to 1995. Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to P.O. Box 9011 present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD Princeton, and Princeton Services since 2004. NJ 08543-9011 Age: 45 * Officers of the Fund serve at the pleasure of the Board of Trustees.
Custodian Brown Brothers Harriman & Co. 40 Water Street Boston, MA 02109-3661 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 800-637-3863 Availability of Quarterly Schedule of Investments The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Electronic Delivery The Fund offers electronic delivery of communications to its shareholders. In order to receive this service, you must register your account and provide us with e-mail information. To sign up for this service, simply access this Web site at http://www.icsdelivery.com/live and follow the instructions. When you visit this site, you will obtain a personal identification number (PIN). You will need this PIN should you wish to update your e-mail address, choose to discontinue this service and/or make any other changes to the service. This service is not available for certain retirement accounts at this time. MERRILL LYNCH INTERNATIONAL VALUE FUND JUNE 30, 2005 Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the end of the period covered by this report, that applies to the registrant's principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. A copy of the code of ethics is available without charge upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863). Item 3 - Audit Committee Financial Expert - The registrant's board of directors has determined that (i) the registrant has the following audit committee financial experts serving on its audit committee and (ii) each audit committee financial expert is independent: (1) Joe Grills, (2) Andre F. Perold (resigned as of October 1, 2004), (3) Robert S. Salomon, Jr., and (4) Stephen B. Swensrud. Item 4 - Principal Accountant Fees and Services (a) Audit Fees - Fiscal Year Ending June 30, 2005 - $34,000 Fiscal Year Ending June 30, 2004 - $30,000 (b) Audit-Related Fees - Fiscal Year Ending June 30, 2005 - $0 Fiscal Year Ending June 30, 2004 - $0 (c) Tax Fees - Fiscal Year Ending June 30, 2005 - $5,700 Fiscal Year Ending June 30, 2004 - $5,200 The nature of the services include tax compliance, tax advice and tax planning. (d) All Other Fees - Fiscal Year Ending June 30, 2005 - $0 Fiscal Year Ending June 30, 2004 - $0 (e)(1) The registrant's audit committee (the "Committee") has adopted policies and procedures with regard to the pre-approval of services. Audit, audit-related and tax compliance services provided to the registrant on an annual basis require specific pre-approval by the Committee. The Committee also must approve other non-audit services provided to the registrant and those non-audit services provided to the registrant's affiliated service providers that relate directly to the operations and the financial reporting of the registrant. Certain of these non-audit services that the Committee believes are a) consistent with the SEC's auditor independence rules and b) routine and recurring services that will not impair the independence of the independent accountants may be approved by the Committee without consideration on a specific case-by-case basis ("general pre-approval"). However, such services will only be deemed pre-approved provided that any individual project does not exceed $5,000 attributable to the registrant or $50,000 for all of the registrants the Committee oversees. Any proposed services exceeding the pre-approved cost levels will require specific pre- approval by the Committee, as will any other services not subject to general pre-approval (e.g., unanticipated but permissible services). The Committee is informed of each service approved subject to general pre-approval at the next regularly scheduled in-person board meeting. (e)(2) 0% (f) Not Applicable (g) Fiscal Year Ending June 30, 2005 - $5,700 Fiscal Year Ending June 30, 2004 - $5,200 (h) The registrant's audit committee has considered and determined that the provision of non-audit services that were rendered to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre- approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. Regulation S-X Rule 2-01(c)(7)(ii) - $0, 0% Item 5 - Audit Committee of Listed Registrants - Not Applicable Item 6 - Schedule of Investments - Not Applicable Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies - Not Applicable Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not Applicable Item 9 - Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers - Not Applicable Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable Item 11 - Controls and Procedures 11(a) - The registrant's certifying officers have reasonably designed such disclosure controls and procedures to ensure material information relating to the registrant is made known to us by others particularly during the period in which this report is being prepared. The registrant's certifying officers have determined that the registrant's disclosure controls and procedures are effective based on our evaluation of these controls and procedures as of a date within 90 days prior to the filing date of this report. 11(b) - There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d)) that occurred during the second fiscal half- year of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12 - Exhibits attached hereto 12(a)(1) - Code of Ethics - See Item 2 12(a)(2) - Certifications - Attached hereto 12(a)(3) - Not Applicable 12(b) - Certifications - Attached hereto Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Merrill Lynch International Value Fund of Mercury Funds II By: /s/ Robert C. Doll, Jr. ------------------------------- Robert C. Doll, Jr., Chief Executive Officer of Merrill Lynch International Value Fund of Mercury Funds II Date: August 19, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Robert C. Doll, Jr. ------------------------------- Robert C. Doll, Jr., Chief Executive Officer of Merrill Lynch International Value Fund of Mercury Funds II Date: August 19, 2005 By: /s/ Donald C. Burke ------------------------------- Donald C. Burke, Chief Financial Officer of Merrill Lynch International Value Fund of Mercury Funds II Date: August 19, 2005 EX-99.CERT 2 ex99cert.txt SECTION 302 EX-99. CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert C. Doll, Jr., Chief Executive Officer of Merrill Lynch International Value Fund of Mercury Funds II, certify that: 1. I have reviewed this report on Form N-CSR of Merrill Lynch International Value Fund of Mercury Funds II; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 19, 2005 /s/ Robert C. Doll, Jr. ----------------------- Robert C. Doll, Jr., Chief Executive Officer of Merrill Lynch International Value Fund of Mercury Funds II EX-99. CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Donald C. Burke, Chief Financial Officer of Merrill Lynch International Value Fund of Mercury Funds II, certify that: 1. I have reviewed this report on Form N-CSR of Merrill Lynch International Value Fund of Mercury Funds II; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 19, 2005 /s/ Donald C. Burke ------------------- Donald C. Burke, Chief Financial Officer of Merrill Lynch International Value Fund of Mercury Funds II EX-99.1350CERT 3 section906.txt SECTION 906 Exhibit 99.1350CERT Certification Pursuant to Section 906 of the Sarbanes Oxley Act I, Robert C. Doll, Jr., Chief Executive Officer of Merrill Lynch International Value Fund of Mercury Funds II (the "Fund"), certify that: 1. The N-CSR of the Fund (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. Dated: August 19, 2005 /s/ Robert C. Doll, Jr. ----------------------- Robert C. Doll, Jr., Chief Executive Officer of Merrill Lynch International Value Fund of Mercury Funds II A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Merrill Lynch International Value Fund of Mercury Funds II and will be retained by Merrill Lynch International Value Fund of Mercury Funds II and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 99.1350CERT Certification Pursuant to Section 906 of the Sarbanes Oxley Act I, Donald C. Burke, Chief Financial Officer of Merrill Lynch International Value Fund of Mercury Funds II (the "Fund"), certify that: 1. The N-CSR of the Fund (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. Dated: August 19, 2005 /s/ Donald C. Burke ------------------- Donald C. Burke, Chief Financial Officer of Merrill Lynch International Value Fund of Mercury Funds II A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Merrill Lynch International Value Fund of Mercury Funds II and will be retained by Merrill Lynch International Value Fund of Mercury Funds II and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----