Exhibit 17(n)
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--------------------------------------------------------------------------------
XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND OF MERCURY V.I. FUNDS, INC.
SEMI-ANNUAL REPORT
JUNE 30, 2003
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Semi-Annual Report -- June 30, 2003
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
The Fund invests primarily in a diversified portfolio of equity securities of
large cap companies that Fund management selects from among those included in
the Xxxxxxx 1000 Growth Index. Our investment process attempts to add value
through both security selection and portfolio construction. Security selection
involves the use of quantitative selection criteria, including earnings
momentum, earnings surprise and valuation. These criteria are input into a
proprietary quantitative model and are subject to selective fundamental
overrides. Portfolio construction consists of an optimization process with risk
management controlling style, capitalization, sector and individual security
selection.
For the six months ended June 30, 2003, the Fund's Class A Shares had a total
return of +12.16%, underperforming the +13.09% return of the unmanaged
benchmark, the Xxxxxxx 1000 Growth Index. The principal theme to our modest
underperformance in the period was poor stock selection in the consumer
discretionary sector. Overall, for managers of equity portfolios, it was a
challenging six months. The volatile, downward trending markets in the first
quarter of 2003 reversed course toward the end of the second quarter and pulled
the major indexes into positive territory for the year-to-date period ended June
30, 2003. Notwithstanding the difficult political and economic environment, we
stuck to our discipline and kept our focus on investing in what we believe are
high-quality companies with good earnings delivery.
The largest significant positive contributor to performance was stock selection
in industrials. The main detractor to performance was stock selection in
consumer discretionary and information technology. At the individual security
level, the greatest positive contributors to performance were CheckFree Corp.,
Career Education Corporation, AdvancePCS, Macromedia, Inc. and UTStarcom Inc.
The most significant detractors to performance were Xxxxxxx River Laboratories
International, Inc., Coca-Cola Enterprises Inc. and BMC Software, Inc. The
portfolio's underweight in Intel Corporation also had a negative impact on
performance.
During the course of the period, we added to the cyclicality of the portfolio in
anticipation of economic recovery. Consequently, relative to the benchmark, we
significantly increased our weighting in information technology. The increase in
the Fund's technology exposure was primarily funded by reductions in consumer
staples and industrials. Our largest purchases included Amgen Inc., Oracle
Corporation, X.X. Xxxxxx, Inc., First Data Corporation and Pfizer Inc. Our
largest sales included Sprint Corp. (PCS Group), H & R Block, Inc., The Procter
& Xxxxxx Company and XXXXXXXX Xxxxxxxxxxxx. We believe we are positioned with
companies that can provide good earnings delivery that are selling at reasonable
prices, and we are encouraged by recent performance in the portfolio as a
reflection of our confidence. At June 30, 2003, our most sizeable overweights
were in consumer discretionary and health care, while our largest underweights
were in consumer staples and financials.
ECONOMIC ENVIRONMENT
As for the current market environment, there continues to be a powerful
tug-of-war between massive policy reflation and the lingering after effects of
the various shocks that have hit the economy during the past three years. The
sharp drop in interest rates and tax cuts have been successful in sustaining
consumer spending, but have not yet managed to trigger a rebound in business
spending. Corporate executives remain cautious, focused more on cost cutting and
balance sheet restructuring than on expanding. Nevertheless, we believe that
business confidence should gradually revive in the second half of the year,
aided by a continued improvement in profits.
Deflationary concerns may persist for several more months, but we believe that
the odds that the economy will fall into a Japanese-style slump are low. In our
opinion, it is far more likely that economic growth will surprise on the upside
in the next year as the latest tax cuts take effect and the manufacturing sector
responds to the competitive boost from a lower dollar. Recent gains in the
1
--------------------------------------------------------------------------------
XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Semi-Annual Report -- June 30, 2003
--------------------------------------------------------------------------------
stock market suggest that investors are already discounting an improvement in
economic activity and earnings. Nonetheless, the rally has further to go on a
cyclical basis given that monetary conditions will remain easy for an extended
period.
