<PAGE> 1
HOTCHKIS AND WILEY VARIABLE TRUST
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
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS.
SEMI-ANNUAL
REPORT
JUNE 30, 1999
[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]
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.
HOTCHKIS AND WILEY: INVESTMENT ADVISOR
<PAGE> 2
[HOTCHKIS AND WILEY FUNDS LOGO]
DEAR SHAREHOLDERS:
The first half of 1999 was a challenging one for fixed income markets as
continued strength in the U.S. economy sparked concerns about rising inflation
and an eventual interest rate increase by the Federal Reserve. But, despite the
lack of evidence of actual inflation in nearly all price measures, yields rose
throughout the first six months of the year. In the early part of 1999, several
noteworthy global events drove the U.S. bond market. While these events did not
cause nearly the volatility experienced in the fall of 1998, they did lead to
significant swings in interest rates and credit spreads. In January, Japan's
Finance Ministry announced that it would no longer buy Japanese government
bonds, which sent both Japanese and U.S. yields higher. The trend toward rising
rates was cut short only weeks later when the Brazilian government allowed its
struggling currency, the Real, to float against the U.S. dollar. This initiated
a flight-to-quality in U.S. Treasuries, pushing yields lower. In April, it was
news from Europe that moved U.S. markets. An unexpected 50 basis point rate cut
by the European Central Bank temporarily halted rising U.S. interest rates.
While global events captured the attention of U.S. fixed income markets
periodically, the continued strength of the economy was clearly the primary
force behind both the Federal Open Market Committee's (FOMC) monetary tightening
and the rise in interest rates which preceded its move at the end of June.
Yields rose over a hundred basis points on some parts of the curve, with the
intermediate maturities taking the brunt of the hit. The U.S. economy posted a
solid 4.3% increase in the first quarter, making the current expansion the
longest in the country's peacetime history. And although second quarter growth
registered a weaker-than-expected 2.3%, the figure was somewhat misleading as
domestic demand growth remained robust. The U.S. consumer, profiting from a
healthy job market (unemployment hovered near 4.2%, a 29-year low) and a
swelling 401(k) account, continued to propel U.S. economic growth in the first
half of the year. Home and auto sales expanded at a torrid pace, as consumers'
confidence peaked and savings plummeted to negative territory. While consumer
spending growth continued to top economists' forecasts, the U.S. manufacturing
sector remained in a slump induced by weak foreign demand and global commodity
price deflation. Falling commodities prices, coupled with moderate wage
inflation, kept overall consumer price inflation in check for most of the first
half of the year. An unexpectedly high Consumer Price Index (CPI) figure in
April sent the bond market reeling, however. In it, the bond market saw its
fears of mounting inflationary pressures finally materialize. Although the CPI
returned to a benign level in May, bonds never fully recovered.
Spread product performed impressively in the first quarter of 1999 as the
markets recovered from last fall's liquidity crisis and investors re-engaged
risk assets. Thus, our heavy weighting in mortgages, corporates, and
asset-backed securities helped performance, offsetting some of the effects of
rising interest rates. During the second quarter, spread product gave back some
of these gains as the economy refused to give way as forecasters had predicted.
The expectations of interest rate increases by the FOMC hurt the relative
performance of spread product, particularly mortgages. Our performance benefited
from moving the portfolio to a short duration position in February, when it
appeared that rates would move higher despite a dearth of inflationary
pressures. We believe the FOMC is inclined to take back more of last fall's 75
<PAGE> 3
basis point easing, particularly if upcoming economic data suggest that growth
is not slowing on its own. Therefore, we have maintained our short duration
stance at June 30 and look to add in areas that we believe offer a yield
advantage.
TOTAL RETURNS FOR PERIODS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Low Duration ML 1-3
VIP Portfolio U.S. Treasury
- -------------------------------------------------------
<S> <C> <C>
Six Months 1.25% 1.17%
One Year 3.96 5.08
Since Inception
(3/18/98)+ 4.41 5.09
</TABLE>
+ Average annual total return. Past performance is no guarantee of future
performance.
