<PAGE> 1
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
800 WEST SIXTH STREET
FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90017
800-236-4479
INVESTMENT ADVISOR
Hotchkis and Wiley
800 West Sixth Street
Fifth Floor
Los Angeles, California 90017
LEGAL COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
DISTRIBUTOR
Princeton Funds Distributor, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
ADMINISTRATOR
CUSTODIAN AND TRANSFER AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202
JUNE 30, 1998
LOGO
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
EQUITY INCOME VIP PORTFOLIO
-------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
-------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
- --------------------------------------------------------------------------------
THIS MATERIAL SHOULD BE PRECEDED
OR ACCOMPANIED BY A PROSPECTUS. HOTCHKIS AND WILEY:
INVESTMENT ADVISOR
<PAGE> 2
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
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.
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.
- --------------------------------------------------------------------------------
<PAGE> 3
Hotchkis and Wiley Funds logo
DEAR SHAREHOLDERS:
We are pleased to present to you the semi-annual report of Hotchkis and Wiley
Variable Trust for the period ending June 30, 1998. Investment commentary on the
Funds follows below:
EQUITY INCOME VIP PORTFOLIO
The Equity Income VIP Portfolio commenced operations on March 18, 1998.
Performance since inception for the Fund is -3.3%, compared to the Standard &
Poor's 500 Index ("S&P 500") return of 5.5% over the period. This 3 1/2-month
period in the market has been marked by pronounced volatility and across
industries performance has been extremely mixed.
Although the Fund benefited from its holdings in consumer durables and finance,
it was held back by its exposure to basic industries, in particular paper and
metals. Lack of exposure to technology, the best performing sector in this time
period, also detracted from performance. Technology stocks are trading at
valuation levels far above the thresholds we are willing to pay.
In keeping with our basic philosophy, we continue to focus on building
significant valuation support into our portfolios. On a relative basis, we think
the current portfolio is one of the cheapest in the history of the firm. Basic
materials companies now represent an exceptional valuation opportunity to buy
world class assets well below replacement costs. Furthermore, we think the
"Asian crisis" should be a long-term positive for many industries as new Asian
projects will only come on stream if they can earn a real return on capital. We
also see considerable opportunity in the utility sector and are convinced that
avoiding the more speculative area of technology is appropriate.
Looking forward, we believe money will flow to those stocks that have reasonable
earnings multiples and lower risk profiles as investors assess valuations
available in the current market. We believe the Fund is well positioned for the
current uncertain economic and market environment. The Fund's projected
price-to-earnings ratio of 14.0X is 57% of the S&P 500. Similarly, the Fund's
2.84% dividend yield is 200% greater than the S&P 500. We believe that these key
portfolio characteristics should help control risk in a volatile market.
INTERNATIONAL VIP PORTFOLIO
The launch of the International VIP Portfolio coincides with some dramatic
events in the international equity markets that should prove beneficial for the
Fund's long term performance. Countries slated to adopt the single European
currency, the euro, have experienced dramatic declines in bond yields and more
competitive currencies. Only in Euroland is growth likely to accelerate this
year as buoyant domestic demand -- particularly in Spain, Italy, Portugal, and
Ireland -- offsets the deflationary impact of Asia. As a result, investors have
poured funds into European equities at an unprecedented rate. In recognition of
the importance of the equity capital market, a growing number of European
companies are restructuring and enhancing profitability. In contrast, Japan, the
world's second largest economy, has yet to resume its historic role as the key
driver of growth in the rest of Asia. Keizo Obuchi's win as LDP leader should
slowly lead to an improvement in the fiscal policy plaguing Japan. With fiscal
stimulus, loose monetary policy and financial system reform, the Japanese
economy may have turned the corner.
<PAGE> 4
Our emphasis on stock selection has led to an allocation that is overweighted in
the UK versus the EAFE Index, slightly underweighted in the EMU markets and
underweighted in Asia. The avalanche of liquidity that rolled into the European
markets in the past 12 to 18 months has led to some massive valuation
disparities. The largest stocks in the UK and the rest of Europe generally offer
the highest price-to-earnings ratios on prospective earnings and have delivered
the bulk of performance gains in their local markets. Concentration in the UK
market is especially striking as only ten stocks (principally in healthcare and
telecommunication) gained over 8% in the latest quarter, leaving the other 128
stocks in the MSCI UK Index down over 5%. The hint of rising interest rates will
lead to the inevitable rotation back to the undervalued cyclical industrials. In
addition, the Japanese market offers a host of opportunities, especially those
related to the domestic economy. Near term performance of these stocks will
depend on signs that the recent reforms are leading to economic stimulus and, in
turn, driving returns higher.
LOW DURATION VIP PORTFOLIO
The Low Duration VIP Portfolio commenced operations on March 18, 1998.
Performance since inception was 1.7%. What an exciting and tricky period it has
been since! The theme of strong domestic growth paired with low inflation
carried over from the previous quarter. The Asian crisis hit at just the right
time to stave off a probable interest rate hike. The deflationary pressures put
on our economy by Asia balanced a very tight labor market in our robust domestic
economy and gave the Fed the luxury of waiting on the sidelines. This balancing
act continued through the end of June, keeping interest rates in a tight range
during the second half of the year. The long bond yield bounced between 5.80%
and 6.00% for the majority of the first six months of 1998.
Looking forward, the balancing act seems likely to continue for some time.
Weakness in our trading partners in Asia has mitigated the robust growth in the
domestic economy. We believe it is probable that economic growth will moderate,
allowing interest rates to move somewhat lower. This does not bode well for most
mortgage-backed securities, therefore we anticipate remaining underweight in
that sector. Corporate profits also remain a concern, leaving asset-backed
securities the sector of choice.
