<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
EQUITY INCOME VIP PORTFOLIO
-------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
-------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
- --------------------------------------------------------------------------------
THIS MATERIAL MUST 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 annual report of Hotchkis and Wiley
Variable Trust for the fiscal year ended December 31, 1998. Investment
commentary on the Portfolios and their strategies follows.
EQUITY INCOME VIP PORTFOLIO
To understand the Equity Income VIP Portfolio's performance, think of 1998 as a
tale of two markets. The S&P 500 Index recorded strong gains from a narrow group
of the largest growth companies, with 10 companies responsible for more than
half of the Index's rise. Underneath this narrow group, the erosion of stock
prices, which began in April, continued with value underperforming dramatically.
On July 17, the whole U.S. market began collapsing, culminating in a selling
crescendo in the last three trading days in August. During the sell-off, a
pronounced shift in investor preference began to emerge, as investors refocused
on underlying valuation support and were drawn to truly over-sold opportunities
within the market. From August 26 through October 8, the more value-oriented
stocks performed well relative to the stocks in the S&P 500 Index. The Equity
Income VIP Portfolio held up well during this period. From August 16 through
October 8, the Equity Income VIP Portfolio generated a -4.3% return while the
S&P 500 Index returned -11.1% and the Russell 1000 Value Index returned -8.1%.
The correction ended in early October when the Federal Reserve ignited the
market with three interest rate cuts in quick succession. Investors crowded into
a handful of the largest, most liquid names. The wide disparity in performance
between growth and value stocks continued, as did that between mega-cap stocks
and all the others -- large-, mid-, and small-cap.
Returns in the Equity Income VIP Portfolio came predominantly from utilities,
both from telephone companies, as the dynamics of new strategic initiatives
became apparent, and from electric companies. Also contributing to returns were
the consumer durables, in particular Ford, which offers attractive valuation,
strong cash flow and improved profitability; Fannie Mae, which benefited from a
refinancing boom driven by falling rates; and Philip Morris, which moved
steadily upward on the multi-state tobacco litigation settlement. The
Portfolio's returns were hampered by holdings in the energy sector, which
suffered from historically low oil prices; capital spending, in particular New
Holland, a farm equipment manufacturer hit by dramatically lower wheat prices;
and from the Portfolio's lack of exposure to technology and drug companies,
which were among the best performing sectors and continued to trade at what we
believed were excessive valuation levels.
The difference in prices between value and growth stocks has become exaggerated.
The divergence has been with us for over three years and has widened to record
levels. Our research supports the current value orientation of the Equity Income
VIP Portfolio, and we intend to stick to our disciplines of focusing on
financially strong companies with above-average current yield and below-average
price-to-earnings ratios.
INTERNATIONAL VIP PORTFOLIO
The International VIP Portfolio was launched this year, almost it would seem
into a maelstrom that swept the world markets. The Asian economic crisis
<PAGE> 4
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 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.
LOW DURATION VIP PORTFOLIO
1998 will be remembered as one of the most difficult years in the history of the
organized fixed-income markets. The year started out with a deceptively positive
tone as the concerns of the "Asian contagion" seemed to be receding. While the
manufacturing sector showed effects of weakness in export markets, the rest of
the economy marched forward with surprising growth. GDP grew at a 5.5% rate in
the first quarter and 1.8% in the second quarter. A strong housing market, low
interest rates and equity market gains gave the consumer accessible wealth to
continue to push the economy along.
This rosy picture in the U.S. masked the damage being done internationally by a
global deflationary spiral. The payback was swift and destructive, kicked off by
Russia defaulting on domestic debt at the beginning of the third quarter. Panic
quickly gripped a marketplace that had become complacent. Debt and equity
markets around the world fell dramatically, with emerging markets bearing the
brunt of the problems. These wild swings led to a contraction of global
liquidity that proved even more destructive. Long Term Capital Management, one
of the world's largest, highest profile and most leveraged hedge funds,
collapsed, provoking unprecedented intervention by the Federal Reserve.
Suddenly, only U.S. treasuries were liquid enough for market participants and
all other securities were shunned.
