<PAGE> 1
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
800 WEST SIXTH STREET
FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90017
800-236-4479
INVESTMENT ADVISOR
Hotchkis and Wiley
800 West Sixth Street
Fifth Floor
Los Angeles, California 90017
LEGAL COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
DISTRIBUTOR
Princeton Funds Distributor, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
ADMINISTRATOR
CUSTODIAN AND TRANSFER AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202
JUNE 30, 1998
LOGO
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
INTERNATIONAL VIP PORTFOLIO
-------------------------------------------------------------
Seeks to provide current income and long-term growth of income,
accompanied by growth of capital. The Fund invests in international equity
securities.
- --------------------------------------------------------------------------------
THIS MATERIAL SHOULD BE PRECEDED
OR ACCOMPANIED BY A PROSPECTUS. HOTCHKIS AND WILEY:
INVESTMENT ADVISOR
<PAGE> 2
HOTCHKIS AND WILEY FUNDS LOGO
DEAR SHAREHOLDERS:
We are pleased to present to you the semi-annual report of Hotchkis and Wiley
Variable Trust International VIP Portfolio for the period ending June 30, 1998.
The launch of the International VIP Portfolio coincides with some dramatic
events in the international equity markets that should prove beneficial for the
Fund's long term performance. Countries slated to adopt the single European
currency, the euro, have experienced dramatic declines in bond yields and more
competitive currencies. Only in Euroland is growth likely to accelerate this
year as buoyant domestic demand -- particularly in Spain, Italy, Portugal, and
Ireland -- offsets the deflationary impact of Asia. As a result, investors have
poured funds into European equities at an unprecedented rate. In recognition of
the importance of the equity capital market, a growing number of European
companies are restructuring and enhancing profitability. In contrast, Japan, the
world's second largest economy, has yet to resume its historic role as the key
driver of growth in the rest of Asia. Keizo Obuchi's win as LDP leader should
slowly lead to an improvement in the fiscal policy plaguing Japan. With fiscal
stimulus, loose monetary policy and financial system reform, the Japanese
economy may have turned the corner.
Our emphasis on stock selection has led to an allocation that is overweighted in
the UK versus the EAFE Index, slightly underweighted in the EMU markets and
underweighted in Asia. The avalanche of liquidity that rolled into the European
markets in the past 12 to 18 months has led to some massive valuation
disparities. The largest stocks in the UK and the rest of Europe generally offer
the highest price-to-earnings ratios on prospective earnings and have delivered
the bulk of performance gains in their local markets. Concentration in the UK
market is especially striking as only ten stocks (principally in healthcare and
telecommunication) gained over 8% in the latest quarter, leaving the other 128
stocks in the MSCI UK Index down over 5%. The hint of rising interest rates will
lead to the inevitable rotation back to the undervalued cyclical industrials. In
addition, the Japanese market offers a host of opportunities, especially those
related to the domestic economy. Near term performance of these stocks will
depend on signs that the recent reforms are leading to economic stimulus and, in
turn, driving returns higher.
We thank you for your investments in the Hotchkis and Wiley Variable Trust
International VIP Portfolio. We look forward to serving your investment needs in
the months and years ahead.
Sincerely,
NANCY D. CELICK
Nancy D. Celick
President
HOTCHKIS AND WILEY VARIABLE TRUST
The statements made in the foregoing commentary are as of June 30, 1998, and may
not accurately reflect opinions of Hotchkis and Wiley after that date. No
guarantee can be given regarding the accuracy of any opinions or predictions
made. Because the Fund is actively managed, any Fund specific information in the
commentary may no longer be accurate. The Fund may not continue to hold any
specific securities mentioned, and has no obligation to disclose purchases or
sales in such securities.
