MERRILL LYNCH
INTERNET
STRATEGIES
FUND, INC.
FUND LOGO
Semi-Annual Report
July 31, 2000
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.
Merrill Lynch
Internet Strategies Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH INTERNET STRATEGIES FUND, INC.
Officers and
Directors
Terry K. Glenn, President and Director
Charles C. Reilly, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Arthur Zeikel, Director
Edward D. Zinbarg, Director
Robert C. Doll, Jr., Senior Vice President
Paul G. Meeks, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Susan B. Baker, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Portfolio Information
As of July 31, 2000
Percent of
Ten Largest Holdings Net Assets
America Online, Inc. 4.8%
VeriSign, Inc. 4.3
Cisco Systems, Inc. 3.8
JDS Uniphase Corporation 3.4
Yahoo! Inc. 3.4
Check Point Software Technologies Ltd. 3.4
Exodus Communications, Inc. 3.2
PMC--Sierra, Inc. 3.1
Juniper Networks, Inc. 3.1
Ariba, Inc. 3.1
Percent of
Ten Largest Industries Net Assets
Hardware 22.3%
Software 17.8
Communications Services 13.0
Electronic Components 12.7
Media 11.6
Services & Solutions 7.4
Business-to-Business 5.2
Retail 2.2
Finance 1.6
Advertising & Marketing 1.4
Merrill Lynch Internet Strategies Fund, Inc., July 31, 2000
DEAR SHAREHOLDER
We are pleased to provide you with our first semi-annual report for
Merrill Lynch Internet Strategies Fund, Inc. The Fund seeks to
provide shareholders with long-term growth of capital through
investment primarily in equity securities of issuers that Fund
management believes will use the Internet as a component of their
business strategies. The Fund seeks to achieve its objective by
investing all of its assets in Master Internet Strategies Trust that
has the same investment objective as the Fund.
Investment Environment
Merrill Lynch Internet Strategies Fund, Inc. commenced operations on
March 22, 2000 with $1.1 billion in shareholder assets. Since the
Fund's inception through July 31, 2000, the Fund's Class A, Class B,
Class C and Class D Shares had total returns of -30.70%, -30.90%,
-30.90% and -30.70%, respectively, as compared to a decline of 42.6%
for the unmanaged Dow Jones Composite Internet Index (DJINET).
Clearly, the timing of the Fund launch was less than ideal. However,
as we will outline in this letter and in our future communications,
we continue to be very optimistic about the opportunity to generate
solid returns for shareholders over the long term by investing in
Internet and Internet-related securities.
The performance of Internet stocks over the life of the Fund does
not tell the whole story of the extreme volatility we have
experienced in the Internet sector thus far in the year 2000. From
the Internet stocks' peak on March 9, 2000 (very close to the peak
for the technology sector on March 10) through May 24, the DJINET
declined a stunning 58.7%. From the May 24 low through July 31,
2000, the DJINET rallied 26.4%, making up some of the losses but
still leaving the sector well below its highs.
In our opinion, the sharp decline in Internet stocks did not have a
single catalyst, but was caused by a variety of factors, most of
which have little to do with the long-term viability of the highest-
quality Internet companies. The two years leading up to the recent
sell-off featured an unprecedented level of underwriting activity.
Investors, both individual and professional, developed a tremendous
desire to be involved with virtually any new company, as long as it
was associated with the Internet. Thus, many companies were able to
become public before they were ready, with untested management,
nascent business plans or insufficient financial controls. The
weakest of these companies formed a very shaky foundation for the
Internet sector coming into the year 2000.
Why did the dramatic correction and change in investor sentiment
happen at this precise time? First, the period in question saw some
investors move from an attitude of praising the business model of
any fast-growing Internet company to one of skepticism of most
Internet businesses. Despite driving huge volumes of online shopping
that exceeded even the most aggressive estimates, Christmas 1999 did
not translate into big profits (or any profit) for most online
retailers. Privacy concerns had investors putting every online
advertising company in the doghouse. Second, the US economy, despite
the Federal Reserve Board's efforts, had continued to grow too
quickly, prompting continued interest rate increases. Higher
interest rates typically have the biggest and most negative effect
on the stocks with the highest multiples. Internet stocks bucked
this trend from August 1999 through early 2000, but in the end gave
in. Third, the group had made spectacular gains in a short time.
From August 4, 1999 through March 9, 2000, the DJINET rose 185.8%.
Fourth, investors were suddenly demanding profitability along with
big growth rates, if not now then in the near future. Especially
punished were the stocks of those companies whose business model did
not generate profit until several years hence. These negative
factors, combined with the recent gains in the Internet stocks and
some high-profile execution miscues, all contributed to the decline.
