<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 02109-3661
THIS MATERIAL MUST BE PRECEDED
OR ACCOMPANIED BY A PROSPECTUS.
SEMI-ANNUAL
REPORT
JUNE 30, 2000
LOGO
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
EQUITY INCOME VIP PORTFOLIO
-------------------------------------------------------
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests primarily in U.S. stocks.
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 Equity Income VIP Portfolio (the "Fund") for the six-month
period ended June 30, 2000.
By the first quarter of 2000, the U.S. equity markets began to experience an
unstable pattern of performance. Investors couldn't decide whether to continue
buying the pricey, high momentum winners of 1998-99 or to take profits and pay
more attention to valuation. Following weak performance in January and February,
the U.S. large capitalization equity market, as defined by the S&P 500 Index,
rebounded to finish the first quarter with a 2.3% gain. "Value" investments
continued to trail as technology issues led the charge with an 11.9% gain for
the quarter. The primary reason for the Fund's underperformance during the
six-month period ended June 30, 2000 was its emphasis on value stocks during a
period when technology and growth stocks greatly outperformed value.
However, all was not sanguine for the technology sector. Beginning on March 27,
2000 and extending through April and May 2000, the Nasdaq Composite Index
experienced a sharp correction, declining -31.5%. During the Nasdaq's sell-off,
large cap value investments held up exceedingly well. While the S&P 500 Index
was -6.6%, the Russell 1000 Value Index actually posted a gain of 0.6%. With its
unwavering value focus, the Fund gained approximately 9.5% from March 27, 2000
through May 31, 2000.
The Fund performed exceedingly well when the environment turned favorable for
value investments. A lack of technology in the portfolio was the single biggest
contributor to the Fund's outperformance in April and May, while exposure to
many of the manufacturing cyclicals (i.e., papers and steel) was the primary
detractor to performance. Also, adding to the Fund's performance was a broad
based group of holdings that generated excellent returns during April and May.
Northrup (+45%), Philip Morris (+24%), Waste Management (+49%), Russell Corp
(+55%), Lockheed Martin (+21%) and Aetna (+20%) are but a few of our holdings
where a dramatic upward reassessment of valuation by investors occurred. In
short, the Fund again demonstrated that it tends to outperform not only the
broad market, but also the value index, when value stocks are in favor.
In June 2000, the market returned to its speculative pattern, bidding up the
price of technology and healthcare stocks (the only two S&P 500 sectors showing
positive returns), and selling off many of the value stocks that had
outperformed the prior two months. June's market dynamics culminated on the last
trading day of the quarter (June 30) when investors were rebalancing their
portfolios to adjust for the reconstitution of the Russell 1000 Index.
Unfortunately, value stocks came under selling pressure as their weight within
the reconstituted index had diminished. Although we are disappointed that our
April/May outperformance of the S&P 500 Index was eliminated by the market
dynamics in June, our second quarter return (-3.2%) still compared favorably to
that of Russell 1000 Value Index (-4.7%).
As we have pointed out in the past, many of the more traditional value areas of
the market appear incredibly oversold. Since underlying valuation (i.e.,
<PAGE> 3
the present value of the future cash flows of a company) is the fundamental
determinant of a stock's intrinsic value, we believe that adherence to our
traditional value disciplines will perform well over the long-term.
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>
S&P
500
Fund Index
----------------------------------------------------------------------------
<S> <C> <C>
Six Months -10.43% -0.49%
----------------------------------------------------------------------------
One Year -21.48 7.42
----------------------------------------------------------------------------
Since Inception (3/18/98) -8.36 15.48
----------------------------------------------------------------------------
</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 1.15% 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 Nasdaq Composite Index is an unmanaged index which covers 4,500 stocks
traded over-the-counter. It represents many small company stocks, but is heavily
influenced by about 100 of the largest Nasdaq stocks. It is a value-weighted
index calculated on price change only and does not include income.
The Russell 1000 Index measures the performance of the 1,000 largest companies
in the Russell 3000 Index, which represents approximately 90% of the total
market capitalization of the Russell 3000 Index.
The Russell 1000 Value Index measures the performance of those Russell 1000
companies with lower price-to-book value ratios and lower forecasted growth
values.
The S&P 500 Index is an unmanaged, capital-weighted index representing the
aggregate market value of the common equity of 500 stocks primarily traded on
the New York Stock Exchange.
The indexes do not reflect the payment of transaction costs, fees and expenses
associated with an investment in the Fund. The Fund's value disciplines may
prevent or restrict investment in major stocks in its benchmark index, the S&P
500 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)
--------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
COMMON STOCKS -- 97.9% Shares Value
------------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 4.8%
............................................................
