ANNUAL REPORT
DECEMBER 31, 2000
Mercury HW
International
Value VIP
Portfolio
OF MERCURY HW
VARIABLE TRUST
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
The Fund invests significantly in foreign stocks. Investment in
foreign securities involves special risks including fluctuating
foreign exchange rates, foreign government regulations, differing
degrees of liquidity, and the possibility of substantial volatility
due to adverse political, economic or other developments.
Mercury HW International Value VIP Portfolio of
Mercury HW Variable Trust
725 South Figueroa Street, Suite 4000
Los Angeles, CA
90017-5400
Printed on post-consumer recycled paper
PORTFOLIO INFORMATION
WORLDWIDE INVESTMENTS AS OF DECEMBER 31, 2000
Ten Largest Percent of
Equity Holdings Net Assets
Nintendo Company Ltd. 3.0%
Koninklijke (Royal) Philips
Electronics NV 2.7
Aventis SA 2.6
Manulife Financial Corporation 2.5
British Aerospace PLC 2.4
Total Fina SA `B' 2.3
Akzo Nobel NV 2.3
Unilever PLC 2.2
Repsol-YPF, SA 2.2
BAA PLC 2.2
Five Largest Percent of
Industries Net Assets
Telecommunications 11.8%
Regional Banks 9.2
Insurance--Multi-Line 6.5
Electric--Utilities 6.0
Leisure/Toys 4.2
December 31, 2000
Mercury HW International Value VIP Portfolio
DEAR SHAREHOLDER
Effective October 6, 2000, International Value VIP Portfolio, a fund
of Hotchkis and Wiley Variable Trust, became Mercury HW
International Value VIP Portfolio, a fund of Mercury HW Variable
Trust. Although the Fund's name has changed, its investment
objective remains the same: to seek current income and long-term
growth of income, accompanied by growth of capital.
We are pleased to present to you this annual report of Mercury HW
International Value VIP Portfolio for the fiscal year ended December
31, 2000.
Fiscal Year in Review
For the year ended December 31, 2000, Mercury HW International Value
VIP Portfolio had a total return of +2.85%, outperforming the
unmanaged benchmark Morgan Stanley Capital International Europe,
Australia, Far East (MSCI EAFE) Index, which had a total return of -
13.96%. (Fund results shown do not reflect sales charges and would
be lower if sales charges were included. Complete performance
information can be found on pages 5 - 7 of this report to
shareholders.) We were able to provide a positive return and the
Fund experienced significantly lower volatility relative to the
Index, which suffered from heavy losses in the technology and
telecommunications sectors. In particular, the Index was severely
punished as global concerns mounted over the sustainability of
growth rates in the more growth-oriented sectors. We avoided the
biggest losers in the MSCI EAFE universe this year, including such
Index heavyweights as Nippon Telegraph and Telephone Corp., Deutsche
Telecom AG, Vodafone PLC, France Telecom, BP Amoco PLC and Sony
Corp., not to mention spectacular disasters such as Softbank
Corporation, which was down 89%. We mention Softbank in particular
because the technology bubble started to deflate in Japan about a
month before the NASDAQ Composite Index reached its zenith in the
United States. Simultaneously, we also witnessed the basic industry,
automobile and material sectors lose investor appeal, with stock
prices declining to levels that were last seen in the height of the
Asian crisis in 1998.
After some anxious moments in the earlier part of the year, while
the trend following the momentum style of investing was in vogue,
the last six months have been most rewarding for the truly defensive
stocks, such as utilities, pharmaceuticals and consumer staples. We
were rewarded for the strategy of owning stocks with tangible
valuations and current yields that provide the security of returns
from dividends, even in the face of difficult market conditions. It
was no surprise when our emphasis on high-quality, undervalued
stocks gave rise to unmistakably defensive performance. Winners in
the Fund came from industries such as insurance, food and beverage,
transportation and utilities. Our lack of exposure to the software
and services sector proved beneficial during this period as the
valuation dispersion between these highly overrated stocks and the
broader market started to shrink. We were also rewarded for our
comparative underexposure to Japan (at about half the MSCI EAFE
Index weight) during a year in which the MSCI Japan (in US dollars)
was down 34.8%.