The beginning of the sell-off had derivative effects that were
damaging to all but the highest-quality Internet stocks. Simply put,
the speed and magnitude of the decline served to highlight the risks
of owning these stocks. As investors were increasingly willing to
own only the highest-quality names, second and third tier companies
were faced with a cash crunch; they needed more money to survive but
had no place to get it. These companies could previously rely on the
capital markets through secondary offerings of common stock for a
seemingly endless supply of cash. Suddenly, companies that required
incremental capital because they were not yet profitable were unable
to get it. These cash-strapped enterprises put further pressure on
those companies that were dependent on advertising revenues, since a
substantial portion of Internet advertising comes from other
Internet companies. As the stocks plummeted, Wall Street analysts
were more afraid to recommend them, and business publications were
more willing to write negative articles.
The pendulum often swings too far, in both directions, and in the
first half of the year the equity markets went from being in love
with Internet stocks to doubting whether any of them would survive.
This dramatic change in perception was clearly reflected in the
stock prices as the group sold off far more than the broader market
for technology stocks. One might criticize us for investing too
quickly at the Fund's inception, since the stocks were at high
levels and inflationary fears lingered. We believe that the
companies we invest in are not now and were not then overvalued. The
last ten years have seen a powerful shift in the multiples of
earnings, sales or cash flow that investors are willing to pay for
the best-positioned growth companies, especially in technology. For
reasons we outline below, we think that this makes sense. The
Internet as a medium, and the network underlying it, is in its
absolute infancy. Over the next five years--ten years, we expect
investors to see huge opportunities unfold across many Internet
subsectors and companies. We believe these opportunities, for the
best companies, were not even close to fully discounted, even at the
March peak. We do believe that the pendulum has swung too far in the
negative direction. The stocks sold off more than was warranted, and
investors were too negative on many of these business models,
creating significant opportunities. The Fund is well positioned to
take advantage of these opportunities, and from these levels we feel
good about the remainder of the year and beyond.
Portfolio Strategy
Our primary investment focus is on finding the best long-term growth
opportunities in two areas associated with the Internet:
* Internet or "dotcom" companies are companies that have been
created to do business on the Internet (for example, retailers,
content, finance and business-to-business) or to facilitate others
using the Internet (for example, access and services applications).
* Internet infrastructure companies are those hardware, software and
telecommunications players that are responsible for building out the
network of computers, cell phones, devices and telecommunications
equipment that comprises the Internet.
Other significant elements of our strategy are as follows.
* The Fund may also invest in traditional companies that are
benefiting from moving some part of their business to the Internet,
either through enhanced opportunities for growth in revenues or
through a more efficient business model.
* The Fund will invest globally, but geographic diversification is
less important than finding the best companies in the best growth
areas, regardless of geographic location.
* The Fund will trade aggressively, both through eliminating some
losing positions and taking profits in some winners. We anticipate
that portfolio turnover will be well in excess of 100%.
* The Fund has the ability to hedge through the use of derivatives,
raising cash or engaging in short sales in order to defend against
short-term price declines in shares of Internet stocks. However, we
do not advocate that anyone invest in the Fund under the assumption
that we will be able to totally prevent substantial declines in
portfolio value when the Internet group is out of favor.
Merrill Lynch Internet Strategies Fund, Inc., July 31, 2000
The Long-Term Opportunity
The reason that we are focused on the Internet is that it may be the
single biggest growth opportunity ever. Many individuals are
familiar with the Internet--they buy things online or use an e-mail
account--but the vast majority of people still do not own a
computer. At the same time, we are on the cusp of traditional
consumer Internet applications being widely offered over cellular
phones and other appliances. Investors can look to the phenomenal
combination of growth and profitability delivered by Yahoo! Inc. and
eBay Inc. or the near-infinite possibilities for the combined
America Online-Time Warner company to become an unparalleled media
powerhouse, to begin to see the incredible potential.
Since businesses worldwide have only begun to develop significant
Internet strategies, we think many billions of dollars will be spent
on their preparation for the New Economy. The sheer size of these
revenue infrastructure opportunities makes the Internet and Internet-
related companies fertile ground for growth stock investing. But the
speed of the adoption of this critical technology and the rate of
change of these businesses make for even more compelling investment
opportunities. The fastest-growing companies are often afforded the
highest valuations because in this winner-take-all technology world,
first mover advantage and speed to market can result in an enduring
competitive advantage. In our opinion, companies like Ariba, Inc.,
Exodus Communications, Inc., Inktomi Corporation, InfoSpace.com,
Inc. and Brocade Communications Systems, Inc. all have a chance to
widen their lead over their competitors and create a Cisco-like (or
Microsoft-like or Intel-like) stronghold on their industry. In the
process, if they execute well, they have the ability to generate
huge returns on investment and for shareholders.