Lockheed Martin Corporation 830 $ 20,594
............................................................
Northrop Grumman Corporation 250 16,563
............................................................
Rockwell International Corporation 160 5,040
....................... ........................ --------
42,197
------------------------------------------------------------
ALUMINUM -- 3.3%
............................................................
Alcoa Inc. 994 28,826
------------------------------------------------------------
APPAREL & TEXTILES -- 1.0%
............................................................
Russell Corporation 430 8,600
------------------------------------------------------------
APPLIANCE & HOUSEHOLD FURNITURE -- 0.5%
............................................................
Whirlpool Corporation 100 4,663
------------------------------------------------------------
AUTO PARTS -- 3.9%
............................................................
Dana Corporation 530 11,229
............................................................
Delphi Automotive Systems Corporation 480 6,990
............................................................
Meritor Automotive, Inc. 265 2,915
............................................................
Tenneco Automotive Inc. 226 1,186
............................................................
TRW Inc. 250 10,844
............................................................
Visteon Corporation # 65 794
....................... ........................ --------
33,958
------------------------------------------------------------
AUTOS & TRUCKS -- 4.5%
............................................................
Ford Motor Company 500 21,500
............................................................
General Motors Corporation 310 17,999
....................... ........................ --------
39,499
------------------------------------------------------------
BEVERAGES -- 1.4%
............................................................
Anheuser-Busch Companies, Inc. 160 11,950
------------------------------------------------------------
CHEMICALS -- 3.0%
............................................................
The Dow Chemical Company 450 13,584
............................................................
Eastman Chemical Company 240 11,460
............................................................
Millennium Chemicals Inc. 60 1,020
....................... ........................ --------
26,064
------------------------------------------------------------
CONTAINERS -- 1.0%
............................................................
Pactiv Corporation # 1,130 8,899
------------------------------------------------------------
COMPUTER SOFTWARE/SERVICES -- 0.3%
............................................................
Computer Associates International, Inc. 50 2,559
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
ELECTRIC: INTEGRATED -- 8.5%
............................................................
CMS Energy Corporation 400 $ 8,850
............................................................
DTE Energy Company 400 12,225
............................................................
Edison International 730 14,965
............................................................
GPU, Inc. 120 3,247
............................................................
P P & L Corporation 493 10,815
............................................................
Public Service Enterprises Group, Inc. 295 10,214
............................................................
SCANA Corporation 284 6,852
............................................................
TXU Corporation 230 6,785
....................... ........................ --------
73,953
------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.8%
............................................................
Harsco Corporation 260 6,630
------------------------------------------------------------
FOREST PRODUCTS -- 3.3%
............................................................
Georgia-Pacific (Timber Group) 500 10,813
............................................................
Weyerhaeuser Company 410 17,630
....................... ........................ --------
28,443
------------------------------------------------------------
INSURANCE: LIFE -- 7.8%
............................................................
Aetna Inc. 300 19,256
............................................................
American General Corporation 200 12,200
............................................................
Lincoln National Corporation 470 16,979
............................................................
MetLife, Inc. # 420 8,846
............................................................
ReliaStar Financial Corporation 200 10,488
....................... ........................ --------
67,769
------------------------------------------------------------
INSURANCE: PROPERTY CASUALTY -- 5.5%
............................................................
The Allstate Corporation 830 18,467
............................................................
Safeco Corporation 500 9,938
............................................................
St. Paul Companies, Inc. 560 19,110
....................... ........................ --------
47,515
------------------------------------------------------------
LEISURE/TOYS -- 0.7%
............................................................
Fortune Brands, Inc. 270 6,227
------------------------------------------------------------
MACHINERY -- 1.3%
............................................................
CNH Global N.V. 1,230 11,378
------------------------------------------------------------
METALS: MISC. -- 0.9%
............................................................
Phelps Dodge Corporation 200 7,438
------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES -- 1.6%
............................................................
Xerox Corporation 690 14,318
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 5
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
OIL: DOMESTIC -- 6.6%
............................................................
Conoco Inc. -- Class A 100 $ 2,200
............................................................
Conoco Inc. -- Class B 100 2,456
............................................................
Occidental Petroleum Corporation 900 18,956
............................................................
Phillips Petroleum Company 110 5,576
............................................................
Sunoco, Inc. 100 2,944
............................................................
USX-Marathon Group, Inc. 615 15,413
............................................................
