<PAGE> 1
ANNUAL REPORT
- --------------------------------------------------------------------------------
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017-5400
800-236-4479
INVESTMENT ADVISOR
Hotchkis and Wiley
725 South Figueroa Street
Suite 4000
Los Angeles, California 90017-5400
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
AND TRANSFER AGENT
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
CUSTODIAN
Firstar Bank Milwaukee, N.A.
615 East Michigan Street
Milwaukee, Wisconsin 53202
DECEMBER 31, 1998
LOGO
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
INTERNATIONAL VIP PORTFOLIO
- --------------------------------------------------------------------------------
Seeks to provide current income and long-term growth of income,
accompanied by growth of capital. The Fund invests in international equity
securities.
- --------------------------------------------------------------------------------
THIS MATERIAL MUST BE PRECEDED
OR ACCOMPANIED BY A PROSPECTUS. HOTCHKIS AND WILEY:
INVESTMENT ADVISOR
<PAGE> 2
HOTCHKIS AND WILEY FUNDS LOGO
DEAR SHAREHOLDERS:
We are pleased to present to you the annual report of Hotchkis and Wiley
Variable Trust International VIP Portfolio for the fiscal year ended December
31, 1998.
The International VIP Portfolio was launched this year, almost it would seem
into a maelstrom that swept the world markets. The Asian economic crisis spread
to all the emerging markets. The contagion effect made investors spurn the
shares of economically cyclical industries. This bout of stock market weakness
brought the International VIP Portfolio a rare opportunity to add some cheaply
priced stocks to the portfolio. For the six month period ending December 31,
1998, the Portfolio's return at -3.4% lagged the MSCI EAFE Index, which was up
3.7%. Throughout 1998, the same type of stocks dominated performance in the
global ex-Asia stock markets. In general, these winning stocks were perceived by
investors to be insensitive to economic growth ("non-cyclical") and are in the
consumer, technology and utility related areas. Further, the best performers had
much larger than average market capitalization. In fact, the very largest
companies, the mega-caps, were the dominant drivers of global equity
performance. The International VIP Portfolio's strict earnings yield and
dividend yield thresholds have made it difficult for us to follow the crowd and
pay the sky-high valuation multiples associated with the international equity
market leaders.
Between the third and fourth quarters, we saw a complete reversal in the world
markets. The flight to quality following the Russian devaluation sparked major
credit concerns and investors forsook risk for safer havens. Central bankers in
the U.S., Europe, the U.K., China and Hong Kong all eased monetary policies with
an eye to avoiding a recession and counteracting the credit contraction. This
created a veritable flood of money in the world financial system. As capacity
investments waned, there were limited avenues for this new cash, namely stock
markets, bonds, bank deposits and financial restructurings. The EAFE Index was
up 20.8% in the fourth quarter. This wall of money flowed into the large cap,
liquid stocks leaving the rest of the market far behind. The U.K. was the most
striking where the ten largest stocks captured virtually all the performance for
the calendar year.
The most significant drag on the International VIP Portfolio's performance in
the fourth quarter came from stock selection in the ebullient 11 EMU markets,
especially in France and Germany, as well as in the U.K. and Japan. The U.K.
again proved problematic with its penchant for telecommunications and
pharmaceutical stocks. In Japan, the Portfolio had an average weight of 11% vs.
21% for the EAFE Index, which was deleterious given that the yen appreciated by
21% vs. the U.S. dollar in the final quarter.
Equity prices can spiral upward only to the point where earnings are set to go
in the opposite direction. At that point, the gap in valuation between the low
price-to-book value, high earnings yield
<PAGE> 3
stocks and the mega-cap growth stocks should close. The U.K. market has seen
perhaps the most extreme form of this behavior, creating the greatest
opportunities for finding undervalued stocks. From our perspective, U.K. stocks
remained the most attractive and constituted the Portfolio's single largest
country weighting at December 31.
As always, we appreciate the trust you place in us. We thank you for your
continued support and look forward to reporting to you again in six months.