We thank you for your investment in the Hotchkis and Wiley Variable Trust. We
look forward to serving your investment needs in the months and years ahead.
Sincerely,
NANCY D. CELICK
Nancy D. Celick
President
HOTCHKIS AND WILEY VARIABLE TRUST
The statements made in the foregoing commentary are as of June 30, 1998, and may
not accurately reflect opinions of Hotchkis and Wiley after that date. No
guarantee can be given regarding the accuracy of any opinions or predictions
made. Because the Funds are actively managed, any Fund specific information in
the commentary may no longer be accurate. The Funds may not continue to hold any
specific securities mentioned, and have no obligation to disclose purchases or
sales in such securities.
<PAGE> 5
[This Page Intentionally Left Blank]
<PAGE> 6
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SCHEDULE OF INVESTMENTS:
EQUITY INCOME VIP PORTFOLIO............................ 1
INTERNATIONAL VIP PORTFOLIO............................ 3
LOW DURATION VIP PORTFOLIO............................. 6
STATEMENT OF ASSETS AND LIABILITIES...................... 8
STATEMENT OF OPERATIONS.................................. 9
STATEMENT OF CHANGES IN NET ASSETS....................... 10
NOTES TO FINANCIAL STATEMENTS............................ 11
FINANCIAL HIGHLIGHTS..................................... 15
</TABLE>
LOGO
LOGO
<PAGE> 7
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
COMMON STOCKS -- 99.0% Shares Value
- ----------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 4.9%
..........................................................
Lockheed Martin Corporation 100 $ 10,587
..........................................................
Northrop Grumman Corporation 200 20,625
..........................................................
Rockwell International Corporation 340 16,341
....................... ....................... --------
47,553
- ----------------------------------------------------------
APPAREL & TEXTILES -- 1.2%
..........................................................
Russell Corporation 400 12,075
- ----------------------------------------------------------
AUTO PARTS -- 2.1%
..........................................................
Dana Corporation 200 10,700
..........................................................
Meritor Automotive, Inc. 400 9,600
....................... ....................... --------
20,300
- ----------------------------------------------------------
AUTOS & TRUCKS -- 6.0%
..........................................................
Ford Motor Company 500 29,500
..........................................................
General Motors Corporation 430 28,729
....................... ....................... --------
58,229
- ----------------------------------------------------------
BANKS -- 6.4%
..........................................................
Banc One Corporation 300 16,744
..........................................................
First Chicago NBD Corporation 200 17,725
..........................................................
First Union Corporation 300 17,475
..........................................................
KeyCorp 300 10,687
....................... ....................... --------
62,631
- ----------------------------------------------------------
BEVERAGES -- 1.0%
..........................................................
Anheuser-Busch Companies, Inc. 200 9,438
- ----------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 2.8%
..........................................................
Georgia-Pacific (Timber Group) 400 9,225
..........................................................
Weyerhaeuser Company 400 18,475
....................... ....................... --------
27,700
- ----------------------------------------------------------
CHEMICALS -- 3.6%
..........................................................
The Dow Chemical Company 200 19,338
..........................................................
Union Carbide Corporation 300 16,012
....................... ....................... --------
35,350
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- ----------------------------------------------------------
CONGLOMERATES -- 1.7%
..........................................................
Tenneco, Inc. 450 $ 17,128
- ----------------------------------------------------------
CONSUMER PRODUCTS -- 1.3%
..........................................................
Tupperware Corporation 440 12,375
- ----------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.9%
..........................................................
Harsco Corporation 200 9,162
- ----------------------------------------------------------
FINANCIAL SERVICES -- 3.8%
..........................................................
Associates First Capital
Corporation-Class A 131 10,071
..........................................................
Beneficial Corporation 100 15,319
..........................................................
Transamerica Corporation 100 11,512
....................... ....................... --------
36,902
- ----------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 2.1%
..........................................................
Whirlpool Corporation 300 20,625
- ----------------------------------------------------------
INSURANCE -- 6.1%
..........................................................
American General Corporation 200 14,238
..........................................................
Lincoln National Corporation 100 9,137
..........................................................
Ohio Casualty Corporation 100 4,425
..........................................................
Safeco Corporation 300 13,613
..........................................................
St. Paul Companies, Inc. 220 9,254
..........................................................
TIG Holdings, Inc. 400 9,200
....................... ....................... --------
59,867
- ----------------------------------------------------------
MACHINERY -- 1.6%
..........................................................
New Holland N.V. 800 15,700
- ----------------------------------------------------------
METALS & MINING -- 4.8%
..........................................................
Aluminum Company of America 280 18,462
..........................................................
Phelps Dodge Corporation 200 11,438
..........................................................
Reynolds Metals Company 300 16,781
....................... ....................... --------
46,681
- ----------------------------------------------------------
NATURAL GAS -- 0.9%
..........................................................
Eastern Enterprises 200 8,575
- ----------------------------------------------------------
</TABLE>
See Notes to Financial Statements
1
<PAGE> 8
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
OIL -- DOMESTIC -- 8.9%
..........................................................
Atlantic Richfield Company 130 $ 10,156
..........................................................
Occidental Petroleum Corporation 1,100 29,700
..........................................................
Phillips Petroleum Company 500 24,094
..........................................................
USX-Marathon Group, Inc. 400 13,725
..........................................................
Ultramar Diamond Shamrock Corporation 300 9,469
....................... ....................... --------
87,144
- ----------------------------------------------------------
PAPER -- 3.5%
..........................................................
Georgia-Pacific Group 200 11,787
..........................................................