The fourth quarter of 1998 started as a continuation and deepening of the
difficulties which had appeared over the previous few months. Hedge funds and
<PAGE> 5
dealer firms kept dumping bonds into the already thin markets, exacerbating the
stunning collapse in market liquidity. Into this quagmire stepped the Federal
Reserve hoping to provide liquidity and save the day. First, the Federal Open
Market Committee lowered interest rates three times beginning at the end of
September. Second, and perhaps more important, Chairman Greenspan ascribed the
change in monetary policy to concerns over market liquidity rather than economic
growth. This was an unprecedented admission and gave some confidence back to
market participants.
Spread product, particularly asset-backed securities, suffered throughout
October but began to regain some ground later in the quarter. While the peak of
the crisis occurred in October, the market continued to value liquidity above
all else, meaning the recovery was primarily seen in a narrow group of
securities. Only the large "benchmark" names in the corporate market and the
most liquid parts of the mortgage-backed market saw noticeable gains in the last
two months of 1998.
Throughout it all, the U.S. economy chugged along impressively, growing at a
3.7% rate in the third quarter and accelerating to an estimated 4.5% rate in the
fourth quarter. The drop in the equity markets proved short-lived, and the
housing market never skipped a beat, sustaining the "wealth effect" driving U.S.
growth.
The heavy weighting in spread product hurt during the year as liquidity
vigilantes pushed spreads dramatically wider during the third and early fourth
quarters. Duration had a positive impact as interest rates were lower on the
year. Our long position in duration hurt in the fourth quarter as rates rose
modestly. We did take advantage of the historic cheapness of mortgage-backed and
corporate securities to add in selected names which had a positive impact on the
Portfolio, particularly in December.
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 Portfolios are
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> 6
GRAPH
<PAGE> 7
- --------------------------------------------------------------------------------
MARKET INDEXES
The indexes described below are unmanaged and include the reinvestment of all
dividends, but do not reflect the payment of transaction costs and advisory fees
associated with an investment in the Funds. The securities that comprise these
indexes may differ substantially from the securities in the Funds' portfolios.
Each index named is not the only index which may be used to characterize
performance of a specific Fund and other indexes may portray different
comparative performance.
MERRILL LYNCH 1-3 YEAR U.S. TREASURY BILL INDEX is an index of Treasury
securities with maturities ranging from one to three years.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE (EUROPE, AUSTRALIA, FAR EAST) INDEX
includes the equity securities of companies, within various industries, whose
primary trading markets are located outside the U.S. These securities are among
the larger capitalization companies in these markets. The countries currently
included in the MSCI EAFE Index are Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the U.K.
RUSSELL 1000 VALUE INDEX measures the performance of those Russell 1000
companies with lower price-to-book value ratios and lower forecasted growth
values. (The Russell 1000 Index measures the performance of the 1,000 largest
companies in the Russell 3000 Index, which is comprised of the 3,000 largest
U.S.-domiciled publicly-traded common stocks by market capitalization
representing approximately 98% of the U.S. publicly-traded equity market.)
STANDARD & POOR'S 500 INDEX is a capital-weighted index, representing the
aggregate market value of the common equity of 500 stocks primarily traded on
the New York Stock Exchange.
<PAGE> 8
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..................................... 16
REPORT OF INDEPENDENT ACCOUNTANTS........................ 17
</TABLE>
LOGO
LOGO
<PAGE> 9
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
COMMON STOCKS -- 97.3% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 5.1%
.........................................................
Lockheed Martin Corporation 180 $ 15,255
.........................................................
Northrop Grumman Corporation 260 19,013
.........................................................
Rockwell International Corporation 340 16,511
...................... .......................
--------
50,779
- ---------------------------------------------------------
APPAREL & TEXTILES -- 0.8%
.........................................................
Russell Corporation 400 8,125
- ---------------------------------------------------------
AUTO PARTS -- 2.0%
.........................................................
Dana Corporation 370 15,123
.........................................................
TRW Inc. 90 5,057
...................... .......................
--------
20,180
- ---------------------------------------------------------
AUTOS & TRUCKS -- 6.1%
.........................................................
Ford Motor Company 500 29,343
.........................................................
General Motors Corporation 430 30,772
...................... .......................