December 31, 2000
Mercury HW International Value VIP Portfolio
We expect some improvement in investor sentiment in 2001. Much of
this will stem from expectations of more accommodative monetary
policy in the Western world--a factor the US Federal Reserve Board
has already set in motion. However, until valuations for tech and
the more volatile telecom stocks (such as mobile and telecom
infrastructure equipment) decline to levels that better represent
their respective earnings prospects, these segments of the markets
will likely remain volatile. We believe defensive stocks that have
demonstrable earnings resilience should continue to lead the
markets. This appears especially true in the present environment
where economic growth rates have peaked and interest rates have
moved up from their lows of this cycle. Stubbornly high-energy
prices are starting to affect core consumer price index figures. In
short, we do not foresee a technology-led rally in 2001. Therefore,
in a more rational, fundamental valuation-driven environment, we
believe our disciplined style of investing will benefit the Fund. In
addition, we believe the defensive characteristics of the Fund may
provide a degree of protection from any equity market volatility.
In Conclusion
We appreciate your continued support, and we look forward to serving
your investment needs in the months and years ahead.
Sincerely,
(Nancy D. Celick)
Nancy D. Celick
President
(Sarah Ketterer)
Sarah Ketterer
Portfolio Manager
(Harry Hartford)
Harry Hartford
Portfolio Manager
(James Doyle)
James Doyle
Portfolio Manager
February 8, 2001
December 31, 2000
Mercury HW International Value VIP Portfolio
FUND PERFORMANCE DATA
ABOUT FUND PERFORMANCE
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Recent Performance
Results" and "Average Annual Total Return" tables 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. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
RECENT PERFORMANCE RESULTS*
6-Month 12-Month Since Inception
As of December 31, 2000 Total Return Total Return Total Return
Mercury HW International Value
VIP Portfolio -0.43% +2.85% +19.69%
*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 6/10/98.
December 31, 2000
Mercury HW International Value VIP Portfolio
FUND PERFORMANCE DATA (CONTINUED)
TOTAL RETURN BASED ON A $10,000 INVESTMENT
A line graph comparing the growth of a $10,000
investment in Mercury HW International Value VIP
Portfolio*++ to the same investment in the Morgan
Stanley Capital International (MSCI) EAFE Index++++.
Beginning and ending values are:
6/10/98** 12/00
Mercury HW International $10,000 $11,969
Value VIP Portfolio
Morgan Stanley Capital International $10,000 $11,306
(MSCI) EAFE Index++++.
*Assuming transaction costs and other operating expenses, including
advisory fees. Does not include insurance-related fees and expenses.
**Commencement of operations.
++Mercury HW International Value VIP Portfolio seeks current income
and long-term growth of income, accompanied by growth of capital.
The Fund invests in international stocks.
++++The Morgan Stanley Capital International (MSCI) EAFE Index is an
arithmetical average weighted by market value of the performance of
over 1,000 non-US companies representing 20 stock markets in Europe,
Australia, New Zealand and the Far East.
Past performance is not indicative of future results.
December 31, 2000
Mercury HW International Value VIP Portfolio
FUND PERFORMANCE DATA (CONCLUDED)
AVERAGE ANNUAL TOTAL RETURN
% Return
One Year Ended 12/31/00 +2.85%
Since Inception (6/10/98) through 12/31/00 +7.27
Past results shown should not be considered a representation of
future performance.