Ultramar Diamond Shamrock Corporation 400 9,925
....................... ........................ --------
57,470
------------------------------------------------------------
OIL: INTERNATIONAL -- 2.6%
............................................................
Dynegy Inc. -- Class A 265 18,103
............................................................
Texaco Inc. 80 4,260
....................... ........................ --------
22,363
------------------------------------------------------------
PAPER -- 3.3%
............................................................
Georgia-Pacific Group 360 9,450
............................................................
International Paper Company 657 19,587
....................... ........................ --------
29,037
------------------------------------------------------------
PHOTOGRAPHY/IMAGING -- 2.9%
............................................................
Eastman Kodak Company 430 25,585
------------------------------------------------------------
POLLUTION CONTROL -- 0.8%
............................................................
Waste Management, Inc. 375 7,125
------------------------------------------------------------
RAILROADS -- 1.9%
............................................................
CSX Corporation 260 5,509
............................................................
Norfolk Southern Corporation 770 11,454
....................... ........................ --------
16,963
------------------------------------------------------------
REGIONAL BANKS -- 3.9%
............................................................
Bank One Corporation 424 11,262
............................................................
First Security Corporation 300 4,069
............................................................
First Union Corporation 320 7,940
............................................................
KeyCorp 370 6,521
............................................................
UnionBanCal Corporation 200 3,712
....................... ........................ --------
33,504
------------------------------------------------------------
RETAIL: DEPARTMENT STORES -- 1.1%
............................................................
May Department Stores Company 400 9,600
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
RETAIL: GENERAL MERCHANDISE -- 2.3%
............................................................
J.C. Penney Company, Inc. 400 $ 7,375
............................................................
Sears, Roebuck & Company 390 12,724
....................... ........................ --------
20,099
------------------------------------------------------------
SATELLITE TELECOM -- 0.7%
............................................................
General Motors Corporation -- Class H 74 6,494
------------------------------------------------------------
SAVINGS & LOANS -- 2.3%
............................................................
Washington Mutual, Inc. 680 19,635
------------------------------------------------------------
SMALL LOANS & FINANCE -- 3.3%
............................................................
Associates First Capital
Corporation -- Class A 142 3,168
............................................................
Fannie Mae 270 14,091
............................................................
Household International, Inc. 280 11,637
....................... ........................ --------
28,896
------------------------------------------------------------
STEEL -- 1.1%
............................................................
USX-U.S. Steel Group, Inc. 500 9,281
------------------------------------------------------------
TELEPHONE -- 7.6%
............................................................
ALLTEL Corporation 240 14,865
............................................................
AT&T Corporation 650 20,556
............................................................
Bell Atlantic Corporation 205 10,417
............................................................
GTE Corporation 120 7,470
............................................................
SBC Communications Inc. 300 12,975
....................... ........................ --------
66,283
------------------------------------------------------------
TOBACCO -- 3.4%
............................................................
Philip Morris Companies, Inc. 1,120 29,750
------------------------------------------------------------
Total common stocks
(cost $1,125,074) 852,971
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
CERTIFICATES OF DEPOSIT -- 2.3% Amount
-------------------------------------------------------------
<S> <C> <C>
Brown Brothers Call Deposit, 5.5000% $19,772 19,772
-------------------------------------------------------------
Total certificates of deposit
(cost $19,772) 19,772
-------------------------------------------------------------
Total investments -- 100.2%
(cost $1,144,846) 872,743
.............................................................
Liabilities in excess of other
assets -- (0.2%) (1,640)
........................ ........................