--------
60,115
- ---------------------------------------------------------
BANKS -- 7.3%
.........................................................
Bank One Corporation 624 31,863
.........................................................
First Union Corporation 300 18,243
.........................................................
KeyCorp 300 9,600
.........................................................
Washington Mutual, Inc. 336 12,831
...................... .......................
--------
72,537
- ---------------------------------------------------------
BEVERAGES -- 1.3%
.........................................................
Anheuser-Busch Companies, Inc. 200 13,125
- ---------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 3.0%
.........................................................
Georgia-Pacific (Timber Group) 400 9,525
.........................................................
Weyerhaeuser Company 400 20,325
...................... .......................
--------
29,850
- ---------------------------------------------------------
CHEMICALS -- 3.1%
.........................................................
The Dow Chemical Company 200 18,188
.........................................................
Union Carbide Corporation 300 12,750
...................... .......................
--------
30,938
- ---------------------------------------------------------
CONGLOMERATES -- 1.9%
.........................................................
Tenneco, Inc. 550 18,734
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Shares Value
<S> <C> <C>
CONSUMER PRODUCTS -- 1.3%
.........................................................
Fortune Brands, Inc. 270 $ 8,538
.........................................................
Tupperware Corporation 240 3,945
...................... .......................
--------
12,483
- ---------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.7%
.........................................................
Harsco Corporation 235 7,153
- ---------------------------------------------------------
FINANCIAL SERVICES -- 2.9%
.........................................................
Associates First Capital Corporation--
Class A 142 6,017
.........................................................
Household International, Inc. 280 11,095
.........................................................
Transamerica Corporation 100 11,550
...................... .......................
--------
28,662
- ---------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 1.7%
.........................................................
Whirlpool Corporation 300 16,613
- ---------------------------------------------------------
INSURANCE -- 6.0%
.........................................................
American General Corporation 130 10,140
.........................................................
Lincoln National Corporation 200 16,363
.........................................................
Ohio Casualty Corporation 100 4,113
.........................................................
Safeco Corporation 300 12,881
.........................................................
St. Paul Companies, Inc. 220 7,645
.........................................................
TIG Holdings, Inc. 500 7,781
...................... .......................
--------
58,923
- ---------------------------------------------------------
MACHINERY -- 2.0%
.........................................................
Deere & Company 125 4,140
.........................................................
New Holland N.V. 1,120 15,330
...................... .......................
--------
19,470
- ---------------------------------------------------------
METALS & MINING -- 4.0%
.........................................................
Alcoa, Inc. 180 13,421
.........................................................
Phelps Dodge Corporation 200 10,175
.........................................................
Reynolds Metals Company 300 15,806
...................... .......................
--------
39,402
- ---------------------------------------------------------
NATURAL GAS -- 0.9%
.........................................................
Eastern Enterprises 200 8,750
- ---------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
1
<PAGE> 10
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
EQUITY INCOME VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
OIL -- DOMESTIC -- 6.7%
.........................................................
Atlantic Richfield Company 130 $ 8,483
.........................................................
Occidental Petroleum Corporation 1,100 18,563
.........................................................
Phillips Petroleum Company 500 21,313
.........................................................
USX-Marathon Group, Inc. 360 10,845
.........................................................
Ultramar Diamond Shamrock Corporation 300 7,275
...................... .......................
--------
66,479
- ---------------------------------------------------------
PAPER -- 3.9%
.........................................................
Georgia-Pacific Group 200 11,713
.........................................................
International Paper Company 300 13,443
.........................................................
Union Camp Corporation 200 13,500
...................... .......................
--------
38,656
- ---------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.8%
.........................................................
Eastman Kodak Company 240 17,280
- ---------------------------------------------------------
POLLUTION CONTROL -- 2.4%
.........................................................
Browning-Ferris Industries, Inc. 530 15,072
.........................................................
Waste Management, Inc. 175 8,159
...................... .......................
--------
23,231
- ---------------------------------------------------------
RAILROADS -- 2.1%
.........................................................
CSX Corporation 200 8,300
.........................................................
Norfolk Southern Corporation 400 12,675
...................... .......................
--------
20,975
- ---------------------------------------------------------
RETAIL -- 4.1%
.........................................................
