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As filed pursuant to Rule 497
Registration No. 333-24349
PROSPECTUS
HOTCHKIS AND WILEY
VARIABLE TRUST
[LOGO]
HOTCHKIS AND WILEY VARIABLE TRUST (THE "TRUST") IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY HAVING FOUR SEPARATE DIVERSIFIED PORTFOLIOS (THE "FUNDS"),
EACH OF WHICH IS A SEPARATE MUTUAL FUND. THE FUNDS ARE INVESTMENT VEHICLES FOR
VARIABLE ANNUITY CONTRACTS AND/OR VARIABLE LIFE INSURANCE CONTRACTS ISSUED BY
PARTICIPATING INSURANCE COMPANIES.
EQUITY INCOME
VIP PORTFOLIO
Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests primarily in domestic equity securities.
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.
TOTAL RETURN BOND
VIP PORTFOLIO
Seeks to maximize long-term total return. The Fund invests in a diversified
portfolio of fixed-income securities of varying maturities with a portfolio
duration of two to eight years.
LOW DURATION
VIP PORTFOLIO
Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in a diversified portfolio of fixed-income securities of varying
maturities with a portfolio duration of one to three years.
This Prospectus provides you with the basic information you should know before
investing in any of the Funds. You should read it and keep it for future
reference. A Statement of Additional Information dated February 1, 1998,
containing additional information about the Trust and each Fund has been filed
with the Securities and Exchange Commission and is incorporated by reference in
its entirety into this Prospectus. You may obtain a copy of the Statement of
Additional Information without charge by calling the Trust at 800-236-4479 or
writing the Trust at 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank, nor are they federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other agency. Investment
in a Fund's shares involves risk, including the possible loss of principal.
Shares of the Funds 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
There can be no assurance that the investment objective of any Fund will be
achieved.
HOTCHKIS AND WILEY VARIABLE TRUST
725 South Figueroa Street, Suite 4000,
Los Angeles, California 90017
800-236-4479
Investment Advisor: Hotchkis and Wiley
Distributor: Princeton Funds Distributor, Inc.
FEBRUARY 1, 1998
AS SUPPLEMENTED SEPTEMBER 14, 1998
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TABLE OF CONTENTS
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<TABLE>
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INVESTMENT OBJECTIVES AND POLICIES..................... 3
SECURITIES AND TECHNIQUES USED BY THE FUNDS............ 7
INVESTMENT RISKS....................................... 13
PRINCIPAL INVESTMENT RESTRICTIONS...................... 15
ORGANIZATION AND MANAGEMENT............................ 15
PURCHASE AND REDEMPTION OF SHARES...................... 18
DIVIDENDS AND TAX STATUS............................... 19
NET ASSET VALUE........................................ 20
PERFORMANCE INFORMATION................................ 20
GENERAL INFORMATION.................................... 21
APPENDIX -- DESCRIPTION OF RATINGS..................... 22
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INVESTMENT OBJECTIVES AND POLICIES
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GENERAL
Each Fund's investment objective is a fundamental policy, which cannot be
changed without the approval of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). There can be no assurance that any objective will be met. For a
discussion of certain risks associated with investment in the Funds, including
their use of derivatives, see "Investment Risks" on page 13.
HOTCHKIS AND WILEY, a division of Merrill Lynch Asset Management L.P. (the
"Advisor"), acts as investment advisor to each Fund.
THE EQUITY INCOME VIP PORTFOLIO
The investment objective of the EQUITY INCOME VIP PORTFOLIO is to provide
current income and long-term growth of income, accompanied by growth of capital.
The EQUITY INCOME VIP PORTFOLIO will attempt to achieve its objective by
investing in equity securities. In selecting investments for the Fund, the
Advisor focuses on securities that it believes to have superior values. In
arriving at this determination, the Advisor will generally seek securities of
companies that have such characteristics as earnings yield at least 3% greater
than the yield on long-term bonds, dividend yield which exceeds the composite
yield on the securities comprising the Standard & Poor's Index of 500 Common
Stocks ("S&P 500"), and overall financial strength.
Under normal market conditions, the EQUITY INCOME VIP PORTFOLIO will invest at
least 80% of its total assets in income-producing equity securities issued by
companies with a record of earnings and dividends. The remainder of its
portfolio may be invested in securities of companies which pay no dividends or
interest but have potential for growth unrecognized by the market or changes in
business or management that indicate possible growth.
The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities to be invested in by the Fund will be rated investment grade or, if
unrated, be of comparable quality in the opinion of the Advisor, provided,
however, that the Fund may invest up to 5% of its net assets in convertible
securities rated at least B by Moody's Investors Service ("Moody's") or Standard
& Poor's Ratings Group ("S&P") or, if unrated, of comparable quality in the
opinion of the Advisor. "Investment grade" means the debt securities have been
rated at least (i) Baa by Moody's or BBB by S&P, Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps"); (ii) A-2 by S&P,
Prime-2 by Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term
obligations; or (iii) of comparable quality as determined by the Advisor in the
case of unrated securities. All ratings are determined at the time of
investment. See the Appendix for a description of ratings.
Securities rated Baa are considered by Moody's to have speculative
characteristics. For Baa/BBB rated securities, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
Securities rated below BBB or Baa are judged to be predominantly speculative
with respect to their capacity to pay interest and repay principal in accordance
with the terms of their obligations and are commonly known as "junk bonds." See
"Investment Risks -- Risks of Investing in Fixed-Income Securities" on page 13.
Investors should carefully consider the relative risks associated with
investments in securities which carry lower ratings and in comparable unrated
securities.
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Subsequent to its purchase by the Fund, a security may be assigned a lower
rating or cease to be rated. Such an event would not require the sale of the
security, but the Advisor will consider such an event in determining whether the
Fund should continue to hold the security in its portfolio.
For liquidity purposes and pending investment of cash receipts, the Fund may
invest in short-term (i.e., maturing or due in one year or less from date of
purchase) investment grade debt securities of the U.S. Government, its agencies
and instrumentalities, bank certificates of deposit, bankers' acceptances, high
quality commercial paper, demand notes and repurchase agreements.
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, the Fund may invest all or part of
its assets in short-term investment grade debt obligations.
The EQUITY INCOME VIP PORTFOLIO can invest on a "global" basis, although it is
not required to. See "Securities and Techniques Used by the Funds -- Foreign
Securities" on page 8.
THE INTERNATIONAL VIP PORTFOLIO
The investment objective of the INTERNATIONAL VIP PORTFOLIO is to provide
current income and long-term growth of income, accompanied by growth of capital.
The Fund will attempt to achieve its objective by investing at least 65% of its
total assets in equity securities in at least three non-U.S. markets.
Ordinarily, the Fund will invest in equity securities issued by companies
located in some or all of the developed foreign equity markets. These markets
generally include 15 markets in Europe as well as Australia, New Zealand, Japan,
Hong Kong, Singapore, Malaysia, Canada and South Korea. There are risks
associated with investment in foreign securities, as described under "Investment
Risks -- Risks of Investing in Emerging Market and Other Foreign Securities" on
page 13.
In selecting investments for the Fund, the Advisor will, in general, use the
same criteria as those used in selecting investments for the EQUITY INCOME VIP
PORTFOLIO; that is, it will focus on securities that it believes have superior
values. The Advisor will generally seek equity securities of companies in each
country that have such characteristics as dividend yield greater than the local
market average; earnings yield at least three percentage points greater than the
country's 10-year government bond yield (or low price-to-earnings ratios
relative to the local market), and financial strength.
Under normal market conditions, the INTERNATIONAL VIP PORTFOLIO will invest at
least 80% of its total assets in income-producing equity securities issued by
companies with a record of earnings and dividends. The remainder of its
portfolio may be invested in securities of companies which pay no dividends or
interest, but have potential for growth unrecognized by the market or changes in
business or management that indicate possible growth. The Fund will not invest
in foreign fixed-income securities with a maturity in excess of one year.