<PAGE> 3
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SCHEDULE OF INVESTMENTS.................................. 1
STATEMENT OF ASSETS AND LIABILITIES...................... 4
STATEMENT OF OPERATIONS.................................. 5
STATEMENT OF CHANGES IN NET ASSETS....................... 6
NOTES TO FINANCIAL STATEMENTS............................ 7
FINANCIAL HIGHLIGHTS..................................... 10
</TABLE>
LOGO
LOGO
<PAGE> 4
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<S> <C> <C>
COMMON STOCKS -- 89.9%
- ------------------------------------------------------------
AUSTRALIA -- 4.6% Shares Value
- ------------------------------------------------------------
AIRLINES -- 1.5%
............................................................
Qantas Airways Limited 2,387,850 $ 3,593,167
- ------------------------------------------------------------
BANKS -- 2.0%
............................................................
Australia and New Zealand
Banking Group, Ltd. 713,170 4,919,742
- ------------------------------------------------------------
INSURANCE -- 1.1%
............................................................
QBE Insurance Group, Ltd. 740,841 2,614,953
..................... ...................... -----------
11,127,862
Total Australia
- ------------------------------------------------------------
CANADA -- 4.3%
- ------------------------------------------------------------
BANKS -- 1.8%
............................................................
Canadian Imperial Bank of
Commerce 135,080 4,344,850
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.1%
............................................................
Imasco, Ltd. 135,510 2,501,864
- ------------------------------------------------------------
METALS & MINERALS -- 1.4%
Noranda, Inc. 196,320 3,390,946
..................... ...................... -----------
10,237,660
Total Canada
- ------------------------------------------------------------
FINLAND -- 1.7%
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.7%
............................................................
UPM-Kymmene Corporation OYJ 145,615 4,007,642
..................... ...................... -----------
4,007,642
Total Finland
- ------------------------------------------------------------
FRANCE -- 6.5%
- ------------------------------------------------------------
AEROSPACE -- DEFENSE -- 1.7%
............................................................
Thomson CSF 109,017 4,147,170
- ------------------------------------------------------------
BANKS -- 1.7%
............................................................
Banque Nationale de Paris 49,181 4,018,409
- ------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS -- 1.2%
............................................................
LaFarge SA 27,340 2,826,235
- ------------------------------------------------------------
OIL-INTERNATIONAL -- 1.9%
............................................................
Elf Aquitaine SA 33,640 4,729,385
..................... ...................... -----------
15,721,199
Total France
- ------------------------------------------------------------
GERMANY -- 4.7% Shares Value
- ------------------------------------------------------------
BANKS -- 1.6%
............................................................
Commerzbank AG 101,170 $ 3,850,553
- ------------------------------------------------------------
CHEMICALS -- 1.3%
............................................................
Bayer AG 61,735 3,194,427
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 0.7%
............................................................
Buderus AG 3,410 1,700,434
- ------------------------------------------------------------
MACHINERY -- 1.1%
............................................................
GEA AG 6,695 2,614,895
..................... ...................... -----------
11,360,309
Total Germany
- ------------------------------------------------------------
HONG KONG -- 7.2%
- ------------------------------------------------------------
BANKS -- 1.7%
............................................................
HSBC Holdings PLC 171,600 4,196,667
- ------------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 1.0%
............................................................
New World Development Co., Ltd. 1,220,000 2,361,724
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 3.3%
............................................................
CLP Holdings Limited 977,000 4,450,895
............................................................
Swire Pacific Ltd. Class A 924,500 3,489,883
..................... ...................... -----------
7,940,778
- ------------------------------------------------------------
UTILITY -- TELECOMMUNICATIONS -- 1.2%
............................................................
Hong Kong Telecommunications,
Ltd. 1,489,600 2,797,118
..................... ...................... -----------
17,296,287
Total Hong Kong
- ------------------------------------------------------------
IRELAND -- 2.2%
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.0%
............................................................
Greencore Group PLC 434,140 2,361,658
- ------------------------------------------------------------
PAPER -- 1.2%
............................................................
