<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
LOW DURATION VIP PORTFOLIO
-------------------------------------------------------
Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in bonds of varying maturities with a portfolio duration of one to
three 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 Low Duration 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 overweight of longer-maturity issues benefitted
performance. Sector strategies, on balance, detracted from relative returns. In
general, holdings
<PAGE> 3
of non-Treasury issues for additional yield had a negative impact, resulting in
the Fund's under performance compared to the Merrill Lynch 1-3 Year U.S.
Treasury Note Index. 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 VARIABLE TRUST
TOTAL RETURNS FOR THE PERIODS ENDED JUNE 30, 2000*
<TABLE>
<CAPTION>
ML 1-3 Year
U.S. Treasury
Fund Note Index
--------------------------------------------------------------------------
<S> <C> <C>
Six Months 2.70% 2.99%
--------------------------------------------------------------------------
One year 4.26% 4.91%
--------------------------------------------------------------------------
Since Inception (3/18/98) 4.29% 5.05%
--------------------------------------------------------------------------
</TABLE>
* Average annual total return for periods greater than one year.
Total returns and average annual total returns for the Fund are net of all
charges and fees and assume 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 0.58% 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 Merrill Lynch 1-3 Year U.S. Treasury Note Index is an unmanaged index of
Treasury securities with maturities of one to three years, which securities are
guaranteed as to the timely payment of principal and interest by the U.S.
government. The Fund owns securities not reflected in this Index or guaranteed.
The Index does not reflect payment of transaction costs, fees and expenses
associated with an investment in the Fund. 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)
--------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 31.8% Amount Value
------------------------------------------------------------
<S> <C> <C>
BANKS -- 6.1%
............................................................
Sovereign Bancorp, 10.2000%,
6/30/2005 r $ 50,000 $ 50,548
............................................................
Wells Fargo Bank, N.A., CLB
8/01/2000, 6.8913%, 5/02/2005 # 50,000 49,927
...................... ....................... ---------
100,475
------------------------------------------------------------
CABLE TELEVISION -- 3.1%
............................................................
Cox Enterprises, Inc., (Acquired
5/01/2000, cost $50,000),
7.5525%, 5/01/2003 # r 50,000 49,909
------------------------------------------------------------
EUROBANKS -- 7.5%
............................................................
Credit Industriel et Commercial
(CIC), 7.4750%, 6/29/2049 # 50,000 47,897
............................................................
Okobank, CLB 10/25/2000, 7.2975%,
9/29/2049 # 50,000 49,916
............................................................
Robert Fleming Capital Ltd., CLB
5/07/2001, 7.3450%, 5/07/2006 # 25,000 24,882
...................... ....................... ---------
122,695
------------------------------------------------------------
FINANCIAL SERVICES -- 7.4%
............................................................
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
............................................................
Pemex Finance Ltd., 5.7200%,
11/15/2003 21,875 21,279
...................... ....................... ---------
121,314
------------------------------------------------------------
OIL: INTEGRATED -- 3.0%
............................................................
Occidental Petroleum Corp.,
6.2400%, 11/24/2000 50,000 49,755
------------------------------------------------------------
TELECOMMUNICATIONS -- 1.7%
............................................................
Sprint Spectrum L.P., CLB
8/15/2001, 11.0000%, 8/15/2006 25,000 26,918
------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
TRANSPORTATION -- 3.0%
............................................................
Bombardier Capital, Inc.,
(Acquired 1/22/1999, cost
$49,897), 6.0000%, 1/15/2002 r $ 50,000 $ 48,832
...................... ....................... ---------
Total corporate bonds and notes 519,898
(cost $521,181)
------------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 9.4%
------------------------------------------------------------
AGENCY-BACKED SECURITIES -- 7.8%
............................................................
Federal Home Loan Mortgage Corporation,
8.5000%, 8/15/2030 /\ 125,000 127,343
------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.5%
............................................................