The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities will be securities of an issuer having an outstanding issue of debt
securities rated at least A by Moody's or S&P or, if unrated, be of comparable
quality in the opinion of the Advisor.
For liquidity purposes and pending investment of cash receipts, the Fund may
invest in short-term investment grade debt securities of the U.S. Government,
its agencies and instrumentalities, bank certificates of deposit, bankers'
acceptances, high quality commercial paper, demand notes and repurchase
agreements.
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, the Fund may invest all or part of
its assets in short-term investment grade debt obligations.
THE INTERNATIONAL VIP PORTFOLIO may purchase foreign currency options or enter
into forward foreign currency exchange contracts for the purpose of hedging
against
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the effect that currency fluctuations will have on the value of Fund assets or
liabilities. See "Securities and Techniques Used by the Funds -- Other
Derivative Instruments" on page 12.
THE FIXED-INCOME FUNDS:
THE TOTAL RETURN BOND VIP PORTFOLIO
The investment objective of the TOTAL RETURN BOND VIP PORTFOLIO is to maximize
long-term total return. The Fund invests in a diversified portfolio of fixed-
income securities of varying maturities with a portfolio duration of two to
eight years. Portfolio holdings will be concentrated in areas of the bond market
(based on quality, sector, coupon or maturity) which the Advisor believes to be
relatively undervalued. The Advisor views bonds to be any interest-bearing
security that obligates the issuer to pay the bondholder specified sums of money
on specified dates and generally requires the issuer to repay the principal
amount of the loan at maturity.
THE LOW DURATION VIP PORTFOLIO
The investment objective of the LOW DURATION VIP PORTFOLIO is to maximize total
return, consistent with preservation of capital. The Fund invests in a
diversified portfolio of fixed-income securities of varying maturities with a
portfolio duration of one to three years. The total rate of return for this Fund
is expected to exhibit less volatility than that of a longer duration
fixed-income fund such as the TOTAL RETURN BOND VIP PORTFOLIO.
INVESTMENT POLICIES OF THE FIXED-INCOME FUNDS
The TOTAL RETURN BOND VIP PORTFOLIO and the LOW DURATION VIP PORTFOLIO (the
"FIXED-INCOME FUNDS") will attempt to achieve their objectives by investing in
the following types of securities which may be issued by domestic or foreign
entities: (i) U.S. Government securities; (ii) corporate debt securities,
including bonds, notes and debentures; (iii) corporate commercial paper; (iv)
mortgage- and other asset-backed securities, including collateralized mortgage
obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs");
(v) variable and floating rate debt securities (including inverse floaters);
(vi) structured debentures, bonds and notes; (vii) bank certificates of deposit;
(viii) fixed time deposits and bankers' acceptances; (ix) repurchase agreements,
reverse repurchase agreements and dollar rolls; (x) preferred stock of issuers
whose assets consist of mortgage-backed securities of U.S. Government agencies;
(xi) debt securities that are convertible into or exchangeable for equity
securities ("convertible securities"); (xii) obligations of foreign governments
or their subdivisions, agencies and instrumentalities; (xiii) obligations of
international agencies (such as the Agency for International Development) or
supranational entities; and (xiv) municipal obligations. There is no limitation
on the percentage of a Fund's assets that may be committed to any of these types
of securities, except to the extent that a security may be deemed to be
illiquid. See "Securities and Techniques Used by the Funds" on page 7.
Under normal circumstances, the TOTAL RETURN BOND VIP PORTFOLIO will invest at
least 70% of its net assets in debt instruments rated at least investment grade.
For a description of "investment grade" see "THE EQUITY INCOME VIP PORTFOLIO."
Up to 15% of the TOTAL RETURN BOND VIP PORTFOLIO's net assets may be invested in
securities rated below investment grade but rated B or higher by one of the
nationally recognized rating agencies or, if unrated, of comparable quality in
the opinion of the Advisor.
Securities rated Baa are considered by Moody's to have speculative
characteristics. For Baa/BBB rated securities, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
Securities rated below BBB or Baa are judged to be predominantly speculative
with respect to their capacity to pay interest and repay principal in accordance
with the terms of their obligations and are commonly known as "junk bonds." See
"Investment Risks -- Risks of Investing in Fixed-Income Securities" on page 13.
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Under normal circumstances, the LOW DURATION VIP PORTFOLIO will invest at least
70% of its net assets in securities rated at least: (i) A by Moody's, S&P, Fitch
or Duff & Phelps; (ii) A-2 by S&P, Prime-2 by Moody's, F-2 by Fitch or D-2 by
Duff & Phelps for short-term debt obligations; or (iii) of comparable quality as
determined by the Advisor in the case of unrated securities. Up to 10% of the
LOW DURATION VIP PORTFOLIO's net assets may be invested in securities rated
below investment grade but rated B or higher by one of the nationally recognized
rating agencies or, if unrated, of comparable quality in the opinion of the
Advisor. The remainder of the LOW DURATION VIP PORTFOLIO's investments will be
rated Baa or BBB by at least one of these rating agencies or, if unrated, of
comparable quality in the opinion of the Advisor.
After its purchase by one of the Funds, a security may be assigned a lower
rating or cease to be rated. This would not require the sale of the issue, but
the Advisor will consider such an event in determining whether the Fund should
continue to hold the security in the portfolio.
Each of the FIXED-INCOME FUNDS may invest up to 15% of its net assets in
emerging market foreign securities, which are generally considered to be of a
credit quality below investment grade.
Each of the FIXED-INCOME FUNDS may invest up to 25% of its total assets in
securities of foreign issuers that are denominated in U.S. dollars. Investment
by these Funds in securities of foreign issuers that are not denominated in U.S.
dollars will be limited to a maximum of 15% of each FIXED-INCOME FUND'S total
assets. See "Securities and Techniques Used by the Funds -- Foreign Securities"
on page 8.
The FIXED-INCOME FUNDS each invest in a diversified portfolio of fixed-income
securities with a different portfolio "duration." Duration is a commonly used
measure of the potential volatility of the price of a debt security, or the
aggregate market value of a portfolio of debt securities, prior to maturity.
Duration measures the magnitude of the change in price of a debt security
relative to a given change in the market interest rate. Duration incorporates a
bond's yield, coupon interest payments, final maturity, call and put features
and prepayment exposure into one measure.
For any fixed-income security with interest payments occurring prior to the
payment of principal, duration is ordinarily less than maturity. In general, all
other things being equal, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security. A Fund's computation of duration is based
on estimated rather than known factors. Thus, there can be no assurance that a
particular portfolio duration will at all times be achieved by the Fund.
Duration is used in the management of the FIXED-INCOME FUNDS as a tool to
measure interest rate risk. For example, a Fund with a 2-year duration would be
expected to change in value 2% for every 1% move in interest rates. Assuming an
expected average duration of 2 years for the LOW DURATION VIP PORTFOLIO, a 1%
decline in interest rates would cause the Fund to gain 2% in price; likewise, a
1% rise in interest rates would produce a decline of 2% in the Fund's price.
Assuming an expected average duration of 4.5 years for the TOTAL RETURN BOND VIP
PORTFOLIO, a 1% decline in interest rates would cause the Fund to gain 4.5% in
price; likewise, a 1% rise in interest rates would produce a decline of 4.5% in
the Fund's price. Other factors such as changes in credit quality, prepayments,
the shape of the yield curve and liquidity affect the net asset value of the
Funds and may be correlated with changes in interest rates. These factors can
exacerbate swings in the Funds' share prices during periods of volatile interest
rate changes.
For a more detailed discussion of duration, see "Investment Objectives and
Policies -- Duration" in the Statement of Additional Information.
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SECURITIES AND TECHNIQUES USED BY THE FUNDS
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The following provides a summary of the securities and techniques used by the
Funds. The Statement of Additional Information contains more detailed
information about these investments and the risks associated with them.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the United States Treasury, such as
Treasury bills, certificates of indebtedness, notes, bonds and component parts
of notes or bonds (including the principal of such obligations or the interest
payments scheduled to be paid on such obligations). U.S. Government agencies and
instrumentalities that issue or guarantee securities include, but are not
limited to, the Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), Federal Home Loan Banks, Federal
Financing Bank, and Student Loan Marketing Association.