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,
/s/ NANCY D. CELICK
Nancy D. Celick
President
HOTCHKIS AND WILEY VARIABLE TRUST
The above reflects opinions of portfolio managers as of June 30, 1999. They are
subject to change and any forecasts made cannot be guaranteed. The Portfolio
might not continue to hold any securities mentioned and has no obligation to
disclose purchases or sales in these securities.
Total returns and average annual total returns are net of all charges and fees
and assume reinvestment of capital gains distributions and shareholder dividends
at net asset value. Insurance related fees and expenses are not reflected in
these returns and, if they were, returns would be lower. Please see the
prospectus for details. The investment advisor pays annual operating expenses in
excess of .58% of average net assets. Were it not to pay such expenses, net
returns would be lower. Investment return and principal will vary so that
shares, when redeemed, may be worth more or less than their original cost. The
Portfolio may invest a portion of its assets in foreign securities and in
non-investment grade debt securities, commonly referred to as high yield or
"junk" bonds, which may be subject to greater market fluctuations and risk of
loss of income and principal than securities in higher rating categories.
Investment in foreign securities involves special risks including fluctuating
foreign exchange rates, foreign government regulations, differing degrees of
liquidity, and the possibility of substantial volatility due to adverse
political, economic or other developments. Past performance is no guarantee of
future performance.
The Merrill Lynch 1-3 Year U.S. Treasury Bill Index is an unmanaged index of
Treasury securities with maturities of one to three years, which securities are
guaranteed by the U.S. government. The Portfolio owns securities not reflected
in the Index or guaranteed. The Index does not reflect the payment of
transaction costs, fees and expenses associated with an investment in the
Portfolio. The Portfolio is not identical in composition to the Index; the
securities and weightings among securities in the Portfolio differ from those in
the Index. It is not possible to invest directly in an index.
<PAGE> 4
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SCHEDULE OF INVESTMENTS................................ 1
STATEMENT OF ASSETS AND LIABILITIES.................... 3
STATEMENT OF OPERATIONS................................ 4
STATEMENT OF CHANGES IN NET ASSETS..................... 5
NOTES TO FINANCIAL STATEMENTS.......................... 6
FINANCIAL HIGHLIGHTS................................... 9
</TABLE>
[HOTCHKIS AND WILEY VARIABLE TRUST LOGO]
<PAGE> 5
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 21.8% Amount Value
- -------------------------------------------------------------
<S> <C> <C>
BANKS -- 2.9%
.............................................................
Sovereign Bancorp, CLB, 6.625%,
3/15/2001 $ 50,000 $ 49,840
- -------------------------------------------------------------
EUROBANKS -- 5.8%
.............................................................
Okobank, CLB 9/09/2002, 5.5987%,
9/29/2049 # 50,000 50,358
.............................................................
Svenska Hndls Banken, CLB
3/03/2002, 5.5687%, 3/29/2049 # 50,000 48,652
............................................... ---------
99,010
- -------------------------------------------------------------
FINANCIAL SERVICES -- 7.3%
.............................................................
Lehman Brothers Holdings,
6.20%, 1/15/2002 75,000 73,866
.............................................................
U.S. West Capital Funding (Acquired
6/03/99, cost $50,000), CLB
9/15/1999, 5.546%, 6/15/2000 # r 50,000 49,979
............................................... ---------
123,845
- -------------------------------------------------------------
RETAIL -- 2.9%
.............................................................
Rite Aid Corp. (Acquired 12/16/98,
cost $49,914), 5.500%, 12/15/2000
r 50,000 49,047
- -------------------------------------------------------------
TRANSPORTATION 2.9%
.............................................................
Bombardier Capital, Inc.,CLB
(Acquired 1/22/1999, cost
$49,897), 6.00%, 1/15/2002 r 50,000 49,200
- -------------------------------------------------------------
Total corporate bonds and notes
(cost $373,654) 370,942
- -------------------------------------------------------------
GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES -- 11.2%
- -------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 11.1%
.............................................................