December 31, 2000
Mercury HW International Value VIP Portfolio
SCHEDULE OF INVESTMENTS
In US Dollars
Shares
Industry Investments Held Value
COMMON STOCKS--99.4%
Australia--2.9%
Insurance-- QBE Insurance Group Limited 804,361 $ 4,420,666
Multi-Line--1.3%
Regional Banks--1.6% Australia and New Zealand Banking
Group Ltd. 728,030 5,817,663
Total Common Stocks in Australia 10,238,329
Austria--0.3%
Steel--0.3% Boehler-Uddeholm AG 37,670 1,220,209
Total Common Stocks in Austria 1,220,209
Canada--4.2%
Insurance--Life--2.5% Manulife Financial Corporation 282,045 8,816,253
Telecommunications--1.7% BCE Inc. 209,650 6,043,838
Total Common Stocks in Canada 14,860,091
Finland--1.1%
Paper--1.1% UPM-Kymmene Oyj 114,170 3,917,948
Total Common Stocks in Finland 3,917,948
France--9.8%
Airlines--1.4% Groupe Air France 209,370 4,914,437
Consumer/Office Societe BIC SA 138,752 5,457,188
Products--1.5%
Oil--International--2.3% Total Fina SA 'B' 55,657 8,277,407
Pharmaceuticals--2.6% Aventis SA 105,538 9,264,880
Regional Banks--2.0% Banque Nationale de Paris (BNP) 79,741 7,000,235
Total Common Stocks in France 34,914,147
December 31, 2000
Mercury HW International Value VIP Portfolio
SCHEDULE OF INVESTMENTS (CONTINUED)
In US Dollars
Shares
Industry Investments Held Value
COMMON STOCKS (continued)
Germany--3.1%
Banks--1.4% DePfa Deutsche Pfandbriefbank AG 68,704 $ 4,989,553
Electric-- Veba AG 97,111 5,908,303
Utilities--1.7%
Total Common Stocks in Germany 10,897,856
Hong Kong--6.6%
Electric-- Hongkong Electric Holdings Limited 2,000,000 7,384,710
Utilities--3.8% Shandong International Power
Development Company Limited 'H' 38,380,000 6,052,308
-----------
13,437,018
Publishing--0.8% South China Morning Post Holdings
Ltd. 3,994,000 2,944,333
Real Estate--2.0% Henderson Land Development
Company Limited 1,430,000 7,278,427
Total Common Stocks in Hong Kong 23,659,778
Ireland--3.9%
Food Manufacturing--1.0% Greencore Group PLC 1,341,520 3,526,749
Paper--1.2% Jefferson Smurfit Group PLC 2,263,892 4,463,693
Regional Banks--1.7% Allied Irish Banks PLC 518,242 6,009,231
Total Common Stocks in Ireland 13,999,673
Italy--1.4%
Telecommunications--1.4% Telecom Italia SpA 444,600 4,917,384
Total Common Stocks in Italy 4,917,384
December 31, 2000
Mercury HW International Value VIP Portfolio
SCHEDULE OF INVESTMENTS (CONTINUED)
In US Dollars
Shares
Industry Investments Held Value
COMMON STOCKS (continued)
Japan--11.7%
Finance--1.7% Takefuji Corporation 96,500 $ 6,084,063
Leisure/Toys--4.2% Namco Ltd. 230,800 4,244,133
Nintendo Company Ltd. 67,200 10,586,060
14,830,193
Office Equipment Canon, Inc. 206,000 7,215,412
& Supplies--2.0%
Retail-- Circle K Japan Co. Ltd. 80,200 2,823,152
Convenience Store--0.8%
Small Loans & Finance-- Promise Co., Ltd. 55,400 3,929,422
3.0% Sanyo Shinpan Finance Co., Ltd. 109,700 3,198,783
Shohkoh Fund & Co., Ltd. 33,910 3,503,835
10,632,040
Total Common Stocks in Japan 41,584,860
Netherlands--9.0%
Chemicals/ Akzo Nobel NV 152,270 8,177,673
Pharmaceuticals--2.3%
Electronics--2.7% Koninklijke (Royal) Philips
Electronics NV 260,619 9,548,006
Insurance-- ING Groep NV 87,820 7,015,203
Multi-Line--2.0%
Regional Banks--1.0% ABN AMRO Holding NV 166,070 3,776,458
Telecommunications--1.0% KPN NV 310,845 3,578,110
Total Common Stocks in the
Netherlands 32,095,450
New Zealand--1.6%
Telecommunications--1.6% Telecom Corporation of New Zealand
Limited 2,653,029 5,635,034
Total Common Stocks in New Zealand 5,635,034
December 31, 2000
Mercury HW International Value VIP Portfolio
SCHEDULE OF INVESTMENTS (CONTINUED)
In US Dollars