International Paper Company 300 12,900
..........................................................
Union Camp Corporation 200 9,925
....................... ....................... --------
34,612
- ----------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.5%
..........................................................
Eastman Kodak Company 200 14,612
- ----------------------------------------------------------
POLLUTION CONTROL -- 3.0%
..........................................................
Browning-Ferris Industries, Inc. 530 18,418
..........................................................
Waste Management, Inc. 300 10,500
....................... ....................... --------
28,918
- ----------------------------------------------------------
RAILROADS -- 2.1%
..........................................................
CSX Corporation 200 9,100
..........................................................
Norfolk Southern Corporation 400 11,925
....................... ....................... --------
21,025
- ----------------------------------------------------------
RETAIL -- 5.2%
..........................................................
Intimate Brands, Inc. 300 8,269
..........................................................
J.C. Penney Company, Inc. 200 14,462
..........................................................
May Department Stores Company 240 15,720
..........................................................
Sears, Roebuck & Company 200 12,213
....................... ....................... --------
50,664
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
SAVINGS & LOANS -- 3.0%
..........................................................
Fannie Mae 250 $ 15,187
..........................................................
H.F. Ahmanson & Company 200 14,200
....................... ....................... --------
29,387
- ----------------------------------------------------------
STEEL -- 1.7%
..........................................................
USX-U.S. Steel Group, Inc. 500 16,500
- ----------------------------------------------------------
TOBACCO -- 3.2%
..........................................................
Philip Morris Companies, Inc. 800 31,500
- ----------------------------------------------------------
UTILITY -- ELECTRIC -- 10.4%
..........................................................
CMS Energy Corporation 400 17,600
..........................................................
GPU, Inc. 100 3,781
..........................................................
P P & L Resources, Inc. 900 20,419
..........................................................
PacifiCorp 800 18,100
..........................................................
Public Service Enterprises Group, Inc. 600 20,663
..........................................................
SCANA Corporation 700 20,869
....................... ....................... --------
101,432
- ----------------------------------------------------------
UTILITY -- TELEPHONE -- 5.3%
..........................................................
AT&T Corporation 300 17,138
..........................................................
Bell Atlantic Corporation 400 18,250
..........................................................
SBC Communications, Inc. 400 16,000
....................... ....................... --------
51,388
- ----------------------------------------------------------
Total common stocks -- 99.0%
(cost $1,003,206) 967,473
..........................................................
Other assets in excess of
liabilities -- 1.0% 9,901
....................... ....................... --------
Total net assets -- 100.0% $977,374
- ----------------------------------------------------------
</TABLE>
See Notes to Financial Statements
2
<PAGE> 9
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
COMMON STOCKS -- 89.9%
- ------------------------------------------------------------
AUSTRALIA 4.6% Shares Value
- ------------------------------------------------------------
<S> <C> <C>
AIRLINES -- 1.5%
............................................................
Qantas Airways Limited 2,387,850 $ 3,593,167
- ------------------------------------------------------------
BANKS -- 2.0%
............................................................
Australia and New Zealand
Banking Group, Ltd. 713,170 4,919,742
- ------------------------------------------------------------
INSURANCE -- 1.1%
............................................................
QBE Insurance Group, Ltd. 740,841 2,614,953
..................... ...................... -----------
Total Australia 11,127,862
- ------------------------------------------------------------
CANADA 4.3%
- ------------------------------------------------------------
BANKS -- 1.8%
............................................................
Canadian Imperial Bank of
Commerce 135,080 4,344,850
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.1%
............................................................
Imasco, Ltd. 135,510 2,501,864
- ------------------------------------------------------------
METALS & MINERALS -- 1.4%
Noranda, Inc. 196,320 3,390,946
..................... ...................... -----------
Total Canada 10,237,660
- ------------------------------------------------------------
FINLAND -- 1.7%
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.7%
............................................................
UPM-Kymmene Corporation OYJ 145,615 4,007,642
..................... ...................... -----------
Total Finland 4,007,642
- ------------------------------------------------------------
FRANCE 6.5%
- ------------------------------------------------------------
AEROSPACE -- DEFENSE -- 1.7%
............................................................
Thomson CSF 109,017 4,147,170
- ------------------------------------------------------------
BANKS -- 1.7%
............................................................
Banque Nationale de Paris 49,181 4,018,409
- ------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS -- 1.2%
............................................................
LaFarge SA 27,340 2,826,235
- ------------------------------------------------------------
OIL-INTERNATIONAL -- 1.9%
............................................................
Elf Aquitaine SA 33,640 4,729,385
..................... ...................... -----------
Total France 15,721,199
- ------------------------------------------------------------
GERMANY 4.7% Shares Value
- ------------------------------------------------------------
BANKS -- 1.6%
............................................................
Commerzbank AG 101,170 $ 3,850,553
- ------------------------------------------------------------
CHEMICALS -- 1.3%
............................................................
Bayer AG 61,735 3,194,427
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 0.7%
............................................................
Buderus AG 3,410 1,700,434
- ------------------------------------------------------------
MACHINERY -- 1.1%
............................................................
GEA AG 6,695 2,614,895
..................... ...................... -----------
Total Germany 11,360,309
- ------------------------------------------------------------
HONG KONG 7.2%
- ------------------------------------------------------------
BANKS -- 1.7%
............................................................
HSBC Holdings PLC 171,600 4,196,667
- ------------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 1.0%
............................................................
New World Development Co., Ltd. 1,220,000 2,361,724
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 3.3%
............................................................
CLP Holdings Limited 977,000 4,450,895
............................................................
