<PAGE>
--------------------------------------------------------------------------------
-----------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND OF
MERCURY ASSET MANAGEMENT V.I. FUNDS, INC.
SEMI-ANNUAL REPORT
JUNE 30, 2000
<PAGE>
--------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Semi-Annual Report
June 30, 2000
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide you with this semi-annual report for the Mercury V.I.
US Large Cap Fund. The Fund's main goal is long-term capital growth through
investments primarily in a diversified portfolio of equity securities of large
cap companies located in the United States, which are undervalued or have good
prospects for earnings growth. In this report, we provide information on the
Fund's performance, discuss our investment strategies and highlight some of the
Fund's holdings.
INVESTMENT ENVIRONMENT
The strong growth in the US equity markets witnessed in 1999 slowed in the six
months ended June 30, 2000, with the broader unmanaged Standard & Poor's 500
(S&P 500) Index ending down 1.0% for the six-month period, compared to 7.0% for
the previous six months. The market continued its bullish run through the end of
1999 and into the first two months of 2000, but faltered as the first quarter of
2000 drew to a close. This happened because of the prospect of further interest
rate increases, spurred on by Federal Reserve Board Chairman Alan Greenspan's
comments on economic overheating and further monetary tightening in the face of
continued robust gross domestic product performance. As a result, high-growth
stocks, and the implicitly high valuations that accompanied them, came under
close scrutiny. Stocks with short trading histories and prospects of
profitability were severely pressured, owing to harsher-than-anticipated
valuation compression. Consequently, there was a severe and rapid move from "new
economy" stocks into old economy names, which caught Wall Street by surprise.
The highly rated business-to-business companies such as TIBCO Software Inc. and
Commerce One, Inc. exhibited particular weakness and even the larger sector
stalwarts such as Cisco Systems, Inc. and EMC Corporation were also subjected to
investor apathy.
The Procter & Gamble Company was also negatively affected by the increasing
evidence of a harsh commercial environment, issuing its second profits warning
of the year. Dial Corporation, another consumer staple company, also suffered
slowing sales growth. We believe this is symptomatic of the general malaise in
the broader retail market. Moreover, Microsoft Corporation suffered a poor
quarter of performance, caught in the throes of its ongoing battle with the US
Department of Justice over alleged anti-competitive practices.
The onset of the earnings season during the period highlighted value as the
corporate bottom line resurfaced for scrutiny. The season started with
disappointing results from technology heavyweights such as Motorola Inc., which
failed to impress global analysts in relation to its Scandinavian peers Nokia
Oyj and Telefonaktiebolaget LM Ericsson. However, Oracle Corporation and Sun
Microsystems, Inc. both beat consensus earnings estimates by comfortable margins
of $0.3 in each case. What these results show is that large-capitalization
technology companies have possessed a substantial ability to deliver on growth
promises while adding real value and real profit.
PORTFOLIO ACTIVITIES
During the six months ended June 30, 2000, the Fund's Class A Shares had a total
return of -3.91%, underperforming the S&P 500 Index by -0.42%. Since the Fund
commenced operations on April 30, 1999, we have seen a steady inflow of cash,
and the Fund had net assets of more than $44.7 million at June 30, 2000, with
the Fund fully invested with common stocks comprising 97.1% of the Fund's net
assets.
There were two distinct periods of very different market psychology during the
six months ended June 30, 2000. The Fund's overweighted position in
telecommunications and technology, which began as solid performers in the new
millennium, suffered during the NASDAQ correction in March and April. The style
shift toward old economy stocks and out of technology was pronounced during
these months and caused the Fund to underperform, primarily during April and
May. Although we retain a bias toward the quality growth companies in technology
and telecommunications that we had favored throughout 1999 (such as EMC
Corporation, Nortel Networks Corporation and Texas Instruments Incorporated), we
moved the portfolio into a slightly more defensive mode during April and May. In
1
<PAGE>
--------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Semi-Annual Report
June 30, 2000 (Concluded)
--------------------------------------------------------------------------------
addition, we added some old economy stocks (Anheuser-Busch Companies, Inc.,
Schlumberger Limited, Halliburton Company and Boeing Company) to provide
diversification to the portfolio at a time when markets are experiencing
unprecedented volatility. This portfolio theme is likely to persist until we
believe that the market gains a clearer direction and we are more comfortable
with the performance of the US economy under the current phase of monetary
policy tightening.