Risk
The Fund's risk management strategy focuses on two areas: risk that
companies will be unsuccessful or not successful enough to grow into
their valuations and become sound investments and market risk in the
form of extreme volatility.
The way we tackle individual company risk is to diversify the Fund
across from 50 to 80 companies, both pure dotcom firms and
infrastructure players. Perhaps the biggest risk an Internet
investor can expose himself to is to own only one or two stocks. The
odds of one company being a flop in this fast-changing environment
are significant. A diversified portfolio is a good start to managing
this risk. The reason we do not restrict investments to only dotcom
companies is that we believe the infrastructure supporting the
Internet is every bit as important as the commerce being conducted
through it. Thus, it will produce many compelling investment
opportunities.
Volatility has been significant in the sector. The pace of change
that the companies must deal with, combined with the hyper growth
rates and the fact that many investors struggle to understand these
businesses, may indicate that this volatility is permanent. We will
attempt to manage this volatility by occasionally raising cash
levels when we believe that Internet stocks have run too hard and
too fast and may be due for a correction, or by hedging with
derivatives. Both strategies have been employed over the brief life
of the Fund, but both have proven difficult to successfully execute.
Using index put options as a hedge against the portfolio is
something we have done, with some success, but the volatility of the
under-lying stocks has been so great that the hedging instruments
themselves are very expensive.
We currently have a higher cash position (6.4% of net assets on July
31, 2000) than we anticipate having over the long run because we are
worried about a potential retest of NASDAQ's spring lows before the
completion of 2000's third quarter. However, the upward spikes in
these stocks happen quickly, and we do not want to run the risk of
having too much idle cash if the stocks make a run like they did in
late 1998 and 1999. We will continue to be somewhat defensive and to
attempt to limit downside risk. However, we firmly believe that the
prime reason to invest in Internet and Internet-related securities
is for the appreciation potential they offer over the long term, but
the opportunity to capture that upside does not come without some
risk and volatility.
Investment Outlook
While it is fashionable to be anti-Internet at the moment, in our
opinion this will change because the benefits offered by the
Internet are immense and forces driving its growth are irreversible.
Investors are always attracted back to great growth stories, even
after they have fallen out of favor. Look for it to be no different
this time. The generous capital markets of the last few years
created too many public companies. There needs to be consolidation,
that is, for the weakest players to merge or to be taken over. We
may also need time to repair the damage in some stocks. Some
investors now believe that many Internet business models will never
work, and these companies' stocks reflect this. Only solid execution
and an inexorable march toward profitability will change this. But
we believe the market has given us a rare opportunity. Many
companies that we viewed as attractive investments six months ago
are now trading 80% below their previous levels; investors expect
little in the way of success from these companies. If we as analysts
have done a good job determining which of these companies will be
successful in the long run, by adding to these positions at these
prices or simply holding them until their merit is clear, we believe
we will see significant appreciation from these levels.
In Conclusion
Although the volatility has been significant, we continue to believe
opportunity remains. We appreciate your support of Merrill Lynch
Internet Strategies Fund, Inc., and we look forward to serving your
investment needs in the months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Paul G. Meeks)
Paul G. Meeks
Senior Vice President and
Portfolio Manager
September 6, 2000
Merrill Lynch Internet Strategies Fund, Inc., July 31, 2000
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 8 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Aggregate Total Return" tables assume reinvestment of
all dividends and capital gains distributions at net asset value on
the ex-dividend date. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
Recent
Performance
Results*
Since Inception
As of July 31, 2000 Total Return
ML Internet Strategies Fund, Inc. Class A Shares -30.70%
ML Internet Strategies Fund, Inc. Class B Shares -30.90
ML Internet Strategies Fund, Inc. Class C Shares -30.90
ML Internet Strategies Fund, Inc. Class D Shares -30.70
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in 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 commenced operations on 3/22/00.