Shares
Industry Investments Held Value
COMMON STOCKS (continued)
Norway--1.8%
Engineering & ++Kvaerner ASA 'A' 258,289 $ 1,830,591
Construction--0.5%
Telecommunications--1.3% Telenor A/S 1,048,700 4,566,545
Total Common Stocks in Norway 6,397,136
Portugal--2.1%
Electric-- Electricidade de Portugal, SA (EDP) 529,100 1,748,637
Utilities--0.5%
Telecommunications-- Portugal Telecom SA (Registered
1.6% Shares) 613,914 5,614,174
Total Common Stocks in Portugal 7,362,811
Singapore--3.2%
Computer Software & Creative Technology Limited 442,338 4,893,364
Services--1.4%
Money Center Banks--1.8% United Overseas Bank Ltd. 887,928 6,656,900
Total Common Stocks in Singapore 11,550,264
Spain--4.4%
Hotels--0.2% NH Hoteles, SA 60,700 746,585
Oil--Integrated--2.2% Repsol-YPF, SA 497,310 7,947,053
Telecommunications--2.0% ++Telefonica SA 422,448 6,980,801
Total Common Stocks in Spain 15,674,439
Sweden--1.0%
Household Products--1.0% Electrolux AB 'B' 288,640 3,747,380
Total Common Stocks in Sweden 3,747,380
December 31, 2000
Mercury HW International Value VIP Portfolio
SCHEDULE OF INVESTMENTS (CONTINUED)
In US Dollars
Shares
Industry Investments Held Value
COMMON STOCKS (continued)
Switzerland--6.6%
Building Materials--1.2% Gerberit International AG
(Registered Shares) 14,643 $ 4,120,462
Insurance-- Zurich Financial Services AG 9,846 5,936,157
Multi-Line--1.7%
Machinery--1.9% ++Saurer AG (Registered Shares) 7,146 3,307,313
Sulzer AG (Registered Shares) 4,707 3,395,546
6,702,859
Pharmaceuticals--1.8% Novartis AG (Registered Shares) 3,727 6,589,235
Total Common Stocks in Switzerland 23,348,713
United Kingdom--24.7%
Aerospace & Defense-- British Aerospace PLC 1,507,444 8,601,952
2.4%
Airports--2.2% BAA PLC 837,690 7,733,289
Auto Services--0.7% Lex Service PLC 443,570 2,638,824
Beverages--1.9% Allied Domecq PLC 1,019,210 6,729,432
Building Materials--2.0% Hanson PLC 1,045,970 7,171,737
Diversified Companies-- Cookson Group PLC 443,370 1,165,659
2.9% Smiths Industries PLC 398,750 4,812,874
Tomkins PLC 1,893,290 4,157,449
-----------
10,135,982
Engineering & Kidde PLC 1,023,895 1,101,236
Construction--0.3%
Foods--2.2% Unilever PLC 933,030 7,986,246
Insurance-- CGNU PLC 335,120 5,416,516
Multi-Line--1.5%
Publishing--2.8% Reed International PLC 470,010 4,914,707
United News & Media PLC 410,248 5,209,042
-----------
10,123,749
Regional Banks--2.9% Lloyds TSB Group PLC 604,486 6,393,107
Royal Bank of Scotland Group PLC 164,597 3,889,742
-----------
10,282,849
December 31, 2000
Mercury HW International Value VIP Portfolio
SCHEDULE OF INVESTMENTS (CONCLUDED)
In US Dollars
Shares
Industry Investments Held Value
COMMONSTOCKS (concluded)
United Kingdom (concluded)
Security Services--0.7% Chubb PLC 1,023,895 $ 2,416,601
Telecommunications--1.2% British Telecommunications PLC 492,463 4,207,868
Tobacco--1.0% British American Tobacco PLC 475,992 3,624,510
Total Common Stocks in the
United Kingdom 88,170,791
Total Common Stocks
(Cost--$333,739,945) 354,192,293
PREFERRED STOCKS--1.8%
Germany--1.8%
Building Materials--0.3% Dyckerhoff AG 56,835 1,011,217
Medical Products & Fresenius Medical Care AG 116,580 5,582,305
Supplies--1.5%
Total Preferred Stocks
(Cost--$6,808,785) 6,593,522
Total Investments
(Cost--$340,548,730)--101.2% 360,785,815
Time Deposits*--4.2% 14,854,387
------------
Liabilities in Excess of Other Assets--(5.4%) (19,348,486)
------------
Net Assets--100% $356,291,716
============
++Non-income producing security.
*Time deposit bears interest at 4.75% and matures on 1/02/2006.
See Notes to Financial Statements.