Federal National Mortgage Association,
.............................................................
Pool #313608, 6.50%, 7/01/2012 47,208 46,599
.............................................................
Pool #413738, 6.50%, 1/01/2013 96,696 95,448
.............................................................
1993-142 SA, 9.33832%,
10/25/2022 # 11,994 11,807
.............................................................
1997-76 FT, 5.43125%, 9/17/2027 # 24,770 23,825
.............................................................
1999-13 ZD, 9.72053%, 4/25/2029 # 10,839 11,299
............................................... ---------
188,978
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.1%
.............................................................
1998-48 CI (IO), 6.50%, 8/25/2028 $ 10,044 $ 1,845
- -------------------------------------------------------------
Total government agency mortgage-
backed securities
(cost $194,429) 190,823
- -------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES -- 35.7%
- -------------------------------------------------------------
ASSET-BACKED SECURITIES -- 30.4%
.............................................................
Associates Manufactured Housing
Pass Through Certificates, CLB,
1996-2 A4, 6.60%, 6/15/2027 75,000 75,331
.............................................................
Champion Auto Grantor Trust
(Acquired 3/18/1998, cost
$19,419), CLB, 1998-A A, 6.11%,
10/15/2002 r 19,419 19,437
.............................................................
Chemical Master Credit Card Trust
1, CLB, 1995-2 A, 6.23%,
6/15/2003 25,000 25,162
.............................................................
CIT Marine Trust, CLB, 1999-A A2,
5.80%, 4/15/2010 50,000 49,857
.............................................................
Contimortgage Home Equity Loan
Trust, CLB, 1998-1 A5, 6.43%,
4/15/2016 50,000 49,804
.............................................................
Ditech Home Loan Owner Trust, CLB,
1997-1 A2, 6.59%, 4/15/2013 34,229 34,319
.............................................................
Green Tree Financial Corporation,
CLB
1996-5 B2, 8.45%, 7/15/2027 19,997 17,462
.............................................................
Green Tree Recreational, Equipment
& Consumer Trust, CLB:
1996-B CTFS, 7.70%, 7/15/2018 50,000 48,201
.............................................................
1996-C A1, 5.2275%, CLB
10/15/2017 # 61,623 61,561
.............................................................
Nationslink Funding Corporation,
CLB, 1999-SL A1V, 5.3025%,
4/10/2007 # 74,097 74,122
.............................................................
Navistar Financial Corporation
Owner Trust, CLB, 1996-B A3,
6.33%, 4/21/2003 61,731 62,008
............................................... ---------
517,264
- -------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.3%
.............................................................
Citicorp Mortgage Securities, Inc.,
CLB, 1997-3 A2, 6.92%, 8/25/2027 6,294 6,312
.............................................................
First Union-Lehman Brothers
Commercial Mortgage Trust, CLB,
1997-C1 A1, 7.15%, 2/18/2004 25,325 25,643
.............................................................
</TABLE>
See Notes to the Financial Statements
1
<PAGE> 6
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
Ocwen Residential MBS Corp., CLB
(Acquired 6/18/1998, cost
$35,307), 1998-R2 AP 6.1474%,
11/25/2034 # r $ 35,351 $ 35,673
.............................................................
Residential Funding Mortgage
Securities, Inc., CLB, 1998-S17
A6, 6.75%, 8/25/2028 23,168 23,211
....................... ....................... ---------
90,839
- -------------------------------------------------------------
Total non-agency mortgage-backed securities
(cost $616,559) 608,103
- -------------------------------------------------------------
U.S. TREASURY
OBLIGATIONS -- 25.8%
- -------------------------------------------------------------
U.S. TREASURY NOTES:
.............................................................
5.50%, 2/29/2000 150,000 150,375
.............................................................
6.25%, 6/30/2002 185,000 188,006
.............................................................