Aggregate
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (3/22/00)
through 6/30/00 -26.40% -30.26%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (3/22/00)
through 6/30/00 -26.70% -29.63%
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (3/22/00)
through 6/30/00 -26.70% -27.43%
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Inception (3/22/00)
through 6/30/00 -26.50% -30.36%
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
MERRILL LYNCH
INTERNET STRATEGIES
FUND, INC. As of July 31, 2000
<S> <S> <C>
Assets: Investment in Master Internet Strategies Trust, at value
(identified cost--$1,049,707,554) $ 845,565,536
Prepaid registration fees and other assets 195,887
--------------
Total assets 845,761,423
--------------
Liabilities: Payable to distributor 579,569
Other liabilities 132,265
--------------
Total liabilities 711,834
--------------
Net Assets: Net assets $ 845,049,589
==============
Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000 shares authorized $ 2,041,019
Consist of: Class B Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 5,557,145
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 3,267,358
Class D Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 1,359,629
Paid-in capital in excess of par 1,174,667,019
Accumulated investment loss--net (3,024,777)
Accumulated realized capital losses on investments and foreign currency
transactions from the Trust--net (134,675,786)
Unrealized depreciation on investments from the Trust--net (204,142,018)
--------------
Net assets $ 845,049,589
==============
Net Asset Class A--Based on net assets of $141,474,759 and 20,410,190 shares outstanding $ 6.93
Value: ==============
Class B--Based on net assets of $383,778,772 and 55,571,448 shares outstanding $ 6.91
==============
Class D--Based on net assets of $94,160,430 and 13,596,293 shares outstanding $ 6.93
==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Internet Strategies Fund, Inc., July 31, 2000
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
MERRILL LYNCH
INTERNET STRATEGIES
FUND, INC. For the Period March 22, 2000++ to July 31, 2000
<S> <S> <C> <C>
Investment Income: Investment income allocated from the Trust
net of $890 foreign withholding tax) $ 3,159,710
Expenses allocated from the Trust (3,247,218)
--------------
Net investment loss from the Trust (87,508)
--------------
Expenses: Account maintenance and distribution fees--Class B $ 1,374,746
Account maintenance and distribution fees--Class C 832,452
Transfer agent fees--Class B 188,132
Registration fees 138,373
Transfer agent fees--Class C 125,173
Account maintenance fees--Class D 86,747
Transfer agent fees--Class A 62,125
Offering costs 61,858
Transfer agent fees--Class D 40,582
Printing and shareholder reports 20,510
Professional fees 4,667
Accounting services 399
Other 1,505
--------------
Total expenses 2,937,269
--------------
Investment loss--net (3,024,777)
--------------
Realized & Realized loss from the Trust on:
Unrealized Loss Investments--net (134,627,186)
from The Foreign currency transactions--net (48,600) (134,675,786)
Trust--Net: --------------
Unrealized depreciation on investments from the Trust--net (204,142,018)
--------------
Net Decrease in Net Assets Resulting from Operations $(341,842,581)
==============
++Commencement of operations.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
MERRILL LYNCH For the Period
INTERNET STRATEGIES March 22, 2000++
FUND, INC. Increase (Decrease) in Net Assets: to July 31, 2000
<S> <S> <C>
Operations: Investment loss--net $ (3,024,777)
Realized loss on investments and foreign currency
transactions from the Trust--net (134,675,786)
Unrealized depreciation on investments from the Trust--net (204,142,018)
--------------
Net decrease in net assets resulting from operations (341,842,581)
--------------
Capital Share Net increase in net assets derived from capital share transactions 1,186,792,170
--------------
Transactions:
Net Assets: Total increase in net assets 844,949,589
Beginning of period 100,000
--------------
End of period $ 845,049,589
==============
++Commencement of operations.
See Notes to Financial Statements.
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios
MERRILL LYNCH have been derived from information provided in For the Period
INTERNET STRATEGIES the financial statements. March 22, 2000++ to July 31, 2000
FUND, INC. Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment loss--net (.01) (.03) (.03) (.01)
Realized and unrealized loss on investments
and foreign currency transactions from the
Trust--net (3.06) (3.06) (3.06) (3.06)
-------- -------- -------- --------
Total from investment operations (3.07) (3.09) (3.09) (3.07)
-------- -------- -------- --------
Net asset value, end of period $ 6.93 $ 6.91 $ 6.91 $ 6.93
======== ======== ======== ========
Total Investment Based on net asset value per share (30.70%)+++ (30.90%)+++ (30.90%)+++ (30.70%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses++++ 1.24%* 2.26%* 2.28%* 1.49%*
Net Assets: ======== ======== ======== ========
Investment loss--net (.22%)* (1.25%)* (1.25%)* (.46%)*
======== ======== ======== ========
Supplemental Data: Net assets, end of period (in thousands) $141,475 $383,779 $225,636 $ 94,160
======== ======== ======== ========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Includes the Fund's share of the Trust's allocated expenses.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Internet Strategies Fund, Inc., July 31, 2000
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH
INTERNET STRATEGIES
FUND, INC.