There is a tendency to presume that monetary policy has been ineffective
considering the economy's softness during the first half of 2003. Some have
argued that if the economy is still growing sluggishly after all the monetary
and fiscal stimulus, why should we expect any improvements in the months and
quarters ahead? The U.S. economy has endured an extraordinary barrage of
negative shocks in recent years, beginning with the bursting of one of the past
century's greatest asset bubbles. This was followed by the September 11, 2001
terrorist attacks, a damaging spate of corporate scandals, two wars and a spike
in energy prices. Yet, the economy suffered its mildest recession on record in
2000/2001. The economy's performance in the face of so many adverse events
reflects the effects of powerful monetary and fiscal stimulus as well as the
economy's underlying resilience.
The Federal Reserve Board's attempts to keep the economy away from deflation
have led to a new phase of monetary policy. Having pushed short-term interest
rates to 1%, we believe that the Federal Reserve Board is intent on making sure
that long-term interest rates stay down until the economy moves onto a more
solid foundation. The Federal Reserve Board is trying to convince investors that
they need not fear an early tightening in policy, even in the face of an
acceleration in economic growth. However, investors know that a sustained move
to above-trend economic growth will set the clock ticking for an eventual change
in Federal Reserve Board policy. Long-term U.S. Treasury bonds are overvalued at
current yields, and the market is displaying the characteristic aspects of a
bubble. The ten-year yield is unlikely to return to its recent low of 3.1%, but
a sustained major sell-off is unlikely until investors start to discount a
Federal Reserve Board tightening. At that point, there could be a rise in yields
as investors exit for the bond market. We believe that the Federal Reserve Board
will work hard to ensure that this does not happen for some time in order to
keep the housing market firm until business spending recovers.
The stimulative monetary environment is positive for the stock market. Equity
prices became over-bought following their 26% rise between mid-March and
mid-June 2003, and it is possible that they could correct further in the near
term. Nevertheless, the cyclical rally has further to run. The flow of money out
of short-term assets is bound to gather pace as investors lose patience with
near-zero returns. The cash mountain has likely peaked, but there is still $5
trillion sitting in money market funds and savings deposits. Some of this money
is bound to leak into stocks as greed overtakes fear as the principal emotion
guiding investors' asset allocation. Bouyant liquidity is not enough to instill
renewed confidence in stocks. There also needs to be enough of an improvement in
the earnings outlook to boost investor optimism. Fortunately, that is occurring
as Standard & Poor's 500 operating earnings rose by 15% during the past 12
months, and analysts' expectations of forward earnings are creeping higher.
Moreover, the quality of earnings is finally improving with negligible
write-offs in the first quarter.
MARKET OUTLOOK
We believe that buoyant liquidity conditions will be the driving force behind
market developments in the next several quarters. The Federal Reserve Board will
be keeping short-term interest rates far below equilibrium levels in order to
"guarantee" stronger economic growth. Investors will feel increasingly
comfortable in taking on more portfolio risk as the economy responds to policy
reflation. The equity market will be an obvious beneficiary, but money should
also continue to flow into corporate bonds and real estate.
IN CONCLUSION
On July 7, 2003, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby the Fund will reorganize, along with
2
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Semi-Annual Report -- June 30, 2003
--------------------------------------------------------------------------------
Focus Twenty V.I. Fund of Xxxxxxx Xxxxx Variable Series Funds, Inc., and become
Large Cap Growth V.I. Fund of Xxxxxxx Xxxxx Variable Series Funds, Inc. We
appreciate your investment in Xxxxxxx Xxxxx Large Cap Growth V.I. Fund.
Sincerely,
[/s/ Xxxxx X. Xxxxx] [/s/ Xxxxxx X. Xxxx, Xx.]
Xxxxx X. Xxxxx Xxxxxx X. Xxxx, Xx.
