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HOTCHKIS AND WILEY VARIABLE TRUST
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 1, 1998
INVESTMENT OBJECTIVES AND POLICIES - THE FIXED-INCOME FUNDS - INVESTMENT
POLICIES OF THE FIXED-INCOME FUNDS
In addition to the types of securities listed in the Prospectus, the Total
Return Bond VIP Portfolio and the Low Duration VIP Portfolio (collectively, the
"Fixed-Income Funds") may invest in municipal obligations.
SECURITIES AND TECHNIQUES USED BY THE FUNDS
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 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.
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ORGANIZATION AND MANAGEMENT - SUBADVISORS
The Advisor has entered into a subadvisory agreement with Mercury Asset
Management International ("Mercury") 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. David Chambers, whose biography appears under "Portfolio Managers--
International VIP Portfolio," has become associated with Mercury and is located
in London.
DIVIDENDS AND TAX STATUS
The following information replaces the second paragraph under "Dividends and Tax
Status."
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.
APPENDIX - DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE
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.
STANDARD & POOR'S RATINGS GROUP
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 very strong or strong capacity to pay principal and interest.
July 29, 1998
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HOTCHKIS AND WILEY VARIABLE TRUST
INTERNATIONAL VIP PORTFOLIO
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 1, 1998, REVISED MAY 15, 1998
ORGANIZATION AND MANAGEMENT - SUBADVISORS
The Advisor has entered into a subadvisory agreement with Mercury Asset
Management International ("Mercury") and Merrill Lynch Asset Management U.K.
Limited, affiliated investment advisors that are subsidiaries of Merrill Lynch &
Co., Inc. The subadvisory arrangement is 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. David Chambers, whose biography appears under "Portfolio Managers,"
has become associated with Mercury and is located in London.
July 29, 1998
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HOTCHKIS AND WILEY VARIABLE TRUST
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 1, 1998
INVESTMENT OBJECTIVES AND POLICIES
MUNICIPAL OBLIGATIONS
The two principal classifications of municipal bonds, notes and
commercial paper are "general obligation" and "revenue" bonds, notes or
commercial paper. General obligation bonds, notes or commercial paper are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Issuers of general obligation bonds, notes or
commercial paper include states, counties, cities, towns and other governmental
units. Revenue bonds, notes and commercial paper are payable from the revenues
derived from a particular facility or class of facilities or, in come cases,
from specific revenue sources. Revenue bonds, notes or commercial paper are
issued for a wide variety of purposes, included the financing of electric, gas,
water and sewer systems and other public utilities; industrial development and
pollution control facilities; single and multifamily housing units; public
buildings and facilities; air and marine ports; transportation facilities such
as toll roads, bridges and tunnels; and health and educational facilities such
as hospitals and dormitories. They rely primarily on user fees to pay debt
service, although the principal revenue source is often supplemented by
additional security features which are intended to enhance the creditworthiness
of the issuer's obligations. In some cases, particularly revenue bonds issued to
finance housing and public buildings, a direct or implied "moral obligation" of
a governmental unit may be pledged to the payment of debt service. In other
cases, a special tax or other charge may augment user fees.
Included within the revenue bonds category are participations in
municipal lease obligations or installment purchase contracts of municipalities
(collectively, "lease obligations"). State and local governments issue lease
obligations to acquire equipment leases and facilities. Lease obligations may
have risks not normally associated with general obligation or other revenue
bonds. Leases and installment purchase or conditional sale contracts (which may
provide for title to the leased asset to pass eventually to the issuer) have
developed as a means for governmental issuers to acquire property and equipment
without the necessity of complying with the constitutional and statutory
requirements generally applicable for the issuance of debt. Certain lease
obligations contain "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on an annual or other periodic basis. Consequently, continued
lease payments on those lease obligations containing "non-appropriation" clauses
are dependent on future legislative actions. If such legislative actions do not
occur, the holders of the lease obligation may experience difficulty in
exercising their rights, including disposition of the property.
Private activity obligations are issued to finance, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain facilities for water supply, gas, electricity, sewage or solid waste
disposal. Private activity obligations are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. The principal and interest on these obligations may be payable from
the general revenues of the users of such
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facilities. Shareholders, depending on their individual tax status, may be
subject to the federal alternative minimum tax on the portion of a distribution
attributable to these obligations. Interest on private activity obligations will
be considered exempt from federal income taxes; however, shareholders should
consult their own tax advisers to determine whether they may be subject to the
federal alternative minimum tax.
Resource recovery obligations are a type of municipal revenue
obligation issued to build facilities such as solid waste incinerators or
waste-to-energy plants. Usually, a private corporation will be involved and the
revenue cash flow will be supported by fees or units paid by municipalities for
the use of the facilities. The viability of a resource recovery project,
environmental protections regulations and project operator tax incentives may
affect the value and credit quality of these obligations.
Tax, revenue or bond anticipation notes are issued by municipalities in
expectation of future tax or other revenues which are payable from these
specific taxes or revenues. Bond anticipation notes usually provide interim
financing in advance of an issue of bonds or notes, the proceeds of which are
used to repay the anticipation notes. Tax-exempt commercial paper is issued by
municipalities to help finance short-term capital or operating needs in
anticipation of future tax or other revenue.
A variable rate obligation is one whose terms provide for the
adjustment of its interest rate on set dates and which, upon such adjustment,
can reasonably be expected to have a market value that approximates its par
value. A floating rate obligation has terms which provide for the adjustment of
its interest rate whenever a specified interest rate changes and which, at any
time, can reasonably be expected to have a market value that approximates its
par value. Variable or floating rate obligations may be secured by bank letters
of credit.
Variable rate auction and residual interest obligations are created
when an issuer or dealer separates the principal portion of a long-term,
fixed-rate municipal bond into two long-term, variable-rate instruments. The
interest rate on one portion reflects short-term interest rates, while the
interest rate on the other portion is typically higher than the rate available
on the original fixed-rate bond.
Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the municipal bond and municipal note
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The achievement of the Fixed-Income Funds' investment
objectives is dependent in part on the continuing ability of the issuers of
municipal securities in which the Fixed-Income Funds invest to meet their
obligations for the payment of principal and interest when due. Obligations of
issuers of municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Bankruptcy Reform Act of 1978, as amended. Therefore, the possibility
exists that, as a result of litigation or other conditions, the ability of any
issuer to pay, when due, the principal of and interest on its municipal
securities may be materially affected.
July 29, 1998
