<PAGE>
- --------------------------------------------------------------------------------
- -----------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND OF
MERCURY ASSET MANAGEMENT V.I. FUNDS, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Semi-Annual Report
June 30, 1999
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide you with this first semi-annual report to shareholders
for Mercury V.I. U.S. Large Cap Fund. The Fund seeks long-term capital growth
through investments primarily in a diversified portfolio of equity securities of
large cap companies located in the United States that Fund management believes
are undervalued or have good prospects for earnings growth. In this and future
reports to shareholders, we will provide information on the Fund's performance,
discuss our investment strategies and highlight some of the Fund's holdings.
INVESTMENT ENVIRONMENT
Economic growth in the United States continued to look strong as the annual rate
for gross domestic product growth was estimated to be in the 3% -- 4% range.
With consumer confidence riding high, spending remained strong throughout the
second quarter of 1999. Steady job creation kept unemployment low, while figures
on housing starts and new home sales came in above expectations.
However, while inflation had been viewed as benign, inflationary pressures
showed an unexpected rise in April when the Consumer Price Index (CPI) jumped
0.7% against an estimated 0.2%, the biggest gain in nine years. This increase
prompted the Federal Reserve Board to take a tighter stance on monetary policy,
and investors became concerned that an increase in interest rates could be as
much as 50 basis points (0.50%).
Consequently, bond yields backed up, peaking at 6.15%, and ended the second
quarter of 1999 at 6%, up from 5.58% at the end of the first quarter. High
valuation growth stocks were particularly sensitive to the reversal in direction
of interest rates and were among the hardest hit. Technology and Internet
stocks, such as America Online, Inc., which gained considerable ground in the
first quarter, gave back some of the gains by the end of the second quarter. As
attention and fund inflows shifted to value stocks, the chemical, paper and
utilities sectors became the main outperformers early in the June quarter.
However, the release of a flat CPI figure for May, which was less than expected
with only a 0.2% rise, meant the likelihood of a smaller interest rate increase
at the June Federal Open Market Committee (FOMC) meeting. When the Federal
Reserve Board's smaller move of 0.25% was announced, it was greeted with relief
by investors.
PORTFOLIO ACTIVITIES
The Fund commenced operations on April 30, 1999 and saw a steady inflow of cash.
At June 30, 1999, common stocks comprised 94.5% of net assets.
Since inception (April 30, 1999) through June 30, 1999, the Fund's Class A
Shares had a total return of +5.30%, outperforming the total return of the
unmanaged Standard & Poor's 500 (S&P 500) Index of +3.06% during the same
period. The performance of the Fund was driven positively by strength in our
technology investments, particularly Texas Instruments Incorporated, as well as
our computer software and telecommunication equipment holdings. These gains
outweighed the relative weakness from our holding in America Online, Inc.
1
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Semi-Annual Report
June 30, 1999 (Concluded)
- --------------------------------------------------------------------------------
During the period, we made only one notable sale. In June, we decided to take
profits in Airtouch Communications ahead of its merger closing with Vodafone
PLC. However, most of the proceeds from this sale were reinvested back into
other stocks benefiting from the growth in wireless telecommunications such as
Sprint Corp. (PCS Group) and Nextel Communications, Inc., which also experienced
strong gains.
Performance was held back by a few of the Fund's financial holdings. The sector
underperformed over the second quarter as a result of the rising interest rate
environment. Our holdings in Providian Financial Corporation and Washington
Mutual, Inc. suffered, most notably.
IN CONCLUSION
We thank you for your investment in Mercury V.I. U.S. Large Cap Fund, and we
look forward to serving
your investment needs in the months and years ahead.
Sincerely,
[SIGNATURE]
Jeffrey Peek
President
[SIGNATURE]
Michael Morony
Portfolio Manager
August 10, 1999
2
<PAGE>
- --------------------------------------------------------------------------------
MERCURY INTERNATIONAL V.I. U.S. LARGE CAP FUND
Performance Information
June 30, 1999
- --------------------------------------------------------------------------------
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE
INCEPTION
TOTAL RETURN
<S> <C>
- ----------------------------------------------------------------
CLASS A SHARES +5.30%
- ----------------------------------------------------------------
</TABLE>
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related
fees and expenses are not reflected in these returns. The Fund commenced
operations on April 30, 1999.
- --------------------------------------------------------------------------------
AGGREGATE TOTAL RETURN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES % RETURN
<S> <C>
- ----------------------------------------------------------------
INCEPTION (4/30/99) TO 6/30/99 +5.30%
- ----------------------------------------------------------------
</TABLE>
Past results shown should not be considered a representation of future
performance.
