<PAGE>
- --------------------------------------------------------------------------------
- -----------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND OF
MERCURY ASSET MANAGEMENT V.I. FUNDS, INC.
ANNUAL REPORT
DECEMBER 31, 1999
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Annual Report
December 31, 1999
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide you with this first annual report to shareholders for
Mercury V.I. U.S. Large Cap Fund.
FISCAL YEAR IN REVIEW
Since inception (April 30, 1999) through December 31, 1999, the Fund's Class A
Shares had a total return of +20.94%, outperforming the total return of the
unmanaged Standard & Poor's (S&P) 500 Index of +11.0% during the same period.
Since the Fund commenced operations on April 30, 1999, we have seen a steady
inflow of cash, and the Fund had net assets of just over $24 million at year-
end. At December 31, 1999, the Fund was fully invested with common stocks
comprising 96.2% of the Fund's net assets.
During this fiscal period, the Fund benefited from its heavy weighting in
selected technology and telecommunication issues, particularly in Yahoo! Inc.,
Cisco Systems, Inc. and Texas Instruments Incorporated. Technology and
telecommunications were the star sectors for the year and were very strong
during the fourth quarter of 1999, as investors became confident that the Year
2000 changeover would not cause material setbacks for these companies. Even
rising bond yields later in the period were not enough to dampen investor
enthusiasm for technology issues, although financial stocks, particularly banks,
were weak on interest rate and execution concerns.
During the period, we took aggressive positions in selected technology and
telecommunications issues. The Fund's general exposure to the technology sector
as a whole was about neutral relative to the S&P 500 Index as we believe that
the route to outperformance is through stock selection and not sectors.
Performance was held back by our holding in Tyco International Ltd., which
performed poorly on concerns that its aggressive accounting policies masked a
deterioration in underlying businesses. Our pharmaceutical holdings were also a
drag on performance, as the sector was dogged by poor investor sentiment,
relating to possible Medicare reforms.
INVESTMENT ENVIRONMENT
On June 30, 1999, the Federal Reserve Board increased interest rates by 0.25%,
which set the tone for an expectation of further interest rate rises during the
third quarter. The US current account deficit continued to be a source of
negative surprise and as a result the Federal Reserve Board raised interest
rates for a second time on August 24, 1999 to 5.25%. Market breadth worsened in
the second half of the year, with nearly 60% of all S&P 500 Index stocks down
over the year with only the technology sector able to outperform the market
during the fourth quarter of the year. Bond yields rose over 25% from their
trough in the fourth quarter of 1998 to the year-end level of 6.48%.
Despite the Federal Reserve Board's efforts to slow the economy by increasing
the Federal Funds rate, gross domestic product growth showed no signs of a
slowdown and finished up a strong 4% in 1999. This was primarily the result of
strong consumer spending (up 3.6%), and a recovery in exports in the second half
of the year. Nevertheless, inflationary pressures remained benign, as indicated
by a consumer price index rise of only 2.3% during the year, while the
unemployment rate continued its downward trend from 4.4% in April to 4.1% at the
end of the year.
Following poor third quarter performance, equity markets improved during the
fourth quarter, particularly the NASDAQ, which appreciated 48% during the
quarter. The S&P 500 Index rose 14.5%, although excluding technology stocks, the
Index would have been down 1%. Corporate activity reached record levels, with
high-profile merger and acquisition activity, such as Dow Chemical Company and
Union Carbide Corporation; Viacom Inc. and CBS Corporation; and the American
Home Products Corporation/Pfizer Inc. battle over Warner-Lambert Company.
1
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Annual Report
December 31, 1999 (Concluded)
- --------------------------------------------------------------------------------
Three increases in interest rates by the Federal Reserve Board failed to dampen
enthusiasm for technology and telecommunications stocks. Communications
equipment and cellular/wireless telecommunications were star performers over the
period, as these industry sectors as measured by S&P were up 49.9% and 77.9%,
respectively, driven by strong growth in sales of software and mobile phones. In
data transmission, Qualcomm Incorporated (not a Fund holding) led the rise
ending the period up 358.7%, with fiber optic components manufacturer JDS
Uniphase Corporation up 263%.