December 31, 2000
Mercury HW International Value VIP Portfolio
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 2000
Assets:
Investments, at value (identified cost--$340,548,730) $360,785,815
Time deposits 14,854,387
Cash 48,308
Receivables:
Securities sold $ 7,591,102
Dividends 880,583
Capital shares sold 17,926
Interest 7,840 8,497,451
--------------
Deferred organization expenses 10,883
------------
Total assets 384,196,844
------------
Liabilities:
Payables:
Capital shares redeemed 27,417,941
Investment adviser 212,182
Securities purchased 60,100 27,690,223
------------
Accrued expenses 214,905
------------
Total liabilities 27,905,128
------------
Net Assets:
Net assets $356,291,716
============
Net Assets Consist of:
Paid-in capital $319,418,409
============
Undistributed investment income--net 8,107,098
============
Undistributed realized capital gains on investments and
foreign currency transactions--net 8,530,292
============
Unrealized appreciation on investments and foreign currency
transactions--net 20,235,917
============
Net assets--Equivalent to $11.68 per share based on
30,502,978 shares outstanding++ $356,291,716
============
++Unlimited shares of no par value authorized.
See Notes to Financial Statements.
December 31, 2000
Mercury HW International Value VIP Portfolio
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000
Investment Income:
Dividends (net of $991,650 foreign withholding tax) $ 9,937,514
Interest and discount earned 865,408
------------
Total income 10,802,922
------------
Expenses:
Investment advisory fees $ 2,595,053
Custodian fees 295,237
Professional fees 101,386
Accounting services 79,868
Printing and shareholder reports 19,933
Trustees' fees and expenses 18,367
Transfer agent fees 17,292
Registration fees 4,800
Pricing fees 2,517
Amortization of organization expenses 1,826
Other expenses 62,034
------------
Total expenses 3,198,313
------------
Investment income--net 7,604,609
------------
Realized & Unrealized Gain (Loss) on Investments
& Foreign Currency Transactions--Net:
Realized gain from:
Investments--net 10,564,367
Foreign currency transactions--net 972,799 11,537,166
------------
Change in unrealized appreciation/depreciation on:
Investments--net (5,921,833)
Foreign currency transactions--net (4,764) (5,926,597)
------------ ------------
Net Increase in Net Assets Resulting from Operations $ 13,215,178
============
See Notes to Financial Statements.
December 31, 2000
Mercury HW International Value VIP Portfolio
STATEMENTS OF CHANGES
IN NET ASSETS
For the Year
Ended December 31,
Increase (Decrease)in Net Assets: 2000 1999
Operations:
Investment income--net $ 7,604,609 $ 3,656,525
Realized gain on investments and foreign currency
transactions--net 11,537,166 4,289,725
Change in unrealized appreciation/depreciation
on investments and foreign currency transactions--net (5,926,597) 28,388,537
-------------- ------------
Net increase in net assets resulting from operations 13,215,178 36,334,787
-------------- ------------
Dividends & Distributions to Shareholders:
Investment income--net (3,616,986) (1,524,275)
Realized gain on investments--net (1,728,083) --
-------------- ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (5,345,069) (1,524,275)
-------------- ------------
Capital Share Transactions:
Net increase (decrease) in net assets derived from capital
share transactions 63,587,744 (39,111,607)
-------------- ------------
Net Assets:
Total increase (decrease)in net assets 71,457,853 (4,301,095)
Beginning of year 284,833,863 289,134,958
-------------- ------------
End of year* $ 356,291,716 $284,833,863
============== ============
*Undistributed investment income--net $ 8,107,098 $ 3,197,003
============== ============
See Notes to Financial Statements.
December 31, 2000
Mercury HW International Value VIP Portfolio
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from
information provided in the financial statements.
For the Period
For the June 10,
Year Ended 1998++ to
December 31, December 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998
Per Share Operating Performance:
Net asset value, beginning of period $ 11.52 $ 9.52 $ 10.00
----------- ----------- -----------
Investment income--net .22 .15 .04
Realized and unrealized gain (loss) on
investments--net .10 1.91 (.48)]
----------- ----------- -----------
Total from investment operations .32 2.06 (.44)
----------- ----------- -----------
Less dividends and distributions:
Investment income--net (.11) (.06) (.04)
Realized gain on investments--net (.05) -- --
----------- ----------- -----------
Total dividends and distributions (.16) (.06) (.04)
----------- ----------- -----------
Net asset value, end of period $ 11.68 $ 11.52 $ 9.52
=========== =========== ===========
Total Investment Return:**
Based on net asset value per share 2.85% 21.68% (4.38%)+++
=========== =========== ===========
Ratios to Average Net Assets:
Expenses .93% 1.01% 1.05%*
=========== =========== ===========
Investment income--net 2.20% 1.63% 1.09%*
=========== =========== ===========
Supplemental Data:
Net assets, end of period (in thousands) $ 356,292 $ 284,834 $ 289,135
=========== =========== ===========
Portfolio turnover 39% 71% 24%
=========== =========== ===========
*Annualized.