1. Significant Accounting Policies:
Merrill Lynch Internet Strategies Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The Fund seeks
to achieve its investment objective by investing all of its assets
in the Master Internet Strategies Trust (the "Trust"), which has the
same investment objective as the Fund. The value of the Fund's
investment in the Trust reflects the Fund's proportionate interest
in the net assets of the Trust. The performance of the Fund is
directly affected by the performance of the Trust. The financial
statements of the Trust, including the Schedule of Investments, are
included elsewhere in this report and should be read in conjunction
with the Fund's financial statements. The Fund's financial
statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which may
require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments, which are,
in the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are
of a normal, recurring nature. Prior to commencement of operations
on March 22, 2000, the Fund had no operations other than those
relating to organizational matters and the issuance of 10,000
capital shares of the Fund on March 13, 2000 to Fund Asset
Management, L.P. ("FAM") for $100,000. The Fund offers four classes
of shares under the Merrill Lynch Select Pricing SM System. Shares
of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to
the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Valuation of securities is discussed
in Note 1a of the Trust's Notes to Financial Statements, which are
included elsewhere in this report.
(b) Income--The Fund's net investment income consists of the Fund's
pro rata share of the net investment income of the Trust, less all
actual and accrued expenses of the Fund determined in accordance
with accounting principles generally accepted in the United States
of America.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.
(d) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(e) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(f) Investment transactions--Investment transactions are accounted
for on a trade date basis.
2. Transactions with Affiliates:
The Fund has entered into a Distribution Agreement and Distribution
Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"),
which is a wholly-owned subsidiary of Merrill Lynch Group, Inc.
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 annual rates
based upon the average daily net assets of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class B .25% .75%
Class C .25% .75%
Class D .25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML &
Co., also provides account maintenance and distribution services to
the Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the period March 22, 2000 to July 31, 2000, FAMD earned
underwriting discounts and direct commissions and MLPF&S earned
dealer concessions on sales of the Fund's Class A and Class D Shares
as follows:
FAMD MLPF&S
Class A $ 212 $ 30,515
Class D $24,241 $4,878,497
For the period March 22, 2000 to July 31, 2000, MLPF&S received
contingent deferred sales charges of $233,586 and $75,762 relating
to transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$5,960 and $5,960 relating to transactions subject to front-end
sales charges waivers in Class A and Class D Shares, respectively.
Financial Data Services, Inc. ("FDS"), an indirect wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, FAMD, FDS, and/or ML & Co.
3. Investments:
Increases and decreases in the Fund's investment in the Trust for
the period March 22, 2000 to July 31, 2000 were $1,192,053,674 and
$7,582,826, respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $1,186,792,170 for the period March 22, 2000 to July 31, 2000.
Transactions in capital shares for each class were as follows:
Class A Shares for the Period Dollar
March 22, 2000++ to July 31, 2000 Shares Amount
Shares sold 23,571,719 $ 222,884,465
Shares redeemed (3,164,029) (22,163,331)
------------ -------------
Net increase 20,407,690 $ 200,721,134
============ =============
++Prior to March 22, 2000 (commencement of operations), the Fund issued
2,500 shares to FAM for $25,000.
Class B Shares for the Period Dollar
March 22, 2000++ to July 31, 2000 Shares Amount
Shares sold 58,277,943 $ 553,588,514
Automatic conversion of shares (68,592) (487,032)
Shares redeemed (2,640,403) (19,517,072)
------------ -------------
Net increase 55,568,948 $ 533,584,410
============ =============
++Prior to March 22, 2000 (commencement of operations), the Fund issued
2,500 shares to FAM for $25,000.
Class C Shares for the Period Dollar
March 22, 2000++ to July 31, 2000 Shares Amount
Shares sold 35,067,707 $ 336,388,246
Shares redeemed (2,396,630) (17,209,997)
------------ -------------
Net increase 32,671,077 $ 319,178,249
============ =============
++Prior to March 22, 2000 (commencement of operations), the Fund issued
2,500 shares to FAM for $25,000.
Class D Shares for the Period Dollar
March 22, 2000++ to July 31, 2000 Shares Amount
Shares sold 15,426,672 $ 146,710,298
Automatic conversion of shares 68,498 487,032
------------ -------------
Total issued 15,495,170 147,197,330
Shares redeemed (1,901,377) (13,888,953)
------------ -------------
Net increase 13,593,793 $ 133,308,377
============ =============
++Prior to March 22, 2000 (commencement of operations), the Fund issued
2,500 shares to FAM for $25,000.