Jefferson Smurfit Group PLC 1,008,380 2,995,894
..................... ...................... -----------
5,357,552
Total Ireland
- ------------------------------------------------------------
ITALY -- 3.0%
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 1.9%
............................................................
ENI SPA 685,100 4,490,121
- ------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
1
<PAGE> 5
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS -- 1.1%
............................................................
Telecom Italia SPA 381,000 $ 2,804,638
............................................ -----------
7,294,759
Total Italy
- ------------------------------------------------------------
JAPAN -- 8.4%
- ------------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.8%
............................................................
Nintendo Co., Ltd. 45,900 4,249,847
- ------------------------------------------------------------
ELECTRONICS -- 2.8%
............................................................
Kyocera Corporation 102,200 4,992,729
............................................................
Sony Corporation 20,400 1,756,530
............................................ -----------
6,749,259
- ------------------------------------------------------------
FINANCIAL SERVICES -- 1.9%
............................................................
Promise Company, Ltd. 112,800 4,640,905
- ------------------------------------------------------------
LEISURE/TOYS -- 1.9%
............................................................
NAMCO Ltd. 199,000 4,645,747
............................................ -----------
20,285,758
Total Japan
- ------------------------------------------------------------
NETHERLANDS -- 6.0%
- ------------------------------------------------------------
BANKS -- 1.8%
............................................................
ABN AMRO Holding N.V. 188,810 4,418,080
- ------------------------------------------------------------
CHEMICALS -- 2.0%
............................................................
Akzo Nobel N.V. 21,690 4,821,607
- ------------------------------------------------------------
INSURANCE -- MULTI-LINE -- 2.2%
............................................................
ING Groep N.V. 79,125 5,181,072
............................................ -----------
14,420,759
Total Netherlands
- ------------------------------------------------------------
NORWAY -- 0.9%
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.9%
............................................................
Kvaerner ASA - Class A 66,070 2,238,628
............................................ -----------
2,238,628
Total Norway
- ------------------------------------------------------------
SINGAPORE -- 1.1%
- ------------------------------------------------------------
BANKS -- 1.1%
............................................................
Development Bank of Singapore
LTD 489,890 2,711,169
............................................ -----------
2,711,169
Total Singapore
- ------------------------------------------------------------
SPAIN -- 0.9% Shares Value
- ------------------------------------------------------------
OIL -- INTERNATIONAL -- 0.9%
............................................................
Repsol SA 40,780 $ 2,250,905
............................................ -----------
2,250,905
Total Spain
- ------------------------------------------------------------
SWEDEN -- 4.8%
- ------------------------------------------------------------
BANKS -- 1.6%
............................................................
Skandinaviska Enskilda Banken AB 226,784 3,881,658
- ------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.7%
............................................................
Electrolux AB - Class B 233,140 4,005,064
- ------------------------------------------------------------
TOBACCO -- 1.5%
............................................................
Swedish Match AB 1,097,210 3,645,925
............................................ -----------
11,532,647
Total Sweden
- ------------------------------------------------------------
SWITZERLAND -- 7.9%
- ------------------------------------------------------------
BANKS -- 1.6%
............................................................
Credit Suisse Group 17,444 3,881,397
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.3%
............................................................
Nestle SA "registered" 1,414 3,025,981
- ------------------------------------------------------------
MACHINERY & EQUIPMENT -- 3.1%
............................................................
Saurer AG "registered" 3,333 3,405,926
............................................................
Sulzer AG "registered" (P.C.) 5,229 4,126,492
............................................ -----------
7,532,418
- ------------------------------------------------------------
PHARMACEUTICALS & HEALTHCARE -- 1.9%
............................................................
Novartis AG "registered" 2,775 4,617,646
............................................ -----------
19,057,442
Total Switzerland
- ------------------------------------------------------------
UNITED KINGDOM -- 25.7%
- ------------------------------------------------------------
APPAREL & TEXTILES -- 0.7%
............................................................