Sincerely,
NANCY D. CELICK
Nancy D. Celick
President
HOTCHKIS AND WILEY VARIABLE TRUST
The opinions expressed above are as of December 31, 1998. The Portfolio is
actively managed and may not continue to hold any specific securities mentioned.
Performance and index descriptions follow. Past performance is no guarantee of
future performance.
<PAGE> 4
GRAPH
<PAGE> 5
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SCHEDULE OF INVESTMENTS.................................. 1
STATEMENT OF ASSETS AND LIABILITIES...................... 4
STATEMENT OF OPERATIONS.................................. 5
STATEMENT OF CHANGES IN NET ASSETS....................... 6
NOTES TO FINANCIAL STATEMENTS............................ 7
FINANCIAL HIGHLIGHTS..................................... 11
REPORT OF INDEPENDENT ACCOUNTANTS........................ 12
</TABLE>
LOGO
LOGO
<PAGE> 6
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<S> <C> <C>
COMMON STOCKS -- 93.9% Shares Value
- ------------------------------------------------------------
AUSTRALIA -- 6.3%
- ------------------------------------------------------------
AIRLINES -- 1.4%
............................................................
Qantas Airways Limited 2,014,845 $ 4,115,712
- ------------------------------------------------------------
BANKS -- 1.9%
............................................................
Australia and New Zealand
Banking Group, Ltd. 829,085 5,431,621
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
............................................................
Pioneer International, Ltd. 2,000,000 4,232,609
- ------------------------------------------------------------
INSURANCE -- 1.5%
............................................................
QBE Insurance Group, Ltd. 1,038,776 4,301,152
..................... ...................... -----------
18,081,094
Total Australia
- ------------------------------------------------------------
AUSTRIA -- 0.5%
- ------------------------------------------------------------
STEEL -- 0.5%
............................................................
Boehler - Uddeholm AG 30,870 1,436,755
..................... ...................... -----------
1,436,755
Total Austria
- ------------------------------------------------------------
CANADA -- 3.3%
- ------------------------------------------------------------
BANKS -- 1.2%
............................................................
Canadian Imperial Bank of
Commerce 135,080 3,341,823
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.0%
............................................................
Imasco, Ltd. 135,510 2,884,881
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 0.2%
............................................................
Nexfor, Inc. 106,493 419,455
- ------------------------------------------------------------
METALS & MINERALS -- 0.8%
............................................................
Noranda, Inc. 244,250 2,425,008
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 0.1%
............................................................
Canadian Hunter Exploration
Ltd. # 61,063 397,542
..................... ...................... -----------
9,468,709
Total Canada
- ------------------------------------------------------------
FINLAND -- 1.5%
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.5%
............................................................
UPM-Kymmene OYJ 158,780 4,450,400
..................... ...................... -----------
4,450,400
Total Finland
- ------------------------------------------------------------
FRANCE -- 10.9%
- ------------------------------------------------------------
AEROSPACE -- DEFENSE -- 1.8%
............................................................
Thomson CSF 119,723 5,140,834
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
BANKS -- 2.9%
............................................................
Banque Nationale de Paris 58,596 $ 4,824,578
............................................................
Societe Generale 21,380 3,461,792
..................... ...................... -----------
8,286,370
- ------------------------------------------------------------
BEVERAGES -- 1.4%
............................................................
Pernod Ricard SA 62,215 4,040,606
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
............................................................
Lafarge SA 46,470 4,414,809
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 0.9%
............................................................
Societe BIC SA 47,749 2,648,322
- ------------------------------------------------------------
OIL-INTERNATIONAL -- 2.4%
............................................................
Elf Aquitaine SA 34,160 3,948,164
Total SA 30,139 3,052,039
..................... ...................... -----------
7,000,203
..................... ...................... -----------
31,531,144
Total France
- ------------------------------------------------------------
GERMANY -- 6.6%
- ------------------------------------------------------------
BANKS -- 1.1%
............................................................