Financial groups such as life insurance and investment bank/brokerage stocks
performed poorly in an environment of rising interest rates. Despite a run up in
mid October from excitement about changes in financial legislation, the S&P
Financials Index closed the period down 14.6%. Property casualty insurers ended
the year down 29.4% because of overcapitalization and a weak pricing
environment. The healthcare sector struggled in the face of concerns about
Medicare reform, a worsening legislative environment, and a dwindling pipeline
of new drugs caused the drug sector to end the period down 14.5%. The
worst-performing industry sector was waste management, which ended the period
down 68.9%.
PORTFOLIO ACTIVITIES
Since the Fund's inception, we have maintained overweighted positions in
selected technology and communications stocks. These two sectors were the key
drivers of the Fund's performance during the second half of 1999. In the last
two months of the year in particular, momentum behind these highly rated and
fast-growing companies was strong and led to outperformance. The Fund also
benefited from our initial purchase of these issues at the end of April, when a
sector rotation out of growth stocks into value stocks temporarily depressed
prices.
In October we initiated a position in Citigroup Inc. This company has leadership
positions in consolidating industries such as credit cards, consumer finance,
and insurance and stands to be a prime beneficiary as financial services
converge. It is also one of the few financial companies within the sector where
earnings estimates have been rising. We also purchased Citrix Systems, Inc. in
November, which saw substantial outperformance in the last two months of the
year as expectations for wireless applications rose.
During the period, we made several notable sales. We sold Tyco International
Ltd. because of deteriorating fundamentals and reduced our exposure to the
financial sector by selling U.S. Bancorp and Washington Mutual, Inc. on the
basis that we believe financial stocks will not perform well in an environment
of rising interest rates. We also reduced our holding in Microsoft Corporation
in November over concerns that the Department of Justice action would limit any
upside appreciation in the stock in the near term.
IN CONCLUSION
We thank you for your investment in Mercury V.I U.S. Large Cap Fund, and we look
forward to servicing your investment needs in the months and years ahead.
Sincerely,
[SIGNATURE]
Jeffrey Peek
President
[SIGNATURE]
Michael Morony
Portfolio Manager
February 10, 2000
2
<PAGE>
- --------------------------------------------------------------------------------
MERCURY INTERNATIONAL V.I. U.S. LARGE CAP FUND
Performance Information
December 31, 1999
- --------------------------------------------------------------------------------
TOTAL RETURN BASED ON A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MERCURY VI US LARGE S&P 500
CAP FUND + - CLASS A SHARES* INDEX ++
<S> <C> <C>
4/30/99** $10,000 $10,000
12/99 $12,094 $11,100
</TABLE>
* Assuming transaction costs and other operating expenses, including advisory
fees.
** Commencement of operations.
+ The Fund invests 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.
++ This unmanaged broad-based Index is comprised of common stocks.
Past results shown should not be considered a representation of future
performance.
- --------------------------------------------------------------------------------
AGGREGATE TOTAL RETURN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES % RETURN
<S> <C>
- --------------------------------------------------------------------------
Inception (4/30/99) to 12/31/99 +20.94%
- --------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
RECENT PERFORMANCE RESULTS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE INCEPTION
AS OF DECEMBER 31, 1999 TOTAL RETURN
<S> <C>
- -----------------------------------------------------------------------------
Class A Shares +20.94%
- -----------------------------------------------------------------------------
</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.