President and Director Senior Vice President and Portfolio Manager
July 29, 2003
3
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Performance Information as of June 30, 2003
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
----------------------------------------------------------------------
CLASS A SHARES % RETURN
----------------------------------------------------------------------
One Year Ended 6/30/03 -1.77%
----------------------------------------------------------------------
Inception (4/30/99) to 6/30/03 -5.44%
----------------------------------------------------------------------
--------------------------------------------------------------------------------
RECENT PERFORMANCE RESULTS
-------------------------------------------------------------------------------------------------------------
6-MONTH 12-MONTH SINCE INCEPTION
AS OF JUNE 30, 2003 TOTAL RETURN TOTAL RETURN TOTAL RETURN
-------------------------------------------------------------------------------------------------------------
Class A Shares* + 12.16% -1.77% -20.80%
-------------------------------------------------------------------------------------------------------------
Xxxxxxx 1000 Growth Index** + 13.09% + 2.94% -37.05%
-------------------------------------------------------------------------------------------------------------
* Average annual and 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.
** This unmanaged Index measures the performance of those Xxxxxxx 1000 companies
with higher price-to-book ratios and higher forecasted growth values. Since
inception total return is from 4/30/99.
Past results shown should not be considered a representation of future
performance.
4
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Schedule of Investments as of June 30, 2003
--------------------------------------------------------------------------------
SHARES PERCENT OF
INDUSTRY++ HELD COMMON STOCKS VALUE NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
AIR FREIGHT & LOGISTICS 15,200 X.X. Xxxxxxxx Worldwide, Inc. ..................... $ 540,512 0.9%
---------------------------------------------------------------------------------------------------------------------------
BEVERAGES 24,100 Coca-Cola Enterprises Inc. ........................ 437,415 0.8
19,300 +Constellation Brands, Inc. (Class A).............. 606,020 1.0
----------- -----
1,043,435 1.8
---------------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY 18,500 +Amgen Inc. ....................................... 1,229,140 2.1
10,300 +Genentech, Inc. .................................. 742,836 1.3
14,000 +Invitrogen Corporation............................ 537,180 1.0
----------- -----
2,509,156 4.4
---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & 10,300 +Apollo Group, Inc. (Class A)...................... 636,128 1.1
SUPPLIES 9,100 +Career Education Corporation...................... 622,622 1.1
26,400 Total System Services, Inc. ....................... 588,720 1.0
----------- -----
1,847,470 3.2
---------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS 22,200 +Cisco Systems, Inc. .............................. 370,518 0.6
EQUIPMENT 22,500 +Emulex Corporation................................ 512,325 0.9
34,300 +Juniper Networks, Inc. ........................... 424,291 0.7
17,000 +UTStarcom, Inc. .................................. 604,690 1.1
----------- -----
1,911,824 3.3
---------------------------------------------------------------------------------------------------------------------------
COMPUTERS & 40,700 +Dell Computer Corporation......................... 1,300,772 2.2
PERIPHERALS 9,800 +Lexmark International Group, Inc. ................ 693,546 1.2
23,100 +Storage Technology Corporation.................... 594,594 1.0
23,300 +VERITAS Software Corporation...................... 668,011 1.2
----------- -----
3,256,923 5.6
---------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION & 9,800 +Xxxxxx Engineering Group Inc. .................... 413,070 0.7
ENGINEERING
---------------------------------------------------------------------------------------------------------------------------
CONTAINERS & 11,900 Ball Corporation................................... 541,569 0.9
PACKAGING
---------------------------------------------------------------------------------------------------------------------------
ELECTRONIC 38,100 +Arrow Electronics, Inc. .......................... 580,644 1.0
EQUIPMENT & 42,900 PerkinElmer, Inc. ................................. 592,449 1.0
INSTRUMENTS 25,600 +Thermo Electron Corporation....................... 538,112 1.0
----------- -----
1,711,205 3.0