All Treasury securities are backed by the full faith and credit of the United
States. Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some, such
as the Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as securities issued
by FNMA, are supported only by the credit of the instrumentality and not by the
Treasury. If the securities are not backed by the full faith and credit of the
United States, the owner of the securities must look principally to the agency
issuing the obligation for repayment and may not be able to assert a claim
against the United States in the event that the agency or instrumentality does
not meet its commitment.
Among the U.S. Government securities that may be purchased by the FIXED-INCOME
FUNDS are certain "mortgage-backed securities" of GNMA, the Federal Home Loan
Mortgage Corporation ("FHLMC") and FNMA. See the discussion of "Mortgage-Related
Securities" on page 11.
MUNICIPAL OBLIGATIONS
The FIXED-INCOME FUNDS may invest in municipal obligations issued by or on
behalf of the governments of states, territories or possessions of the United
States, the District of Columbia and their agencies and instrumentalities.
Municipal obligations may be backed by the full taxing power of a municipality
("general obligations"), backed by the revenues from a specific project or the
credit of a private organization ("revenue obligations") or issued by or on
behalf of public authorities to provide funding for various privately operated
industrial and commercial facilities ("private activity bonds"). Some municipal
obligations are collateralized as to payment of principal and interest by an
escrow of U.S. Government or federal agency obligations, while others are
insured by private insurance companies, while still others may be supported by
letters of credit furnished by domestic or foreign banks. Others are not backed
by escrowed securities, insurance, letters of credit or other credit
enhancements.
The FIXED-INCOME FUNDS' investments in municipal obligations may include fixed,
variable or floating rate general obligations, revenue obligations, and other
obligations, including municipal lease obligations; resource recovery
obligations; certificates of participation; inverse floaters; instruments with
demand features, tender option bonds and standby commitments; private activity
obligations; zero coupon and asset-backed obligations; variable rate auction and
residual interest obligations; tax, revenue or bond anticipation notes; tax-
exempt commercial paper; and purchase obligations that are subject to
restrictions on resale. See the Statement of Additional Information for a
further discussion of these obligations.
The FIXED-INCOME FUNDS may invest a portion of the value of their assets in
municipal obligations which
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are related in such a way that an economic, business or political development or
change affecting one such security would also affect the other securities.
Examples of these include securities the interest on which is paid from revenues
of similar types of projects, or securities whose issuers are located in the
same state. As a result, the FIXED-INCOME FUNDS may be subject to greater risk
compared to funds that do not follow this practice.
CORPORATE AND OTHER OBLIGATIONS
Each Fund may invest in corporate debt securities, variable and floating rate
debt securities and corporate commercial paper in the rating categories
described above. Floating rate securities normally have a rate of interest which
is set as a specific percentage of a designated base rate, such as the rate on
Treasury bonds or bills or the prime rate at a major commercial bank. The
interest rate on floating rate securities changes periodically when there is a
change in the designated base rate. Variable rate securities provide for a
specified periodic adjustment in the interest rate based on prevailing market
rates.
The FIXED-INCOME FUNDS may invest in structured debentures and structured notes,
which are hybrid instruments with characteristics of both bonds and swap
agreements. Like a bond, these securities make regular coupon payments and
generally have fixed principal amounts. However, the coupon payments are
typically tied to a swap agreement which can be affected by changes in a variety
of factors such as exchange rates, the shape of the yield curve and foreign
interest rates. Because of these factors, structured debentures and structured
notes can display price behavior that is more volatile than and often not
correlated to other fixed-income securities.
The FIXED-INCOME FUNDS may also invest in inverse floaters and tiered index
bonds. An inverse floater is a type of derivative that bears a floating or
variable interest rate that moves in the opposite direction to the interest rate
on another security or index level. Changes in the interest rate of the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed-rate bond. Tiered index bonds
are also a type of derivative instrument. The interest rate on a tiered index
bond is tied to a specified index or market rate. So long as this index or
market rate is below a predetermined "strike" rate, the interest rate on the
tiered index bond remains fixed. If, however, the specified index or market rate
rises above the "strike" rate, the interest rate on the tiered index bond will
decrease. In general, the interest rates on tiered index bonds and inverse
floaters move in the opposite direction of prevailing interest rates. The market
for inverse floaters and tiered index bonds is relatively new. These corporate
debt obligations may have characteristics similar to those of mortgage-related
securities, but corporate debt obligations, unlike mortgage-related securities,
are not subject to prepayment risk other than through contractual call
provisions which generally impose a penalty for prepayment.
ASSET-BACKED SECURITIES
The FIXED-INCOME FUNDS may invest in securities whose principal and interest
payouts are backed by, or supported by, any of various types of assets. These
assets most typically include receivables related to the purchase of
automobiles, credit card loans, and home equity loans. These securities
generally take the form of a structured type of security, including
pass-through, pay-through, and stripped interest payout structures.
FOREIGN SECURITIES
Each Fund may invest in foreign securities. Foreign economies may differ from
the U.S. economy; individual foreign companies may differ from domestic
companies in the same industry; and foreign currencies may be stronger or weaker
than the U.S. dollar. The Advisor believes that the ability to invest abroad
will enable the Funds to take advantage of these differences when they are
favorable.
Fixed-income securities that may be purchased by the INTERNATIONAL and
FIXED-INCOME FUNDS include debt obligations issued or guaranteed by foreign
governments, their subdivisions, agencies or instrumentalities, or by
supranational entities that have been constituted by the governments of several
countries to promote
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economic development, such as The World Bank and The Asian Development Bank.
Foreign investment in certain foreign government debt is restricted or
controlled to varying degrees.
The FIXED-INCOME FUNDS may invest in fixed-income securities of issuers located
in emerging foreign markets. Such markets generally include every country in the
world other than the U.S., Canada, Japan, Australia, Malaysia, New Zealand, Hong
Kong, Singapore, South Korea and most Western European countries. From time to
time, emerging markets have offered the opportunity for higher returns but
involve a higher level of risk. Accordingly, the Advisor believes that the
FIXED-INCOME FUNDS' limited ability to invest in emerging markets throughout the
world may enable the Funds to obtain a wider range of attractive investment
opportunities. Emerging market securities include securities issued or
guaranteed by governments, their agencies, instrumentalities or central banks
("sovereign debt"); securities of issuers organized and operated to restructure
the investment characteristics of sovereign debt; securities of banks and other
business entities; and securities denominated in or indexed to currencies of
emerging markets. These securities include "Brady Bonds," which afford emerging
market countries a means to restructure their outstanding commercial bank debt.
Foreign governmental issuers of debt or the governmental authorities that
control repayment of the debt may be unable or unwilling to repay principal or
pay interest when due and all or a portion of the interest payments and/or
principal repayment with respect to Brady Bonds may be uncollateralized.
Emerging market securities are generally considered to be of a credit quality
below investment grade, even though they often are not rated by any nationally
recognized rating agency. The Advisor seeks to reduce the risk associated with
emerging market securities by limiting the amount of such securities held by the
Funds, by the depth of its own credit analysis, and evaluation of political,
economic, currency and other factors that may be pertinent.
There are risks in investing in emerging market and other foreign securities.
See "Investment Risks -- Risks of Investing in Emerging Market and Other Foreign
Securities" on page 13.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements involving U.S. Government
securities with commercial banks or broker-dealers, whereby the seller of a
security agrees to repurchase the security on an agreed-upon date in the future.
While each Fund intends to be fully "collateralized" as to such agreements, and
the collateral will be marked to market daily, if the person obligated to
repurchase from the Fund defaults, there may be possible delays and expenses in
liquidating the securities subject to the repurchase agreement, a decline in
their value and loss of interest.