Federal National Mortgage Association:
1993-142 SA, 8.0643%, 10/25/2022
# 5,888 5,435
............................................................
1997-76 FT, 7.0562%, 9/17/2027 # 20,503 19,580
...................... ....................... ---------
25,015
------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.1%
............................................................
Federal National Mortgage Association,
1998-48 CI (IO), 6.5000%,
8/25/2028 7,386 1,301
...................... ....................... ---------
Total government agency mortgage-
backed securities
(cost $154,951) 153,659
------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES -- 39.0%
------------------------------------------------------------
ASSET-BACKED SECURITIES -- 30.0%
............................................................
Asset Backed Funding Certificates,
CLB, 1999-1 A2F, 7.6410%,
10/25/2030 24,123 23,885
............................................................
Associates Manufactured Housing
Pass Through Certificates, CLB,
1996-2 A4, 6.6000%, 6/15/2027 75,000 74,020
............................................................
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 5
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
Champion Auto Grantor Trust,
(Acquired 3/18/1998, cost
$4,829), CLB, 1998-A A, 6.1100%,
10/15/2002 r $ 4,829 $ 4,772
............................................................
CIT Marine Trust, CLB, 1999-A A2,
5.8000%, 4/15/2010 50,000 48,156
............................................................
Credit-Based Asset Servicing and
Securities, CLB, 2000-CB2 A1A,
7.0613%, 9/25/2029 # 24,715 24,793
............................................................
First Union-Lehman Brothers
Commercial Mortgage Trust, CLB,
1997-C1 A1, 7.1500%, 2/18/2004 19,973 19,911
............................................................
GMAC Mortgage Corporation Loan
Trust, CLB, 2000-HLTV A1,
6.8513%, 11/18/2015 # 47,996 47,988
............................................................
Green Tree Recreational, Equipment
& Consumer Trust, CLB:
1996-B CTFS, 7.7000%, 7/15/2018 50,000 47,880
............................................................
1996-C A1, 6.8913%, 10/15/2017 # 31,969 31,967
............................................................
Nationslink Funding Corporation,
CLB, 1999-SL A1V, 6.9850%,
4/10/07 57,891 57,911
............................................................
Navistar Financial Corporation
Owner Trust, CLB, 1996-B A3,
6.3300%, 4/21/2003 22,392 22,402
............................................................
Nomura Asset Securities
Corporation, CLB, 1995-MD3 A1A,
8.1700%, 3/04/2020 36,616 37,030
............................................................
Nomura Depositor Trust, (Acquired
9/03/1999, cost $49,104), 1998-
ST1A A3A, 7.2013%, 1/15/2003 # r 50,000 49,305
...................... ....................... ---------
490,020
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.0%
............................................................
Citicorp Mortgage Securities,
Inc., CLB, 1997-3 A2, 6.9200%,
8/25/2027 $ 862 $ 858
............................................................
Countrywide Home Loans, Inc., CLB,
1998-3 A1, 6.8000%, 4/25/2028 44,184 43,505
............................................................
Medallion Trust, CLB, 2000-1G A1,
6.0588%, 7/12/2031 # 25,000 25,010
............................................................
Ocwen Residential MBS Corp.,
(Acquired 6/18/1998, cost
$29,431), CLB, 1998-R2 AP,
6.5671%, 11/25/2034 # r 24,969 23,720
............................................................
Residential Funding Mortgage
Securities, Inc., CLB, 1998-S17
A6, 6.7500%, 8/25/2028 6,996 6,967
............................................................
Washington Mutual, CLB, 2000-1 A1,
6.9413%, 6/25/2024 # 46,955 46,891
...................... ....................... ---------
146,951
...................... ....................... ---------
Total non-agency mortgage-backed securities 636,971
(cost $646,286)
------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 17.4%
------------------------------------------------------------
U.S. Treasury Bond,
10.7500%, 2/15/2003 45,000 49,627
............................................................