---------------------------------------------------------------------------------------------------------------------------
FOOD & STAPLES 123,700 +Rite Aid Corporation.............................. 550,465 0.9
RETAILING 11,500 Wal-Mart Stores, Inc. ............................. 617,205 1.1
----------- -----
1,167,670 2.0
---------------------------------------------------------------------------------------------------------------------------
HEALTH CARE 15,700 Xxxxxx, Xxxxxxxxx and Company...................... 609,945 1.1
EQUIPMENT & 54,000 +Cytyc Corporation................................. 568,080 1.0
SUPPLIES 15,500 +Xxxxxx Scientific International Inc. ............. 540,950 0.9
12,100 Guidant Corporation................................ 537,119 0.9
11,600 +St. Jude Medical, Inc. ........................... 667,000 1.2
10,500 +Varian Medical Systems, Inc. ..................... 604,485 1.0
----------- -----
3,527,579 6.1
---------------------------------------------------------------------------------------------------------------------------
HEALTH CARE 17,000 +AdvancePCS........................................ 649,910 1.1
PROVIDERS & SERVICES 22,300 +DaVita, Inc. ..................................... 597,194 1.0
8,700 +Express Scripts, Inc. ............................ 594,384 1.0
19,300 Omnicare, Inc. .................................... 652,147 1.2
15,400 +Oxford Health Plans, Inc. ........................ 647,262 1.2
8,300 +WellPoint Health Networks Inc. ................... 699,690 1.2
----------- -----
3,840,587 6.7
---------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & 19,200 Xxxxxxxx'x International, Inc. .................... 603,456 1.1
LEISURE 15,900 GTECH Holdings Corporation......................... 598,635 1.0
7,000 International Game Technology...................... 716,310 1.2
----------- -----
1,918,401 3.3
---------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES 20,100 X.X. Xxxxxx, Inc. ................................. 564,810 1.0
7,900 Lennar Corporation (Class A)....................... 564,850 1.0
1,500 +NVR, Inc. ........................................ 616,500 1.0
----------- -----
1,746,160 3.0
---------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 5,900 Church & Xxxxxx Co., Inc. ......................... 193,107 0.3
---------------------------------------------------------------------------------------------------------------------------
5
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Schedule of Investments as of June 30, 2003 (Continued)
--------------------------------------------------------------------------------
SHARES PERCENT OF
INDUSTRY++ HELD COMMON STOCKS VALUE NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
IT SERVICES 11,300 +Affiliated Computer Services, Inc. (Class A)...... $ 516,749 0.9%
22,500 +CheckFree Corp. .................................. 626,400 1.1
23,100 First Data Corporation............................. 957,264 1.7
48,100 +Xxxxxx Xxxxxxxxxxx................................ 590,668 1.0
----------- -----
2,691,081 4.7
---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL 80,000 General Electric Company........................... 2,294,400 4.0
CONGLOMERATES
---------------------------------------------------------------------------------------------------------------------------
INTERNET & CATALOG 18,700 +Xxxxxx.xxx, Inc. ................................. 682,363 1.2
RETAIL 6,900 +eBay Inc. ........................................ 718,842 1.2
----------- -----
1,401,205 2.4
---------------------------------------------------------------------------------------------------------------------------
MEDIA 14,600 +Getty Images, Inc. ............................... 602,980 1.1
---------------------------------------------------------------------------------------------------------------------------
MULTILINE RETAIL 35,500 Dollar General Corporation......................... 648,230 1.1
---------------------------------------------------------------------------------------------------------------------------
OIL & GAS 13,600 Pogo Producing Company............................. 581,400 1.0
---------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 12,800 +Forest Laboratories, Inc. ........................ 700,800 1.2
14,000 Xxxxxxx & Xxxxxxx.................................. 723,800 1.3
10,600 Medicis Pharmaceutical (Class A)................... 601,020 1.0
24,400 Merck & Co., Inc. ................................. 1,477,420 2.6
64,500 Pfizer Inc. ....................................... 2,202,675 3.8
29,000 +SICOR Inc. ....................................... 589,860 1.0