REVERSE REPURCHASE AGREEMENTS
The FIXED-INCOME FUNDS may enter into reverse repurchase agreements, whereby a
Fund sells securities concurrently with entering into an agreement to repurchase
those securities at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on those securities. Reverse repurchase agreements are speculative techniques
involving leverage and are considered borrowings by the Funds for purposes of
the percentage limitations applicable to borrowings.
DOLLAR ROLLS
The FIXED-INCOME FUNDS may use dollar rolls as part of their investment
strategy. In a dollar roll, a Fund sells securities for delivery in the current
month and simultaneously contracts to repurchase substantially similar
securities (same type and coupon) on a specified future date from the same
party. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position
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or cash equivalent security position that matures on or before the forward
settlement date of the dollar roll transaction.
The FIXED-INCOME FUNDS will establish a segregated account with the custodian in
which they will maintain cash, U.S. Government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily, equal in value to
their obligations in respect of dollar rolls. Dollar rolls involve the risk that
the market value of the securities retained by the Fund may decline below the
price of the securities the Fund has sold but is obligated to repurchase under
the agreement. If the buyer of the securities under a dollar roll files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Dollar rolls are speculative techniques involving leverage and are considered
borrowings by the Funds, subject to their limitations on borrowings.
BORROWING
As a fundamental policy, the EQUITY INCOME and INTERNATIONAL VIP PORTFOLIOS may
borrow money, but only from banks for temporary or emergency purposes in amounts
not exceeding 10% of each Fund's total assets. The FIXED-INCOME FUNDS may borrow
for temporary, emergency or investment purposes. This borrowing may be
unsecured. The 1940 Act requires a Fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed. Borrowing subjects a Fund to
interest costs which may or may not be recovered by appreciation of the
securities purchased, and can exaggerate the effect on net asset value of any
increase or decrease in the market value of a Fund's portfolio. This is the
speculative factor known as leverage.
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, the FIXED-INCOME FUNDS may lend their
portfolio securities, provided: (i) the loan is secured continuously by
collateral consisting of short-term, high quality debt securities, including
U.S. Government securities, negotiable certificates of deposit, bankers'
acceptances or letters of credit, maintained on a daily marked-to-market basis
in an amount at least equal to the current market value of the securities
loaned; (ii) the Fund may at any time call the loan and obtain the return of the
securities loaned; (iii) the Fund will receive any interest or dividends paid on
the loaned securities; and (iv) the aggregate market value of securities loaned
will not at any time exceed one-third of the total assets of the Fund.
WHEN-ISSUED SECURITIES
The INTERNATIONAL VIP PORTFOLIO and the FIXED-INCOME FUNDS may purchase
securities on a when-issued or delayed-delivery basis, generally in connection
with an underwriting or other offering. When-issued and delayed-delivery
transactions occur when securities are bought with payment for and delivery of
the securities scheduled to take place at a future time, beyond normal
settlement dates, generally from 15 to 45 days after the transaction. The price
that the Fund is obligated to pay on the settlement date may be different from
the market value on that date. While securities may be sold prior to the
settlement date, the Funds intend to purchase such securities with the purpose
of actually acquiring them, unless a sale would be desirable for investment
reasons. At the time the Fund makes a commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the value of the
security each day in determining the Fund's net asset value. The Fund will also
establish a segregated account with its custodian in which it will hold cash,
U.S. Government securities, equity securities or other liquid, unencumbered
assets, marked-to-market daily, equal in value to its obligations for
when-issued securities.
SHORT SALES AGAINST-THE-BOX
Each Fund may make short sales of securities (i.e., sales of securities the Fund
does not own) or maintain a short position only if (i) at all times when the
short position is open, the Fund owns an equal amount of such securities or
securities convertible into or
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exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short (a short
sale "against-the-box") and (ii) not more than 25% of the Fund's net assets
(taken at current value) is held as collateral for such sales at any one time.
REAL ESTATE INVESTMENT TRUSTS
Each Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet certain
Internal Revenue Code requirements. To qualify, a REIT must distribute at least
95% of its taxable income to its shareholders and receive at least 75% of that
income from rents, mortgages and sales of property. REITs offer investors
greater liquidity and diversification than direct ownership of a handful of
properties, as well as greater income potential than an investment in common
stocks. Like any investment in real estate, though, a REIT's performance depends
on several factors, such as its ability to find tenants for its properties, to
renew leases and to finance property purchases and renovations.
MORTGAGE-RELATED SECURITIES
The FIXED-INCOME FUNDS may invest in mortgage-related securities, including
mortgage pass-through securities and collateralized mortgage obligations.
Mortgage pass-through securities are securities representing interests in pools
of mortgages in which payments of both interest and principal on the securities
are generally made monthly, in effect "passing through" monthly payments made by
the individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities). For
a discussion of certain risks associated with investment in mortgage-related
securities, including their volatility, see "Investment Risks -- Risks of
Investing in Fixed-Income Securities" on page 13.
Payment of principal and interest on some mortgage-related securities (but not
the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
GNMA) or by agencies or instrumentalities of the U.S. Government (in the case of
securities guaranteed by FNMA or the FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.
CMOs, including CMOs that have elected to be treated as REMICs, are hybrid
instruments with characteristics of both bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage loans but
are more typically collateralized by portfolios of securities guaranteed by
GNMA, FHLMC or FNMA or of mortgage pass-through securities created by
non-governmental issuers. CMOs are structured into multiple classes, with each
class bearing a different stated maturity. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes receive principal
only after the first class has been retired.
Other mortgage-related securities include those that directly or indirectly
represent a participation in or are secured by and payable from mortgage loans
on real property, such as CMO residuals, stripped mortgage-backed securities,
variable rate securities (including inverse floaters), or tiered index bonds and
may be structured in classes with rights to receive varying proportions of
principal and interest. Stripped mortgage-backed securities are derivative,
multi-class mortgage securities. The FIXED-INCOME FUNDS may invest in stripped
mortgage-backed securities issued by the U.S. Government, its agencies and
instrumentalities. Stripped mortgage-backed securities are usually structured
with two classes that receive different proportions of the interest and
principal distributions on a pool of mortgage assets. In certain cases, one
class will receive
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all of the interest (the interest-only or "IO" class), while the other class
will receive all of the principal (the principal-only or "PO" class). The yields
to maturity on IOs and POs are sensitive to the rate of principal repayments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than expected prepayments of
principal, the yield on POs could be materially adversely affected. Such
securities will be considered liquid only if so determined in accordance with
guidelines established by the Trustees. The FIXED-INCOME FUNDS also may invest
in stripped mortgage-backed securities that are privately issued. These
securities will be considered illiquid for purposes of each Fund's limit on
illiquid securities.
CMOs and other mortgage-related securities that are issued or guaranteed by the
U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities for purposes of applying a Fund's
diversification tests. Generally, the entity that has the ultimate
responsibility for the payment of interest and principal on a security is deemed
to be the issuer of an obligation.
OTHER DERIVATIVE INSTRUMENTS
In addition to the asset-backed securities and mortgage-related securities
(including tiered index bonds and inverse floaters) which may be purchased only
by the FIXED-INCOME FUNDS, all Funds may utilize certain other financial
instruments whose performance is derived from the performance of an underlying
asset ("derivatives"). The Funds may purchase and write call and put options on
securities, securities indexes and on foreign currencies, and enter into futures
contracts and use options on futures contracts. The Funds also may enter into
swap agreements with other institutional investors with respect to foreign
currencies, interest rates and securities indexes. The Funds may use these
techniques to hedge against changes in interest rates, foreign currency exchange
rates or securities prices or as part of their overall investment strategies.
Each Fund will maintain segregated accounts consisting of cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily (or, as permitted by applicable regulation, enter into
certain offsetting positions), to cover its obligations under options, futures
contracts and swap agreements to avoid leveraging of the Fund. See "Investment
Risks -- Risks of Using Certain Derivatives" on page 14.
