<PAGE> 1
[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]
725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017-5400
800-236-4479
INVESTMENT ADVISER
MERCURY ADVISORS
725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017-5400
LEGAL COUNSEL
GARDNER, CARTON & DOUGLAS
321 NORTH CLARK STREET
CHICAGO, ILLINOIS 60610
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
100 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
DISTRIBUTOR
FAM DISTRIBUTORS, INC.
P.O. BOX 9081
PRINCETON, NEW JERSEY 08543-9081
TRANSFER AGENT
FINANCIAL DATA SERVICES, INC.
P.O. BOX 41621
JACKSONVILLE, FLORIDA 32232-1621
CUSTODIAN
BROWN BROTHERS HARRIMAN & CO.
40 WATER STREET
BOSTON, MASSACHUSETTS 02309-3661
THIS MATERIAL MUST BE PRECEDED
OR ACCOMPANIED BY A PROSPECTUS.
SEMI-ANNUAL
REPORT
JUNE 30, 2000
LOGO
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
TOTAL RETURN BOND VIP PORTFOLIO
-------------------------------------------------------
Seeks to maximize long-term total return.
The Fund invests in bonds of varying maturities
with a portfolio duration of two to eight years.
MERCURY ADVISORS: INVESTMENT ADVISER
<PAGE> 2
[HOTCHKIS AND WILEY FUNDS LOGO]
DEAR SHAREHOLDER:
We are pleased to present to you the semi-annual report of the Hotchkis and
Wiley Variable Trust Total Return Bond VIP Portfolio (the "Fund") for the
six-month period ended June 30, 2000.
A booming economy is fundamentally bad for the bond market as it signals
potential future inflationary pressures resulting from an excess of demand
relative to supply. The past six months were no exception. The economy grew at
an estimated 5.0% annual rate during the last six months. Consumer spending, the
result of full employment and a booming equity market, was the key driver of
this torrid growth. Investment spending was also a vital component of growth as
corporations invested in productivity-enhancing technology to remain
competitive. These productivity enhancements kept inflation contained,
particularly relative to such strong economic growth, but recently signs of
increasing inflation began to emerge.
Meanwhile, technical changes in the market became increasingly important. In
spite of a steaming economy, longer-maturity U.S. Treasuries actually rallied as
the Treasury Department began to reduce the supply of outstanding debt by
purchasing and retiring billion of dollars of bonds. The Treasury buybacks were
a result of record federal surpluses and are expected to continue for several
years. The increased current demand and anticipation of reduced future supply
caused 30-year Treasury bond yields to fall by 58 basis points during the first
half of 2000. In the meantime, the Federal Reserve Bank continued to try to slow
the economy by increasing short-term rates. The Fed raised the Federal Funds
Rate by 100 basis points in three separate moves over the past six months. In
sympathy, short-term Treasury rates rose about 50 basis points.
With short-term rates rising and long-term rates falling, the yield curve
continued to invert. In fact, at the end of the period, three-month Treasury
yields, at 5.86%, were only 4 basis points lower than 30 year Treasury yields.
At the beginning of the period this difference was a more normal 117 basis
points.
Non-Treasury sectors of the bond market did not perform nearly as well as
Treasuries, particularly longer-maturity issues. Corporate securities suffered
as the Fed raised rates and investors fled to higher quality positions. In
general, lower quality and longer maturity corporate bonds fared the worst. Many
below-investment-grade bonds posted negative total returns for the twelve-month
period as the negative price effects of spread widening more than offset their
initial yield advantage. Floating-rate debt, the coupon payments of which adjust
upwards as rates rise, outperformed fixed-rate issues. Adjusted for duration
differences, mortgage- and asset-backed securities performed in-line with the
overall market. However, in both cases, longer-maturity issues underperformed
shorter-maturity issues. Non-U.S. bonds posted fairly weak returns as global
growth remained strong. However, emerging market issues were extremely strong,
bouncing back as those economies regained some momentum.