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,
/s/ Jeffrey Peek
Jeffrey Peek
President
/s/ Michael Morony
Michael Morony
Portfolio Manager
August 8, 2000
2
<PAGE>
--------------------------------------------------------------------------------
MERCURY INTERNATIONAL V.I. U.S. LARGE CAP FUND
Performance Information as of June 30, 2000
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES % RETURN
<S> <C>
--------------------------------------------------------------------------
Year Ended 6/30/00 +10.37%
--------------------------------------------------------------------------
Inception (4/30/99) to 6/30/00 +13.74%
--------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
RECENT PERFORMANCE RESULTS*
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MONTH 12 MONTH SINCE INCEPTION
AS OF JUNE 30, 2000 TOTAL RETURN TOTAL RETURN TOTAL RETURN
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
Class A Shares -3.91% +10.37% +16.22%
-------------------------------------------------------------------------------------------------------
</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.
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, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE 10,530 The Boeing Company $ 440,286 1.0%
19,080 United Technologies Corporation 1,123,335 2.5
----------- -----
1,563,621 3.5
-----------------------------------------------------------------------------------------------------------------------
AUTOMOBILES 10,680 Ford Motor Company 459,240 1.0
1,342 +Visteon Corporation 16,272 0.0
----------- -----
475,512 1.0
-----------------------------------------------------------------------------------------------------------------------
BANKS 14,650 The Chase Manhattan Corporation 674,816 1.5
14,700 FleetBoston Financial Corporation 499,800 1.1
----------- -----
1,174,616 2.6
-----------------------------------------------------------------------------------------------------------------------
BEVERAGES 5,940 Anheuser-Busch Companies, Inc. 443,644 1.0
3,570 The Coca-Cola Company 205,052 0.5
30,640 PepsiCo, Inc. 1,361,565 3.0
----------- -----
2,010,261 4.5
-----------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY 6,460 +Amgen Inc. 453,815 1.0
-----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 23,660 +Cisco Systems, Inc. 1,503,889 3.4
EQUIPMENT 2,810 +Efficient Networks, Inc. 206,711 0.5
5,000 +JDS Uniphase Corporation 599,063 1.3
15,630 Nortel Networks Corporation 1,066,747 2.4
3,330 +VeriSign, Inc. 587,121 1.3
----------- -----
3,963,531 8.9
-----------------------------------------------------------------------------------------------------------------------
COMPUTERS & 14,800 +Dell Computer Corporation 729,825 1.6
PERIPHERALS 9,900 +EMC Corporation 761,681 1.7
7,190 +Sun Microsystems, Inc. 653,841 1.5
----------- -----
2,145,347 4.8
-----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED 14,010 American Express Company 730,271 1.6
FINANCIALS 20,400 Citigroup Inc. 1,229,100 2.7
----------- -----
1,959,371 4.3
-----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED 11,250 AT&T Corp. 355,781 0.8
TELECOMMUNICATION 3,900 +Amdocs Limited 299,325 0.7
SERVICES 20,950 Bell Atlantic Corporation 1,064,522 2.4
5,520 +Level 3 Communications, Inc. 485,415 1.1
8,810 SBC Communications Inc. 381,032 0.9
7,920 Sprint Corp. (FON Group) 403,920 0.9
----------- -----
2,989,995 6.8
-----------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & 10,700 Halliburton Company 504,906 1.1
SERVICE 6,360 Schlumberger Limited 474,615 1.1
----------- -----
979,521 2.2
-----------------------------------------------------------------------------------------------------------------------
FOOD & DRUG 6,620 +Safeway Inc. 298,727 0.7
RETAILING 32,720 Walgreen Co. 1,053,175 2.4
----------- -----
1,351,902 3.1
-----------------------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & 15,110 Medtronic, Inc. 752,667 1.7
SUPPLIES
-----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 5,840 The Procter & Gamble Company 334,340 0.7
-----------------------------------------------------------------------------------------------------------------------
IT CONSULTING & 6,300 Electronic Data Systems Corporation 259,875 0.6
SERVICES
-----------------------------------------------------------------------------------------------------------------------
INDUSTRIAL 53,000 General Electric Company 2,809,000 6.3
CONGLOMERATES
-----------------------------------------------------------------------------------------------------------------------
INSURANCE 12,300 American International Group, Inc. 1,445,250 3.2
-----------------------------------------------------------------------------------------------------------------------
INTERNET SOFTWARE & 16,050 +America Online, Inc. 846,638 1.9
SERVICES 6,150 +Commerce One, Inc. 280,209 0.6
3,100 +TIBCO Software Inc. 332,475 0.7
----------- -----
</TABLE>
4
<PAGE>
--------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Schedule of Investments as of June 30, 2000 (Concluded)
--------------------------------------------------------------------------------
<TABLE>
-----------------------------------------------------------------------------------------------------------------------
1,459,322 3.2
<CAPTION>
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------
MULTILINE RETAIL 12,300 +Kohl's Corporation $ 684,187 1.5%
20,850 Wal-Mart Stores, Inc. 1,201,481 2.7
----------- -----
1,885,668 4.2
-----------------------------------------------------------------------------------------------------------------------
OIL & GAS 8,230 Chevron Corporation 698,007 1.6
21,456 Exxon Mobil Corporation 1,684,296 3.8
12,510 Texaco Inc. 666,158 1.5
----------- -----
3,048,461 6.9