5.75%, 10/31/2002 100,000 100,250
....................... ....................... ---------
Total U.S. Treasury obligations 438,631
(cost $439,346)
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
VARIABLE RATE
DEMAND NOTES* -- 5.0%
- -------------------------------------------------------------
General Mills, Inc., 4.825% (cost
$85,195) $ 85,195 $ 85,195
- -------------------------------------------------------------
Total investments -- 99.5%
(cost $1,709,183) 1,693,694
.............................................................
Other assets in excess of liabilities -- 0.5% 8,333
....................... ....................... ---------
$1,702,027
Total net assets -- 100.0%
- -------------------------------------------------------------
</TABLE>
# -- Variable rate security. The rate listed is as of June 30, 1999.
* -- Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rate listed is as of June 30, 1999.
IO -- Interest Only.
CLB -- Callable.
r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.
See Notes to the Financial Statements
2
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999
LOW DURATION VIP PORTFOLIO (Unaudited)
- ---------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $1,693,694
Cash...................................................... 5,425
Dividends and interest receivable......................... 12,168
Organizational expenses, net of accumulated
amortization............................................ 14,195
Prepaid expenses.......................................... 27
----------
Total assets.......................................... 1,725,509
----------
LIABILITIES:
Payable to Advisor........................................ 522
Dividends payable......................................... 7,869
Accrued expenses and other liabilities.................... 15,091
----------
Total liabilities..................................... 23,482
----------
Net assets............................................ $1,702,027
==========
NET ASSETS CONSIST OF:
Paid in capital........................................... $1,728,055
Undistributed net investment income....................... 318
Undistributed net realized loss on securities............. (10,857)
Net unrealized depreciation of securities................. (15,489)
----------
Net assets............................................ $1,702,027
==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 172,943
Net asset value per share (offering and redemption
price).................................................. $ 9.84
==========
*Cost of Investments....................................... $1,709,183
==========
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 8
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
LOW DURATION VIP PORTFOLIO (Unaudited)
- ------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Income
Interest................................................ $ 48,699
--------
Total income........................................ 48,699
--------
Expenses
Advisory fee............................................ 3,903
Legal and auditing fees................................. 2,253
Custodian fees and expenses............................. 2,160
Accounting and transfer agent fees and expenses......... 18,561
Administration fee...................................... 325
Trustees' fees and expenses............................. 925
Reports to shareholders................................. 2,478
Registration fees....................................... 327
Amortization of organizational expenses................. 1,988
Other expenses.......................................... 392
--------
Total expenses...................................... 33,312
Less, expense reimbursement............................. (28,391)
--------
Net expenses........................................ 4,921
--------
Net investment income................................... 43,778
--------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on securities......................... (7,496)
Net change in unrealized depreciation of securities..... (14,332)
--------
Net loss on investments................................... (21,828)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 21,950
========
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended March 18, 1998**
June 30, 1999 through
LOW DURATION VIP PORTFOLIO (Unaudited) December 31, 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 43,778 $ 61,726
Net realized loss on securities......................... (7,496) (143)
Net change in unrealized depreciation of securities..... (14,332) (1,157)
---------- ----------
Net increase in net assets resulting from
operations.......................................... 21,950 60,426
---------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (45,072) (64,700)
---------- ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 139,737 1,713,346
Shares issued in connection with payment of dividends
and distributions...................................... 44,978 56,925
Cost of shares redeemed................................. (183,314) (42,249)
---------- ----------
Net increase in net assets from Fund share
transactions........................................ 1,401 1,728,022
---------- ----------
Total increase (decrease) in net assets..................... (21,721) 1,723,748
NET ASSETS:
Beginning of period..................................... 1,723,748 --
---------- ----------
End of period*.......................................... $1,702,027 $1,723,748
========== ==========
*Including undistributed net investment income of: $ 318 $ 1,612
========== ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 14,047 171,309
Shares issued in connection with payment of dividends
and distributions...................................... 4,534 5,683
Shares redeemed......................................... (18,413) (4,217)
---------- ----------
Net increase........................................ 168 172,775
========== ==========
** Commencement of operations.
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 10
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
JUNE 30, 1999 (UNAUDITED)
NOTE 1.