Merrill Lynch Internet Strategies Fund, Inc., July 31, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Master Internet Strategies Trust
Shares Percent of
COUNTRY Industries Held Common Stocks Value Net Assets
<S> <S> <C> <S> <C> <C>
Canada Hardware 220,900 Nortel Networks Corporation $ 16,429,437 2.0%
Total Common Stocks in Canada 16,429,437 2.0
Israel Software 245,400 ++Check Point Software Technologies Ltd. 28,435,725 3.4
Total Common Stocks in Israel 28,435,725 3.4
United States Advertising & Marketing 163,700 ++TMP Worldwide Inc. 11,776,169 1.4
Business-to-Business 224,600 ++Ariba, Inc. 26,039,562 3.1
228,400 ++Internet Capital Group, Inc. 7,708,500 0.9
218,000 ++VerticalNet, Inc. 10,409,500 1.2
------------ ------
44,157,562 5.2
Communications Services 80,100 ++Akamai Technologies, Inc. 6,312,881 0.8
23,300 ++Airspan Networks Inc. 519,881 0.1
89,100 ++Comverse Technology, Inc. 7,818,525 0.9
58,800 ++Digex, Inc. 3,704,400 0.4
2,200 ++Exfo Electro-Optical Engineering Inc. 113,987 0.0
606,500 ++Exodus Communications, Inc. 26,951,344 3.2
334,600 ++Genuity Inc. 2,718,625 0.3
241,400 ++Inktomi Corporation 25,814,712 3.1
207,700 ++KPNQwest NV 6,957,950 0.8
515,500 ++Metromedia Fiber Network, Inc. (Class A) 18,074,719 2.1
140,400 ++Nextel Communications, Inc. (Class A) 7,844,850 0.9
4,700 ++Sunrise Telecom Incorporated 218,550 0.0
26,500 ++TyCom, Ltd. 902,656 0.1
93,000 ++UTStarcom, Inc. 2,365,688 0.3
------------ ------
110,318,768 13.0
Electronic Components 73,700 ++Applied Micro Circuits Corporation 11,013,544 1.3
37,000 ++Broadcom Corporation (Class A) 8,297,250 1.0
250,000 ++Conexant Systems, Inc. 7,984,375 1.0
55,200 Corning Incorporated 12,913,350 1.5
245,700 ++JDS Uniphase Corporation 29,023,312 3.4
137,000 ++PMC--Sierra, Inc. 26,518,063 3.1
4,800 ++Stratos Lightwave, Inc. 180,000 0.0
191,500 ++Vitesse Semiconductor Corporation 11,466,063 1.4
------------ ------
107,395,957 12.7
Finance 153,600 ++HomeStore.com, Inc. 5,376,000 0.6
238,100 ++Intuit Inc. 8,080,519 1.0
------------ ------
13,456,519 1.6
Hardware 5,500 ++Avici Systems Inc. 545,187 0.1
123,900 ++Brocade Communications Systems, Inc. 22,131,637 2.6
490,900 ++Cisco Systems, Inc. 32,123,269 3.8
261,000 ++Copper Mountain Networks, Inc. 20,570,062 2.4
40,900 ++Corvis Corporation 3,366,581 0.4
288,400 ++Dell Computer Corporation 12,653,550 1.5
201,300 ++EMC Corporation 17,135,662 2.0
184,100 ++Juniper Networks, Inc. 26,222,744 3.1
108,100 ++Redback Networks Inc. 14,039,488 1.7
130,600 ++Sun Microsystems, Inc. 13,770,138 1.6
74,200 ++Sycamore Networks, Inc. 9,149,788 1.1
------------ ------
171,708,106 20.3
Media 766,500 ++America Online, Inc. 40,864,031 4.8
120,500 ++CNET Networks, Inc. 3,584,875 0.4
104,300 ++Go2Net, Inc. 6,153,700 0.8
540,000 ++InfoSpace.com, Inc. 18,191,250 2.2
224,600 ++Yahoo! Inc. 28,889,175 3.4
------------ ------
97,683,031 11.6
Retail 236,900 ++eBay Inc. 11,830,194 1.4
281,300 ++Priceline.com Incorporated 6,628,131 0.8
18,458,325 2.2
------------ ------
Services & Solutions 437,600 ++CMGI Inc. 16,574,100 2.0
95,200 ++Gemstar-TV Guide International, Inc. 5,789,350 0.7
78,700 ++Internet Pictures Corporation 870,619 0.1
208,600 ++Portal Software, Inc. 10,495,188 1.2
263,300 ++RealNetworks, Inc. 11,173,794 1.3
6,700 ++Talarian Corporation 84,588 0.0
210,300 ++Viant Corporation 6,926,756 0.8
316,200 ++Vignette Corporation 10,691,513 1.3
11,600 ++Virage, Inc. 186,325 0.0
------------ ------
62,792,233 7.4
</TABLE>
Merrill Lynch Internet Strategies Fund, Inc., July 31, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Master Internet Strategies Trust (concluded)
Shares Percent of
COUNTRY Industries Held Common Stocks Value Net Assets
<S> <S> <C> <S> <C> <C>
United States Software 55,700 ++Amdocs Limited $ 3,742,344 0.4%
(concluded) 251,100 ++BEA Systems, Inc 10,797,300 1.3
11,400 ++Blue Martini Software, Inc. 677,587 0.1