Swire Pacific Ltd. Class A 924,500 3,489,883
..................... ...................... -----------
7,940,778
- ------------------------------------------------------------
UTILITY -- TELECOMMUNICATIONS -- 1.2%
............................................................
Hong Kong Telecommunications,
Ltd. 1,489,600 2,797,118
..................... ...................... -----------
Total Hong Kong 17,296,287
- ------------------------------------------------------------
IRELAND 2.2%
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.0%
............................................................
Greencore Group PLC 434,140 2,361,658
- ------------------------------------------------------------
PAPER -- 1.2%
............................................................
Jefferson Smurfit Group PLC 1,008,380 2,995,894
..................... ...................... -----------
Total Ireland 5,357,552
- ------------------------------------------------------------
ITALY 3.0%
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 1.9%
............................................................
ENI SPA 685,100 4,490,121
- ------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
3
<PAGE> 10
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS -- 1.1%
............................................................
Telecom Italia SPA 381,000 $ 2,804,638
..................... ...................... ------------
Total Italy 7,294,759
- ------------------------------------------------------------
JAPAN 8.4%
- ------------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.8%
............................................................
Nintendo Co., Ltd. 45,900 4,249,847
- ------------------------------------------------------------
ELECTRONICS -- 2.8%
............................................................
Kyocera Corporation 102,200 4,992,729
............................................................
Sony Corporation 20,400 1,756,530
..................... ...................... ------------
6,749,259
- ------------------------------------------------------------
FINANCIAL SERVICES -- 1.9%
............................................................
Promise Company, Ltd. 112,800 4,640,905
- ------------------------------------------------------------
LEISURE/TOYS -- 1.9%
............................................................
NAMCO Ltd. 199,000 4,645,747
..................... ...................... ------------
Total Japan 20,285,758
- ------------------------------------------------------------
NETHERLANDS 6.0%
- ------------------------------------------------------------
BANKS -- 1.8%
............................................................
ABN AMRO Holding N.V. 188,810 4,418,080
- ------------------------------------------------------------
CHEMICALS -- 2.0%
............................................................
Akzo Nobel N.V. 21,690 4,821,607
- ------------------------------------------------------------
INSURANCE -- MULTI-LINE -- 2.2%
............................................................
ING Groep N.V. 79,125 5,181,072
..................... ...................... ------------
Total Netherlands 14,420,759
- ------------------------------------------------------------
NORWAY 0.9%
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.9%
............................................................
Kvaerner ASA - Class A 66,070 2,238,628
..................... ...................... ------------
Total Norway 2,238,628
- ------------------------------------------------------------
SINGAPORE 1.1%
- ------------------------------------------------------------
BANKS -- 1.1%
............................................................
Development Bank of Singapore
LTD 489,890 2,711,169
..................... ...................... ------------
Total Singapore 2,711,169
- ------------------------------------------------------------
SPAIN 0.9% Shares Value
- ------------------------------------------------------------
OIL -- INTERNATIONAL -- 0.9%
............................................................
Repsol SA 40,780 $ 2,250,905
..................... ...................... ------------
Total Spain 2,250,905
- ------------------------------------------------------------
SWEDEN 4.8%
- ------------------------------------------------------------
BANKS -- 1.6%
............................................................
Skandinaviska Enskilda Banken AB 226,784 3,881,658
- ------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.7%
............................................................
Electrolux AB - Class B 233,140 4,005,064
- ------------------------------------------------------------
TOBACCO -- 1.5%
............................................................
Swedish Match AB 1,097,210 3,645,925
..................... ...................... ------------
Total Sweden 11,532,647
- ------------------------------------------------------------
SWITZERLAND 7.9%
- ------------------------------------------------------------
BANKS -- 1.6%
............................................................
Credit Suisse Group 17,444 3,881,397
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.3%
............................................................
Nestle SA "registered" 1,414 3,025,981
- ------------------------------------------------------------
MACHINERY & EQUIPMENT -- 3.1%
............................................................
Saurer AG "registered" 3,333 3,405,926
............................................................
Sulzer AG "registered" (P.C.) 5,229 4,126,492
..................... ...................... ------------
7,532,418
- ------------------------------------------------------------
PHARMACEUTICALS & HEALTHCARE -- 1.9%
............................................................
Novartis AG "registered" 2,775 4,617,646
..................... ...................... ------------
Total Switzerland 19,057,442
- ------------------------------------------------------------
UNITED KINGDOM 25.7%
- ------------------------------------------------------------
APPAREL & TEXTILES -- 0.7%
............................................................
Coats Viyella PLC 1,291,860 1,584,269
- ------------------------------------------------------------
BANKS -- 3.6%
............................................................
Abbey National PLC 229,390 4,076,150
............................................................
National Westminster Bank PLC 252,050 4,504,040
..................... ...................... ------------
8,580,190
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.8%
............................................................
Hanson PLC 705,940 4,290,356
- ------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
4
<PAGE> 11
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
CHEMICALS -- 2.6%
............................................................
The BOC Group PLC 266,563 $ 3,631,467
............................................................
Laporte PLC 233,486 2,785,434
..................... ...................... ------------
6,416,901
- ------------------------------------------------------------
DIVERSIFIED -- 1.2%
............................................................
Cookson Group PLC 837,420 2,878,303
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 3.6%
............................................................
BTR PLC 1,310,430 3,716,968
............................................................
Tomkins PLC 915,300 4,967,144
..................... ...................... ------------
8,684,112
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.2%
............................................................
TI Group PLC 394,860 2,997,648
- ------------------------------------------------------------
FOOD & BEVERAGES -- 1.8%
............................................................
Allied Domecq PLC 468,420 4,400,174
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.9%
............................................................