3
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Schedule of Investments as of June 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
AEROSPACE 2,400 United Technologies Corporation $ 171,047 $ 172,050 3.0%
- ----------------------------------------------------------------------------------------------------------------------
AUTOS & AUTO RELATED 1,050 Ford Motor Company 66,174 59,259 1.0
- ----------------------------------------------------------------------------------------------------------------------
BEVERAGES 2,200 PepsiCo, Inc. 81,294 85,113 1.5
- ----------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES 500 +Concord EFS, Inc. 16,125 21,156 0.4
- ----------------------------------------------------------------------------------------------------------------------
COMPUTER & OFFICE 850 +America Online, Inc. 120,154 93,925 1.7
EQUIPMENT 850 +BMC Software, Inc. 36,356 45,847 0.8
2,200 +Cisco Systems, Inc. 127,129 141,762 2.5
2,700 +Dell Computer Corporation 109,975 99,731 1.7
1,300 +EMC Corporation 70,283 71,500 1.3
400 International Business Machines Corporation 47,018 51,700 0.9
3,250 +Microsoft Corporation 265,766 292,906 5.1
---------- ---------- -----
776,681 797,371 14.0
- ----------------------------------------------------------------------------------------------------------------------
COSMETICS & TOILETRIES 1,000 Estee Lauder Companies Inc. (Class A) 47,780 50,125 0.9
- ----------------------------------------------------------------------------------------------------------------------
DOMESTIC OIL 1,200 Texaco Inc. 75,485 75,000 1.3
- ----------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 2,250 General Electric Company 238,135 254,250 4.5
300 Honeywell Inc. 34,203 34,763 0.6
1,050 Tyco International Ltd. 86,649 99,488 1.7
---------- ---------- -----
358,987 388,501 6.8
- ----------------------------------------------------------------------------------------------------------------------
ELECTRONICS 750 Intel Corporation 45,891 44,578 0.8
400 +JDS Uniphase Corporation 61,075 66,400 1.2
1,400 +Tellabs, Inc. 77,988 94,588 1.6
1,050 Texas Instruments Incorporated 110,994 152,250 2.7
---------- ---------- -----
295,948 357,816 6.3
- ----------------------------------------------------------------------------------------------------------------------
FINANCE COMPANIES 950 American Express Company 124,029 123,619 2.2
500 +The Goldman Sachs Group, Inc. 34,351 36,125 0.6
700 Providian Financial Corporation 85,631 65,450 1.2
1,750 U.S. Bancorp 64,527 59,500 1.0
---------- ---------- -----
308,538 284,694 5.0
- ----------------------------------------------------------------------------------------------------------------------
FOOD 2,700 +The Kroger Co. 73,415 75,431 1.3
1,050 +Safeway Inc. 56,697 51,975 0.9
---------- ---------- -----
130,112 127,406 2.2
- ----------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 1,250 Fort James Corporation 49,515 47,344 0.8
- ----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 2,900 The Dial Corporation 98,799 107,844 1.9
800 The Procter & Gamble Company 75,463 71,400 1.3
---------- ---------- -----
174,262 179,244 3.2
- ----------------------------------------------------------------------------------------------------------------------
INSURANCE 1,450 The Allstate Corporation 52,799 52,019 0.9
1,200 American International Group, Inc. 141,253 140,475 2.5
---------- ---------- -----
194,052 192,494 3.4
- ----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL OIL 1,950 Exxon Corporation 160,370 150,394 2.6
1,700 Mobil Corporation 177,014 168,300 3.0
---------- ---------- -----
337,384 318,694 5.6
- ----------------------------------------------------------------------------------------------------------------------
MACHINERY 1,250 Case Corporation 52,294 60,156 1.1
- ----------------------------------------------------------------------------------------------------------------------
MEDIA 2,650 +Infinity Broadcasting Corp. (Class A) 73,484 78,837 1.4
1,100 The Walt Disney Company 34,991 33,894 0.6
---------- ---------- -----
108,475 112,731 2.0
- ----------------------------------------------------------------------------------------------------------------------
MEDICAL SERVICES 1,100 Cardinal Health, Inc. 66,032 70,537 1.2
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Schedule of Investments as of June 30, 1999 (Concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE PERCENT OF
INDUSTRY HELD COMMON STOCKS COST (NOTE 1A) NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PHARMACEUTICALS 1,750 Bristol-Myers Squibb Company $ 112,386 $ 123,266 2.2%
1,300 Merck & Co., Inc. 91,403 96,200 1.7
650 Pfizer Inc. 74,783 71,338 1.2
1,100 Schering-Plough Corporation 53,279 58,300 1.0
650 Warner-Lambert Company 44,130 45,094 0.8
---------- ---------- -----
375,981 394,198 6.9
- ----------------------------------------------------------------------------------------------------------------------
REGIONAL BANKS 600 Bank of America Corporation 43,236 43,987 0.8
900 Bank One Corporation 55,432 53,606 0.9
1,600 Fleet Financial Group, Inc. 69,040 71,000 1.2
2,900 Mellon Bank Corporation 107,505 105,487 1.9
---------- ---------- -----
275,213 274,080 4.8
- ----------------------------------------------------------------------------------------------------------------------
RETAILING 1,450 CVS Corporation 69,524 73,587 1.3
1,350 The Home Depot, Inc. 81,240 86,991 1.5
950 +Kohl's Corporation 63,873 73,328 1.3
1,800 +Staples, Inc. 51,032 55,575 1.0
3,800 Wal-Mart Stores, Inc. 174,662 183,350 3.2
2,800 Walgreen Co. 75,868 82,250 1.4
---------- ---------- -----
516,199 555,081 9.7
- ----------------------------------------------------------------------------------------------------------------------
SAVINGS & LOAN 1,250 Washington Mutual, Inc. 51,019 44,219 0.8
- ----------------------------------------------------------------------------------------------------------------------
TELEPHONES 1,900 AT&T Corp. 96,826 106,044 1.9