Coats Viyella PLC 1,291,860 1,584,269
- ------------------------------------------------------------
BANKS -- 3.6%
............................................................
Abbey National PLC 229,390 4,076,150
............................................................
National Westminster Bank PLC 252,050 4,504,040
............................................ -----------
8,580,190
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.8%
............................................................
Hanson PLC 705,940 4,290,356
- ------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
2
<PAGE> 6
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
CHEMICALS -- 2.6%
............................................................
The BOC Group PLC 266,563 $ 3,631,467
............................................................
Laporte PLC 233,486 2,785,434
............................................ -----------
6,416,901
- ------------------------------------------------------------
DIVERSIFIED -- 1.2%
............................................................
Cookson Group PLC 837,420 2,878,303
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 3.6%
............................................................
BTR PLC 1,310,430 3,716,968
............................................................
Tomkins PLC 915,300 4,967,144
............................................ -----------
8,684,112
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.2%
............................................................
TI Group PLC 394,860 2,997,648
- ------------------------------------------------------------
FOOD & BEVERAGES -- 1.8%
............................................................
Allied Domecq PLC 468,420 4,400,174
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.9%
............................................................
Hillsdown Holdings PLC 795,510 2,163,512
............................................................
Tate & Lyle PLC 307,080 2,435,004
............................................ -----------
4,598,516
- ------------------------------------------------------------
INSURANCE -- 1.9%
............................................................
CGU PLC 244,040 4,552,279
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
RETAIL -- FOOD CHAINS -- 1.9%
............................................................
Tesco PLC 471,570 $ 4,602,863
- ------------------------------------------------------------
TOBACCO -- 2.3%
............................................................
B.A.T Industries PLC 551,310 5,519,162
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 1.2%
............................................................
Powergen PLC 202,000 2,790,658
............................................ -----------
61,895,131
Total United Kingdom
............................................................
Total common stocks 216,796,009
(cost $216,056,241)
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Principal
CASH EQUIVALENTS -- 29.7% Amount
- -----------------------------------------------------------
Vista Institutional Prime
Money Market Fund $71,564,121 71,564,121
(cost $71,564,121)
- -----------------------------------------------------------
Total investments -- 119.6%
(cost $287,620,362) 288,360,130
...........................................................
Liabilities in excess of other
assets -- (19.6)% (47,226,339)
............................................
-----------
Total net assets -- 100.0% $241,133,791
- -----------------------------------------------------------
</TABLE>
P.C. -- Participation Certificates.
See Notes to Financial Statements
3
<PAGE> 7
Financial Statements -- June 30, 1998
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
<TABLE>
<CAPTION>
INTERNATIONAL
VIP
-------------
<S> <C>
ASSETS:
Investments, at value*.................................... $288,360,130
Foreign currency**........................................ 652,587
Dividends and interest receivable......................... 447,936
Organizational expenses, net of accumulated
amortization........................................... 14,164
------------
Total assets......................................... 289,474,817
------------
LIABILITIES:
Payable to Advisor........................................ 91,366
Payable for investments purchased......................... 1,297,563
Accrued expenses and other liabilities.................... 46,952,097
------------
Total liabilities.................................... 48,341,026
------------
Net assets........................................... $241,133,791
============
NET ASSETS CONSIST OF:
Paid in capital........................................... $240,470,024
Undistributed net investment income....................... 100,590
Undistributed net realized loss on securities and foreign
currency transactions.................................. (176,829)
Net unrealized appreciation of securities and foreign
currency............................................... 740,006
------------
Net assets........................................... $241,133,791
============
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................ 24,180,526
Net asset value per share (offering and redemption
price)................................................. $ 9.97
============
*Cost of Investments....................................... $287,620,362
============
**Cost of Foreign Currency.................................. $ 644,976
============
</TABLE>
See Notes to Financial Statements
4
<PAGE> 8
Financial Statements -- Period Ended June 30, 1998
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
INTERNATIONAL
VIP(1)
-------------
<S> <C>
INVESTMENT INCOME
Income*
Dividends.............................................. $ 476,588
---------
Expenses
Advisory fee........................................... 77,116
Legal and auditing fees................................ 2,286
Custodian fees and expenses............................ 2,500
Accounting and transfer agent fees and expenses........ 4,500
Administration fee..................................... 2,500
Trustees' fees and expenses............................ 286
Reports to shareholders................................ 1,143
Registration fees...................................... 11,250
Amortization of organizational expenses................ 86
Other expenses......................................... 71
---------
Total expenses.................................... 101,738
---------
Net investment income..................................... 374,850
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on securities and foreign currency
transactions.......................................... (176,829)
Net change in unrealized appreciation of securities and
foreign currency...................................... 740,006
---------
Net gain on investments................................... 563,177
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 938,027
=========
*Net of Foreign Taxes Withheld.............................. $ 25,399
=========
</TABLE>
(1) For the period June 10, 1998 (commencement of operations) through June 30,
1998.