Commerzbank AG 101,170 3,199,273
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.2%
............................................................
Dyckerhoff AG 4,819 1,335,943
............................................................
Friedrich Grohe AG 7,730 2,040,897
..................... ...................... -----------
3,376,840
- ------------------------------------------------------------
CHEMICALS -- 1.2%
............................................................
Bayer AG 61,735 2,576,425
............................................................
SGL Carbon AG 15,415 924,980
..................... ...................... -----------
3,501,405
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 1.5%
............................................................
Buderus AG 7,215 2,627,931
............................................................
Vossloh AG 55,405 1,629,048
..................... ...................... -----------
4,256,979
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.6%
............................................................
VEBA AG 77,963 4,664,151
..................... ...................... -----------
18,998,648
Total Germany
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
1
<PAGE> 7
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
HONG KONG -- 3.0%
- ------------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 1.9%
............................................................
Hang Lung Development Company
Limited 2,102,000 $ 2,251,959
............................................................
New World Development Co., Ltd. 1,220,000 3,070,747
..................... ...................... -----------
5,322,706
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 1.1%
............................................................
Swire Pacific Ltd. Class A 734,500 3,289,811
..................... ...................... -----------
8,612,517
Total Hong Kong
- ------------------------------------------------------------
IRELAND -- 2.4%
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.0%
............................................................
Greencore Group PLC 627,720 2,899,758
- ------------------------------------------------------------
PAPER -- 1.4%
............................................................
Jefferson Smurfit Group PLC 2,205,650 3,977,005
..................... ...................... -----------
6,876,763
Total Ireland
- ------------------------------------------------------------
ITALY -- 3.5%
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 1.6%
............................................................
ENI SPA 689,400 4,512,833
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.9%
............................................................
Telecom Italia SPA 557,900 4,767,928
............................................................
Telecom Italia SPA -- RNC 117,000 737,519
..................... ...................... -----------
5,505,447
..................... ...................... -----------
10,018,280
Total Italy
- ------------------------------------------------------------
JAPAN -- 8.8%
- ------------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.5%
............................................................
Nintendo Co., Ltd. 45,900 4,455,722
- ------------------------------------------------------------
ELECTRONICS -- 2.1%
............................................................
Kyocera Corporation 85,600 4,530,430
............................................................
Sony Corporation 20,400 1,488,406
..................... ...................... -----------
6,018,836
- ------------------------------------------------------------
FINANCIAL SERVICES -- 2.3%
............................................................
Aiful Corporation 14,100 857,501
............................................................
Promise Company, Ltd. 112,800 5,880,005
..................... ...................... -----------
6,737,506
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
LEISURE/TOYS -- 1.4%
............................................................
NAMCO Ltd. 199,000 $ 4,004,702
............................................................
STEEL -- 1.5%
............................................................
Yodogawa Steel Works, Ltd. 1,166,000 4,403,515
..................... ...................... -----------
25,620,281
Total Japan
- ------------------------------------------------------------
NETHERLANDS -- 9.4%
- ------------------------------------------------------------
BANKS -- 1.1%
............................................................
ABN AMRO Holding N.V. 154,870 3,257,843
- ------------------------------------------------------------
CHEMICALS -- 1.6%
............................................................
Akzo Nobel N.V. 103,985 4,734,809
- ------------------------------------------------------------
ELECTRONICS -- 1.5%
............................................................
Koninklijke (Royal) Philips
Electronics N.V. 66,136 4,437,866
- ------------------------------------------------------------
INSURANCE -- MULTI-LINE -- 3.7%
............................................................
Fortis (NL) N.V. 61,930 5,131,879
............................................................
ING Groep N.V. 90,555 5,521,837
..................... ...................... -----------
10,653,716
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.5%
............................................................
Koninklijke KPN N.V. 83,795 4,194,804
..................... ...................... -----------
27,279,038
Total Netherlands
- ------------------------------------------------------------
NORWAY -- 0.5%
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.5%
............................................................