Hillsdown Holdings PLC 795,510 2,163,512
............................................................
Tate & Lyle PLC 307,080 2,435,004
..................... ...................... ------------
4,598,516
- ------------------------------------------------------------
INSURANCE -- 1.9%
............................................................
CGU PLC 244,040 4,552,279
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
RETAIL -- FOOD CHAINS -- 1.9%
............................................................
Tesco PLC 471,570 $ 4,602,863
- ------------------------------------------------------------
TOBACCO -- 2.3%
............................................................
B.A.T Industries PLC 551,310 5,519,162
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 1.2%
............................................................
Powergen PLC 202,000 2,790,658
..................... ...................... ------------
Total United Kingdom 61,895,131
............................................................
Total common stocks
(cost $216,056,241) 216,796,009
- ------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Principal
CASH EQUIVALENTS -- 29.7% Amount
- -----------------------------------------------------------
Vista Institutional Prime
Money Market Fund $71,564,121 71,564,121
(cost $71,564,121)
- -----------------------------------------------------------
Total investments -- 119.6%
(cost $287,620,362) 288,360,130
...........................................................
Liabilities in excess of other
assets -- (19.6)% (47,226,339)
..................... ...................... ------------
Total net assets -- 100.0% $241,133,791
- -----------------------------------------------------------
</TABLE>
P.C. -- Participation Certificates.
See Notes to Financial Statements
5
<PAGE> 12
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 19.0% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
APPAREL -- 1.6%
...........................................................
La Petite Holdings, CLB 8/01/1998,
9.625%, 8/01/2001 $ 25,000 $ 25,750
- -----------------------------------------------------------
EUROBANKS -- 3.1%
...........................................................
Okobank, CLB 9/09/2002, 6.1875%,
9/29/2049 # 50,000 49,933
- -----------------------------------------------------------
FINANCIAL SERVICES -- 9.5%
...........................................................
Florida Windstorm (Acquired
4/06/1998, cost $51,608), 6.85%,
8/25/2007 r 50,000 51,876
...........................................................
Lehman Brothers, Inc., 6.50%,
4/15/2008 50,000 50,188
...........................................................
The Money Store, Inc., 8.05%,
4/15/2002 50,000 53,175
...................... ....................... ---------
155,239
- -----------------------------------------------------------
OIL & GAS (DOMESTIC) -- 2.9%
...........................................................
Harcor Energy, Inc., CLB
7/15/1999, 14.875%, 7/15/2002 40,000 47,500
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 1.9%
...........................................................
Teleport Communications, CLB
7/01/2001, 0.00%, 7/01/2007 35,000 30,450
- -----------------------------------------------------------
Total corporate bonds and notes
(cost $273,239) 308,872
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 14.2% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 7.8%
...........................................................
Federal Home Loan Mortgage
Corporation:
1944 SB, 10.5625%, 3/15/2027 # $ 2,770 $ 2,792
...........................................................
2036 Z, 7.00%, 3/15/2028 7,929 7,904
...........................................................
2043 SC, 10.12813%, 4/15/2028 # 28,526 28,305
...........................................................
2055 ZA, 6.50%, 5/15/2013 50,271 48,730
...........................................................
Federal National Mortgage Association,
1997-76 FT, 6.0875%, 9/17/2027 # 40,288 39,291
...................... ....................... ---------
127,022
- -----------------------------------------------------------
PASS-THROUGH SECURITIES -- 4.4%
...........................................................
Government National Mortgage
Association, 8247, 7.00%,
7/20/2023 # 68,951 70,683
- -----------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.0%
...........................................................
Federal National Mortgage
Association, 1997-76 B (PO),
0.00%, 6/25/2018 33,605 32,953
- -----------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $231,147) 230,658
- -----------------------------------------------------------
</TABLE>
See Notes to Financial Statements
6
<PAGE> 13
Schedule of Investments -- June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
NON-AGENCY MORTGAGE- Principal
BACKED SECURITIES -- 16.5% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES -- 11.4%
...........................................................
Champion Auto Grantor Trust
(Acquired 3/18/1998, cost
$45,025), 1998-A A, 6.11%,
10/15/2002 r $ 45,026 $ 45,117
...........................................................
Green Tree Financial Corporation,
1996-5 B2, 8.45%, 7/15/2027 19,997 21,097
...........................................................
Green Tree Recreational, Equipment
& Consumer Trust, 1996-B CTFS,
7.70%, 7/15/2018 50,000 49,891
...........................................................
The Money Store Home Equity Trust,
1994-C A3, 7.40%, 3/15/2018 18,570 18,672
...........................................................
Trust Investment Enhanced Return
Securities, 1997-7 A, CLB
2/15/1999, 6.688%, 11/15/2003 50,000 50,248
...................... ....................... ---------
185,025
- -----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.1%
...........................................................
Citicorp Mortgage Securities,
Inc., 1997-3 A2, 6.92%,
8/25/2027 32,327 32,472
...........................................................
Ocwen Residential MBS Corp
(Acquired 6/18/1998, cost
$49,938), 1998-R2 AP,
4.9739%, 11/25/2034 # r 50,000 49,953
...................... ....................... ---------
82,425
- -----------------------------------------------------------
Total non-agency mortgage-backed
securities (cost $302,700) 267,450
- -----------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 23.1%
- -----------------------------------------------------------
U.S. Treasury Notes:
5.875%, 11/30/2001 160,000 161,650
...........................................................
5.75%, 11/30/2002 80,000 80,675
...........................................................
5.50%, 2/29/2000 50,000 50,000
...........................................................