1,300 Bell Atlantic Corporation 75,447 84,987 1.5
982 +Global Crossing Ltd. 53,444 41,796 0.7
1,500 +MCI WorldCom Inc. 124,300 129,000 2.3
1,200 +Nextel Communications, Inc. (Class A) 57,581 60,225 1.1
850 SBC Communications Inc. 47,495 49,300 0.9
2,900 Sprint Corp. (FON Group) 149,746 153,156 2.7
1,550 +Sprint Corp. (PCS Group) 72,110 88,544 1.5
---------- ---------- -----
676,949 713,052 12.6
- ----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 5,205,546 5,380,321 94.5
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT $ 519,000 Student Loan Marketing Association, 4.60%
AGENCY due 7/01/1999 519,000 519,000 9.1
OBLIGATIONS*
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES 519,000 519,000 9.1
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS.......................... $5,724,546 5,899,321 103.6
----------
----------
LIABILITIES IN EXCESS OF OTHER ASSETS...... (204,242) (3.6)
---------- -----
NET ASSETS................................. $5,695,079 100.0%
---------- -----
---------- -----
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* US Government Agency Obligations are traded on a discount basis; the interest
rate shown reflects the discount rate paid at the time of purchase by the
Fund.
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Statement of Assets and Liabilities as of June 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $5,724,546) (Note 1a).............................. $5,899,321
Cash......................................................................................... 5,532
Receivables:
Securities sold............................................................................ $ 125,853
Capital shares sold........................................................................ 94,421
Investment adviser (Note 2)................................................................ 29,766
Dividends.................................................................................. 2,804 252,844
Prepaid expense.............................................................................. 80,000
----------
Total assets............................................................................... 6,237,697
----------
LIABILITIES:
Payable for securities purchased............................................................. 434,035
Accrued expenses and other liabilities....................................................... 108,583
----------
Total liabilities.......................................................................... 542,618
----------
NET ASSETS:
Net assets................................................................................... $5,695,079
----------
----------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $0.0001 par value, 200,000,000 shares authorized+............ $ 54
Paid-in capital in excess of par............................................................. 5,419,314
Undistributed investment income -- net....................................................... 1,528
Undistributed realized capital gains on investments -- net................................... 99,408
Unrealized appreciation on investments -- net................................................ 174,775
----------
NET ASSETS................................................................................... $5,695,079
----------
----------
NET ASSET VALUE:
Class A -- Based on net assets of $5,695,079 and 541,074 shares outstanding.................. $ 10.53
----------
----------
</TABLE>
+ The Fund is also authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Statement of Operations for the Period April 30, 1999+ to June 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME (NOTES 1D & 1E):
Dividends...................................................................................... $ 7,256
Interest and discount earned................................................................... 4,806
---------
Total income................................................................................... 12,062
---------
EXPENSES:
Offering costs................................................................................. $ 14,884
Printing and shareholder reports............................................................... 5,634
Directors' fees and expenses................................................................... 5,583
Investment advisory fees (Note 2).............................................................. 5,478
Professional fees.............................................................................. 5,030
Accounting services (Note 2)................................................................... 3,823
Custodian fees................................................................................. 3,219
Transfer agent fees............................................................................ 1,026
Registration fees.............................................................................. 371
Pricing fees................................................................................... 101
Other.......................................................................................... 629
---------
Total expenses before reimbursement............................................................ 45,778
Reimbursement of expenses (Note 2)............................................................. (35,244)
---------
Total expenses................................................................................. 10,534
---------
Investment income -- net....................................................................... 1,528
---------
REALIZED & UNREALIZED GAIN ON INVESTMENTS -- NET (NOTES 1B, 1E & 3):
Realized gain from investments -- net.......................................................... 99,408
Unrealized appreciation on investments -- net.................................................. 174,775
---------
Net realized and unrealized gain on investments................................................ 274,183