The Fund was positioned for rising interest rates, and this duration decision
added to relative returns. In terms of yield curve strategy, or maturity
structure, the Fund's lack of longer-maturity Treasuries had a significant,
negative impact on performance, which contributed to the Fund's underperformance
<PAGE> 3
compared to the Lehman Brothers Aggregate Bond Index. Sector strategies, on
balance, detracted from relative returns. In general, holdings of non-Treasury
issues for additional yield had a negative impact. Specifically, overweighting
corporates with limited use of below-investment-grade issues detracted from
performance. A neutral to slight underweighting of mortgage-backed securities
did not significantly impact the Fund. A larger-than-index allocation to
asset-backed securities improved performance. Finally, security selection added
to returns primarily through large positions in floating-rate securities and
Treasury Inflation Protected Securities.
We appreciate your continued support and look forward to serving your investment
needs in the months and years ahead.
Sincerely,
/s/ Nancy D. Celick
Nancy D. Celick
President
HOTCHKIS AND WILEY FUNDS
TOTAL RETURNS FOR THE PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
LB Aggregate
Fund Bond Index
-----------------------------------------------------------------------------
<S> <C> <C>
Since Inception (2/03/00) 2.61% 4.04%
-----------------------------------------------------------------------------
</TABLE>
Total return for the Fund is net of all charges and fees and assumes
reinvestment of capital gains distributions and shareholder dividends at net
asset value. Insurance related fees and expenses are not reflected in these
returns and, if they were, returns would be lower. Please see the prospectus for
details. The investment adviser pays annual operating expenses in excess of
0.65% of the Fund's average net assets. Were the investment adviser not to pay
such expenses, net returns would be lower. Investment returns and principal will
vary so that shares, when redeemed, may be worth more or less than their
original cost. Past performance is no guarantee of future results.
The Fund may invest a portion of its assets in non-investment grade debt
securities, commonly referred to as high yield or "junk" bonds, which may be
subject to greater market fluctuations and risk of loss of income and principal
than securities in higher rating categories. The Fund may also invest a portion
of its assets in emerging market and other foreign securities, which involve
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.
The Lehman Brothers Aggregate Bond Index is made up of the Government/Credit
Index, the Mortgage-Backed Securities Index and the Asset-Backed Securities
Index. The Index includes fixed-rate debt issues rated investment-grade or
higher. All issues have at least one year to maturity and an outstanding par
value of at least $100 million for U.S. government issues and $50 million for
all others. The Index does not reflect payment of transaction costs, fees and
expenses associated with an investment in the Fund. The securities and
securities weightings in the Fund differ from those in the Index. It is not
possible to invest directly in an index.
The opinions expressed in the Shareholder letter are as of June 30, 2000. They
are subject to change and any forecasts made cannot be guaranteed. The Fund may
not continue to hold any securities mentioned and has no obligation to disclose
purchases or sales in these securities.
2
<PAGE> 4
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
TOTAL RETURN BOND VIP FUND
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 31.0% Amount Value
------------------------------------------------------------
<S> <C> <C>
AEROSPACE/DEFENSE -- 0.8%
............................................................
Raytheon Company, (Acquired
3/02/2000, cost $25,000),
7.4700%, 3/01/2002 # r $ 25,000 $ 24,985
------------------------------------------------------------
BANKS -- 6.3%
............................................................
US Bancorp, 6.7763%, 6/07/2002 # 100,000 100,095
............................................................
Wells Fargo Bank, N.A., CLB
8/01/2000, 6.8913%, 5/02/2005 # 100,000 99,855
...................... ....................... ---------
199,950
------------------------------------------------------------
CABLE TELEVISION -- 5.5%
............................................................
Cox Communications, Inc., 6.5300%,
2/01/2028 25,000 23,145
............................................................
Cox Enterprises, Inc., (Acquired
5/01/2000, cost $150,000),
7.5525%, 5/01/2003 # r 150,000 149,727
...................... ....................... ---------
172,872
------------------------------------------------------------
ELECTRIC: INTERGRATED -- 1.2%
............................................................