43,800 ++Mercury Interactive Corp. 4,347,150 0.5
122,700 ++Microsoft Corporation 8,565,994 1.0
245,500 ++Oracle Corporation 18,458,531 2.2
102,500 ++Siebel Systems, Inc. 14,843,281 1.8
9,200 ++Speechworks International 184,000 0.0
234,300 ++TIBCO Software Inc. 24,132,900 2.8
228,405 ++VeriSign, Inc. 36,245,018 4.3
------------ ------
121,994,105 14.4
Total Common Stocks in the United States 759,740,775 89.8
Total Investments in Common Stocks
(Cost--$1,008,768,020) 804,605,937 95.2
Face
Amount Short-Term Securities
United States Commercial Paper* US$ 14,000,000 British Aerospace NA, 6.50%
due 8/08/2000 13,982,306 1.6
36,409,000 The CIT Group Holdings, Inc.,
6.65% due 8/01/2000 36,409,000 4.3
10,000,000 CSW Credit Inc., 6.50% due 8/10/2000 9,983,750 1.2
------------ ------
Total Investments in Short-Term Securities
(Cost--$60,375,056) 60,375,056 7.1
Total Investments (Cost--$1,069,143,076) 864,980,993 102.3
Liabilities in Excess of Other Assets (19,335,051) (2.3)
Net Assets $845,645,942 100.0%
============ ======
*Commercial Paper is traded on a discount basis; the interest rates
shown reflect the discount rates paid at the time of purchase by the
Trust.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
MASTER INTERNET
STRATEGIES TRUST As of July 31, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,069,143,076) $ 864,980,993
Cash 720
Receivables:
Contributions $ 2,035,896
Securities sold 1,781,810 3,817,706
--------------
Prepaid expenses and other assets 105,287
--------------
Total assets 868,904,706
--------------
Liabilities: Payables:
Securities purchased 20,226,951
Withdrawals 2,152,940
Investment adviser 775,436 23,155,327
--------------
Accrued expenses and other liabilities 103,437
--------------
Total liabilities 23,258,764
--------------
Net Assets: Net assets $ 845,645,942
==============
Net Assets Partners' capital $1,049,808,025
Consist of: Unrealized depreciation on investments--net (204,162,083)
--------------
Net assets $ 845,645,942
==============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Internet Strategies Fund, Inc., July 31, 2000
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
MASTER INTERNET
STRATEGIES TRUST For the Period March 22, 2000++ to July 31, 2000
<S> <S> <C> <C>
Investment Income: Interest and discount earned $ 3,145,422
Dividends (net of $890 foreign witholding tax) 14,564
--------------
Total income 3,159,986
--------------
Expenses: Investment advisory fees $ 3,086,558
Accounting services 99,384
Custodian fees 28,837
Trustees' fees and expenses 12,358
Offering costs 10,400
Professional fees 4,865
Pricing fees 3,060
Other 2,033
--------------
Total expenses 3,247,495
--------------
Investment loss--net (87,509)
--------------
Realized & Realized loss from:
Unrealized Loss on Investments--net (134,638,691)
Investments & Foreign currency transactions--net (48,604) (134,687,295)
Foreign Currency --------------
Transactions--Net: Unrealized depreciation on investments--net (204,162,083)
--------------
Net Decrease in Net Assets Resulting from Operations $(338,936,887)
==============
++Commencement of operations.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period
MASTER INTERNET March 22, 2000++
STRATEGIES TRUST Increase (Decrease) in Net Assets: to July 31, 2000
<S> <S> <C>
Operations: Investment loss--net $ (87,509)
Realized loss on investments and foreign currency transactions--net (134,687,295)
Unrealized depreciation on investments--net (204,162,083)
--------------
Net decrease in net assets resulting from operations (338,936,887)
--------------
Net Capital Increase in net assets derived from net capital contributions 1,184,382,729
--------------
Contributions:
Net Assets: Total increase in net assets 845,445,842
Beginning of period 200,100
--------------
End of period $ 845,645,942
==============
++Commencement of operations.