14,900 +Xxxxxx Pharmaceuticals, Inc. ..................... 601,513 1.1
----------- -----
6,897,088 12.0
---------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & 44,500 +Amkor Technology, Inc. ........................... 584,730 1.0
SEMICONDUCTOR 25,800 Intel Corporation.................................. 536,227 0.9
EQUIPMENT 30,700 +National Semiconductor Corporation................ 605,404 1.1
----------- -----
1,726,361 3.0
---------------------------------------------------------------------------------------------------------------------------
SOFTWARE 16,000 Adobe Systems Incorporated......................... 513,120 0.9
44,200 +BEA Systems, Inc. ................................ 480,012 0.9
9,800 Fair, Xxxxx and Company, Incorporated.............. 504,210 0.9
28,200 +Macromedia, Inc. ................................. 593,328 1.0
63,300 Microsoft Corporation.............................. 1,621,113 2.8
96,400 +Oracle Corporation................................ 1,158,728 2.0
10,300 +Synopsys, Inc. ................................... 637,055 1.1
----------- -----
5,507,566 9.6
---------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL 21,300 +Abercrombie & Fitch Co. (Class A)................. 605,133 1.1
26,700 +AutoNation, Inc. ................................. 419,724 0.7
31,900 Blockbuster Inc. (Class A)......................... 537,515 0.9
44,800 Foot Locker, Inc. ................................. 593,600 1.0
40,500 The Gap, Inc. ..................................... 759,780 1.3
16,800 The Home Depot, Inc. .............................. 556,416 1.0
30,000 +Staples, Inc. .................................... 550,500 1.0
----------- -----
4,022,668 7.0
---------------------------------------------------------------------------------------------------------------------------
TEXTILES, APPAREL & 11,900 +Coach, Inc. ...................................... 591,906 1.0
LUXURY GOODS 10,900 +Columbia Sportswear Company....................... 560,369 1.0
11,000 +The Timberland Company (Class A).................. 581,460 1.0
----------- -----
1,733,735 3.0
---------------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE 20,800 Xxxxxx Xxx......................................... 1,402,752 2.4
FINANCE 21,500 New York Community Bancorp, Inc. .................. 625,435 1.1
----------- -----
2,028,187 3.5
---------------------------------------------------------------------------------------------------------------------------
WIRELESS 80,900 +AT&T Wireless Services Inc. ...................... 664,189 1.2
TELECOMMUNICATION 41,400 +Nextel Communications, Inc. (Class A)............. 748,512 1.3
SERVICES
----------- -----
1,412,701 2.5
---------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST -- $52,125,283).......... 57,716,270 100.1
---------------------------------------------------------------------------------------------------------------------------
6
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Schedule of Investments as of June 30, 2003 (Concluded)
--------------------------------------------------------------------------------
BENEFICIAL PERCENT OF
INTEREST SHORT-TERM SECURITIES VALUE NET ASSETS
---------------------------------------------------------------------------------------------------------------------------
$ 190,915 Xxxxxxx Xxxxx Liquidity Series, LLC Cash Sweep
Series II(a)..................................... $ 190,915 0.3%
---------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST -- $190,915)................................. 190,915 0.3
---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST -- $52,316,198)............ 57,907,185 100.4
LIABILITIES IN EXCESS OF OTHER ASSETS.............. (258,588) (0.4)
----------- -----
NET ASSETS......................................... $57,648,597 100.0%
=========== =====
---------------------------------------------------------------------------------------------------------------------------
(a) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
-----------------------------------------------------------------------------------
NET INTEREST
AFFILIATE ACTIVITY INCOME
-----------------------------------------------------------------------------------
Xxxxxxx Xxxxx Liquidity Series, LLC Cash Sweep Series II.... $ 68,541 $1,627
-----------------------------------------------------------------------------------
+ Non-income producing security.
++ For Fund compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management. This
definition may not apply for purposes of this report, which may combine such
industry sub-classifications for reporting ease.
See Notes to Financial Statements.