Kvaerner ASA -- Class A 72,490 1,427,156
..................... ...................... -----------
1,427,156
Total Norway
- ------------------------------------------------------------
SINGAPORE -- 2.1%
- ------------------------------------------------------------
COMPUTERS -- 2.1%
............................................................
Creative Technology Limited # 396,300 5,944,500
..................... ...................... -----------
5,944,500
Total Singapore
- ------------------------------------------------------------
SPAIN -- 2.4%
- ------------------------------------------------------------
BANKS -- 1.0%
............................................................
Banco Bilbao Vizcaya S.A. 179,850 2,822,564
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.4%
............................................................
Telefonica de Espana S.A. 88,190 3,925,112
............................................................
Telefonica de Espana
S.A. -- Bonus Rights # 88,190 78,378
-----------
4,003,490
..................... ...................... -----------
6,826,054
Total Spain
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
2
<PAGE> 8
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
SWEDEN -- 2.4%
- ------------------------------------------------------------
BANKS -- 0.9%
............................................................
Skandinaviska Enskilda Banken
AB 247,844 $ 2,614,259
- ------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.5%
............................................................
Electrolux AB -- Class B 250,510 4,311,252
..................... ...................... -----------
6,925,511
Total Sweden
- ------------------------------------------------------------
SWITZERLAND -- 6.4%
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.5%
............................................................
Nestle SA "registered" 1,999 4,351,664
- ------------------------------------------------------------
MACHINERY & EQUIPMENT -- 2.4%
............................................................
Saurer AG "registered"# 4,690 2,800,000
............................................................
Sulzer AG "registered" 6,970 4,242,388
..................... ...................... -----------
7,042,388
- ------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 2.5%
............................................................
Novartis AG "registered" 3,687 7,247,834
..................... ...................... -----------
18,641,886
Total Switzerland
- ------------------------------------------------------------
UNITED KINGDOM -- 23.9%
- ------------------------------------------------------------
APPAREL & TEXTILES -- 0.7%
............................................................
Coats Viyella PLC 4,525,450 2,033,064
- ------------------------------------------------------------
BANKS -- 4.2%
............................................................
Lloyds TSB Group PLC 433,277 6,149,505
............................................................
National Westminster Bank PLC 317,410 6,115,820
..................... ...................... -----------
12,265,325
- ------------------------------------------------------------
BUILDING MATERIALS -- 2.1%
............................................................
Hanson PLC 777,000 6,144,247
- ------------------------------------------------------------
CHEMICALS -- 2.6%
............................................................
BOC Group PLC 266,563 3,903,085
............................................................
Laporte PLC 469,810 3,642,786
..................... ...................... -----------
7,545,871
- ------------------------------------------------------------
DIVERSIFIED -- 1.3%
............................................................
Cookson Group PLC 1,729,690 3,741,426
- ------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 3.8%
............................................................
BTR PLC 1,110,490 2,272,717
............................................................
Tomkins PLC 1,300,520 6,123,913
............................................................
Williams PLC 468,041 2,628,350
..................... ...................... -----------
11,024,980
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
ENGINEERING & CONSTRUCTION -- 1.5%
............................................................
TI Group PLC 782,750 $ 4,223,073
- ------------------------------------------------------------
FOOD & BEVERAGES -- 1.4%
............................................................
Allied Domecq PLC 442,510 4,023,822
- ------------------------------------------------------------
FOOD PRODUCERS -- 0.6%
............................................................
Hillsdown Holdings PLC 1,392,245 1,760,576
- ------------------------------------------------------------
INSURANCE -- 2.6%
............................................................
Allied Zurich AG PLC # 250,635 3,751,184
............................................................
CGU PLC 244,040 3,814,901
..................... ...................... -----------
7,566,085
- ------------------------------------------------------------
RETAIL -- FOOD CHAINS -- 1.4%
............................................................
Tesco PLC 1,414,710 4,060,524
- ------------------------------------------------------------
TOBACCO -- 0.8%
............................................................