See Notes to Financial Statements.
<CAPTION>
FINANCIAL HIGHLIGHTS
For the Period
MASTER INTERNET The following per share data and ratios have been derived March 22, 2000++
STRATEGIES TRUST from information provided in the financial statements. to July 31, 2000
<S> <S> <C>
Ratios to Average Expenses, net of reimbursement 1.05%*
Net Assets: =========
Expenses 1.05%*
=========
Investment loss--net (.03%)*
=========
Supplemental Data: Net assets, end of period (in thousands) $845,646
=========
Portfolio turnover 26.41%
=========
++Commencement of operations.
*Annualized.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Internet Strategies Fund, Inc., July 31, 2000
NOTES TO FINANCIAL STATEMENTS
MASTER INTERNET
STRATEGIES TRUST
1. Significant Accounting Policies:
Master Internet Strategies Trust (the "Trust") is registered under
the Investment Company Act of 1940 and is organized as a Delaware
business trust. The Trust's financial statements are prepared in
accordance with accounting principles generally accepted in the
United States of America, which may require the use of management
accruals and estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary
to a fair statement of the results for the interim period presented.
All such adjustments are of a normal, recurring nature. The
following is a summary of significant accounting policies followed
by the Trust.
(a) Valuation of investments--Portfolio securities that are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Trustees as the
primary market. Securities that are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written or
purchased are valued at the last sale price in the case of exchange-
traded options. In the case of options traded in the over-the-
counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). Short-term securities are
valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair market
value, as determined in good faith by or under the direction of the
Trust's Board of Trustees.
(b) Derivative financial instruments--The Trust may engage in
various portfolio investment techniques to increase or decrease the
level of risk to which the Trust is exposed more quickly and
efficiently than transactions in other types of investments. Losses
may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Trust may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Trust
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Trust agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Trust as unrealized gains or losses. When
the contract is closed, the Trust records a realized gain or loss
equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
* Options--The Trust is authorized to purchase and write call and
put options. When the Trust writes an option, an amount equal to the
premium received by the Trust is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Trust enters into a closing transaction), the Trust
realizes a gain or loss on the option to the extent of the premiums
received or paid (or a gain or loss to the extent that the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Trust is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Trust's records. However, the effect on
operations is recorded from the date the Trust enters into such
contracts.
* Foreign currency options and futures--The Trust may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Trust,
sold by the Trust but not yet delivered, or committed or anticipated
to be purchased by the Trust.
(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 US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(d) Income taxes--The Trust is classified as a partnership for
Federal income tax purposes. As a partnership for Federal income tax
purposes, the Trust will not incur Federal income tax liability.
Items of partnership income, gain, loss and deduction will pass
through to investors as partners in the Trust. Therefore, no Federal
income tax provision is required. Under the applicable foreign tax
law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security
transactions are accounted for on the date the securities are
purchased or sold (the trade dates). 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
Trust has determined the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Trust has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Trust's investments and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Trust. For such
services, the Trust pays a monthly fee at an annual rate of 1.0% of
the average daily value of the Trust's net assets. In addition,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a subsidiary of
ML & Co., received $29,124 in commissions on the execution of
portfolio security transactions for the Trust for the period March
22, 2000 to July 31, 2000.
Accounting services are provided to the Trust by FAM at cost.
Certain officers and/or trustees of the Trust are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period March 22, 2000 to July 31, 2000 were $1,305,956,404
and $173,517,794, respectively.
Net realized losses for the period March 22, 2000 to July 31, 2000
and net unrealized losses as of July 31, 2000 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(123,670,590) $(204,162,083)
Options purchased (10,968,101) --
Foreign currency transactions (48,604) --
------------- -------------
Total investments $(134,687,295) $(204,162,083)
============= =============
As of July 31, 2000, net unrealized depreciation for Federal income
tax purposes aggregated $204,162,083, of which $42,533,987 related
to appreciated securities and $246,696,070 related to depreciated
securities. At July 31, 2000, the aggregate cost of investments for
Federal income tax purposes was $1,069,143,076.