Intimate Brands, Inc. 300 8,963
.........................................................
J.C. Penney Company, Inc. 200 9,375
.........................................................
May Department Stores Company 220 13,283
.........................................................
Sears, Roebuck & Company 200 8,500
...................... .......................
--------
40,121
- ---------------------------------------------------------
SAVINGS & LOANS -- 1.9%
.........................................................
Fannie Mae 250 18,500
- ---------------------------------------------------------
STEEL -- 1.4%
.........................................................
USX-U.S. Steel Group, Inc. 600 13,800
- ---------------------------------------------------------
TOBACCO -- 4.3%
.........................................................
Philip Morris Companies, Inc. 800 42,800
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Shares Value
<S> <C> <C>
UTILITY -- ELECTRIC -- 11.0%
.........................................................
CMS Energy Corporation 400 $ 19,375
.........................................................
Edison International 660 18,398
.........................................................
GPU, Inc. 100 4,418
.........................................................
Illinova Corporation 365 9,125
.........................................................
P P & L Resources, Inc. 448 12,488
.........................................................
PacifiCorp 200 4,213
.........................................................
Public Service Enterprises Group, Inc. 360 14,400
.........................................................
SCANA Corporation 410 13,223
.........................................................
Texas Utilities Company 210 9,804
.........................................................
USEC, Inc. 200 2,775
...................... .......................
--------
108,219
- ---------------------------------------------------------
UTILITY -- TELEPHONE -- 7.6%
.........................................................
AT&T Corporation 300 22,575
.........................................................
ALLTEL Corporation 250 14,953
.........................................................
Bell Atlantic Corporation 190 10,070
.........................................................
GTE Corporation 100 6,500
.........................................................
SBC Communications, Inc. 400 21,450
...................... .......................
--------
75,548
- ---------------------------------------------------------
Total common stocks
(cost $1,032,118) 961,448
</TABLE>
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------
Principal
VARIABLE RATE DEMAND NOTES* -- 2.5% Amount
- ------------------------------------------------------------
General Mills, Inc., 5.2337% $ 7,979 7,979
............................................................
Pitney Bowes, Inc., 5.2337% 16,560 16,560
...................... .......................
--------
Total variable rate demand notes
(cost $24,539) 24,539
- ------------------------------------------------------------
Total investments -- 99.8% (cost
$1,056,657) 985,987
............................................................
Other assets in excess of
liabilities -- 0.2% 2,317
...................... .......................
--------
Total net assets -- 100.0% $988,304
- ------------------------------------------------------------
</TABLE>
* 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 December 31, 1998.
See Notes to the Financial Statements
2
<PAGE> 11
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<S> <C> <C>
COMMON STOCKS -- 93.9%
- ------------------------------------------------------------
AUSTRALIA -- 6.3% Shares Value
- ------------------------------------------------------------
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
3
<PAGE> 12
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
4
<PAGE> 13
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
5
<PAGE> 14
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 21.7% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
EUROBANKS -- 5.7%
...........................................................
Okobank, CLB 9/09/2002, 5.7386%,
9/29/2049 # $ 50,000 $ 50,082
...........................................................
Svenska Hndls Banken, CLB
3/03/2002, 5.7767%, 3/29/2049 # 50,000 48,898
...................... .......................
---------
98,980
- -----------------------------------------------------------
FINANCIAL SERVICES -- 7.3%
...........................................................
Florida Windstorm (Acquired
4/06/1998, cost $51,543), 6.85%,
8/25/2007 r 50,000 52,114
...........................................................
Lehman Brothers Holdings, 6.20%,
1/15/2002 75,000 74,463
...................... .......................
---------
126,577
- -----------------------------------------------------------
INDUSTRIAL (DOMESTIC) -- 2.9%
...........................................................
Rite Aid Corp.
(Acquired 12/16/1998, cost
$49,914),
5.50%, 12/15/2000 r 50,000 49,814
- -----------------------------------------------------------
OIL & GAS (DOMESTIC) -- 2.7%
...........................................................
Harcor Energy, Inc.,
CLB 7/15/1999,
14.875%, 7/15/2002 40,000 45,844
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 3.1%
...........................................................