Empresa Nacional de Electricidad
SA (Endesa-Chile), 8.5000%,
4/01/2009 40,000 39,040
------------------------------------------------------------
ELECTRONIC COMPONENTS -- 0.6%
............................................................
Pioneer-Standard Electronics,
Inc.,
8.5000%, 8/01/2006 20,000 19,258
------------------------------------------------------------
FINANCIAL SERVICES -- 9.4%
............................................................
Ford Motor Credit Company:
7.8750%, 6/15/2010 50,000 50,016
............................................................
7.7500%, 2/15/2007 50,000 49,986
............................................................
General Motors Acceptance
Corporation, 6.8525%, 8/06/2001
# 50,000 50,072
............................................................
Golden State Holdings, CLB
8/01/2000, 7.3913%, 8/01/2003 # 50,000 47,620
............................................................
Heller Financial, Inc., 6.9700%,
8/09/2001 # 50,000 50,047
............................................................
John Deere Capital Corporation,
6.8788%, 2/11/2002 # 50,000 49,988
...................... ....................... ---------
297,729
------------------------------------------------------------
OIL: INTEGRATED -- 3.9%
............................................................
Ashland, Inc., CLB 3/07/2001,
7.3925%, 3/07/2003 # 125,000 124,579
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
SOVEREIGN -- 0.8%
............................................................
Republic of Philippines, 9.8750%,
1/15/2019 $ 30,000 $ 24,600
------------------------------------------------------------
TELECOMMUNICATIONS -- 2.5%
............................................................
Sprint Spectrum L.P., CLB
8/15/2001, 11.0000%, 8/15/2006 50,000 53,835
............................................................
Telefonica de Argentina S.A.,
11.8750%, 11/01/2004 25,000 26,188
...................... ....................... ---------
80,023
...................... ....................... ---------
Total corporate bonds and notes 983,036
(cost $988,476)
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT AGENCY MORTGAGE-
BACKED SECURITIES -- 16.6%
------------------------------------------------------------
<S> <C> <C>
AGENCY-BACKED SECURITIES -- 6.3%
............................................................
Federal Home Loan Mortgage Corporation,
6.8750%, 1/15/2005 200,000 198,959
------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.9%
............................................................
Government National Mortgage Association:
1998-26 GD, 5.7000%, 10/20/2018 127,732 124,643
------------------------------------------------------------
PASS-THROUGH SECURITIES -- 6.4%
............................................................
Government National Mortgage Association,
8.0000%, 8/15/2030/\ 200,000 201,874
...................... ....................... ---------
Total government agency mortgage-
backed securities
(cost $524,282) 525,476
------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES -- 9.3%
------------------------------------------------------------
ASSET-BACKED SECURITIES -- 2.5%
............................................................
Credit-Based Asset Servicing and
Securities, CLB, 2000-CB2 A1A,
7.0613%, 9/25/2029 # 39,545 39,670
............................................................
Nomura Asset Securities
Corporation, 1995-MD3 A1B, CLB,
8.1500%
3/4/2020 40,000 41,196
...................... ....................... ---------
80,866
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 5
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
TOTAL RETURN BOND VIP FUND
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
~
COLLATERALIZED MORTGAGE OBLIGATIONS -- 6.8%
............................................................
Countrywide Home Loans, Inc., CLB,
1998-3 A1, 6.8000%, 4/25/2028 $ 88,369 $ 87,009
............................................................
Medallion Trust, CLB, 2000-1G A1,
6.5088%, 7/12/2031 # 35,000 35,014
............................................................
Washington Mutual, CLB, 2000-1 A1,
6.9413%, 6/25/2024 # 93,910 93,782
...................... ....................... ---------
215,805
...................... ....................... ---------
Total non-agency mortgage-backed securities
296,671
(cost $295,762)
------------------------------------------------------------
U.S. TREASURY
OBLIGATIONS -- 40.9%
------------------------------------------------------------
~
............................................................