--------
Total net assets -- 100.0% $871,103
-------------------------------------------------------------
</TABLE>
# - Non-income producing security.
See Notes to the Financial Statements
4
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 2000
EQUITY INCOME VIP PORTFOLIO (Unaudited)
---------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $ 872,743
Cash...................................................... 252
Dividends and interest receivable......................... 3,667
Receivable for investments sold........................... 2,652
Organizational expenses, net of accumulated
amortization............................................ 10,149
Prepaid expenses.......................................... 1,586
----------
Total assets.......................................... 891,049
----------
LIABILITIES:
Payable to Adviser........................................ 1,230
Accrued expenses and other liabilities.................... 18,716
----------
Total liabilities..................................... 19,946
----------
Net assets............................................ $ 871,103
==========
NET ASSETS CONSIST OF:
Paid in capital........................................... $1,109,575
Undistributed net investment income....................... 503
Undistributed net realized gain on securities............. 33,128
Net unrealized depreciation of securities................. (272,103)
----------
Net assets............................................ $ 871,103
==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 111,803
Net asset value per share (offering and redemption
price).................................................. $ 7.79
==========
*Cost of Investments....................................... $1,144,846
==========
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 7
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000
EQUITY INCOME VIP PORTFOLIO (Unaudited)
-------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income*
Dividends............................................... $ 16,034
Interest................................................ 399
---------
Total income........................................ 16,433
---------
Expenses
Advisory fee............................................ 3,386
Legal and auditing fees................................. 244
Custodian fees and expenses............................. 2,536
Accounting and transfer agent fees and expenses......... 14,618
Administration fee...................................... 182
Trustees' fees and expenses............................. 135
Reports to shareholders................................. 5,666
Registration fees....................................... 100
Amortization of organizational expenses................. 1,826
Other expenses.......................................... 1,538
---------
Total expenses...................................... 30,231
Less, expense reimbursement............................. (25,039)
---------
Net expenses........................................ 5,192
---------
Net investment income................................... 11,241
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on securities......................... 2,579
Net change in unrealized depreciation of securities..... (114,868)
---------
Net loss on investments................................... (112,289)
---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(101,048)
=========
*Net of Foreign Taxes Withheld.............................. $ 103
=========
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 Year Ended
EQUITY INCOME VIP PORTFOLIO (Unaudited) December 31, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 11,241 $ 20,005
Net realized gain on securities......................... 2,579 34,115
Net change in unrealized depreciation of securities..... (114,868) (86,565)
--------- --------
Net decrease in net assets resulting from
operations.......................................... (101,048) (32,445)
--------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (13,234) (21,583)
--------- --------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... -- 75,069
Shares issued in connection with payment of dividends
and distributions...................................... 13,233 21,583
Cost of shares redeemed................................. (8) (58,768)
--------- --------
Net increase in net assets from Fund share
transactions........................................ 13,225 37,884
--------- --------
Total decrease in net assets................................ (101,057) (16,144)
NET ASSETS:
Beginning of period..................................... 972,160 988,304
--------- --------
End of period*.......................................... $ 871,103 $972,160
========= ========
*Including undistributed net investment income of: $ 503 $ 2,494
========= ========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. -- 7,689
Shares issued in connection with payment of dividends
and distributions...................................... 1,665 2,335
Shares redeemed......................................... (1) (6,520)
--------- --------
Net increase........................................ 1,664 3,504
========= ========
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 9
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000 (UNAUDITED)
NOTE 1.
ACCOUNTING POLICIES. The Equity Income 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 current income and long-term growth
of income, accompanied by growth 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 International VIP Portfolio, the Low Duration 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. 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.
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.
8
<PAGE> 10
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid quarterly. 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 0.75% as applied to the Fund's daily net assets. The Adviser
has contractually agreed to pay all operating expenses in excess of 1.15% as
applied to the Fund's daily net assets through April 30, 2001. For the six
months ended June 30, 2000, the Adviser paid $25,039 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
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 $85,130
and $74,218, respectively.
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>
Equity Income VIP Portfolio................................. $(272,103) $47,028 $(319,131)
</TABLE>
At June 30, 2000, the cost of investments for federal income tax purposes was
$1,144,846. 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 HW Large Cap Value VIP
Portfolio.
9
<PAGE> 11
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended March 18, 1998*
June 30, 2000 Year Ended through
EQUITY INCOME VIP PORTFOLIO (Unaudited) December 31, 1999 December 31, 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 8.83 $ 9.27 $ 10.00
-------- -------- --------
Income from Investment Operations:
Net investment income................................... 0.10 0.20 0.14
Net realized and unrealized gain (loss) on
investments........................................... (1.02) (0.45) (0.75)
-------- -------- --------
Total from investment operations........................ (0.92) (0.25) (0.61)
-------- -------- --------
Less Distributions:
Dividends (from net investment income).................. (0.12) (0.19) (0.12)
-------- -------- --------
Net Asset Value, End of Period.............................. $ 7.79 $ 8.83 $ 9.27
======== ======== ========
Total Return................................................ (10.43)%(1) (2.73)% (6.04)%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $871,103 $972,160 $988,304
Ratio of expenses to average net assets:
Before expense reimbursement............................ 6.70%(2) 5.76% 7.81%(2)
After expense reimbursement............................. 1.15%(2) 1.15% 1.15%(2)
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement............................ (3.06)%(2) (2.71)% (4.95)%(2)
After expense reimbursement............................. 2.49%(2) 1.90% 1.71%(2)
Portfolio turnover rate..................................... 8%(1) 24% 12%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
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