5.875%, 2/15/2004 80,000 81,525
- -----------------------------------------------------------
Total U.S. Treasury obligations
(cost $373,778) 373,850
- -----------------------------------------------------------
Principal
SHORT-TERM INVESTMENTS -- 26.4% Amount Value
- -----------------------------------------------------------
DISCOUNT NOTES -- 4.9%
...........................................................
Centex Corp., 7.00%, 7/01/1998 $ 80,000 $ 80,000
- -----------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 21.5%
...........................................................
General Mills, Inc., 5.2651% 78,423 78,423
...........................................................
Johnson Controls, Inc., 5.2651% 29,639 29,639
...........................................................
Pitney Bowes, Inc., 5.2651% 80,064 80,064
...........................................................
Sara Lee Corp., 5.2562% 80,000 80,000
...........................................................
Warner-Lambert Co., 5.2660% 79,956 79,956
...................... ....................... ---------
348,082
Total variable rate demand notes
- -----------------------------------------------------------
Total short-term investments
(cost $428,082) 428,082
- -----------------------------------------------------------
Total investments -- 99.2%
(cost $1,608,946) 1,608,912
...........................................................
Other assets in excess of liabilities -- 0.8% 12,494
...................... ....................... ----------
$1,621,406
Total net assets -- 100.0%
- -----------------------------------------------------------
</TABLE>
# Variable rate security. Rate listed is as of June 30, 1998.
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of June 30, 1998.
PO -- Principal Only.
CLB -- Callable.
r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.
See Notes to Financial Statements
7
<PAGE> 14
Financial Statements -- June 30, 1998
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
<TABLE>
<CAPTION>
EQUITY LOW
INCOME INTERNATIONAL DURATION
VIP VIP VIP
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value*................................. $ 967,473 $288,360,130 $1,608,912
Foreign currency**..................................... -- 652,587 --
Cash................................................... 4,563 -- --
Dividends and interest receivable...................... 2,329 447,936 12,919
Receivable from Advisor................................ 12,765 -- 15,377
Organizational expenses, net of accumulated
amortization........................................ 13,430 14,164 13,430
Prepaid expenses....................................... 241 -- 203
---------- ------------ ----------
Total assets...................................... 1,000,801 289,474,817 1,650,841
---------- ------------ ----------
LIABILITIES:
Payable to Advisor..................................... -- 91,366 --
Payable for investments purchased...................... -- 1,297,563 --
Dividends payable...................................... -- -- 5,007
Accrued expenses and other liabilities................. 23,427 46,952,097 24,428
---------- ------------ ----------
Total liabilities................................. 23,427 48,341,026 29,435
---------- ------------ ----------
Net assets........................................ $ 977,374 $241,133,791 $1,621,406
========== ============ ==========
NET ASSETS CONSIST OF:
Paid in capital........................................ $1,014,424 $240,470,024 $1,621,496
Undistributed net investment income.................... 287 100,590 --
Undistributed net realized loss on securities and
foreign currency transactions....................... (1,604) (176,829) (56)
Net unrealized appreciation (depreciation) of
securities and foreign currency..................... (35,733) 740,006 (34)
---------- ------------ ----------
Net assets........................................ $ 977,374 $241,133,791 $1,621,406
========== ============ ==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)......................................... 101,461 24,180,526 162,213
Net asset value per share (offering and redemption
price).............................................. $ 9.63 $ 9.97 $ 10.00
========== ============ ==========
*Cost of Investments.................................... $1,003,206 $287,620,362 $1,608,946
========== ============ ==========
**Cost of Foreign Currency............................... $ -- $ 644,976 $ --
========== ============ ==========
</TABLE>
See Notes to Financial Statements
8
<PAGE> 15
Financial Statements -- Period Ended June 30, 1998
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
EQUITY
INCOME INTERNATIONAL LOW DURATION
VIP VIP VIP
PORTFOLIO(1) PORTFOLIO(2) PORTFOLIO(1)
-------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income*
Dividends...................................... $ 7,493 $ 476,588 --
Interest....................................... 488 -- $ 18,713
-------- --------- --------
Total income.............................. 7,981 476,588 18,713
-------- --------- --------
Expenses
Advisory fee................................... 2,133 77,116 1,316
Legal and auditing fees........................ 5,600 2,286 5,600
Custodian fees and expenses.................... 1,000 2,500 1,000
Accounting and transfer agent fees and
expenses..................................... 9,666 4,500 10,666
Administration fee............................. 10,000 2,500 10,000
Trustees' fees and expenses.................... 800 286 800
Reports to shareholders........................ 800 1,143 800
Registration fees.............................. 1,400 11,250 1,400
Amortization of organizational expenses........ 820 86 820
Other expenses................................. 200 71 200
-------- --------- --------
Total expenses............................ 32,419 101,738 32,602
Less, expense reimbursement.................... (29,149) -- (30,942)
-------- --------- --------
Net expenses.............................. 3,270 101,738 1,660
-------- --------- --------
Net investment income............................. 4,711 374,850 17,053
-------- --------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on securities and foreign
currency transactions........................ (1,604) (176,829) (56)
Net change in unrealized appreciation
(depreciation) of securities and foreign
currency..................................... (35,733) 740,006 (34)
-------- --------- --------
Net gain (loss) on investments.................... (37,337) 563,177 (90)
-------- --------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $(32,626) $ 938,027 $ 16,963
======== ========= ========
*Net of Foreign Taxes Withheld...................... $ 96 $ 25,399 $ --
======== ========= ========
</TABLE>
(1) For the period March 18, 1998 (commencement of operations) through June 30,
1998.
(2) For the period June 10, 1998 (commencement of operations) through June 30,
1998.