The Funds may buy or sell interest rate futures contracts, options on interest
rate futures contracts and options on debt securities for the purpose of hedging
against changes in the value of securities which a Fund owns or anticipates
purchasing due to anticipated changes in interest rates. The Funds also may
engage in currency exchange transactions by means of buying or selling foreign
currency on a spot basis, entering into forward foreign currency exchange
contracts, and buying and selling foreign currency options, futures and options
on futures. Foreign currency exchange transactions may be entered into for the
purpose of hedging against foreign currency exchange risk arising from the
Funds' investment or anticipated investment in securities denominated in foreign
currencies. A Fund will not enter into futures contracts or options thereon for
non-hedging purposes if, immediately thereafter, the aggregate initial margin
deposits on the Fund's futures positions and premiums paid for options thereon
would exceed 5% of the liquidation value of the Fund's total assets. There is no
other percentage limitation on a Fund's use of options, futures and options
thereon, except for the limitation on foreign currency option contracts
described below.
Also, the Funds may enter into interest rate, index and currency exchange rate
swap agreements for the purpose of attempting to obtain a particular desired
return at a lower cost to a Fund than if the Fund had invested directly in an
instrument that yielded that desired return. In a standard swap agreement, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on a particular predetermined investment or investments. Swap
agreements are subject
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to the Funds' overall limit that no more than 15% of net assets may be invested
in illiquid securities, and a Fund will not enter into a swap agreement with any
single party if the net amount owed or to be received under existing contracts
with that party would exceed 5% of the Fund's assets.
The Funds may purchase foreign currency options or enter into forward foreign
currency exchange contracts for the purpose of hedging against the effect that
currency fluctuations will have on the value of Fund liabilities, such as known
or expected redemptions or the payment of any declared dividends. No Fund will
enter into foreign currency option contracts if the premiums on such options
exceed 5% of the Fund's total assets. See "Investment Objectives and Policies --
Derivative Instruments" in the Statement of Additional Information.
STATE INSURANCE REGULATION
Each Fund provides an investment vehicle for variable annuity contracts and
variable life insurance policies to be offered by the separate accounts of
participating life insurance companies ("Participating Insurance Companies").
Certain states have regulations concerning concentration of investments and
purchase and sale of futures contracts, among other techniques. If these
regulations are applied to a Fund, the Fund may be limited in its ability to
engage in such techniques and to manage its investments with the flexibility
provided herein. It is each Fund's intention to operate in material compliance
with current insurance laws and regulations, as applied in each jurisdiction in
which contracts or policies of separate accounts of Participating Insurance
Companies are offered.
INVESTMENT RISKS
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The investment practices described above involve certain risks. The net asset
value of any of the Funds may increase or decrease for many reasons. These
include changes in the market prices of portfolio securities. This means an
investor's price may be worth more or less at redemption than at the time of
purchase. The following provides a summary of the more significant risks
associated with investing in the Funds. The Statement of Additional Information
contains more detailed information about these investments and the risks that
are associated with them.
RISKS OF INVESTING IN EMERGING MARKET AND OTHER FOREIGN SECURITIES
Investments in emerging market and other foreign securities involve certain risk
considerations not typically associated with investing in securities of U.S.
issuers, including: (i) currency devaluations and other currency exchange rate
fluctuations; (ii) political uncertainty and instability; (iii) more substantial
government involvement in the economy; (iv) higher rates of inflation; (v) less
government supervision and regulation of the securities markets and participants
in those markets; (vi) controls on foreign investment and limitations on
repatriation of invested capital and on a Fund's ability to exchange local
currencies for U.S. dollars; (vii) greater price volatility; (viii)
substantially less liquidity and significantly smaller capitalization of
securities markets; (ix) absence of uniform accounting and auditing standards;
(x) generally higher commission expenses; (xi) delay in settlement of securities
transactions; and (xii) greater difficulty in enforcing shareholder rights and
remedies.
RISKS OF INVESTING IN FIXED-INCOME SECURITIES
The Funds which invest in fixed-income securities are subject primarily to
interest rate and credit risk. Interest rate risk is the potential for a decline
in bond prices due to rising interest rates. In general, bond prices vary
inversely with interest rates. The change in bond price depends on several
factors, including the bond's maturity date. In general, bonds with longer
maturities are more sensitive to changes in interest rates than bonds with
shorter maturities. Credit risk is the possibility that
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a bond issuer will fail to make timely payments of interest or principal to a
Fund.
The FIXED-INCOME FUNDS may invest in mortgage- and asset-backed securities. The
yield characteristics of mortgage- and asset-backed securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a Fund purchases such a
security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively, if
the Fund purchases these securities at a discount, faster than expected
prepayments will increase yield to maturity, while slower than expected
prepayments will reduce yield to maturity. Although the extent of prepayments on
a pool of mortgage loans depends on various economic and other factors, as a
general rule, prepayments on fixed-rate mortgage loans will increase during a
period of falling interest rates and decrease during a period of rising interest
rates. Asset-backed securities, although less likely to experience the same
prepayment rates as mortgage-backed securities, may respond to certain of the
same factors influencing prepayments, while at other times different factors
will predominate. Mortgage-backed securities and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because of
the risk of prepayment.
The FIXED-INCOME FUNDS may invest in stripped mortgage- or asset-backed
securities, which receive differing proportions of the interest and principal
payments from the underlying assets. The market value of such securities
generally is more sensitive to changes in prepayment and interest rates than is
the case with traditional mortgage-and asset-backed securities, and in some
cases the market value may be extremely volatile. With respect to certain
stripped securities, such as interest only ("IO") and principal only ("PO")
classes, a rate of prepayment that is faster or slower than anticipated may
result in a Fund failing to recover all or a portion of its investment, even
though the securities are rated investment grade. Certain of the stripped
mortgage- and asset-backed securities held by the Funds are considered to be
illiquid under guidelines established by the Trustees.
Reverse repurchase agreements and dollar rolls, which the FIXED-INCOME FUNDS may
enter into, involve the risk that the market value of the securities retained by
the Fund may decline below the price of the securities the Fund has sold but is
obligated to repurchase under the agreement. If the buyer of securities under a
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.
The FIXED-INCOME FUNDS and, to a limited extent, the EQUITY INCOME VIP PORTFOLIO
may invest a portion of their assets in non-investment grade debt securities,
commonly referred to as "junk bonds." Low-rated and comparable unrated
securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as speculative with
respect to the issuer's capacity to pay interest and to repay principal. The
market values of certain of these securities tend to be more sensitive to
individual corporate development and changes in economic conditions than higher
quality bonds. In addition, low-rated and comparable unrated securities tend to
be less marketable than higher-quality debt securities because the market for
them is not as broad or active. The lack of a liquid secondary market may have
an adverse effect on market price and a Fund's ability to sell particular
securities.
RISKS OF USING CERTAIN DERIVATIVES
Participation in the options or futures markets involves investment risks and
transaction costs to which a Fund would not be subject absent the use of these
strategies. If the Advisor's predictions of movements in the direction of the
securities and interest rate markets are
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inaccurate, the adverse consequences to a Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, futures contracts and options on futures contracts include: (i)
dependence on the Advisor's ability to predict correctly movements in the
direction of interest rates and securities prices; (ii) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the prices of the securities being hedged; (iii) the fact that
skills needed to use these strategies are different from those needed to select
portfolio securities; (iv) the absence of a liquid secondary market for any
particular instrument at any time; (v) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences; and (vi) the
possible inability of a Fund to purchase or sell a portfolio security at a time
that otherwise would be favorable for it to do so, or the possible need for the
Fund to sell the security at a disadvantageous time, due to the requirement that
the Fund maintain "cover" or segregate securities in connection with hedging
transactions. The loss from investing in futures transactions is potentially
unlimited. There also is no assurance that a liquid secondary market will exist
for futures contracts and options thereon in which a Fund may invest. See
"Investment Objectives and Policies -- Derivative Instruments" in the Statement
of Additional Information.
PRINCIPAL INVESTMENT RESTRICTIONS
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Each Fund is subject to certain investment restrictions which are fundamental
policies. Fundamental policies are those that cannot be changed without the
approval of a majority (as defined in the 1940 Act) of that Fund's outstanding
voting securities. Each Fund's investment objective is a fundamental policy.