U.S. Treasury Notes:
5.7500%, 4/30/2003 55,000 54,175
............................................................
6.5000%, 10/15/2006 20,000 20,231
............................................................
U.S. Treasury Inflation Index,
3.6250%, 7/15/2002 /\/\ 160,341 159,339
...................... ....................... ---------
Total U.S. Treasury obligations 283,372
(cost $282,445)
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 6
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
CERTIFICATES OF Principal
DEPOSIT -- 10.0% Amount Value
------------------------------------------------------------
<S> <C> <C>
Brown Brothers Call Deposit,
5.5000% $164,000 $ 164,000
...................... ....................... ---------
Total Certificates of Deposit 164,000
(cost $164,000)
------------------------------------------------------------
Total investments -- 107.6%
(cost $1,768,863) 1,757,900
............................................................
Liabilities in excess of other assets --(7.6)% (123,681)
...................... ....................... ---------
$1,634,219
Total net assets -- 100.0%
------------------------------------------------------------
</TABLE>
# -- Variable rate security. The rate listed is as of June 30, 2000.
IO -- Interest only.
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.
/\ -- When-issued security.
/\/\ -- Security marked as segregated to cover when-issued security.
See Notes to the Financial Statements
5
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 2000
LOW DURATION VIP PORTFOLIO (Unaudited)
---------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $1,757,900
Dividends and interest receivable......................... 15,756
Receivable for investments sold........................... 177,265
Organizational expenses, net of accumulated
amortization............................................ 10,161
Prepaid expenses.......................................... 3,474
----------
Total assets.......................................... 1,964,556
----------
LIABILITIES:
Payable to Adviser........................................ 2,943
Payable to Custodian...................................... 2,918
Dividends payable......................................... 8,113
Payable for investments purchased......................... 304,140
Accrued expenses and other liabilities.................... 12,223
----------
Total liabilities..................................... 330,337
----------
Net assets............................................ $1,634,219
==========
NET ASSETS CONSIST OF:
Paid in capital........................................... $1,687,575
Undistributed net investment income....................... 513
Undistributed net realized loss on securities............. (42,906)
Net unrealized depreciation of securities................. (10,963)
----------
Net assets............................................ $1,634,219
==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 169,017
Net asset value per share (offering and redemption
price).................................................. $ 9.67
==========
*Cost of Investments........................................ $1,768,863
==========
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 8
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000
LOW DURATION VIP PORTFOLIO (Unaudited)
-------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income
Interest................................................ $ 55,737
--------
Total income........................................ 55,737
--------
Expenses
Advisory fee............................................ 3,851
Legal and auditing fees................................. 314
Custodian fees and expenses............................. 2,410
Accounting and transfer agent fees and expenses......... 19,179
Administration fee...................................... 367
Trustees' fees and expenses............................. 120
Reports to shareholders................................. 5,911
Registration fees....................................... 99
Amortization of organizational expenses................. 1,826
Other expenses.......................................... 1,967
--------
Total expenses...................................... 36,044
Less, expense reimbursement............................. (31,188)
--------
Net expenses........................................ 4,856
--------
Net investment income................................... 50,881
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on securities......................... (22,764)
Net change in unrealized appreciation of securities..... 15,675
--------
Net loss on investments................................... (7,089)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 43,792
========
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 2000 Year Ended
LOW DURATION VIP PORTFOLIO (Unaudited) December 31, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 50,881 $ 90,712
Net realized loss on securities......................... (22,764) (17,121)
Net change in unrealized appreciation (depreciation) of
securities............................................. 15,675 (25,481)
---------- ----------
Net increase in net assets resulting from
operations.......................................... 43,792 48,110
---------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (53,152) (91,719)
---------- ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 148,597 227,553
Shares issued in connection with payment of dividends
and distributions...................................... 53,152 91,307
Cost of shares redeemed................................. (259,055) (298,114)
---------- ----------
Net increase (decrease) in assets resulting from
Fund share transactions............................. (57,306) 20,746
---------- ----------
Total decrease in net assets................................ (66,666) (22,863)
NET ASSETS:
Beginning of period..................................... 1,700,885 1,723,748
---------- ----------
End of period*.......................................... $1,634,219 $1,700,885
========== ==========
*Including undistributed net investment income of:.......... $ 513 $ 2,784
========== ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 15,327 22,957
Shares issued in connection with payment of dividends
and distributions...................................... 5,502 9,271
Shares redeemed......................................... (26,744) (30,071)
---------- ----------
Net increase (decrease)............................. (5,915) 2,157
========== ==========
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 10
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000 (UNAUDITED)
NOTE 1.