Continental Cablevision, Inc., CLB
6/01/1999, 11.00%, 6/01/2007 50,000 53,773
- -----------------------------------------------------------
Total corporate bonds and notes
(cost $374,665) 374,988
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 14.3% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.5%
...........................................................
Federal Home Loan Mortgage
Corporation, Gold Series, 6.00%,
12/01/2028' $100,000 $ 98,896
...........................................................
Federal National Mortgage
Association,
1993-142 SA, 8.7490%, 10/25/2022
# 17,769 17,813
...........................................................
1996-63 SC, 10.6890%, 1/18/2027# 24 24
...........................................................
1997-76 FT, 6.0250%, 9/17/2027# 31,876 31,641
...........................................................
1998-48 ZN, 6.50%, 8/25/2028 16,004 15,967
...................... .......................
---------
164,341
- -----------------------------------------------------------
PASS-THROUGH SECURITIES -- 3.6%
...........................................................
Government National Mortgage
Association, 8247, 6.6250%,
7/20/2023 # 60,221 61,509
- -----------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 1.2%
...........................................................
Federal National Mortgage
Association,
1997-30 EA (PO), 0.00%,
5/18/2027 19,379 19,105
...........................................................
1998-48 CI (IO), 6.50%,
8/25/2028 11,576 1,072
...................... .......................
---------
20,177
- -----------------------------------------------------------
Total government agency
mortgage-backed securities (cost
$246,281) 246,027
- -----------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 15
Schedule of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
NON-AGENCY MORTGAGE- Principal
BACKED SECURITIES -- 23.5% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES -- 10.3%
...........................................................
Associates Manufactured Housing
Pass Through Certificates, CLB,
1996-2 A4, 6.60%, 6/15/2027 $ 75,000 $ 76,551
...........................................................
Champion Auto Grantor Trust
(Acquired 3/18/1998, cost
$29,983), CLB, 1998-A A, 6.11%,
10/15/2002 r 29,983 30,105
...........................................................
Green Tree Financial Corporation,
CLB, 1996-5 B2, 8.45%, 7/15/2027 19,997 18,985
...........................................................
Green Tree Recreational, Equipment
& Consumer Trust, CLB, 1996-B
CTFS, 7.70%, 7/15/2018 50,000 48,250
...........................................................
The Money Store Home Equity Trust,
CLB, 1994-C A3, 7.40%, 3/15/2018 3,028 3,030
...................... .......................
---------
176,921
- -----------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 13.2%
...........................................................
Citicorp Mortgage Securities,
Inc., CLB, 1997-3 A2, 6.92%,
8/25/2027 19,511 19,586
...........................................................
ICI Funding Corporation Secured
Assets Corporation, CLB, 1997-2
1A4, 7.60%, 7/25/2028 70,000 70,296
...........................................................
Independent National Mortgage
Corporation, CLB, 1996-E A5,
7.00%, 5/25/2026 54,517 54,880
...........................................................
Ocwen Residential MBS Corp., CLB,
(Acquired 6/18/1998, cost
$42,204), 1998-R2 AP 4.9739%,
11/25/2034 # r 42,256 42,471
...........................................................
Residential Funding Mortgage
Securities, Inc., CLB, 1998-S17
A6, 6.75%, 8/25/2028 40,714 40,825
...................... .......................
---------
228,058
- -----------------------------------------------------------
Total non-agency mortgage-backed
securities (cost $407,968) 404,979
- -----------------------------------------------------------
Principal
U.S. TREASURY OBLIGATIONS -- 31.9% Amount Value
- -----------------------------------------------------------
U.S. Treasury Notes:
5.875%, 11/30/2001" $285,000 $ 294,530
...........................................................
6.25%, 02/28/2002 100,000 104,531
...........................................................
5.50%, 2/29/2000 150,000 151,453
- -----------------------------------------------------------
Total U.S. Treasury obligations
(cost $548,751) 550,514
- -----------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 13.8%
- -----------------------------------------------------------
General Mills, Inc., 5.2337% 62,237 62,237
...........................................................
Pitney Bowes, Inc., 5.2337% 84,129 84,129
...........................................................
Sara Lee Corp., 5.2287% 58,011 58,011
...........................................................