**Total investment returns exclude insurance-related fees and
expenses.
++Commencement of operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
December 31, 2000
Mercury HW International Value VIP Portfolio
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies:
Mercury HW International Value VIP Portfolio (the "Fund") (formerly
International VIP Portfolio) is a fund of Mercury HW Variable Trust
(the "Trust") (formerly Hotchkis and Wiley Variable Trust). The
Trust is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company, which is
organized as a Massachusetts business trust. 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. Shares of the
Fund are not offered to the general public, but may only be
purchased by the separate accounts of participating insurance
companies for the purpose of funding variable annuity contracts
and/or variable life insurance contracts. 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 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. 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 Trustees 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. Short-term securities are
valued at amortized cost, which approximates market value. Other
investments are stated at market value. Securities and assets for
which market value quotations are not available are valued at their
fair value as determined in good faith by or under the direction of
the Trust's Board of Trustees.
(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.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. 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.
December 31, 2000
Mercury HW International Value VIP Portfolio
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(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,
withholding taxes may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (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 premium and 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.
(g) Deferred organization expenses--Expenses incurred by the Trust
in connection with the organization, registration and the initial
public offering of shares are being deferred and amortized over the
period of benefit, but not to exceed sixty months from the Fund's
commencement of operations. The proceeds of any redemption of the
initial shares by the original shareholder will be reduced by a pro-
rata portion of any then unamortized organization expenses in the
same proportion as the number of initial shares being redeemed bears
to the number of initial shares outstanding at the time of such
redemption.
(h) Reclassification--Accounting principles generally accepted in
the United States of America require that certain components of net
assets be adjusted to reflect permanent differences between
financial and tax reporting. Accordingly, the current year's
permanent book/tax differences of $468 have been reclassified
between undistributed net investment income and paid-in capital in
excess of par and $922,940 has been reclassified between
undistributed net realized capital gains and undistributed net
investment income. These reclassifications have no effect on net
assets or net asset value per share.
2 Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement for the
Fund with Fund Asset Management, L.P., doing business as Mercury
Advisors ("Mercury Advisors"). The general partner of Mercury
Advisors is Princeton Services, Inc. ("PSI"), an indirect, wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. Mercury Advisors 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 .75% of the average daily
value of the Fund's net assets. Mercury Advisors has contractually
agreed to pay all annual operating expenses in excess of 1.35% as
applied to the Fund's daily net assets through April 30, 2001.
December 31, 2000
Mercury HW International Value VIP Portfolio
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Mercury Advisors has entered into subadvisory agreements with
Merrill Lynch Investment Managers International Limited and Merrill
Lynch Asset Management U.K. Limited, affiliated investment advisers
that are indirect subsidiaries of ML & Co. The subadvisory
arrangements are for investment research, recommendations, and other
investment-related services to be provided to the Fund. There is no
increase in the aggregate fees paid by the Fund for these services.
Financial Data Services, Inc. ("FDS"), an indirect, wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
FAM Distributors, Inc. ("FAMD"), an indirect, wholly-owned
subsidiary of Merrill Lynch Group, Inc., is the Fund's distributor.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a
subsidiary of ML & Co., received $38,870 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended December 31, 2000.
Accounting services were provided to the Fund by Mercury Advisors.
Certain officers and/or trustees of the Trust are officers and/or
directors of Mercury Advisors, FAMD, PSI, FDS, and/or ML & Co.
3 Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 2000 were $200,153,757 and
$128,112,351, respectively.
Net realized gains for the year ended December 31, 2000 and net
unrealized gains (losses) as of December 31, 2000 were as follows:
Realized Unrealized
Gains Gains (Losses)
Long-term investments $10,564,367 $ 20,237,085
Foreign currency transactions 972,799 (1,168)
----------- ------------
Total $11,537,166 $ 20,235,917
=========== ============
As of December 31, 2000, net unrealized appreciation for Federal
income tax purposes aggregated $17,751,805, of which $55,301,225
related to appreciated securities and $37,549,420 related to
depreciated securities. The aggregate cost of investments at
December 31, 2000 for Federal income tax purposes was $357,888,397.