3
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Schedule of Investments as of December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
AEROSPACE 9,200 United Technologies Corporation $ 598,000 2.5%
- ------------------------------------------------------------------------------------------------------------------------
AUTOS & AUTO RELATED 4,250 Ford Motor Company 227,109 0.9
- ------------------------------------------------------------------------------------------------------------------------
BEVERAGES 9,300 PepsiCo, Inc. 327,825 1.4
- ------------------------------------------------------------------------------------------------------------------------
COSMETICS & TOILETRIES 4,300 The Estee Lauder Companies Inc. (Class A) 216,881 0.9
- ------------------------------------------------------------------------------------------------------------------------
DOMESTIC OIL 5,600 Texaco Inc. 304,150 1.2
- ------------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 9,450 General Electric Company 1,462,388 6.1
5,475 Honeywell International Inc. 315,839 1.3
----------- -----
1,778,227 7.4
- ------------------------------------------------------------------------------------------------------------------------
FINANCE COMPANIES-- 2,950 American Express Company 490,438 2.0
CONSUMER & DIVERSIFIED 3,100 Bank of America Corporation 155,581 0.7
10,500 Citigroup Inc. 583,406 2.4
2,550 Providian Financial Corporation 232,209 1.0
----------- -----
1,461,634 6.1
- ------------------------------------------------------------------------------------------------------------------------
FOOD RETAILERS 9,500 +The Kroger Co. 179,313 0.7
4,150 +Safeway Inc. 147,584 0.6
----------- -----
326,897 1.3
- ------------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS 3,500 Weyerhaeuser Company 251,344 1.0
- ------------------------------------------------------------------------------------------------------------------------
GENERAL & DRUG 7,575 The Home Depot, Inc. 519,361 2.2
RETAILING 3,950 +Kohl's Corporation 285,141 1.2
10,900 Wal-Mart Stores, Inc. 753,462 3.1
10,500 Walgreen Co. 307,125 1.3
----------- -----
1,865,089 7.8
- ------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 9,200 The Dial Corporation 223,675 0.9
5,800 The Procter & Gamble Company 635,463 2.6
----------- -----
859,138 3.5
- ------------------------------------------------------------------------------------------------------------------------
INSURANCE 4,800 American International Group, Inc. 519,000 2.2
- ------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL OIL 8,500 Conoco Inc. (Class B) 211,438 0.9
12,786 Exxon Mobil Corporation 1,030,072 4.3
----------- -----
1,241,510 5.2
- ------------------------------------------------------------------------------------------------------------------------
MEDIA 8,950 +Infinity Broadcasting Corporation (Class A) 323,878 1.4
4,400 The Walt Disney Company 128,700 0.5
----------- -----
452,578 1.9
- ------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 6,650 Bristol-Myers Squibb Company 426,847 1.8
6,700 Merck & Co., Inc. 449,319 1.9
7,050 Pfizer Inc. 228,684 0.9
3,900 Schering-Plough Corporation 164,531 0.7
4,450 Warner-Lambert Company 364,622 1.5
----------- -----
1,634,003 6.8
- ------------------------------------------------------------------------------------------------------------------------
REGIONAL BANKS 6,700 FleetBoston Financial Corporation 233,244 1.0
11,300 Mellon Financial Corporation 384,906 1.6
----------- -----
618,150 2.6
- ------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY-- 10,000 +Cisco Systems, Inc. 1,070,625 4.5
SEMICONDUCTORS, 8,000 +Dell Computer Corporation 407,500 1.7
NETWORK & OTHER 3,900 +EMC Corporation 426,075 1.8
HARDWARE 4,650 Intel Corporation 382,463 1.6
4,800 +JDS Uniphase Corporation 774,000 3.2
2,800 +Sun Microsystems, Inc. 216,650 0.9
3,100 +Tellabs, Inc. 198,787 0.8
5,700 Texas Instruments Incorporated 552,187 2.3
----------- -----
4,028,287 16.8
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Schedule of Investments as of December 31, 1999 (Concluded)
- --------------------------------------------------------------------------------
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
<S> <C> <C> <C> <C>
TECHNOLOGY-- 8,900 +America Online, Inc. $ 671,394 2.8%
SOFTWARE & SERVICES 2,750 +BMC Software, Inc. 219,656 0.9
EQUIPMENT 3,100 +Citrix Systems, Inc. 381,106 1.6
9,600 +Microsoft Corporation 1,120,200 4.7
1,700 +VeriSign, Inc. 324,912 1.3
700 +Yahoo! Inc. 302,881 1.3
----------- -----
3,020,149 12.6
- ------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 5,800 AT&T Corp. 294,350 1.2
9,100 Bell Atlantic Corporation 560,219 2.3
6,882 +Global Crossing Ltd. 343,670 1.4
6,150 +MCI WorldCom Inc. 325,950 1.4
3,100 +Nextel Communications, Inc. (Class A) 319,494 1.3
5,400 +Qwest Communications International Inc. 231,863 1.0
3,750 SBC Communications Inc. 182,813 0.8
7,400 Sprint Corp. (FON Group) 498,112 2.1
6,050 +Sprint Corp. (PCS Group) 620,125 2.6
----------- -----
3,376,596 14.1
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST -- $19,970,835) 23,106,567 96.2
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER* $798,000 General Motors Acceptance Corp.,
5% due 1/03/2000 797,778 3.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES (COST -- $797,778) 797,778 3.3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST -- $20,768,613)................ 23,904,345 99.5
OTHER ASSETS LESS LIABILITIES.......................... 109,502 0.5
----------- -----
NET ASSETS............................................. $24,013,847 100.0%
=========== =====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Fund.