See Notes to Financial Statements
9
<PAGE> 16
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
EQUITY INCOME VIP INTERNATIONAL VIP LOW DURATION VIP
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------- --------------------- ---------------------
March 18, 1998** June 10, 1998** March 18, 1998**
through June 30, 1998 through June 30, 1998 through June 30, 1998
----------------------------------------------- ---------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income................. $ 4,711 $ 374,850 $ 17,053
Net realized loss on securities and
foreign currency transactions....... (1,604) (176,829) (56)
Net change in unrealized appreciation
(depreciation) of securities and
foreign currency.................... (35,733) 740,006 (34)
---------- ------------ ----------
Net increase (decrease) in net
assets resulting from
operations..................... (32,626) 938,027 16,963
---------- ------------ ----------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income................. (4,424) (274,260) (17,053)
---------- ------------ ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold......... 1,010,000 240,197,502 1,609,449
Shares issued in connection with
payment of dividends and
distributions....................... 4,424 274,260 12,047
Cost of shares redeemed............... -- (1,738) --
---------- ------------ ----------
Net increase in net assets from
Fund share transactions........ 1,014,424 240,470,024 1,621,496
---------- ------------ ----------
Total increase in net assets.............. 977,374 241,133,791 1,621,406
NET ASSETS:
Beginning of period................... -- -- --
---------- ------------ ----------
End of period*........................ $ 977,374 $241,133,791 $1,621,406
========== ============ ==========
*Including undistributed net investment
income of: $ 287 $ 100,589 $ --
========== ============ ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold........................... 100,999 24,152,999 161,006
Shares issued in connection with
payment of dividends and
distributions....................... 462 27,703 1,207
Shares redeemed....................... -- (176) --
---------- ------------ ----------
Net increase..................... 101,461 24,180,526 162,213
========== ============ ==========
** Commencement of operations
</TABLE>
See Notes to Financial Statements
10
<PAGE> 17
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
NOTE 1.
ACCOUNTING POLICIES. Hotchkis and Wiley Variable Trust (the "Trust") is
registered under the Investment Company Act of 1940 as a diversified, open-end,
management investment company. The Trust was organized as a Massachusetts
business trust on February 4, 1997 and consists of four series of shares
comprising the Equity Income VIP Portfolio, the International VIP Portfolio, the
Low Duration VIP Portfolio and the Total Return Bond VIP Portfolio
(collectively, the "Funds"), the assets of which are invested in separate,
independently managed portfolios. Investment operations of the Funds began on
March 18, 1998 (the Equity Income VIP Portfolio and the Low Duration VIP
Portfolio) and on June 10, 1998 (the International VIP Portfolio). The Total
Return Bond VIP Portfolio has not commenced operations other than those relating
to organizational matters. 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.
The Equity Income VIP Portfolio seeks to provide current income and long-term
growth of income, accompanied by growth of capital. The International VIP
Portfolio seeks to provide current income and long-term growth of income,
accompanied by growth of capital. The Low Duration VIP Portfolio seeks to
maximize total return, consistent with preservation of capital. The Total Return
Bond VIP Portfolio seeks to maximize long-term total return. The following is a
summary of significant account policies followed by the Funds in the preparation
of the financial statements.
ORGANIZATIONAL EXPENSES: Expenses incurred by the Trust in connection with the
organization, registration and the initial public offering of shares are being
deferred and amortized over the period of benefit, but not to exceed sixty
months from the Trust's commencement of operations. These costs were advanced by
the Advisor and will be reimbursed by the Trust. The proceeds of any redemption
of the initial shares by the original shareholder will be reduced by a pro-rata
portion of any then unamortized organization expenses in the same proportion as
the number of initial shares being redeemed bears to the number of initial
shares outstanding at the time of such redemption.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or The Nasdaq Stock Market ("NSM") are
valued at the last sale price as of 4:00 p.m., Eastern time, or, in the absence
of recorded sales, at the average of readily available closing bid and asked
prices on such exchange or NSM. Unlisted securities that are not included in NSM
are valued at the average of the quoted bid and asked price in the
over-the-counter market. Fixed income securities are normally valued on the
basis of quotes obtained from brokers and dealers or pricing services. Certain
fixed income securities for which daily market quotations are not readily
available may be valued pursuant to guidelines established by the Board of
Trustees, with reference to fixed income securities whose prices are more
readily obtainable or an appropriate matrix utilizing similar factors. As a
broader market does not
11
<PAGE> 18
- --------------------------------------------------------------------------------
exist, the proceeds received upon the disposal of such securities may differ
from quoted values previously furnished by such market makers. Securities for
which market quotations are not otherwise available are valued at fair value as
determined in good faith by Hotchkis and Wiley (the "Advisor") under procedures
established by the Board of Trustees. Short-term investments which mature in
less than 60 days are valued at amortized cost (unless the Board of Trustees
determines that this method does not represent fair value), if their original
maturity was 60 days or less, or by amortizing the values as of the 61st day
prior to maturity, if their original term to maturity exceeded 60 days.
Investments quoted in foreign currency are valued daily in U.S. dollars on the
basis of the foreign currency exchange rate prevailing at the time of valuation.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are maintained
in U.S. dollars. For the International VIP Portfolio, foreign currency
transactions are translated into U.S. dollars on the following basis: (i) market
value of investment securities, assets and liabilities at the daily rates of
exchange, and (ii) purchases and sales of investment securities, dividend and
interest income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions. The International VIP Portfolio does not
isolate and treat as ordinary income that portion of the results of operations
arising as a result of changes in the exchange rate from the fluctuations
arising from changes in the market prices of securities held during the period.