Among its restrictions, a Fund may not: (i) with respect to 75% of its total
assets, invest more than 5% of its total assets (determined at the time of
investment) in securities of any one issuer (other than U.S. Government
securities); (ii) with respect to 75% of its total assets, purchase more than
10% of the outstanding voting securities of any one issuer; or (iii) invest more
than 25% of its total assets (determined at the time of investment) in one or
more issuers having their principal business activities in a single industry.
Additional information about each Fund's investment restrictions is contained in
the Statement of Additional Information. It is the position of the Securities
and Exchange Commission that open-end investment companies such as the Funds
should not make certain investments if thereafter more than 15% of the value of
their net assets would be invested in illiquid securities. As a matter of
operating policy (though not a fundamental policy), the Funds limit such
investments to no more than 15% of the value of their net assets. The
investments in this 15% limit include: (i) those which are restricted, i.e.,
those which cannot freely be sold for legal or contractual reasons; (ii) fixed
time deposits subject to withdrawal penalties (other than overnight deposits);
and (iii) repurchase agreements having a maturity of more than seven days. The
15% limitation does not include obligations which are payable at principal
amount plus accrued interest within seven days after purchase.
ORGANIZATION AND MANAGEMENT
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ORGANIZATION AND VOTING RIGHTS
Each Fund is a newly established diversified 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. The Trust's
Board of Trustees decides on matters of general policy and reviews the
activities of the Advisor, and the Trust's officers conduct and supervise the
daily business operations of the Trust. Each Fund is a series of shares, each
having separate assets and liabilities, of
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the Trust. The Board of Trustees may, at its own discretion, create additional
series of shares and classes within series.
Generally, the Funds will not hold an annual meeting of shareholders unless
required by the 1940 Act. Shareholders have one vote per share owned. Matters
submitted to shareholders must be approved by a majority of the outstanding
securities of each Fund, unless it is clear that the interests of each Fund in
the matter are identical or the matter does not affect a Fund. At the request of
the holders of at least 10% of the shares, the Trust will hold a meeting to vote
on the removal of a Trustee, which can occur by a vote of a majority of the
outstanding shares. Ten shareholders holding the lesser of $25,000 worth or one
percent of a Fund's shares may advise the Trustees in writing that they wish to
communicate with other shareholders for the purpose of requesting a meeting to
remove a Trustee. The Trustees will then, if requested by the applicants, mail
at the applicants' expense the applicants' communications to all other
shareholders.
The rights accompanying Fund shares are legally vested in the separate accounts.
However, in accordance with current law and interpretations thereof,
Participating Insurance Companies will vote shares held in the separate accounts
in a manner consistent with timely voting instructions received from the holders
of variable annuity contracts and variable life insurance policies. Each
Participating Insurance Company will vote Fund shares held in separate accounts
for which no timely instructions are received from the holders of variable
annuity contracts and variable life insurance policies, as well as shares it
owns, in the same proportion as those shares for which voting instructions are
received. For a further discussion, please refer to the insurance company's
separate account prospectus.
THE INVESTMENT ADVISOR
HOTCHKIS AND WILEY, located at 725 South Figueroa Street, Suite 4000, Los
Angeles, California 90017, acts as investment advisor to the Funds and generally
administers the affairs of the Trust. The Advisor is a division of Merrill Lynch
Asset Management, L.P. Subject to the direction and control of the Board of
Trustees, the Advisor supervises and arranges the purchase and sale of
securities held in the portfolios of the Funds.
For the services of the Advisor to the EQUITY INCOME VIP PORTFOLIO and the
INTERNATIONAL VIP PORTFOLIO, the Trust, under separate Investment Advisory
Agreements between the Trust and the Advisor, pays the Advisor a fee, computed
daily and payable monthly, at an annual rate of 0.75% of each Fund's average
daily net assets. This fee is higher than that paid by most mutual funds, but
does not reflect the reimbursement of certain of the Funds' expenses as
described below.
Under the Investment Advisory Agreement relating to the TOTAL RETURN BOND VIP
PORTFOLIO, the Trust pays a fee, computed daily and payable monthly, at an
annual rate of 0.55% of the Fund's average daily net assets.
Under the Investment Advisory Agreement relating to the LOW DURATION VIP
PORTFOLIO, the Trust pays the Advisor a fee, computed daily and payable monthly,
at an annual rate of 0.46% of the Fund's average daily net assets.
In addition to the fee payable to the Advisor, each Fund is responsible for its
operating expenses including: (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation and expenses of the
Trust's Trustees other than those affiliated with the Advisor; (v) legal and
audit expenses; (vi) fees and expenses of the Fund's custodian and any
subcustodian, shareholder servicing or transfer agent and accounting services
agent; (vii) expenses incident to the issuance of its shares, including issuance
on the payment of, or reinvestment of, dividends; (viii) fees and expenses
incident to the registration under federal or state securities laws of the Trust
or its shares; (ix) expenses of preparing, printing and mailing reports and
notices and proxy material to shareholders of the Trust; (x) all other expenses
incident to holding meetings of the Trust's shareholders; (xi) dues or
assessments of or contributions to the Investment Company Institute or any
successor; and (xii) such non-
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recurring expenses as may arise, including litigation affecting the Trust and
the legal obligations which the Trust may have to indemnify its officers and
Trustees with respect thereto.
Although not required to do so, the Advisor has agreed to reimburse the EQUITY
INCOME VIP PORTFOLIO to the extent necessary so that its regular annual
operating expenses will not exceed 1.15% of the Fund's average daily net assets.
The Advisor has agreed to reimburse the INTERNATIONAL VIP PORTFOLIO to the
extent necessary so that its regular annual operating expenses will not exceed
1.35% of the Fund's average daily net assets. The Advisor has agreed to
reimburse the TOTAL RETURN BOND VIP PORTFOLIO to the extent necessary so that
its regular annual operating expenses will not exceed 0.65% of the Fund's
average daily net assets. The Advisor has agreed to reimburse the LOW DURATION
VIP PORTFOLIO to the extent necessary so that its regular annual operating
expenses will not exceed 0.58% of the Fund's average daily net assets. The
Advisor will give shareholders at least 30 days' notice of any decision to
change this reimbursement policy.
SUBADVISORS
The Advisor has entered into a subadvisory agreement with Mercury Asset
Management International and Merrill Lynch Asset Management U.K. Limited,
affiliated investment advisors that are subsidiaries of Merrill Lynch & Co.,
Inc. The subadvisory arrangements are for investment research, recommendations
and other investment related services to be provided to the INTERNATIONAL VIP
PORTFOLIO at rates of compensation as may be agreed by the parties. There is no
increase in the aggregate fees paid by this Fund for such services.
THE DISTRIBUTOR
Princeton Funds Distributor, Inc., 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is the Funds' distributor.
THE ADMINISTRATOR
Firstar Trust Company, 615 East Michigan Street, Milwaukee, Wisconsin 53202,
serves as administrator to the Trust pursuant to a Fund Administration Servicing
Agreement.
PORTFOLIO MANAGERS
The portfolio managers have responsibility for the day-to-day management of the
Funds' portfolios.
EQUITY INCOME VIP PORTFOLIO
The current portfolio managers of the EQUITY INCOME VIP PORTFOLIO are Gail
Bardin and Sheldon Lieberman. Ms. Bardin is a managing director of the Advisor
and has served as a portfolio manager of the Advisor since 1988. Mr. Lieberman
joined the Advisor in 1994. Prior to joining the Advisor, Mr. Lieberman was the
Chief Investment Officer for the Los Angeles County Employees Retirement
Association. Ms. Bardin and Mr. Lieberman have served as portfolio managers of
the Fund since its inception.