Warner-Lambert Co., 5.1760% 32,974 32,974
...................... .......................
---------
Total variable rate demand notes
(cost $237,351) 237,351
- -----------------------------------------------------------
Total investments -- 105.2%
(cost $1,815,016) 1,813,859
...........................................................
Liabilities in excess of other assets --(5.2)% (90,111)
...................... .......................
---------
Total net assets -- 100.0% $1,723,748
- -----------------------------------------------------------
</TABLE>
# Variable rate security. The rate listed is as of December 31, 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 December 31, 1998.
IO -- Interest Only.
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.
' -- When-issued security.
" -- Security segregated as collateral to cover when-issued security.
See Notes to the Financial Statements
7
<PAGE> 16
Financial Statements -- December 31, 1998
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
EQUITY LOW
INCOME INTERNATIONAL DURATION
VIP VIP VIP
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value*................................. $ 985,987 $289,631,920 $1,813,859
Foreign currency**..................................... -- 320,385 --
Dividends and interest receivable...................... 2,545 452,757 17,105
Receivable for investments sold........................ 5,152 -- 18
Organizational expenses, net of accumulated
amortization........................................ 16,183 16,917 16,183
Prepaid expenses....................................... 124 1,345 3,752
---------- ------------ ----------
Total assets...................................... 1,009,991 290,423,324 1,850,917
---------- ------------ ----------
LIABILITIES:
Payable to Advisor..................................... 5,528 178,629 3,009
Payable for forward currency exchange contracts........ -- 157,797 --
Payable for investments purchased...................... -- 634,648 99,248
Dividends payable...................................... -- -- 7,775
Accrued expenses and other liabilities................. 16,159 317,292 17,137
---------- ------------ ----------
Total liabilities................................. 21,687 1,288,366 127,169
---------- ------------ ----------
Net assets........................................ $ 988,304 $289,134,958 $1,723,748
========== ============ ==========
NET ASSETS CONSIST OF:
Paid in capital........................................ $1,060,991 $294,944,329 $1,726,654
Undistributed net investment income.................... 1,547 62,996 1,612
Undistributed net realized loss on securities and
foreign currency transactions....................... (3,564) (3,646,344) (3,361)
Net unrealized depreciation of securities and foreign
currency............................................ (70,670) (2,226,023) (1,157)
---------- ------------ ----------
Net assets........................................ $ 988,304 $289,134,958 $1,723,748
========== ============ ==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)......................................... 106,635 30,379,778 172,775
Net asset value per share (offering and redemption
price).............................................. $ 9.27 $ 9.52 $ 9.98
========== ============ ==========
*Cost of Investments.................................... $1,056,657 $291,795,170 $1,815,016
========== ============ ==========
**Cost of Foreign Currency............................... $ -- $ 314,263 $ --
========== ============ ==========
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 17
Financial Statements -- Period Ended December 31, 1998
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
EQUITY
INCOME INTERNATIONAL LOW DURATION
VIP VIP VIP
PORTFOLIO(1) PORTFOLIO(2) PORTFOLIO(1)
-------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income*
Dividends...................................... $ 20,815 $ 2,909,676 --
Interest....................................... 746 110 $ 68,296
-------- ----------- --------
Total income.............................. 21,561 2,909,786 68,296
-------- ----------- --------
Expenses
Advisory fee................................... 5,646 1,019,881 5,211
Legal and auditing fees........................ 6,238 38,457 5,473
Custodian fees and expenses.................... 3,036 107,772 5,394
Accounting and transfer agent fees and
expenses..................................... 25,952 44,148 28,675
Administration fee............................. 4,070 53,644 4,128
Trustees' fees and expenses.................... 9,006 49,015 8,745
Reports to shareholders........................ 422 34,205 904
Registration fees.............................. 1,666 80,472 1,741
Amortization of organizational expenses........ 2,280 1,546 2,280
Other expenses................................. 456 874 470
-------- ----------- --------
Total expenses............................ 58,772 1,430,014 63,021
Less, expense reimbursement.................... (50,101) -- (56,451)
-------- ----------- --------
Net expenses.............................. 8,671 1,430,014 6,570
-------- ----------- --------
Net investment income............................. 12,890 1,479,772 61,726
-------- ----------- --------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on securities and foreign
currency transactions........................ (3,564) (3,884,261) (143)
Net change in unrealized depreciation of
securities and foreign currency.............. (70,670) (2,226,023) (1,157)
-------- ----------- --------
Net loss on investments........................... (74,234) (6,110,284) (1,300)
-------- ----------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $(61,344) $(4,630,512) $ 60,426
======== =========== ========
*Net of Foreign Taxes Withheld...................... $ 96 $ 304,486 $ --
======== =========== ========
</TABLE>
(1) For the period March 18, 1998 (commencement of operations) through December
31, 1998.