ACCOUNTING POLICIES. The Low Duration 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 March 18, 1998. The Fund seeks to maximize long-term total return.
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 International VIP Portfolio and the Total Return Bond 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. The proceeds of any
redemption of the initial shares by the original shareholder will be reduced by
a pro-rata portion of any then unamortized organization expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of such redemption.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or The Nasdaq Stock Market ("NSM") are
valued at the last sale price as of 4:00 p.m., Eastern time, or, in the absence
of recorded sales, at the average of readily available closing bid and asked
prices on such exchange or NSM. Unlisted securities that are not included in NSM
are valued at the average of the quoted bid and asked price in the over-the-
counter market. Fixed-income securities are normally valued on the basis of
quotes obtained from brokers and dealers or pricing services. Certain
fixed-income securities for which daily market quotations are not readily
available may be valued pursuant to guidelines established by the Board of
Trustees, with reference to fixed-income securities whose prices are more
readily obtainable or an appropriate matrix utilizing similar factors. As a
broader market does not 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.
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.
6
<PAGE> 11
RESTRICTED SECURITIES: The Fund owns investment securities which are
unregistered and thus restricted as to resale. 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 June 30, 1999, the Fund had restricted securities with an
aggregate market value of $203,336, representing 12% of the net assets of the
Fund.
WHEN-ISSUED SECURITIES: The Fund may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Fund records purchases of when-issued securities and
reflects the values of such securities in determining net asset value in the
same manner as other portfolio securities. The Fund segregates and maintains at
all times cash or other liquid assets in an amount at least equal to the amount
of outstanding commitments for when-issued securities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid monthly. Distributions of net realized capital gains, if any, will be
declared and paid 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 monthly, at the annual rate of 0.46%
as applied to the Fund's daily net assets. The Advisor has agreed to pay all
operating expenses in excess of 0.58% as applied to the Fund's daily net assets.
For the six months ended June 30, 1999, the Adviser paid $28,391 of operating
expenses on behalf of the Fund.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the Board
of Trustees of the Trust 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.
7
<PAGE> 12
NOTE 3.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the six months ended June 30, 1999, were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
-------------------------- --------------------------
Fund U.S. Government Other U.S. Government Other
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Low Duration VIP Portfolio............................. $897,380 $578,238 $1,050,651 $368,525
</TABLE>
As of June 30, 1999, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciated Depreciated
Fund Depreciation Securities Securities
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Low Duration VIP Portfolio.................................. $(15,489) $3,066 $(18,555)
</TABLE>
At June 30, 1999, the cost of investments for federal income tax purposes was
$1,709,183. Any differences between book and tax are due primarily to wash sale
losses.
At June 30, 1999, the Fund had accumulated net realized capital loss carryovers
of $3,361, expiring in 2006. To the extent that the Fund realizes future net
capital gains, those gains will be offset by any unused capital loss carryover.
8
<PAGE> 13
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended March 18, 1998*
June 30, 1999 through
LOW DURATION VIP PORTFOLIO (Unaudited) December 31, 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.98 $ 10.00
Income from Investment Operations:
Net investment income................................... 0.28 0.46
Net realized and unrealized loss on investments......... (0.16) (0.03)
---------- ----------
Total from investment operations........................ 0.12 0.43
---------- ----------
Less Distributions:
Dividends (from net investment income).................. (0.26) (0.45)
---------- ----------
Net Asset Value, End of Period.............................. $ 9.84 $ 9.98
========== ==========
Total Return(1)............................................. 1.25% 4.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $1,702,027 $1,723,748
Ratio of expenses to average net assets(2):
Before expense reimbursement............................ 3.93% 5.56%
After expense reimbursement............................. 0.58% 0.58%
Ratio of net investment income to average net assets(2):
Before expense reimbursement............................ 1.81% 0.47%
After expense reimbursement............................. 5.16% 5.45%
Portfolio turnover rate(1).................................. 88% 296%
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
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