INTERNATIONAL VIP PORTFOLIO
The current portfolio managers of the INTERNATIONAL VIP PORTFOLIO are Sarah
Ketterer, Harry Hartford and David Chambers. Ms. Ketterer is a managing director
of the Advisor. Prior to joining the Advisor, Ms. Ketterer was with Bankers
Trust Company as an Associate from 1987 to 1990 and a Financial Analyst with
Dean Witter Reynolds from 1983 to 1985. Prior to joining the Advisor, Mr.
Hartford was with the Investment Bank of Ireland as a Senior Manager,
International and Global Equities, from 1985 to 1994. Mr. Chambers has been
associated with Mercury Asset Management International in London since July
1998. Prior to joining the Advisor, Mr. Chambers was with Baring Asset
Management, Inc. as Senior Vice President, Global Equities from 1992 to 1995 and
Baring Brothers, London, England as Assistant Director, Corporate Finance from
1990 to 1991. Ms. Ketterer and Messrs. Hartford and Chambers have served as
portfolio managers to the Fund since its inception.
FIXED-INCOME FUNDS
The current portfolio managers of the FIXED-INCOME FUNDS are Roger DeBard,
Michael Sanchez and John Queen. Mr. DeBard is a managing director of the
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Advisor and has served as a portfolio manager of the Advisor since 1985. Mr.
Sanchez joined the Advisor in August 1996 as a portfolio manager. Prior to
joining the Advisor, Mr. Sanchez was with Provident Investment Counsel as a
Senior Vice President and portfolio manager from 1991 to 1995 and with ARCO
Investment Management Company as Director of Fixed Income Investments from 1988
to 1991. Mr. Queen joined the Advisor in 1997 as a portfolio manager. Prior to
joining the Advisor, Mr. Queen was associated with the Capital Group as a member
of an analyst team responsible for $3 billion in fixed-income assets. They have
served as portfolio managers for each FIXED-INCOME FUND since its inception.
PURCHASE AND REDEMPTION OF SHARES
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Investors may not purchase or redeem shares of the Funds directly, but only
through variable annuity contracts and variable life insurance policies offered
through the separate accounts of Participating Insurance Companies. Investors
should refer to the prospectus of the Participating Insurance Company's separate
account for information on how to purchase a variable annuity contract or
variable life insurance policy, how to select specific Funds as investment
options for the applicable contract or policy and how to redeem monies from the
applicable contract or policy.
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of the Funds based on, among other things, the amount
of premium payments to be invested and the amount of surrender and transfer
requests (as defined in the prospectus describing the variable annuity contracts
and variable life insurance policies issued by the Participating Insurance
Companies) to be effected on that day pursuant to variable annuity contracts and
variable life insurance policies. Orders received by the Funds are effected on
business days only. Orders for the purchase of shares of a Fund are effected at
the net asset value per share next calculated after an order is received in
proper form by the Fund or its designee so long as payment for the shares is
received by the end of the next business day. Redemptions are effected at the
net asset value per share next calculated after receipt in proper form of a
redemption request by a Fund or its designee. For purposes of the purchase and
redemption of shares of the Funds, the separate account of a Participating
Insurance Company shall be a designee of the Fund for receipt of requests for
purchase and redemption, and receipt by such designee shall constitute receipt
by the Fund, provided that the Fund receives notice of such requests in
accordance with applicable requirements on the next following business day.
Separate accounts must transmit purchase and redemption orders promptly. Payment
for redemptions will be made by the Funds within seven days after the request is
received. The Funds may suspend the right of redemption under certain
extraordinary circumstances in accordance with the rules of the Securities and
Exchange Commission.
The Funds do not assess any sales charges or redemption fees. Mortality and
expense risk fees and other charges may be assessed by Participating Insurance
Companies under the variable annuity contracts or variable life insurance
policies. The Participating Insurance Companies are required to describe these
fees in the prospectuses for the contracts or policies.
Shares of the Funds may be sold to and held by separate accounts that fund
variable annuity and variable life insurance contracts issued by Participating
Insurance Companies. The Funds currently do not foresee any disadvantages to the
holders of variable annuity contracts and variable life insurance policies of
Participating Insurance Companies arising from the fact that interests of the
holders of variable annuity contracts and variable life insurance policies may
differ due to differences of tax treatment or other considerations or due to
conflicts between the Participating Insurance Companies. Nevertheless, the
Trustees will monitor events to seek to identify any material irreconcilable
18
<PAGE> 19
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. Should a material irreconcilable
conflict arise between the holders of variable annuity contracts and variable
life insurance policies of Participating Insurance Companies, the Participating
Insurance Companies may be required to withdraw the assets allocable to some or
all of the separate accounts from the Funds. Any such withdrawal could disrupt
orderly portfolio management to the potential detriment of such holders. The
variable annuity contracts and variable life insurance policies are described in
the separate prospectuses issued by the Participating Insurance Companies. The
Funds assume no responsibility for such prospectuses.
Certain recordkeeping and administrative services that would otherwise be
performed by the transfer agent may be performed by a Participating Insurance
Company for which the Advisor may make payments out of its own resources.
DIVIDENDS AND TAX STATUS
- --------------------------------------------------------------------------------
The discussion of the federal income taxation of the Funds and their
distributions is for general information only. Purchasers of variable annuity
contracts or variable life insurance policies issued by Participating Insurance
Companies should refer to the prospectuses of those contracts or policies for
additional tax information.
The EQUITY INCOME VIP PORTFOLIO expects to declare and pay income dividends
quarterly; the INTERNATIONAL VIP PORTFOLIO expects to declare and pay income
dividends semi-annually; and the FIXED-INCOME FUNDS expect to declare and pay
income dividends monthly.
Distributions from net realized short-term gains, if any, and distributions from
any net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) realized through October 31st of each year and not
previously paid out will be paid out after that date; each Fund may also pay
supplemental distributions after the end of the Trust's fiscal year. Dividends
and distributions are paid in full and fractional shares of each Fund based on
the net asset value per share at the close of business on the record date,
unless the shareholder requests, in writing to the Trust, payment in cash. The
Trust will notify each shareholder after the close of its fiscal year of both
the dollar amount and the tax status of that year's distributions.
Each Fund will be treated as a separate entity for federal tax purposes. The
Funds intend to elect to qualify and remain qualified as regulated investment
companies under Subchapter M of the Internal Revenue Code (the "Code"). If so
qualified, each Fund will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized during any fiscal year
which it distributes to its shareholders provided that at least 90% of its net
investment income earned in the fiscal year is distributed.
A segregated asset account upon which a variable annuity contract or variable
life insurance policy is based must meet certain diversification tests set forth
in the Code and U.S. Treasury regulations. If, as is intended, each Fund meets
these tests and complies with certain other conditions, a segregated asset
account investing solely in shares of a Fund will also be deemed to meet these
diversification requirements. However, a failure of a Fund to qualify as a
regulated investment company or to meet such conditions and to comply with such
tests could cause the owners of variable annuity contracts and variable life
insurance policies based on such accounts to recognize ordinary income each year
in the amount of any net appreciation of such contract or policy during the year
(including the annual costs of life insurance, if any, provided under such
policy).
Provided that a Fund and a segregated asset account investing in the Fund
satisfy the above requirements, any distributions from the Fund will be exempt
from current federal income taxation to the extent that such distributions
accumulate in an individual's variable
19
<PAGE> 20
annuity contract or an individual's variable life insurance contract.
The Code provides for a dividends-received deduction (the "deduction")
applicable to corporations, including insurance companies. Special provisions
are contained in the Code as to the eligibility of dividends for the deduction.
The basic test under the Code for determining the extent to which the dividends
paid by each Fund are eligible for the deduction is the extent to which the
Fund's income is derived from qualifying dividends received from domestic
corporations. See "Dividends and Tax Status" in the Statement of Additional
Information for additional information about the deduction.