(2) For the period June 10, 1998 (commencement of operations) through December
31, 1998.
See Notes to the Financial Statements
9
<PAGE> 18
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
EQUITY INCOME VIP INTERNATIONAL VIP LOW DURATION VIP
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- ------------------------- -------------------------
March 18, 1998** June 10, 1998** March 18, 1998**
through December 31, 1998 through December 31, 1998 through December 31, 1998
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income...... $ 12,890 $ 1,479,772 $ 61,726
Net realized loss on
securities and foreign
currency transactions.... (3,564) (3,884,261) (143)
Net change in unrealized
depreciation of
securities and foreign
currency................. (70,670) (2,226,023) (1,157)
---------- ------------ ----------
Net increase
(decrease) in net
assets resulting
from operations..... (61,344) (4,630,512) 60,426
---------- ------------ ----------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income...... (12,711) (1,179,786) (64,700)
---------- ------------ ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares
sold..................... 1,070,974 299,085,362 1,713,346
Shares issued in connection
with payment of dividends
and distributions........ 12,711 1,179,786 56,925
Cost of shares redeemed.... (21,326) (5,319,892) (42,249)
---------- ------------ ----------
Net increase in net
assets from Fund
share
transactions........ 1,062,359 294,945,256 1,728,022
---------- ------------ ----------
Total increase in net assets... 988,304 289,134,958 1,723,748
NET ASSETS:
Beginning of period........ -- -- --
---------- ------------ ----------
End of period*............. $ 988,304 $289,134,958 $1,723,748
========== ============ ==========
*Including undistributed net
investment income of: $ 1,547 $ 62,996 $ 1,612
========== ============ ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold................ 107,647 30,816,414 171,309
Shares issued in connection
with payment of dividends
and distributions........ 1,390 125,916 5,683
Shares redeemed............ (2,402) (562,552) (4,217)
---------- ------------ ----------
Net increase.......... 106,635 30,379,778 172,775
========== ============ ==========
** Commencement of operations.
</TABLE>
See Notes to the Financial Statements
10
<PAGE> 19
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 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 accounting policies followed by the Funds in the
preparation of the financial statements.
ORGANIZATIONAL EXPENSES: Expenses incurred by the Equity Income VIP Portfolio,
International VIP Portfolio and the Low Duration VIP Portfolio 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 Funds' commencement of operations. These costs were
advanced by the Advisor and will be reimbursed by the Funds. 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
11
<PAGE> 20
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
whose prices are more readily obtainable or an appropriate matrix utilizing
similar factors. As a broader market does not exist, the proceeds received upon
the disposal of such securities may differ from quoted values previously
furnished by such market makers. Securities for which market quotations are not
otherwise available are valued at fair value as determined in good faith by
Hotchkis and Wiley (the "Advisor") under procedures established by the Board of
Trustees. Short-term investments which mature in less than 60 days are valued at
amortized cost (unless the Board of Trustees determines that this method does
not represent fair value), if their original maturity was 60 days or less, or by
amortizing the values as of the 61st day prior to 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.
FORWARD CURRENCY EXCHANGE CONTRACTS: The International VIP Portfolio 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 each Fund's intent 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
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<PAGE> 21
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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. At
December 31, 1998, the Low Duration VIP Portfolio had restricted securities with
an aggregate market value of $174,504, representing 10% of the net assets of the
Fund.