B.A.T. Industries PLC 275,855 2,446,954
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 0.9%
............................................................
Powergen PLC 202,000 2,661,964
..................... ...................... -----------
69,497,911
Total United Kingdom
..................... ...................... -----------
Total common stocks 271,636,647
(cost $273,799,897)
- ------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Principal
CASH EQUIVALENTS -- 6.2% Amount
- -----------------------------------------------------------
Vista Institutional Prime
Money Market Fund $17,995,273 17,995,273
..................... ......................
-----------
Total cash equivalents
(cost $17,995,273) 17,995,273
- -----------------------------------------------------------
Total investments -- 100.1%
(cost $291,795,170) 289,631,920
...........................................................
Liabilities in excess of other
assets -- (0.1)% (496,962)
..................... ......................
------------
Total net assets -- 100.0% $289,134,958
- -----------------------------------------------------------
</TABLE>
# -- Non-income producing security.
See Notes to the Financial Statements
3
<PAGE> 9
Financial Statements -- December 31, 1998
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
INTERNATIONAL
VIP
-------------
<S> <C>
ASSETS:
Investments, at value*.................................... $289,631,920
Foreign currency**........................................ 320,385
Dividends and interest receivable......................... 452,757
Organizational expenses, net of accumulated
amortization........................................... 16,917
Prepaid expenses.......................................... 1,345
------------
Total assets......................................... 290,423,324
------------
LIABILITIES:
Payable to Advisor........................................ 178,629
Payable for forward currency exchange contracts........... 157,797
Payable for investments purchased......................... 634,648
Accrued expenses and other liabilities.................... 317,292
------------
Total liabilities.................................... 1,288,366
------------
Net assets........................................... $289,134,958
============
NET ASSETS CONSIST OF:
Paid in capital........................................... $294,944,329
Undistributed net investment income....................... 62,996
Undistributed net realized loss on securities and foreign
currency transactions.................................. (3,646,344)
Net unrealized depreciation of securities and foreign
currency............................................... (2,226,023)
------------
Net assets........................................... $289,134,958
============
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................ 30,379,778
Net asset value per share (offering and redemption
price)................................................. $ 9.52
============
*Cost of Investments....................................... $291,795,170
============
**Cost of Foreign Currency.................................. $ 314,263
============
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 10
Financial Statements -- Period Ended December 31, 1998
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INTERNATIONAL
VIP
PORTFOLIO(1)
-------------
<S> <C>
INVESTMENT INCOME
Income*
Dividends.............................................. $ 2,909,676
Interest............................................... 110
-----------
Total income...................................... 2,909,786
-----------
Expenses
Advisory fee........................................... 1,019,881
Legal and auditing fees................................ 38,457
Custodian fees and expenses............................ 107,772
Accounting and transfer agent fees and expenses........ 44,148
Administration fee..................................... 53,644
Trustees' fees and expenses............................ 49,015
Reports to shareholders................................ 34,205
Registration fees...................................... 80,472
Amortization of organizational expenses................ 1,546
Other expenses......................................... 874
-----------
Total expenses.................................... 1,430,014
-----------
Net investment income..................................... 1,479,772
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on securities and foreign currency
transactions.......................................... (3,884,261)
Net change in unrealized depreciation of securities and
foreign currency...................................... (2,226,023)
-----------
Net loss on investments................................... (6,110,284)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(4,630,512)
===========
*Net of Foreign Taxes Withheld.............................. $ 304,486
===========
</TABLE>
(1) For the period June 10, 1998 (commencement of operations) through December
31, 1998.