7
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Statement of Assets and Liabilities as of June 30, 2003
--------------------------------------------------------------------------------
ASSETS:
Investments, at value (identified cost -- $52,316,198)...... $ 57,907,185
Cash........................................................ 4,475
Receivables:
Securities sold........................................... $ 1,501,895
Capital shares sold....................................... 30,860
Dividends................................................. 28,192
Interest.................................................. 493 1,561,440
------------
Prepaid expenses and other assets........................... 7,950
------------
Total assets.............................................. 59,481,050
------------
LIABILITIES:
Payables:
Securities purchased...................................... 1,712,361
Capital shares redeemed................................... 88,021
Investment adviser........................................ 30,956
Other affiliates.......................................... 1,115
------------
Total liabilities......................................... 1,832,453
------------
NET ASSETS:
Net assets.................................................. $ 57,648,597
============
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.0001 par value,
200,000,000 shares authorized+............................ $ 744
Paid-in capital in excess of par............................ 74,558,515
Accumulated investment loss -- net.......................... $ (102,525)
Accumulated realized capital losses on investments -- net... (22,399,124)
Unrealized appreciation on investments -- net............... 5,590,987
------------
Total accumulated losses -- net............................. (16,910,662)
------------
NET ASSETS.................................................. $ 57,648,597
============
NET ASSET VALUE:
Class A -- Based on net assets of $57,648,597 and 7,438,266
shares outstanding........................................ $ 7.75
============
+ The Fund is also authorized to issue 200,000,000 Class B Shares.
See Notes to Financial Statements.
8
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Statement of Operations for the Six Months Ended June 30, 2003
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends................................................... $ 146,418
Interest.................................................... 1,627
----------
Total income................................................ 148,045
----------
EXPENSES:
Investment advisory fees.................................... $155,731
Professional fees........................................... 31,523
Accounting services......................................... 17,078
Printing and shareholder reports............................ 15,309
Custodian fees.............................................. 13,350
Directors' fees and expenses................................ 8,921
Transfer agent fees......................................... 2,522
Registration fees........................................... 1,173
Pricing fees................................................ 439
Other....................................................... 4,524
--------
Total expenses.............................................. 250,570
----------
Investment loss -- net...................................... (102,525)
----------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS -- NET:
Realized loss from investments -- net....................... (389,673)
Change in unrealized appreciation/depreciation on
Investments -- net........................................ 6,340,043
----------
Total realized and unrealized gain on investments -- net.... 5,950,370
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $5,847,845
==========
See Notes to Financial Statements.
9
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Statements of Changes in Net Assets
--------------------------------------------------------------------------------
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: JUNE 30, 2003 DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------
OPERATIONS:
Investment loss -- net...................................... $ (102,525) $ (255,028)
Realized loss on investments -- net......................... (389,673) (7,568,199)
Change in unrealized appreciation/depreciation on
investments -- net........................................ 6,340,043 (4,683,967)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ 5,847,845 (12,507,194)
----------- ------------
CAPITAL SHARE TRANSACTIONS:
Increase in net assets derived from net capital share
transactions.............................................. 6,701,001 9,739,419
----------- ------------
NET ASSETS:
Total increase (decrease) in net assets..................... 12,548,846 (2,767,775)
Beginning of period......................................... 45,099,751 47,867,526
----------- ------------
End of period*.............................................. $57,648,597 $ 45,099,751
=========== ============
* Accumulated investment loss -- net........................ $ (102,525) --
=========== ============
See Notes to Financial Statements.