-----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST 12,300 International Paper Company 366,694 0.8
PRODUCTS 11,470 Weyerhaeuser Company 493,210 1.1
----------- -----
859,904 1.9
-----------------------------------------------------------------------------------------------------------------------
PERSONAL PRODUCTS 8,960 The Estee Lauder Companies Inc. (Class A) 442,960 1.0
-----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 16,620 Bristol-Myers Squibb Company 968,115 2.2
10,530 Merck & Co., Inc. 806,861 1.8
36,418 Pfizer Inc. 1,748,040 3.9
10,965 Pharmacia Corporation 566,753 1.3
----------- -----
4,089,769 9.2
-----------------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR 3,230 +Applied Materials, Inc. 292,719 0.7
EQUIPMENT & PRODUCTS 11,620 Intel Corporation 1,552,723 3.5
13,440 Texas Instruments Incorporated 923,160 2.1
----------- -----
2,768,602 6.3
-----------------------------------------------------------------------------------------------------------------------
SOFTWARE 7,510 +Citrix Systems, Inc. 142,221 0.3
21,260 +Microsoft Corporation 1,699,471 3.8
7,710 +Oracle Corporation 647,640 1.4
----------- -----
2,489,332 5.5
-----------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL 6,435 The Home Depot, Inc. 321,348 0.7
-----------------------------------------------------------------------------------------------------------------------
WIRELESS 10,530 +Nextel Communications, Inc. (Class A) 644,304 1.4
TELECOMMUNICATION 12,090 +Sprint Corp. (PCS Group) 719,355 1.6
SERVICES 1,363,659 3.0
-----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST--$41,584,875) 43,397,649 97.1
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT SHORT-TERM SECURITIES
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER* $1,070,000 General Motors Acceptance Corp.,
7.13% due 7/03/2000 1,069,576 2.4
-----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES (COST--$1,069,576) 1,069,576 2.4
-----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$42,654,451)................ 44,467,225 99.5
TIME DEPOSITS**...................................... 2,000,000 4.5
LIABILITIES IN EXCESS OF OTHER ASSETS................ (1,762,777) (4.0)
----------- -----
NET ASSETS........................................... $44,704,448 100.0%
=========== =====
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Non-income producing security.
* 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.
** Time deposits bear interest at 6.937% and mature on July 3, 2000.
See Notes to Financial Statements.
5
<PAGE>
--------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Statement of Assets and Liabilities as of June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost -- $42,654,451)...... $44,467,225
Time deposits............................................... 2,000,000
Receivables:
Capital shares sold....................................... $ 96,507
Dividends................................................. 13,350
Interest.................................................. 385 110,242
----------
Prepaid expense............................................. 63,587
-----------
Total assets.............................................. 46,641,054
-----------
LIABILITIES:
Payables:
Securities purchased...................................... 1,830,769
Investment adviser........................................ 18,446
Capital shares redeemed................................... 127 1,849,342
----------
Accrued expenses and other liabilities...................... 87,264
-----------
Total liabilities......................................... 1,936,606
-----------
NET ASSETS:
Net assets.................................................. $44,704,448
===========
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.0001 par value,
200,000,000 shares authorized+............................ $ 387
Paid-in capital in excess of par............................ 42,721,319
Accumulated investment loss on investments -- net........... (13,723)
Undistributed realized capital gain on investments -- net... 183,691
Unrealized appreciation on investments -- net............... 1,812,774
-----------
NET ASSETS.................................................. $44,704,448
===========
NET ASSET VALUE:
Class A -- Based on net assets of $44,704,448 and 3,866,591
shares outstanding........................................ $ 11.56
===========
</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 Six Months Ended June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................... $ 146,892
Interest and discount earned................................ 52,100
-----------
Total income................................................ 198,992
-----------
EXPENSES:
Investment advisory fees.................................... $110,612
Accounting services......................................... 39,246
Custodian fees.............................................. 28,186
Professional fees........................................... 26,333
Offering costs.............................................. 19,173
Printing and shareholder reports............................ 14,755
Director's fees and expenses................................ 13,574
Transfer agent fees......................................... 4,802
Registration fees........................................... 3,026
Pricing fees................................................ 300
Other....................................................... 2,011
--------
Total expenses before reimbursement......................... 262,018
Reimbursement of expenses................................... (49,303)
--------
Total expenses after reimbursement.......................... 212,715
-----------
Investment loss -- net...................................... (13,723)
-----------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS -- NET:
Realized gain from investments -- net....................... 284,188
Change in unrealized appreciation on investments -- net..... (1,322,958)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(1,052,493)
===========
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
--------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Statements of Changes in Net Assets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED APRIL 30, 1999+
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2000 TO DECEMBER 31, 1999
<S> <C> <C>
-----------------------------------------------------------------------------------------------------
OPERATIONS:
Investment loss -- net...................................... $ (13,723) $ (5,446)
Realized gain (loss) on investments -- net.................. 284,188 (47,005)
Change in unrealized appreciation on investments -- net..... (1,322,958) 3,135,732
----------- -----------
Net increase (decrease) in net assets resulting from
operations................................................ (1,052,493) 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.............................................. 21,743,094 21,053,083
----------- -----------
NET ASSETS:
Total increase in net assets................................ 20,690,601 24,013,747
Beginning of period......................................... 24,013,847 100
----------- -----------
End of period............................................... $44,704,448 $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>
CLASS A
THE FOLLOWING RATIOS HAVE BEEN DERIVED FROM INFORMATION --------------------------------------
PROVIDED IN THE FINANCIAL STATEMENTS. FOR THE SIX FOR THE PERIOD
MONTHS ENDED APRIL 30,1999+
INCREASE/DECREASE IN NET ASSET VALUE: JUNE 30, 2000 TO DECEMBER 31, 1999
<S> <C> <C>
----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 12.03 $ 10.00
------- -------
Investment loss -- net...................................... --++ --++
Realized and unrealized gain (loss) on investments -- net... (.47) 2.10
------- -------
Total from investment operations............................ (.47) 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.............................. $ 11.56 $ 12.03
======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... (3.91%)^ 20.94%^
======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.............................. 1.25%* 1.25%*
======= =======
Expenses.................................................... 1.54%* 2.83%*
======= =======
Investment loss -- net...................................... (.08%)* (.07%)*
======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $44,704 $24,014
======= =======
Portfolio turnover.......................................... 35.03% 37.25%
======= =======
</TABLE>
* Annualized.
** Total investment returns exclude insurance-related fees and expenses. The
Fund's Investment Adviser voluntarily waived a portion of its management fee.
Without such waiver, the Fund's performance would have been lower.
+ 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 accounting principles generally accepted in the United States of
America, 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. 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 increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Mercury Asset
Management International Limited ("Mercury International"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co.").
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 Fund Asset Management, L.P. ("FAM"), another
indirect wholly-owned subsidiary of ML & Co. 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.
11
<PAGE>
--------------------------------------------------------------------------------
MERCURY V.I. U.S. LARGE CAP FUND
Notes to Financial Statements (Concluded)
--------------------------------------------------------------------------------
For the six months ended June 30, 2000, Mercury International earned fees of
$110,612, of which $49,303 were voluntarily waived.
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 six
months ended June 30, 2000 were $32,936,464 and $11,606,613, respectively.
Net realized gains for the six months ended June 30, 2000 and net unrealized
gains as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
REALIZED UNREALIZED
GAINS GAINS
<S> <C> <C>
-------------------------------------------------------------------------------------
Long-term investments....................................... $284,188 $1,812,774
-------- ----------
Total investments........................................... $284,188 $1,812,774
======== ==========
</TABLE>
As of June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $1,812,774, of which $4,649,880 related to appreciated securities and
$2,837,106 related to depreciated securities. At June 30, 2000, the aggregate
cost of investments for Federal income tax purposes was $42,654,451.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
DOLLAR
CLASS A SHARES FOR THE SIX MONTHS ENDED JUNE 30, 2000 SHARES AMOUNT
<S> <C> <C>
-------------------------------------------------------------------------------------
Shares sold............................................... 2,038,813 $23,701,088
Shares redeemed........................................... (168,231) (1,957,994)
--------- -----------
Net increase.............................................. 1,870,582 $21,743,094
========= ===========
</TABLE>
<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
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
13
<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
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<CAPTION>
<S> <C> <C>
[LOGO] Printed on post-consumer recycled paper MERCVI1--6/00
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