U.S. Treasury Bonds:
............................................................
8.7500%, 11/15/2008 150,000 159,938
............................................................
8.7500%, 5/15/2017 20,000 25,144
............................................................
6.3750%, 8/15/2027 para.para. 275,000 282,906
............................................................
5.2500%, 2/15/2029 320,000 284,000
............................................................
U.S. Treasury Notes:
............................................................
5.7500%, 4/30/2003 120,000 118,200
............................................................
6.5000%, 5/15/2005 50,000 50,563
............................................................
6.5000%, 10/15/2006 35,000 35,405
............................................................
U.S. Treasury Inflation Index
Notes:
............................................................
3.8750%, 4/15/2029 104,138 103,878
............................................................
3.6250%, 7/15/2002 240,512 239,008
...................... ....................... ---------
Total U.S. Treasury obligations 1,299,042
(cost $1,289,600)
------------------------------------------------------------
SHORT-TERM Principal
INVESTMENTS -- 7.4% Amount Value
------------------------------------------------------------
~COMMERCIAL PAPER -- 4.7%
............................................................
Air Products and Chemical, Inc.,
6.8000%, 7/13/2000 4(2) $150,000 $ 149,660
------------------------------------------------------------
CERTIFICATES OF DEPOSIT -- 2.7%
............................................................
Brown Brothers Call Deposit,
5.5000% 86,000 86,000
...................... ....................... ---------
Total short-term investments 235,660
(cost $235,660)
------------------------------------------------------------
Total investments -- 105.2%
(cost $3,333,780) 3,339,885
............................................................
Liabilities in excess of other assets --(5.2)% (165,817)
...................... ....................... ---------
$3,174,068
Total net assets -- 100.0%
------------------------------------------------------------
</TABLE>
# -- Variable rate security. The rate listed is as of June 30, 2000.
CLB -- Callable.
r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.
4(2) -- Restricted Security requiring resale to institutional investors.
para. -- When-issued security.
para.para. -- Security marked as segregated to cover when-issued security.
See Notes to the Financial Statements
4
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 2000
TOTAL RETURN BOND VIP PORTFOLIO (Unaudited)
-------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $3,339,885
Cash...................................................... 4,981
Dividends and interest receivable......................... 45,519
Receivable for investments sold........................... 201,953
Prepaid expenses.......................................... 40
----------
Total assets.......................................... 3,592,378
----------
LIABILITIES:
Payable to Adviser........................................ 2,151
Payable for investments purchased......................... 402,812
Payable for Fund shares repurchased....................... 22
Accrued expenses and other liabilities.................... 13,325
----------
Total liabilities..................................... 418,310
----------
Net assets............................................ $3,174,068
==========
NET ASSETS CONSIST OF:
Paid in capital........................................... $3,169,319
Undistributed net investment income....................... 396
Undistributed net realized loss on securities............. (1,752)
Net unrealized appreciation of securities................. 6,105
----------
Net assets............................................ $3,174,068
==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 316,676
Net asset value per share (offering and redemption
price).................................................. $ 10.02
==========
*Cost of Investments........................................ $3,333,780
==========
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 7
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 3, 2000*
through June 30, 2000
TOTAL RETURN BOND VIP PORTFOLIO (Unaudited)
-----------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income
Interest................................................ $ 81,717
--------
Total income........................................ 81,717
--------
Expenses
Advisory fee............................................ 6,464
Legal and auditing fees................................. 443
Custodian fees and expenses............................. 1,652
Accounting and transfer agent fees and expenses......... 15,995
Administration fee...................................... 556
Trustees' fees and expenses............................. 268
Reports to shareholders................................. 5,214
Registration fees....................................... 1,288
Organizational expenses................................. 18,462
Other expenses.......................................... 72
--------
Total expenses...................................... 50,414
Less, expense reimbursement............................. (42,775)
--------
Net expenses........................................ 7,639
--------
Net investment income................................... 74,078
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on securities......................... (1,752)
Net change in unrealized appreciation of securities..... 6,105
--------
Net gain on investments................................... 4,353
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 78,431
========
* Commencement of operations.