Dividends and interest received by a Fund may be subject to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate these foreign taxes, and foreign
countries generally do not impose taxes on capital gains on investments by
foreign investors. If more than 50% of the value of the INTERNATIONAL VIP
PORTFOLIO'S total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund may elect to enable shareholders of the Fund
to receive the benefit of the foreign tax credit with respect to any foreign
income taxes paid by the Fund.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per share of each Fund is determined on each day that the
New York Stock Exchange is open for trading, as of the close of regular trading
on the New York Stock Exchange (currently 4:00 p.m., Eastern time), except on
days on which no orders to purchase, sell or redeem shares have been received or
days on which changes in the value of a Fund's portfolio securities do not
materially affect the net asset value. The net asset value per share is the
value of a Fund's assets, less its liabilities, divided by the number of shares
of the Fund outstanding. The value of a Fund's portfolio securities is
determined on the basis of the market value of such securities or, if market
quotations are not readily available, at fair value under guidelines established
by the Trustees. Short-term investments maturing in less than 60 days are valued
at amortized cost which the Board has determined to equal fair value. See "Net
Asset Value" in the Statement of Additional Information for further information.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Each Fund's performance may be quoted in advertising, shareholder reports and
other communications in terms of yield or total rate of return. All performance
information is historical and is not intended to indicate future performance.
Yield and total rates of return fluctuate in response to market conditions and
other factors, and the value of an investor's shares when redeemed may be more
or less than their original cost.
Each Fund may provide its period and average annualized "total rates of return."
The "total rate of return" refers to the change in the value of an investment in
the Fund over a stated period and reflects any change in net asset value per
share and is compounded to include the value of any shares purchased with any
dividends or capital gains declared during such period. Period total rates of
return may be "annualized." An "annualized" total rate of return assumes that
the period total rate of return is generated over a one-year period.
Each Fund may provide annualized "yield" quotations. The "yield" of a Fund
refers to the income generated by an investment in the Fund over a 30-day or
one-month period (which period is stated in any such advertisement or
communication). This income is then annualized; that is, the amount of income
generated by the investment over that period is assumed to be generated each
month over a one-year period and is shown as a
20
<PAGE> 21
percentage of the maximum public offering price on the last day of that period.
A "yield" quotation, unlike a total rate of return quotation, does not reflect
changes in net asset value.
Yields and total returns quoted for the Funds include the effect of deducting
the Funds' expenses, but may not include charges and expenses attributable to a
particular variable annuity contract or variable life insurance policy. Since
shares of the Funds can be purchased only through a variable annuity contract or
variable life insurance policy, a prospective purchaser should carefully review
the prospectus of the variable annuity contract or variable life insurance
policy he or she has chosen for information on relevant charges and expenses.
Including these charges in the quotations of the Funds' yield and total return
would have the effect of decreasing performance. Performance information for the
Funds must always be accompanied by, and be reviewed with, performance
information for the insurance product which invests in the Funds. See the
Statement of Additional Information for more information concerning the
calculation of yield and total rate of return quotations for the Funds.
All data included in performance advertisements will reflect past performance
and is not indicative of future results. The investment return and principal
value of an investment in a Fund will fluctuate, and an investor's proceeds upon
redeeming Fund shares may be more or less than the original cost of the shares.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Declaration of Trust contains an express disclaimer of shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or its Trustees. The Declaration of Trust provides for indemnification
and reimbursement of expenses out of the Trust's property for any shareholder
held personally liable for its obligations. While Massachusetts law permits a
shareholder of a trust such as this to be held personally liable as a partner
under certain circumstances, the risk of a shareholder incurring financial loss
on account of shareholder liability is highly unlikely and is limited to the
relatively remote circumstances in which the Trust would be unable to meet its
obligations.
Common expenses incurred by the Trust are allocated among the Funds based upon
(i) relative net assets; (ii) as incurred on a specific identification basis; or
(iii) evenly among the Funds, depending on the nature of the expenditure.
Except for (i) changes which do not adversely affect the rights of Trust
shareholders; (ii) a change in the name of the Trust, or a series or class
thereof; (iii) authorization of a new series or class; (iv) changes to supply
any omission or correct any ambiguous or defective provision; or (v) changes
required by any federal or state or similar regulatory authority or required by
the Code to eliminate or reduce any federal, state or local taxes which may be
payable by a Fund or its shareholders, no amendment may be made to the
Declaration of Trust without the affirmative vote of the holders of at least 67%
of the Trust's outstanding shares at a meeting at which more than 50% of its
outstanding shares are present in person or represented by proxy. The holders of
shares have no preemptive or conversion rights. Shares when issued are fully
paid and non-assessable, except as set forth above.
The Trust's custodian is Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin 53202 and its subcustodian for foreign securities is The
Chase Manhattan Bank, N.A., Four Chase MetroTech Center, Brooklyn, New York
11245.
As of the date of this Prospectus, the Advisor owned all of the outstanding
shares of the TOTAL RETURN BOND VIP PORTFOLIO and the EQUITY INCOME VIP
PORTFOLIO, and 61% of the outstanding shares of the LOW DURATION VIP PORTFOLIO.
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<PAGE> 22
APPENDIX -- DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE
- ----------------------------------------------------------
BOND RATINGS:
"AAA" -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"AA" -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa through B. The modifier "1" indicates that the obligation
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the company
ranks in the lower end of that generic rating category.
"A" -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
"BAA" -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"BA" -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
"B" -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
"PRIME-1" -- Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
"PRIME-2" -- Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
- ----------------------------------------------------------
MUNICIPAL BOND RATINGS:
Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or "MIG" with variable rate demand obligations being
designated as "VMIG." A VMIG rating may also be assigned to commercial paper
programs which are characterized as having variable short-term maturities, but
having neither a variable rate nor demand feature. Factors used in determining
ratings include liquidity of the borrower and short-term cyclical elements.
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<PAGE> 23
STANDARD & POOR'S
RATINGS GROUP
- ----------------------------------------------------------
BOND RATINGS:
"AAA" -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
"AA" -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
"A" -- Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
"BBB" -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Debt rated BB and B is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
- ----------------------------------------------------------
COMMERCIAL PAPER RATINGS:
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
"A-1" -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
- ----------------------------------------------------------
MUNICIPAL BOND RATINGS:
S&P uses SP-1, SP-2 and SP-3 to rate short-term municipal obligations. A rating
of SP-1 denotes a strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a (+)
designation.
FITCH INVESTORS SERVICE, INC.
- ----------------------------------------------------------
BOND RATINGS:
The following summarizes the ratings used by Fitch for corporate bonds:
"AAA" -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
"A" -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds
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<PAGE> 24
will fall below investment grade is higher than for bonds with higher ratings.
"BB" -- Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.
"B" -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
PLUS (+) MINUS (-) -- Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:
"F-1+" -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
"F-1" -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
"F-2" -- Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" or "F-1" ratings.
DUFF & PHELPS
CREDIT RATING CO.
- ----------------------------------------------------------
BOND RATINGS:
The following summarizes the ratings used by Duff & Phelps for long-term debt:
"AAA" -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
"AA+," "AA," "AA-" -- High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.
"A+," "A," "A-" -- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
"BBB+," "BBB," "BBB-" -- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
"BB+," "BB," "BB-" -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
"B+," "B," "B-" -- Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:
"D-1+" -- Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
"D-1" -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
"D-1-" -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
"D-2" -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
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HOTCHKIS
AND
WILEY
VARIABLE TRUST
725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017
800.236.4479
INVESTMENT ADVISOR
Hotchkis and Wiley
725 South Figueroa Street
Suite 4000
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, Wisconsin 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
You should rely only on the information contained in
the Prospectus when deciding whether to invest. No one
is authorized to provide you with information that is
different. The Funds are not offered or sold in any
jurisdiction where offers or sales would be unlawful.
PROSPECTUS
FEBRUARY 1, 1998
(AS SUPPLEMENTED SEPTEMBER 14, 1998)
[LOGO]
HOTCHKIS
AND
WILEY
VARIABLE TRUST
EQUITY INCOME
VIP PORTFOLIO
INTERNATIONAL
VIP PORTFOLIO
TOTAL RETURN BOND
VIP PORTFOLIO
LOW DURATION
VIP PORTFOLIO
HOTCHKIS AND WILEY: INVESTMENT ADVISOR