+ Non-income producing security.
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Statement of Assets and Liabilities as of December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $20,768,613)...... $23,904,345
Cash........................................................ 554
Receivables:
Investment adviser........................................ $42,837
Capital shares sold....................................... 33,943
Dividends................................................. 11,194
Securities sold........................................... 4,500 92,474
-------
Prepaid expense............................................. 63,587
-----------
Total assets.............................................. 24,060,960
-----------
LIABILITIES:
Capital shares redeemed payable............................. 140
Accrued expenses and other liabilities...................... 46,973
-----------
Total liabilities......................................... 47,113
-----------
NET ASSETS:
Net assets.................................................. $24,013,847
===========
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.0001 par value,
200,000,000 shares authorized+............................ $ 200
Paid-in capital in excess of par............................ 20,978,412
Accumulated realized capital loss on investments -- net..... (47,005)
Accumulated distributions in excess of realized capital
gains on investments -- net............................... (53,492)
Unrealized appreciation on investments -- net............... 3,135,732
-----------
NET ASSETS.................................................. $24,013,847
===========
NET ASSET VALUE:
Class A -- Based on net assets of $24,013,847 and 1,996,009
shares outstanding........................................ $ 12.03
===========
</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 December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................... $ 63,831
Interest and discount earned................................ 28,081
----------
Total income................................................ 91,912
----------
EXPENSES:
Offering costs.............................................. $ 74,163
Investment advisory fees.................................... 50,626
Custodian fees.............................................. 22,105
Director's fees and expenses................................ 22,000
Professional fees........................................... 19,953
Printing and shareholder reports............................ 19,229
Transfer agent fees......................................... 6,747
Registration fees........................................... 5,751
Pricing fees................................................ 12
---------
Total expenses before reimbursement......................... 220,586
Reimbursement of expenses................................... (123,228)
---------
Total expenses after reimbursement.......................... 97,358
----------
Investment loss -- net...................................... (5,446)
----------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS -- NET:
Realized loss from investments -- net....................... (47,005)
Unrealized appreciation on investments -- net............... 3,135,732
----------
Net realized and unrealized gain on investments............. 3,088,727
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $3,083,281
==========
</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+ TO
INCREASE (DECREASE) IN NET ASSETS: DECEMBER 31, 1999
<S> <C>
- ---------------------------------------------------------------------------------
OPERATIONS:
Investment loss -- net...................................... $ (5,446)
Realized loss on investments -- net......................... (47,005)
Unrealized appreciation on investments -- net............... 3,135,732
-----------
Net increase in net assets resulting from operations........ 3,083,281
-----------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
In excess of investment income -- net:
Class A................................................... (69,125)
In excess of realized gain on investments -- net:
Class A................................................... (53,492)
-----------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (122,617)
-----------
CAPITAL SHARE TRANSACTIONS:
Increase in net assets derived from net capital share
transactions.............................................. 21,053,083
-----------
NET ASSETS:
Total increase in net assets................................ 24,013,747
Beginning of period......................................... 100
-----------
End of period............................................... $24,013,847
===========
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE FOLLOWING RATIOS HAVE BEEN DERIVED FROM INFORMATION CLASS A
PROVIDED IN THE FINANCIAL STATEMENTS. --------------------
FOR THE PERIOD
APRIL 30, 1999+ TO
INCREASE/DECREASE IN NET ASSET VALUE: DECEMBER 31, 1999
<S> <C>
- ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 10.00
-------
Investment loss -- net...................................... --++
Realized and unrealized gain on investments -- net.......... 2.10
-------
Total from investment operations............................ 2.10
-------
Less dividends and distributions:
In excess of investment income -- net..................... (.04)
In excess of realized gain on investments -- net.......... (.03)
-------
Total dividends and distributions........................... (.07)
-------
Net asset value, end of period.............................. $ 12.03
=======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 20.94%++
=======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.............................. 1.25%*
=======
Expenses.................................................... 2.83%*
=======
Investment loss -- net...................................... (.07%)*
=======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $24,014
=======
Portfolio turnover.......................................... 37.25%
=======
</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. 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 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
10
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
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 Fund's
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. Distributions in excess of net investment
income and net realized capital gains are due primarily to post-October losses.