10
--------------------------------------------------------------------------------
XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Financial Highlights
--------------------------------------------------------------------------------
THE FOLLOWING RATIOS HAVE BEEN DERIVED FROM CLASS A
INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS. -----------------------------------------------------------------------
FOR THE YEAR
FOR THE SIX ENDED DECEMBER 31, FOR THE PERIOD
MONTHS ENDED ----------------------------------- APRIL 30,1999+
INCREASE (DECREASE) IN NET ASSET VALUE: JUNE 30, 2003 2002 2001 2000 TO DEC. 31, 1999
------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 6.91 $ 9.02 $ 9.95 $ 12.03 $ 10.00
------- ------- ------- ------- -------
Investment loss -- net............................... (.01)++++ (.04)++++ (.03)++++ --++ --++
Realized and unrealized gain (loss) on
investments -- net.................................. .85 (2.07) (.90) (1.93) 2.10
------- ------- ------- ------- -------
Total from investment operations..................... .84 (2.11) (.93) (1.93) 2.10
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net............................ -- -- --++ -- --
In excess of investment income -- net............... -- -- -- --++ (.04)
In excess of realized gain on investments -- net.... -- -- -- (.15) (.03)
------- ------- ------- ------- -------
Total dividends and distributions.................... -- -- --++ (.15) (.07)
------- ------- ------- ------- -------
Net asset value, end of period....................... $ 7.75 $ 6.91 $ 9.02 $ 9.95 $ 12.03
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 12.16%+++ (23.39%) (9.32%) (15.95%) 20.94%+++
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....................... 1.05%* 1.18% 1.15% 1.21% 1.25%*
======= ======= ======= ======= =======
Expenses............................................. 1.05%* 1.18% 1.15% 1.34% 2.83%*
======= ======= ======= ======= =======
Investment loss--net................................. (.43%)* (.55%) (.29%) (.02%) (.07%)*
======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $57,649 $45,100 $47,868 $51,305 $24,014
======= ======= ======= ======= =======
Portfolio turnover................................... 76.46% 133.57% 172.49% 75.08% 37.25%
======= ======= ======= ======= =======
* Annualized.
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Amount is less than $.01 per share.
+++ Aggregate total investment return.
++++ Based on average shares outstanding.
See Notes to Financial Statements.
11
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XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Notes to Financial Statements
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Xxxxxxx Xxxxx Large Cap Growth V.I. Fund (the "Fund") is a series of Mercury
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
conformity 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 multiple 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. Income, expenses (other than expenses attributable to a specific
class) and realized and unrealized gains and losses on investments are allocated
daily to each class based on its relative net assets. 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 or the Nasdaq National Market are valued at the last sale price or
official closing price on the exchange on which such securities are traded, 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 at the last
available ask price for short positions. Securities traded in the
over-the-counter market are valued at the last available bid price prior to the
time of valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under the
authority of the Board of Directors as the primary market. Securities that are
traded both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market. 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 available are valued at fair value as determined in
good faith by or under the direction of the Fund's Board of Directors.
Occasionally, events affecting the values of securities and other assets may
occur between the times at which valuations of such securities are determined
(that is, close of the market on which such securities trade) and the close of
business on the NYSE. If events (for example, company announcement, natural
disasters, market volatility) occur during such periods that are expected to
materially affect the value for such securities, those securities may be valued
at their fair market value as determined in good faith by the Fund's Board of
Directors or by the investment adviser using a pricing service and/or procedures
approved by the Board of Directors of the Fund.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movement and movements in the securities
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. 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.
12
--------------------------------------------------------------------------------
XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Notes to Financial Statements (Continued)
--------------------------------------------------------------------------------
- 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 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. The contract is marked-to-market daily and the
change in market value is recorded by the Fund as an unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value at the time it was opened and the value at the
time it was closed.
(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 U.S. 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). Realized gains and losses on security transactions are determined on the
identified cost basis. 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 is recognized on the accrual 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 wash sales and
post-October losses.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"), an indirect, wholly-owned subsidiary of Xxxxxxx Xxxxx
& Co., Inc. ("ML & Co.").
FAM 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.
For the six months ended June 30, 2003, the Fund reimbursed FAM $561 for certain
accounting services.
Certain officers and/or directors of the Corporation are officers and/or
directors of FAM, PSI, and/or ML & Co.
13
--------------------------------------------------------------------------------
XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Notes to Financial Statements (Continued)
--------------------------------------------------------------------------------
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2003 were $42,288,372 and $35,745,431, respectively.
Net realized losses for the six months ended June 30, 2003 and net unrealized
gains as of June 30, 2003 were as follows:
REALIZED UNREALIZED
LOSSES GAINS
-------------------------------------------------------------------------------------
Long-term investments....................................... $(389,673) $5,590,987
--------- ----------
Total investments........................................... $(389,673) $5,590,987
========= ==========
As of June 30, 2003, net unrealized appreciation for Federal income tax purposes
aggregated $4,612,389, of which $7,487,378 related to appreciated securities and
$2,874,989 related to depreciated securities. At June 30, 2003, the aggregate
cost of investments for Federal income tax purposes was $53,294,796.