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 Funds record purchases of when-issued securities and reflect
the values of such securities in determining net asset value in the same manner
as other portfolio securities. The Funds segregate and maintain at all times
cash or other liquid assets in an amount at least equal to the amount of
outstanding commitments for when-issued securities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid monthly for the Low Duration VIP Portfolio, 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. Prior to July 1, 1998, dividends from
net investment income were declared daily and paid monthly for the Low Duration
VIP Portfolio.
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.,
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. 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
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<PAGE> 22
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NOTES TO FINANCIAL STATEMENTS
December 31, 1998
period ended December 31, 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.................................... $50,101 $0 $56,451
</TABLE>
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 Funds,
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 as
follows:
<TABLE>
<CAPTION>
Purchases Sales
------------------------------- ------------------------------
Fund U.S. Government Other U.S. Government Other
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY INCOME VIP PORTFOLIO..... $ 15,224 $ 1,124,274 -- $ 103,816
INTERNATIONAL VIP PORTFOLIO..... -- 326,422,822 -- 48,920,665
LOW DURATION VIP PORTFOLIO...... 3,566,834 1,570,733 $2,775,659 779,785
</TABLE>
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>
EQUITY INCOME VIP PORTFOLIO.................... $ (70,670) $ 58,130 $ (128,800)
INTERNATIONAL VIP PORTFOLIO.................... (4,087,155) 23,654,334 (27,741,489)
LOW DURATION VIP PORTFOLIO..................... (1,157) 7,863 (9,020)
</TABLE>
At December 31, 1998, the cost of investments for federal income tax purposes
was $1,056,657, $293,719,075, and $1,815,016 for the Equity Income,
International and Low Duration VIP Portfolios, respectively. Any differences
between book and tax are due primarily to wash sale losses. In addition, the
cost
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<PAGE> 23
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basis difference in the International VIP Portfolio is due to mark-to-market
adjustments for passive foreign investment companies.
At December 31, 1998, the Equity Income, International and Low Duration VIP
Portfolios had accumulated net realized capital loss carryovers of $3,564,
$3,178,827 and $3,361, respectively, expiring in 2006. To the extent the Funds
realize 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 International VIP
Portfolio 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 are 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>
NOTE 5.
FEDERAL TAX DISCLOSURE (UNAUDITED). For the period ended December 31, 1998, 100%
of the ordinary distributions paid in the Equity Income VIP Portfolio qualify
for the dividend received deduction available to corporate shareholders.
The International VIP Portfolio 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.
15
<PAGE> 24
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FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
EQUITY INCOME INTERNATIONAL LOW DURATION
VIP PORTFOLIO VIP PORTFOLIO VIP PORTFOLIO
------------------------- ------------------------- -------------------------
March 18, 1998* June 10, 1998* March 18, 1998*
through December 31, 1998 through December 31, 1998 through December 31, 1998
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period... $10.00 $10.00 $10.00
Income from Investment Operations:
Net investment income.............. 0.14 0.04 0.46
Net realized and unrealized loss on
investments...................... (0.75) (0.48) (0.03)
-------- ------------ ----------
Total from investment operations... (0.61) (0.44) 0.43
-------- ------------ ----------
Less Distributions:
Dividends (from net investment
income).......................... (0.12) (0.04) (0.45)
-------- ------------ ----------
Net Asset Value, End of Period......... $ 9.27 $ 9.52 $ 9.98
======== ============ ==========
Total Return(1)........................ (6.04)% (4.38)% 4.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period.............. $988,304 $289,134,958 $1,723,748
Ratio of expenses to average net
assets(2):
Before expense reimbursement....... 7.81% 1.05% 5.56%
After expense reimbursement........ 1.15% 1.05% 0.58%
Ratio of net investment income to
average net assets(2):
Before expense reimbursement....... (4.95)% 1.09% 0.47%
After expense reimbursement........ 1.71% 1.09% 5.45%
Portfolio turnover rate(1)............. 12% 24% 296%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
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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 statements of assets and liabilities, including
the schedules 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 Equity Income VIP Portfolio,
the International VIP Portfolio and the Low Duration VIP Portfolio (three of the
four portfolios of Hotchkis and Wiley Variable Trust, the "Funds") at December
31, 1998, the results of each of their operations, the changes in each of their
net assets and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' 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, WI
February 18, 1999
17