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................... $ 275,711
---------
---------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 30, 1999+
INCREASE (DECREASE) IN NET ASSETS: TO JUNE 30, 1999
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Investment income -- net........................................................................... $ 1,528
Realized gain on investments -- net................................................................ 99,408
Unrealized appreciation on investments -- net...................................................... 174,775
----------------
Net increase in net assets resulting from operations............................................... 275,711
----------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Increase in net assets derived from net capital share transactions................................. 5,419,318
----------------
NET ASSETS:
Total increase in net assets....................................................................... 5,695,029
Beginning of period................................................................................ 50
----------------
End of period*..................................................................................... $5,695,079
----------------
----------------
* Undistributed investment income -- net........................................................... $ 1,528
----------------
----------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
----------------
FOR THE PERIOD
APRIL 30, 1999+
INCREASE (DECREASE) IN NET ASSET VALUE: TO JUNE 30, 1999
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
THE FOLLOWING RATIOS HAVE BEEN DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS.
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................................................... $ 10.00
----------------
Investment income -- net........................................................................... --++
Realized and unrealized gain on investments -- net................................................. .53
----------------
Total from investment operations................................................................... .53
----------------
Net asset value, end of period..................................................................... $ 10.53
----------------
----------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................................................................. 5.30%++
----------------
----------------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..................................................................... 1.25%*
----------------
----------------
Expenses........................................................................................... 5.42%*
----------------
----------------
Investment income -- net........................................................................... .18%*
----------------
----------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................................................... $ 5,695
----------------
----------------
Portfolio turnover................................................................................. 14.26%
----------------
----------------
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Amount is less than $.01 per share.
++ Aggregate total investment return.
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Mercury V.I. U.S. Large Cap Fund (the "Fund") is a series of Mercury Asset
Management V.I. Funds, Inc. (the "Corporation"). The Fund is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's financial statements are prepared in
accordance with generally accepted accounting principles which may require the
use of management accruals and estimates. These unaudited financial statements
reflect all adjustments which are, in the opinion of management, necessary to a
fair statement of the results for the interim period presented. All such
adjustments are of a normal recurring nature. Prior to commencement of
operations on April 30, 1999, the Fund had no operations other than those
relating to organizational matters and the issuance of 10 capital shares of the
Fund on April 19, 1999 to Mercury Asset Management International Ltd. ("Mercury
International") for $100. The Fund offers two classes of shares. Class A and
Class B Shares have equal voting, dividend, liquidation and other rights, except
that only shares of the respective classes are entitled to vote on matters
concerning only that class and Class B Shares bear certain expenses related to
the distribution of such shares. The following is a summary of significant
accounting policies followed by the Fund.
(a) VALUATION OF INVESTMENTS -- Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued or, lacking any sales, at the last available
bid price for long positions and the last available ask price for short
positions. Securities traded in the over-the-counter market are valued at the
last available bid price in the over-the-counter market prior to the time of
valuation. Securities traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market.
Short positions in securities traded in the over-the-counter market are valued
at the last available ask price prior to the time of valuation. Options written
or purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the over-the-counter market, valuation
is the last asked price (options written) or the last bid price (options
purchased). Short-term securities are valued at amortized cost, which
approximates market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair market value, as
determined in good faith by or under the direction of the Fund's Board of
Directors.
(b) DERIVATIVE FINANCIAL INSTRUMENTS -- The Fund may engage in various portfolio
investment strategies to seek to increase its return by hedging its holdings
against adverse movements in the equity, debt and currency markets. Losses may
arise due to changes in the value of the contract or if the counterparty does
not perform under the contract.