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
DOLLAR
CLASS A SHARES FOR THE SIX MONTHS ENDED JUNE 30, 2003 SHARES AMOUNT
--------------------------------------------------------------------------------------
Shares sold................................................. 1,627,599 $11,728,852
Shares redeemed............................................. (715,065) (5,027,851)
--------- -----------
Net increase................................................ 912,534 $ 6,701,001
========= ===========
DOLLAR
CLASS A SHARES FOR THE YEAR ENDED DECEMBER 31, 2002 SHARES AMOUNT
---------------------------------------------------------------------------------------
Shares sold................................................. 2,237,991 $17,777,989
Shares redeemed............................................. (1,018,291) (8,038,570)
---------- -----------
Net increase................................................ 1,219,700 $ 9,739,419
========== ===========
5. SHORT-TERM BORROWINGS:
The Fund, along with certain other funds managed by FAM and its affiliates, is a
party to a $500,000,000 credit agreement with Bank One, N.A. and certain other
lenders. The Fund may borrow under the credit agreement to fund shareholder
redemptions and for other lawful purposes other than for leverage. The Fund may
borrow up to the maximum amount allowable under the Fund's current prospectus
and statement of additional information, subject to various other legal,
regulatory or contractual limits. The Fund pays a commitment fee of .09% per
annum based on the Fund's pro rata share of the unused portion of the credit
agreement. Amounts borrowed under the credit agreement bear interest at a rate
equal to, at each fund's election, the Federal Funds rate plus .50% or a base
rate as determined by Bank One, N.A. On November 29, 2002, the credit agreement
was renewed for one year under the same terms, except that the commitment was
reduced from $1,000,000,000 to $500,000,000. The Fund did not borrow under the
credit agreement during the six months ended June 30, 2003.
6. CAPITAL LOSS CARRYFORWARD:
On December 31, 2002, the Fund had a net capital loss carryforward of
$19,848,993, of which $11,984,238 expires in 2009 and $7,864,755 expires in
2010. This amount will be available to offset like amounts of any future taxable
gains.
14
--------------------------------------------------------------------------------
XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Notes to Financial Statements (Concluded)
--------------------------------------------------------------------------------
7. REORGANIZATION PLAN:
On July 7, 2003, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby the Fund will reorganize, along with Focus Twenty V.I. Fund of Xxxxxxx
Xxxxx Variable Series Funds, Inc., and become Large Cap Growth V.I. Fund of
Xxxxxxx Xxxxx Variable Series Funds, Inc.
15
--------------------------------------------------------------------------------
XXXXXXX XXXXX LARGE CAP GROWTH V.I. FUND
Officers and Directors
--------------------------------------------------------------------------------
XXXXX X. XXXXX-Director and President
XXXXX X. XXXX-Director
XXXXX X. XXXXX-Director
XXXX XXXXXXX-Director
XXXXXX X. XXXXXXXX-Director
X. XXXX XXXXXX-Director
XXXXX X. XXXXXXX-Director
XXXXXX X. XXXX, XX.-Senior Vice President
XXXXXX X. XXXXX-Vice President and Treasurer
XXXXXXX X. XXXXXXXXX-Secretary
CUSTODIAN
Brown Brothers Xxxxxxxx & Co.
00 Xxxxx Xxxxxx
Xxxxxx, XX 00000-0000
TRANSFER AGENT
Financial Data Services, Inc.
P.O. Box 44062
Jacksonville, Florida 32232-4062
000-000-0000
16
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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 0-000-XXX-XXXX (0-000-000-0000); (2)
on xxx.xxxxxxxxxxx.xx.xxx; and (3) on the Securities and Exchange Commission's
website at xxxx://xxx.xxx.xxx.
Xxxxxxx Xxxxx Large Cap Growth V.I. Fund of
Mercury V.I. Funds, Inc.
Box 9011
Princeton, N.J.
08543-9011
[RECYCLE LOGO] Printed on post-consumer recycled paper #MERCVI1--6/03
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