See Notes to Financial Statements
5
<PAGE> 9
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
INTERNATIONAL VIP
PORTFOLIO
---------------------
June 10, 1998**
through June 30, 1998
---------------------
<S> <C>
OPERATIONS:
Net investment income................................... $ 374,850
Net realized loss on securities and foreign currency
transactions........................................... (176,829)
Net change in unrealized appreciation of securities and
foreign currency....................................... 740,006
------------
Net increase in net assets resulting from
operations........................................ 938,027
------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (274,260)
------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 240,197,502
Shares issued in connection with payment of dividends
and distributions...................................... 274,260
Cost of shares redeemed................................. (1,738)
------------
Net increase in net assets from Fund share
transactions...................................... 240,470,024
------------
Total increase in net assets................................ 241,133,791
NET ASSETS:
Beginning of period..................................... --
------------
End of period*.......................................... $241,133,791
============
*Including undistributed net investment income of: $ 100,590
============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 24,152,999
Shares issued in connection with payment of dividends
and distributions...................................... 27,703
Shares redeemed......................................... (176)
------------
Net increase....................................... 24,180,526
============
** Commencement of operations
</TABLE>
See Notes to Financial Statements
6
<PAGE> 10
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
NOTE 1.
ACCOUNTING POLICIES. The International VIP Portfolio (the "Fund") is a series of
Hotchkis and Wiley Variable Trust (the "Trust"), an open-end, management
investment company organized as a Massachusetts business trust on February 4,
1997 and registered under the Investment Company Act of 1940. The Fund commenced
operations on June 10, 1998. The Fund seeks to provide current income and
long-term growth of income, accompanied by growth of capital. 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. In addition
to the Fund, the Trust offers the Equity Income VIP Portfolio, the Low Duration
VIP Portfolio and the Total Return VIP Portfolio (collectively, the "Funds").
The assets of each series are invested in separate, independently managed
portfolios. The following is a summary of significant accounting policies
followed by the Fund in the preparation of the financial statements.