- - FINANCIAL FUTURES CONTRACTS -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities. Upon
entering into a contract, the Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
- - OPTIONS -- The Fund is authorized to purchase and write call and put options.
When the Fund writes an option, an amount equal to the premium received by the
Fund is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written. When a security is purchased or sold through an exercise
of an option, the related premium paid (or received) is added to (or deducted
from) the basis of the
10
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
security acquired or deducted from (or added to) the proceeds of the security
sold. When an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the premiums
received or paid (or a gain or loss to the extent that the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
- - FORWARD FOREIGN EXCHANGE CONTRACTS -- The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or Fund positions. Such contracts are not entered on the Funds'
records. However, the effect on operations is recorded from the date the Fund
enters into such contracts.
(c) FOREIGN CURRENCY TRANSACTIONS -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) INCOME TAXES -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Dividend income is recorded on the ex-dividend dates. Dividends from
foreign securities where the ex-dividend date may have passed are subsequently
recorded when the Fund has determined the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(f) DIVIDENDS AND DISTRIBUTIONS -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Mercury
International, an affiliate of Fund Asset Management, L.P. ("FAM"). The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Incorporated ("ML & Co."), which is the
limited partner.
Mercury International is responsible for the management of the Fund's
investments and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.65% of the average
daily value of the Fund's net assets. Mercury International has entered into a
Sub-Advisory Agreement with FAM with respect to the Fund, pursuant to which FAM
provides investment advisory services with respect to the Fund's daily cash
assets. Mercury International has agreed to pay FAM a fee in an amount to be
determined from time to time by both parties but in no event in excess of the
amount that Mercury International actually receives for providing services to
the Corporation pursuant to the Investment Advisory Agreement.
Mercury International has agreed to limit the annual operating expenses of the
Fund to 1.25% and 1.40% of the Fund's average net assets with respect to the
Class A Shares and Class B Shares, respectively. These expense limits will be in
place through April 2000.
11
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Notes to Financial Statements (Concluded)
- --------------------------------------------------------------------------------
For the period April 30, 1999 to June 30, 1999, Mercury International earned
fees of $5,478, all of which were waived. FAM also reimbursed the Fund for
additional expenses of $29,766.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Corporation are officers and/or
directors of Mercury International, FAM, PSI, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
period April 30, 1999 to June 30, 1999 were $5,744,732 and $697,890,
respectively.
Net realized gains for the period April 30, 1999 to June 30, 1999 and net
unrealized gains as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
GAINS GAINS
<S> <C> <C>
- -------------------------------------------------------------------------
Long-term investments........................ $ 99,408 $ 174,775
------------ ------------
Total investments............................ $ 99,408 $ 174,775
------------ ------------
------------ ------------
</TABLE>
As of June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $174,775, of which $303,618 related to appreciated securities and
$128,843 related to depreciated securities. At June 30, 1999, the aggregate cost
of investments for Federal income tax purposes was $5,724,546.
4. CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share transactions was
$5,419,318 for the period April 30, 1998 to June 30, 1999.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES FOR THE PERIOD APRIL 30, 1998+ DOLLAR
TO JUNE 30, 1999 SHARES AMOUNT
<S> <C> <C>
- -------------------------------------------------------------------------
Shares sold................................ 541,069 $ 5,419,321
Shares redeemed............................ -- (3)
------------ ------------
Net increase............................... 541,069 $ 5,419,318
------------ ------------
------------ ------------
</TABLE>
+ Prior to April 30, 1999 (commencement of operations), the Fund issued 5 shares
to Mercury International for $50.
12
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Directors and Officers
- --------------------------------------------------------------------------------
JEFFREY M. PEEK-Director and President
DAVID O. BEIM-Director
JAMES T. FLYNN-Director
W. CARL KESTER-Director
KAREN P. ROBARDS-Director
TERRY K. GLENN-Director and Executive Vice President
DONALD C. BURKE-Vice President and Treasurer
ALLAN J. OSTER-Secretary
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
TRANSFER AGENT
Financial Data Services, Inc.
P.O. Box 44062
Jacksonville, Florida 32232-4062
(888) 763-2260
13
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This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Mercury V.I. U.S. Large Cap Fund of
Mercury Asset Management V.I. Funds, Inc.
Box 9011
Princeton, NJ
08543-9011
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[LOGO] Printed on post-consumer recycled paper MERCVI1--6/99
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