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 3, 2000*
through June 30, 2000
TOTAL RETURN BOND VIP PORTFOLIO (Unaudited)
-----------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Net investment income................................... $ 74,078
Net realized loss on securities......................... (1,752)
Net change in unrealized appreciation of securities..... 6,105
----------
Net increase in net assets resulting from
operations........................................ 78,431
----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (73,682)
----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 3,152,712
Shares issued in connection with payment of dividends
and distributions...................................... 73,682
Cost of shares redeemed................................. (57,075)
----------
Net increase in assets resulting from Fund share
transactions...................................... 3,169,319
----------
Total increase in net assets................................ 3,174,068
NET ASSETS:
Beginning of period..................................... --
----------
End of period**......................................... $3,174,068
==========
**Including undistributed net investment income of: $ 396
==========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 314,997
Shares issued in connection with payment of dividends
and distributions...................................... 7,370
Shares redeemed......................................... (5,691)
----------
Net increase........................................ 316,676
==========
* Commencement of operations.
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 9
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000 (UNAUDITED)
NOTE 1.
ACCOUNTING POLICIES. The Total Return Bond VIP Portfolio (the "Fund") is a
series of Hotchkis and Wiley Variable Trust (the "Trust"), an open-end,
management investment company organized as a Massachusetts business trust on
February 4, 1997 and registered under the Investment Company Act of 1940. The
Fund commenced operations on February 3, 2000. The Fund seeks to maximize total
return. Shares of the Fund are not offered to the general public but may only be
purchased by the separate accounts of participating insurance companies for the
purpose of funding variable annuity contracts and/or variable life insurance
contracts. In addition to the Fund, the Trust offers the Equity Income VIP
Portfolio, the International VIP Portfolio and the Low Duration VIP Portfolio
(collectively, the "Funds"). The assets of each series are invested in separate,
independently managed portfolios. The following is a summary of significant
accounting policies followed by the Fund in the preparation of the financial
statements.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or The Nasdaq Stock Market ("NSM") are
valued at the last sale price as of 4:00 p.m., Eastern Time, or, in the absence
of recorded sales, at the average of readily available closing bid and asked
prices on such exchange or NSM. Unlisted securities that are not included in NSM
are valued at the average of the quoted bid and asked price in the
over-the-counter market. Fixed-income securities are normally valued on the
basis of quotes obtained from broker-dealers or pricing services. Certain
fixed-income securities for which daily market quotations are not readily
available may be valued pursuant to guidelines established by the Board of
Trustees, with reference to fixed-income securities whose prices are more
readily obtainable or an appropriate matrix utilizing similar factors. As a
broader market does not exist, the proceeds received upon the disposition of
such securities may differ from values previously furnished by such methods.
Securities for which market quotations are not otherwise available are valued at
fair value as determined in good faith by Mercury Advisors (the "Adviser"),
formerly Hotchkis and Wiley, under procedures established by the Board of
Trustees. Short-term investments which mature in less than 60 days are valued at
amortized cost (unless the Board of Trustees determines that this method does
not represent fair value), if their original maturity was 60 days or less, or by
amortizing the values as of the 61st day prior to maturity, if their original
term to maturity exceeded 60 days.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and the Fund
intends to distribute substantially all of its investment company net taxable
income and net capital gains to shareholders. Therefore, no federal income tax
provision is required.
EXPENSE ALLOCATION: Common expenses incurred by the Trust are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.
RESTRICTED SECURITIES: The Fund owns investment securities which are
unregistered and thus restricted as to resale. Resale to the public may require
registration or may be limited to qualified institutional buyers. At June 30,
2000, the Fund had restricted securities with an aggregate market value of
$324,372, representing 10% of the net assets of the Fund.