ACCOUNTING POLICIES. The Low Duration 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 March 18, 1998. The Fund seeks to maximize total return,
consistent with preservation of capital. 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 Total Return Bond 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.
ORGANIZATIONAL EXPENSES: Expenses incurred by the Trust in connection with the
organization, registration and the initial public offering of shares are being
deferred and amortized over the period of benefit, but not to exceed sixty
months from the Trust's commencement of operations. The proceeds of any
redemption of the initial shares by the original shareholder will be reduced by
a pro-rata portion of any then unamortized organization expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of such redemption.
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.
9
<PAGE> 11
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
$227,086, representing 14% 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 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 0.46% as applied to the Fund's daily net assets. The Adviser
has contractually agreed to pay all operating expenses in excess of 0.58% as
applied to the Fund's daily net assets through April 30, 2001. For the six
months ended June 30, 2000, the Adviser paid $31,188 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.
10
<PAGE> 12
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
six months ended June 30, 2000.
NOTE 4.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the six months 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>
Low Duration VIP Portfolio............................ $720,114 $792,725 $725,086 $757,767
</TABLE>
As of June 30, 2000, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciated Depreciated
Fund Depreciation Securities Securities
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Low Duration VIP Portfolio.................................. $(10,963) $2,421 $(13,384)
</TABLE>
At June 30, 2000, the cost of investments for federal income tax purposes was
$1,768,863. Any differences between book and tax are due primarily to wash sale
losses.
At June 30, 2000, the Fund had accumulated net realized capital loss carryovers
of $3,361 expiring in 2006 and $16,782 expiring in 2007. To the extent that the
Fund realizes future net capital gains, those gains will be offset by any unused
capital loss carryover.
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 Low Duration VIP Portfolio.
11
<PAGE> 13
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended March 18, 1998*
June 30, 2000 Year Ended through
LOW DURATION VIP PORTFOLIO (Unaudited) December 31, 1999 December 31, 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.72 $ 9.98 $ 10.00
---------- ---------- ----------
Income from Investment Operations:
Net investment income................................... 0.30 0.54 0.46
Net realized and unrealized loss on investments......... (0.04) (0.27) (0.03)
---------- ---------- ----------
Total from investment operations........................ 0.26 0.27 0.43
---------- ---------- ----------
Less Distributions:
Dividends (from net investment income).................. (0.31) (0.53) (0.45)
---------- ---------- ----------
Net Asset Value, End of Period.............................. $ 9.67 $ 9.72 $ 9.98
========== ========== ==========
Total Return................................................ 2.70%(1) 2.80% 4.40%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $1,634,219 $1,700,885 $1,723,748
Ratio of expenses to average net assets
Before expense reimbursement............................ 4.31%(2) 4.00% 5.56%(2)
After expense reimbursement............................. 0.58%(2) 0.58% 0.58%(2)
Ratio of net investment income to average net assets
Before expense reimbursement............................ 2.35%(2) 1.90% 0.47%(2)
After expense reimbursement............................. 6.08%(2) 5.32% 5.45%(2)
Portfolio turnover rate..................................... 95%(1) 137% 296%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
12