However, for federal income tax purposes, the International VIP Portfolio does
isolate and treat as ordinary income the effect of changes in foreign exchange
rates arising from actual foreign currency transactions and the effect of
changes in foreign exchange rates arising from trade date and settlement date
differences.
FEDERAL INCOME TAXES: It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and each Fund
intends to distribute investment company net taxable income and net capital
gains to shareholders. Therefore, no federal income tax provision is required.
EXPENSE ALLOCATION: Common expenses incurred by the Funds are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.
RESTRICTED SECURITIES: The Low Duration VIP Portfolio owns investment securities
which are unregistered and thus restricted as to resale. These securities are
valued by the Fund after giving due consideration to pertinent factors including
recent private sales, market conditions and the issuer's financial performance.
Where future disposition of these securities requires registration under the
Securities Act of 1933, the Fund has the right to include these securities in
such registration, generally without cost to the Fund. The Fund has no right to
require registration of unregistered securities. The Low Duration VIP Portfolio
had restricted securities with an aggregate market value of $146,946,
representing 9% of the net assets of the Fund.
12
<PAGE> 19
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
WHEN-ISSUED SECURITIES: The Funds may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Fund records purchases of when-issued securities and
reflects the values of such securities in determining net asset value in the
same manner as other portfolio securities. The Fund segregates and maintains at
all times cash or other liquid assets in an amount at least equal to the amount
of outstanding commitments for when-issued securities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
daily and paid monthly for the Low Duration VIP Portfolio and declared and paid
quarterly for the Equity Income VIP Portfolio and declared and paid
semi-annually for the International VIP Portfolio. Distributions of net realized
capital gains, if any, will be declared at least annually. Effective July 1,
1998 the Low Duration VIP Portfolio will declare and pay dividends monthly.
OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is recognized
on the accrual basis. Generally accepted accounting principles require that
permanent financial reporting and tax differences relating to shareholder
distributions be reclassified to paid in capital.
NOTE 2.
INVESTMENT ADVISORY AGREEMENTS. Each Fund has an investment advisory agreement
with the Advisor, with whom certain officers and Trustees of the Trust are
affiliated. The Advisor is a division of Merrill Lynch Asset Management, L.P., a
separate business unit of Merrill Lynch & Co. The Advisor receives a fee,
computed daily and payable monthly, at the annual rates presented below as
applied to each Fund's daily net assets. The Advisor has voluntarily agreed to
pay all operating expenses in excess of the annual rates presented below as
applied to each Fund's daily net assets. For the period ended June 30, 1998, the
Advisor reimbursed the following expenses:
<TABLE>
<CAPTION>
Equity Income International Low Duration
VIP Portfolio VIP Portfolio VIP Portfolio
---------------------------------------------
<S> <C> <C> <C>
ANNUAL ADVISORY RATE..................................... 0.75% 0.75% 0.46%
ANNUAL CAP ON EXPENSES................................... 1.15% 1.35% 0.58%
EXPENSE REIMBURSEMENT.................................... $29,149 $0 $30,942
</TABLE>
13
<PAGE> 20
- --------------------------------------------------------------------------------
NOTE 3.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the period ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------------------------- -------------------------------
Fund U.S. Government Other U.S. Government Other
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY INCOME VIP PORTFOLIO.... -- $ 1,016,403 -- $ 11,593
INTERNATIONAL VIP PORTFOLIO.... -- 219,742,084 -- 3,586,274
LOW DURATION VIP PORTFOLIO..... $1,555,747 801,429 $951,539 223,912
</TABLE>
As of June 30, 1998, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciation Appreciated Depreciated
Fund (Depreciation) Securities Securities
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY INCOME VIP PORTFOLIO...................... $(35,733) $ 27,812 $ (63,545)
INTERNATIONAL VIP PORTFOLIO...................... 739,768 5,087,182 (4,347,414)
LOW DURATION VIP PORTFOLIO....................... (34) 1,926 (1,960)
</TABLE>
At June 30, 1998, the cost of investments for federal income tax purposes was
$1,003,206, $287,620,362, and $1,608,946 for the Equity Income, International
and Low Duration VIP Portfolios, respectively.
14
<PAGE> 21
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
EQUITY INCOME INTERNATIONAL LOW DURATION
VIP PORTFOLIO VIP PORTFOLIO VIP PORTFOLIO
---------------------- --------------------- ---------------------
March 18, 1998* June 10, 1998* March 18, 1998*
through June 30, 1998 through June 30, 1998 through June 30, 1998
---------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............. $10.00 $10.00 $10.00
Income from Investment Operations:
Net investment income........................ 0.04 0.02 0.17
Net realized and unrealized loss on
investments................................ (0.37) (0.04) --
-------- ------------ ----------
Total from investment operations............. (0.33) (0.02) 0.17
-------- ------------ ----------
Less Distributions:
Dividends (from net investment income)....... (0.04) (0.01) (0.17)
-------- ------------ ----------
Net Asset Value, End of Period................... $ 9.63 $ 9.97 $10.00
======== ============ ==========
Total Return(1).................................. (3.26)% (0.19)% 1.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period........................ $977,374 $241,133,791 $1,621,406
Ratio of expenses to average net assets(2):
Before expense reimbursement................. 11.41% 0.99% 11.39%
After expense reimbursement.................. 1.15% 0.99% 0.58%
Ratio of net investment income to average net
assets(2):
Before expense reimbursement................. (8.60)% 3.65% (4.85)%
After expense reimbursement.................. 1.66% 3.65% 5.96%
Portfolio turnover rate(1)....................... 1% 112% 148%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to Financial Statements
15