(g) RECLASSIFICATION -- Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $74,571 have been reclassified between paid-in capital
in excess of par and accumulated net investment loss. These reclassifications
have no effect on net assets or net asset values per share.
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., Inc. ("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 .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
11
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Notes to Financial Statements (Concluded)
- --------------------------------------------------------------------------------
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.
For the period April 30, 1999 to December 31, 1999, Mercury International earned
fees of $50,626, all of which were waived. FAM also reimbursed the Fund for
additional expenses of $72,602.
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 December 31, 1999 were $24,220,384 and $4,202,544,
respectively.
Net realized losses for the period April 30, 1999 to December 31, 1999 and net
unrealized gains as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
LOSSES GAINS
<S> <C> <C>
- -------------------------------------------------------------------------------------
Long-term investments....................................... $(47,005) $3,135,732
-------- ----------
Total investments........................................... $(47,005) $3,135,732
======== ==========
</TABLE>
As of December 31, 1999, net unrealized appreciation for Federal income tax
purposes aggregated $3,062,898, of which $3,588,870 related to appreciated
securities and $525,972 related to depreciated securities. At December 31, 1999,
the aggregate cost of investments for Federal income tax purposes was
$20,841,447.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
DOLLAR
CLASS A SHARES FOR THE PERIOD APRIL 30, 1999+ TO DECEMBER 30, 1999 SHARES AMOUNT
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
Shares sold................................................... 2,113,257 $22,372,710
Shares issued to shareholders in reinvestment of dividends
and distributions........................................... 10,561 122,618
---------- -----------
Total issued.................................................. 2,123,818 22,495,328
Shares redeemed............................................... (127,819) (1,442,245)
---------- -----------
Net increase.................................................. 1,995,999 $21,053,083
========== ===========
</TABLE>
+ Prior to April 30, 1999 (commencement of operations), the Fund issued 10
shares to Mercury International for $100.
12
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Independent Auditors' Report
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
MERCURY V.I. U.S. LARGE CAP FUND OF
MERCURY ASSET MANAGEMENT V.I. FUNDS, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Mercury V.I. U.S. Large Cap Fund of Mercury
Asset Management V.I. Funds, Inc. as of December 31, 1999, the related
statements of operations, changes in net assets and the financial highlights for
the period April 30, 1999 (commencement of operations) to December 31, 1999.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at December 31, 1999 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Mercury V.I. U.S.
Large Cap Fund of Mercury Asset Management V.I. Funds, Inc. as of December 31,
1999, the results of its operations, the changes in its net assets, and the
financial highlights for the period April 30, 1999 (commencement of operations)
to December 31, 1999 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 14, 2000
13
<PAGE>
- --------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Officers and Directors
- --------------------------------------------------------------------------------
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
14
<PAGE>
This report is authorized for distribution only to current shareholders of the
Fund. 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
<TABLE>
<CAPTION>
<S> <C> <C>
[LOGO] Printed on post-consumer recycled paper MERCVI1--12/99
</TABLE>