4 Capital Share Transactions:
Transactions in capital shares were as follows:
For the Year Ended
December 31, 2000 Shares Dollar Amount
Shares sold 26,714,935 $302,825,616
Shares issued to shareholders in reinvestment
of dividends 471,346 5,345,069
------------- ------------
Total issued 27,186,281 308,170,685
Shares redeemed (21,417,783) (244,582,941)
------------- ------------
Net increase 5,768,498 $ 63,587,744
============= ============
December 31, 2000
Mercury HW International Value VIP Portfolio
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
For the Year Ended
December 31, 1999 Shares Dollar Amount
Shares sold 10,476,787 $114,485,146
Shares issued to shareholders in reinvestment
of dividends and distributions 136,340 1,524,275
------------- ------------
Total issued 10,613,127 116,009,421
Shares redeemed (16,258,425) (155,121,028)
------------- ------------
Net decrease (5,645,298) $ (39,111,607)
============= ============
5 Short-Term Borrowings:
On December 1, 2000, the Fund, along with certain other funds
managed by Mercury Advisorsand its affiliates, renewed and amended a
$1,000,000,000 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 facility. Amounts borrowed under the facility 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. The Fund did not
borrow under the facility during the year ended December 31, 2000.
6 Commitments:
At December 31, 2000, the Fund had entered into foreign exchange
contracts under which it had agreed to sell various foreign
currencies with a notional value of $7,612,300.
7 Reorganization Plan:
The Trust's Board of Trustees approved a plan of reorganization,
subject to shareholder approval and certain other conditions,
whereby the Fund would acquire substantially all of the assets and
liabilities of International Equity Focus Fund, which is a fund of
Merrill Lynch Variable Series Funds, Inc., in exchange for newly
issued shares of the Fund. These Funds are registered, open-end
management investment companies. Both entities have a similar
investment objective. The International Equity Focus Fund is managed
by Merrill Lynch Investment Managers, L.P., an affiliate of Mercury
Advisors.
December 31, 2000
Mercury HW International Value VIP Portfolio
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Board of Trustees and Shareholders of
Mercury HW Variable Trust:
In our opinion, the accompanying statement of assets and
liabilities, including the schedule of investments, and the related
statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of the Mercury HW International Value VIP
Portfolio (one of the four portfolios of Mercury HW Variable Trust,
the "Fund") at December 31, 2000, the results of its operations, the
changes in its net assets and the financial highlights for each of
the periods indicated, in conformity with accounting principles
generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included
confirmation of securities at December 31, 2000 by correspondence
with the custodian and brokers, provide a reasonable basis for our
opinion.
(PricewaterhouseCoopers LLP)
Milwaukee, WI
February 13, 2001
December 31, 2000
Mercury HW International Value VIP Portfolio
IMPORTANT TAX INFORMATON
(UNAUDITED)
97.73% of the net investment income distribution paid by Mercury HW
International Value VIP Portfolio to shareholders of record on
December 11, 2000 represents income from foreign sources.
Additionally, there was $.018946 per share of foreign taxes
associated with this distribution.
The foreign taxes represent taxes incurred by the Fund on dividends
and/or interest received by the Fund from foreign sources. Foreign
taxes paid should be included as foreign taxable income with an
offsetting deduction from gross income or as a credit for taxes paid
to foreign governments. You should consult your tax adviser
regarding the appropriate treatment of foreign taxes paid.
Finally, the Fund paid a long-term capital gains distribution of
$.053394 per share to shareholders of record on December 11, 2000.
The entire distribution is subject to a maximum 20% tax rate.
Please retain this information for your records.
OFFICERS AND TRUSTEES
Robert L. Burch III, Trustee
John A. G. Gavin, Trustee
Joe Grills, Trustee
Nigel Hurst-Brown, Trustee
Madeline A. Kleiner, Trustee
Richard R. West, Trustee
Nancy D. Celick, President
Donald C. Burke, Vice President and
Treasurer
Anna Marie S. Lopez, Assistant
Treasurer and Assistant Secretary
Turner Swan, Secretary
Gracie Fermelia, Vice President and
Assistant Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(888) 763-2260
December 31, 2000 Mercury HW International Value VIP Portfolio