See Notes to the Financial Statements
5
<PAGE> 11
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INTERNATIONAL VIP
PORTFOLIO
-------------------------
June 10, 1998**
through December 31, 1998
-------------------------
<S> <C>
OPERATIONS:
Net investment income.................................. $ 1,479,772
Net realized loss on securities and foreign currency
transactions.......................................... (3,884,261)
Net change in unrealized depreciation of securities and
foreign currency...................................... (2,226,023)
------------
Net decrease in net assets resulting from
operations....................................... (4,630,512)
------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. (1,179,786)
------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.......................... 299,085,362
Shares issued in connection with payment of dividends
and distributions..................................... 1,179,786
Cost of shares redeemed................................ (5,319,892)
------------
Net increase in net assets from Fund share
transactions..................................... 294,945,256
------------
Total increase in net assets................................ 289,134,958
NET ASSETS:
Beginning of period.................................... --
------------
End of period*......................................... $289,134,958
============
*Including undistributed net investment income of: $ 62,996
============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................ 30,816,414
Shares issued in connection with payment of dividends
and distributions..................................... 125,916
Shares redeemed........................................ (562,552)
------------
Net increase...................................... 30,379,778
============
** Commencement of operations.
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 12
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1.
ACCOUNTING POLICIES. The International VIP Portfolio (the "Fund") is a series of
Hotchkis and Wiley Variable Trust (the "Trust"), an open-end, management
investment company organized as a Massachusetts business trust on February 4,
1997 and registered under the Investment Company Act of 1940. The Fund commenced
operations on June 10, 1998. The Fund seeks to provide current income and
long-term growth of income, accompanied by growth of capital. Shares of the Fund
are not offered to the general public but may only be purchased by the separate
accounts of participating insurance companies for the purpose of funding
variable annuity contracts and/or variable life insurance contracts. In addition
to the Fund, the Trust offers the Equity Income VIP Portfolio, the Low Duration
VIP Portfolio and the Total Return VIP Portfolio (collectively, the "Funds").
The assets of each series are invested in separate, independently managed
portfolios. The following is a summary of significant accounting policies
followed by the Fund in the preparation of the financial statements.
ORGANIZATIONAL EXPENSES: Expenses incurred by the Trust in connection with the
organization, registration and the initial public offering of shares are being
deferred and amortized over the period of benefit, but not to exceed sixty
months from the Trust's commencement of operations. These costs were advanced by
the Advisor and will be reimbursed by the Trust. The proceeds of any redemption
of the initial shares by the original shareholder will be reduced by a pro-rata
portion of any then unamortized organization expenses in the same proportion as
the number of initial shares being redeemed bears to the number of initial
shares outstanding at the time of such redemption.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or The Nasdaq Stock Market ("NSM") are
valued at the last sale price as of 4:00 p.m., Eastern time, or, in the absence
of recorded sales, at the average of readily available closing bid and asked
prices on such exchange or NSM. Unlisted securities that are not included in NSM
are valued at the average of the quoted bid and asked price in the
over-the-counter market. 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 Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis: (i) market value of investment securities, assets and
liabilities at the daily rates of exchange, and (ii) purchases and sales of
investment securities, dividend and interest
7
<PAGE> 13
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions. The Fund does not isolate and treat as
ordinary income that portion of the results of operations arising as a result of
changes in the exchange rate from the fluctuations arising from changes in the
market prices of securities held during the period. However, for federal income
tax purposes, the Fund does isolate and treat as ordinary income the effect of
changes in foreign exchange rates arising from actual foreign currency
transactions and the effect of changes in foreign exchange rates arising from
trade date and settlement date differences.
FORWARD CURRENCY EXCHANGE CONTRACTS: The Fund utilizes forward currency exchange
contracts for the purpose of hedging foreign currency risk. Under these
contracts, they are obligated to exchange currencies at specific future dates.
Risks arise from the possible inability of counter-parties to meet the terms of
their contracts and from movements in currency values.
FEDERAL INCOME TAXES: It is the Fund's intent to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and the Fund
intends to distribute investment company net taxable income and net capital
gains to shareholders. Therefore, no federal income tax provision is required.
EXPENSE ALLOCATION: Common expenses incurred by the Trust are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid semi-annually. Distributions of net realized capital gains, if any,
will be declared at least annually.
OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is recognized
on the accrual basis. Generally accepted accounting principles require that
permanent financial reporting and tax differences relating to shareholder
distributions be reclassified to paid in capital.