WHEN-ISSUED SECURITIES: The Fund may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the
8
<PAGE> 10
agreement, these securities may be delivered and paid for at a future date,
generally within 45 days. The Fund records purchases of when-issued securities
and reflects the values of such securities in determining net asset value in the
same manner as other portfolio securities. The Fund maintains at all times cash
or other liquid assets in an amount at least equal to the amount of outstanding
commitments for when-issued securities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid monthly. Distributions of net realized capital gains, if any, will be
declared and paid at least annually.
OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is recognized
on the accrual basis. Generally accepted accounting principles require that
permanent financial reporting and tax differences relating to shareholder
distributions be reclassified within the capital accounts.
NOTE 2.
INVESTMENT ADVISORY AGREEMENT. The Fund has an investment advisory agreement
with the Adviser, with which certain officers and Trustees of the Trust are
affiliated. The Adviser is an indirect wholly-owned subsidiary of Merrill Lynch
& Co., Inc. The Adviser receives a fee, computed daily and payable monthly, at
the annual rate of 0.55% as applied to the Fund's daily net assets. The Adviser
has contractually agreed to pay all operating expenses, including organizational
expenses, in excess of 0.65% as applied to the Fund's daily net assets through
April 30, 2001. For the period ended June 30, 2000, the Adviser paid $42,775 of
operating expenses on behalf of the Fund.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the Board
of Trustees of the Trust has adopted procedures which allow the Fund, under
certain conditions described in the Rule, to acquire newly-issued securities
from a member of an underwriting group in which an affiliated underwriter
participates.
NOTE 3.
CREDIT FACILITY. Effective December 3, 1999, the Trust entered into a one year
Credit Agreement with a syndicate of bank lenders led by Bank of America
intended to provide the Fund with a source of cash to be used to meet redemption
requests from Fund shareholders. The Trust together with certain other open-end
investment companies advised by Merrill Lynch Investment Managers, L.P. and/or
its affiliates may borrow in the aggregate up to $1,000,000,000, except that in
no event may the borrowing by the Fund or any participating fund be in excess of
that permitted by its prospectus and Statement of Additional Information or by
applicable law. The Fund had no borrowings under the Credit Agreement for the
period ended June 30, 2000.
9
<PAGE> 11
NOTE 4.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the period ended June 30, 2000, were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
---------------------------- ----------------------------
Fund U.S. Government Other U.S. Government Other
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Return Bond VIP Portfolio.................... $2,076,650 $3,062,797 $599,321 $1,450,989
</TABLE>
As of June 30, 2000, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciated Depreciated
Fund Appreciation Securities Securities
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return Bond VIP Portfolio............................. $6,105 $15,965 $(9,860)
</TABLE>
At June 30, 2000, the cost of investments for federal income tax purposes was
$3,333,780. Any differences between book and tax are due primarily to wash sale
losses.
NOTE 5.
RESTRUCTURING. The Board of Trustees has approved, effective on or about October
5, 2000, a change in the name of the Fund to Mercury Total Return Bond VIP
Portfolio.
10
<PAGE> 12
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 3, 2000*
through
June 30, 2000
TOTAL RETURN BOND VIP PORTFOLIO (Unaudited)
-------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $ 10.00
----------
Income from Investment Operations:
Net investment income................................... 0.24
Net realized and unrealized gain on investments......... 0.02
----------
Total from investment operations........................ 0.26
----------
Less Distributions:
Dividends (from net investment income).................. (0.24)
----------
Net Asset Value, End of Period.............................. $ 10.02
==========
Total Return................................................ 2.61%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $3,174,068
Ratio of expenses to average net assets
Before expense reimbursement............................ 4.27%(2)
After expense reimbursement............................. 0.65%(2)
Ratio of net investment income to average net assets
Before expense reimbursement............................ 2.66%(2)
After expense reimbursement............................. 6.28%(2)
Portfolio turnover rate..................................... 99%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
11