ORGANIZATIONAL 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 Trust's commencement of operations. These costs were advanced by
the Advisor and will be reimbursed by the Trust. 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.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or The Nasdaq Stock Market ("NSM") are
valued at the last sale price as of 4:00 p.m., Eastern time, or, in the absence
of recorded sales, at the average of readily available closing bid and asked
prices on such exchange or NSM. Unlisted securities that are not included in NSM
are valued at the average of the quoted bid and asked price in the
over-the-counter market. Fixed income securities are normally valued on the
basis of quotes obtained from brokers and dealers or pricing services. Certain
fixed income securities for which daily market quotations are not readily
available may be valued pursuant to guidelines established by the Board of
Trustees, with reference to fixed income securities whose prices are more
readily obtainable or an appropriate matrix utilizing similar factors. As a
broader market does not exist, the proceeds received upon the disposal of such
securities may differ from quoted values previously furnished by such market
makers. Securities for which market quotations are not otherwise available are
valued at fair value as determined in good faith by Hotchkis and Wiley (the
"Advisor") under procedures established by the Board of Trustees. Short-term
investments which mature in less than 60 days are valued at amortized cost
(unless the Board of Trustees determines that this method does not represent
fair value), if their original maturity was 60 days or less, or by amortizing
the values as of the 61st day prior to
7
<PAGE> 11
- --------------------------------------------------------------------------------
maturity, if their original term to maturity exceeded 60 days. Investments
quoted in foreign currency are valued daily in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the time of valuation.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis: (i) market value of investment securities, assets and
liabilities at the daily rates of exchange, and (ii) purchases and sales of
investment securities, dividend and interest income and certain expenses at the
rates of exchange prevailing on the respective dates of such transactions. The
Fund does not isolate and treat as ordinary income that portion of the results
of operations arising as a result of changes in the exchange rate from the
fluctuations arising from changes in the market prices of securities held during
the period. However, for federal income tax purposes, the Fund does isolate and
treat as ordinary income the effect of changes in foreign exchange rates arising
from actual foreign currency transactions and the effect of changes in foreign
exchange rates arising from trade date and settlement date differences.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and the Fund
intends to distribute investment company net taxable income and net capital
gains to shareholders. Therefore, no federal income tax provision is required.
EXPENSE ALLOCATION: Common expenses incurred by the Trust are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.
WHEN-ISSUED SECURITIES: The Fund may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Fund records purchases of when-issued securities and
reflects the values of such securities in determining net asset value in the
same manner as other portfolio securities. The Fund segregates and maintains at
all times cash or other liquid assets in an amount at least equal to the amount
of outstanding commitments for when-issued securities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid semi-annually. Distributions of net realized capital gains, if any,
will be declared at least annually.
8
<PAGE> 12
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is recognized
on the accrual basis. Generally accepted accounting principles require that
permanent financial reporting and tax differences relating to shareholder
distributions be reclassified to paid in capital.
NOTE 2.
INVESTMENT ADVISORY AGREEMENT The Fund has an investment advisory agreement with
the Advisor, with whom certain officers and Trustees of the Trust are
affiliated. The Advisor is a division of Merrill Lynch Asset Management, L.P., a
separate business unit of Merrill Lynch & Co. The Advisor receives a fee,
computed daily and payable monthly, at the annual rate of 0.75% as applied to
the Fund's daily net assets. The Advisor has voluntarily agreed to pay all
operating expenses in excess of 1.35% as applied to the Fund's daily net assets.
NOTE 3.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the period ended June 30, 1998 were
$219,742,084 and $3,586,274, respectively.
As of June 30, 1998, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciation Appreciated Depreciated
Fund (Depreciation) Securities Securities
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTERNATIONAL VIP PORTFOLIO...................... $739,768 $5,087,182 $(4,347,414)
</TABLE>
At June 30, 1998, the cost of investments for federal income tax purposes was
$287,620,362.
9
<PAGE> 13
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
INTERNATIONAL
VIP PORTFOLIO
---------------------
June 10, 1998*
through June 30, 1998
---------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $10.00
Income from Investment Operations:
Net investment income................................... 0.02
Net realized and unrealized loss on investments......... (0.04)
------------
Total from investment operations........................ (0.02)
------------
Less Distributions:
Dividends (from net investment income).................. (0.01)
------------
Net Asset Value, End of Period.............................. $ 9.97
============
Total Return(1)............................................. (0.19)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $241,133,791
Ratio of expenses to average net assets(2).................. 0.99%
Ratio of net investment income to average net assets(2)..... 3.65%
Portfolio turnover rate(1).................................. 112%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to Financial Statements
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