NOTE 2.
INVESTMENT ADVISORY AGREEMENT The Fund has an investment advisory agreement with
the Advisor, with whom certain officers and Trustees of the Trust are
affiliated. The Advisor is a division of Merrill Lynch Asset Management, L.P.,
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. The Advisor
receives a fee, computed daily and payable
8
<PAGE> 14
- --------------------------------------------------------------------------------
monthly, at the annual rate of 0.75% as applied to the Fund's daily net assets.
The Advisor has voluntarily agreed to pay all operating expenses in excess of
1.35% as applied to the Fund's daily net assets.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the Board
of Trustees of the Funds has adopted procedures which allow the Fund, under
certain conditions described in the Rule, to acquire newly-issued securities
from a member of an underwriting group in which an affiliated underwriter
participates.
NOTE 3.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the period ended December 31, 1998 were
$326,422,822 and $48,920,665, respectively.
As of December 31, 1998, unrealized appreciation (depreciation) for federal
income tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciation Appreciated Depreciated
Fund (Depreciation) Securities Securities
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTERNATIONAL VIP PORTFOLIO.................... $(4,087,155) $23,654,334 $(27,741,489)
</TABLE>
At December 31, 1998, the cost of investments for federal income tax purposes
was $293,719,075. The difference between book and tax is due primarily to wash
sale losses and mark-to-market adjustments for passive foreign investment
companies.
As December 31, 1998, the Fund had accumulated net realized capital loss
carryovers of $3,178,827, expiring in 2006. To the extent that Fund realizes
future net capital gains, those gains will be offset by any unused capital loss
carryover.
NOTE 4.
FORWARD CURRENCY EXCHANGE CONTRACT. At December 31, 1998, the Fund had entered
into a "portfolio hedge" forward currency exchange contract that obligates the
Fund to deliver and receive currency at a specified future date. The net
unrealized depreciation of $61,576 is included in the net unrealized
depreciation section of the accompanying financial statements. The terms of the
open contract is as follows:
<TABLE>
<CAPTION>
Currency to U.S. $ value at Currency to U.S. $ value at
Settlement Date be Delivered December 31, 1998 be Received December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4/30/99 42,905,100 Hong Kong Dollars $5,530,510 42,905,100 Hong Kong Dollars $5,468,934
</TABLE>
9
<PAGE> 15
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 5.
FEDERAL TAX DISCLOSURE (UNAUDITED). The Fund intends to make an election under
Internal Revenue Code Section 853 to pass through non-U.S. taxes paid by the
Fund to its shareholders. Non-U.S. taxes paid by the Fund for the period ended
12/31/98 were $288,516. Foreign source income earned by the Fund for the period
ended 12/31/98 was $1,890,256. Shareholders are entitled to claim a credit for
foreign taxes or a deduction, generally at their option.
10
<PAGE> 16
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INTERNATIONAL
VIP PORTFOLIO
-------------------------
June 10, 1998*
through December 31, 1998
-------------------------
<S> <C>
Net Asset Value, Beginning of Period........................ $10.00
Income from Investment Operations:
Net investment income................................... 0.04
Net realized and unrealized loss on investments......... (0.48)
------
Total from investment operations........................ (0.44)
------
Less Distributions:
Dividends (from net investment income).................. (0.04)
------
Net Asset Value, End of Period.............................. $ 9.52
======
Total Return(1)............................................. (4.38)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $289,134,958
Ratio of expenses to average net assets(2).................. 1.05%
Ratio of net investment income to average net assets(2)..... 1.09%
Portfolio turnover rate(1).................................. 24%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
11
<PAGE> 17
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Hotchkis and Wiley Variable Trust:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the International VIP Portfolio
(one of the four portfolios of Hotchkis and Wiley Variable Trust, the "Fund") at
December 31, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for the period June 10, 1998 (commencement
of operations) through December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS
Milwaukee, Wisconsin
February 18, 1999
12
