<PAGE> 1
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017-5400
800-236-4479
INVESTMENT ADVISER
MERCURY ADVISORS
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, WISCONSIN 53202
DISTRIBUTOR
FAM DISTRIBUTORS, INC.
P.O. BOX 9081
PRINCETON, NEW JERSEY 08543-9081
TRANSFER AGENT
FINANCIAL DATA SERVICES, INC.
P.O. BOX 41621
JACKSONVILLE, FLORIDA 32232-1621
CUSTODIAN
BROWN BROTHERS HARRIMAN & CO.
40 WATER STREET
BOSTON, MASSACHUSETTS 02309-3661
THIS MATERIAL MUST BE PRECEDED
OR ACCOMPANIED BY A PROSPECTUS.
SEMI-ANNUAL
REPORT
JUNE 30, 2000
LOGO
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
INTERNATIONAL VIP PORTFOLIO
-------------------------------------------------------
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in international stocks.
MERCURY ADVISORS: INVESTMENT ADVISER
<PAGE> 2
[HOTCHKIS AND WILEY FUNDS LOGO]
DEAR SHAREHOLDER:
We are pleased to present to you the semi-annual report of the Hotchkis and
Wiley Variable Trust International VIP Portfolio (the "Fund") for the six-month
period ended June 30, 2000.
In the first part of the calendar year 2000, the markets continued to trend
strongly towards the new economy stocks. In virtually every developed equity
market, the best performance was concentrated in a few sectors and growth stocks
dramatically outperformed value stocks. Markets continued to be dominated by the
technology, media and telecommunications ("TMT") industries, taking the cue from
the phenomenal performance of the new economy-dominated Nasdaq Composite Index
in the U.S.
When it appeared that the new investment paradigm had completely vanquished the
competition, valuation criteria re-emerged in the investors' lexicon. Investors
in the high-flying technology industries turned their attention to earnings and
started questioning the growth assumptions that had thus far sustained these
stocks. Recent developments expose the fragility of the optimistic assumptions
that supported the valuations placed on these "must have" stocks.
Global growth patterns should diverge over the next year. While the U.S. may or
may not achieve a soft landing, it is clear that the U.S. Federal Reserve is
determined to rein in the economy, election year political considerations
notwithstanding. The U.K. is in a similar position as the Bank of England has
more work ahead to slow the economy to more sustainable levels. Euroland
economies, aided by the considerably weakened euro, have more room to expand.
Japan also has considerable spare capacity and the economy is still quite
anemic. Globally, the output gap may take longer to close but the recent year's
growth has removed much of the spare capacity in the system.
The price difference between the most expensive and the cheapest stocks peaked
during this period at a ratio twice as high as the long-term norm. In the last
four months, this disparity began correcting, although it remains much higher
than the historic average. This divergence still leaves room for relative gains
by the previously neglected sectors of the market. Index performance has been so
dominated by the large cap, highly rated TMT sector companies that the relative
performance prospects for the forgotten sectors are much improved. Even the new
economy stocks depend on the willingness of the old economy stocks to continue
funding capital expenditures that feed the revenue growth estimates driving
these must-have go-go companies. We therefore expect these valuation
differentials to retract to more normal levels. We believe interest rates will
likely rise for the greater part of this year, and we have modest expectations
for general gains in the world stock markets.
The Fund benefited strongly in the market's rotation out of the most expensive
stocks, which contributed to the Fund's outperformance compared to the MSCI EAFE
Index for the six-month period ended June 30, 2000. Our holdings in the old
economy had reached such rock bottom valuations that any general decline in the
market had little impact. Further, our insistence on owning stocks with tangible
valuation and current yield served us well, as these criteria started to find
favor with other market participants. In fact, in overall declining markets,
these stocks actually registered positive gains. Market volatility exceeded even
the schizophrenic peaks we experienced last year at the height of the Asian
crisis. The Fund has taken on a decidedly defensive tilt in the past few months.
The Fund continues to invest in stocks with a healthy dividend yield premium
over the benchmark: as of June 30, 2000, the investments in the Fund's portfolio
had over a 65% yield premium to the MSCI EAFE Index.+
<PAGE> 3
We appreciate your continued support and look forward to serving your investment
needs in the months and years ahead.
Sincerely,
/s/ Nancy D. Celick
Nancy D. Celick
President
HOTCHKIS AND WILEY VARIABLE TRUST
+ The dividend yield referred to is that of the securities held in the Fund's
portfolio; it is not reflective of the yield distributed to Fund shareholders.
TOTAL RETURNS FOR THE PERIODS ENDED JUNE 30, 2000*
<TABLE>
<CAPTION>
Fund MSCI EAFE
---------------------------------------------------------------------------
<S> <C> <C>
Six Months 3.30% -3.95%
---------------------------------------------------------------------------
One Year 12.05 17.44
---------------------------------------------------------------------------
Since Inception (6/10/98) 9.27 12.47(1)
---------------------------------------------------------------------------
</TABLE>
(1) Period 6/1/98 through 6/30/00.
* Average annual total return for periods greater than one year.
Total returns and average annual total returns for the Fund 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 adviser pays annual
operating expenses in excess of 1.35% of the Fund's average net assets. Were the
investment adviser not to pay such expenses, net returns would be lower.
Investment returns and principal will vary so that shares, when redeemed, may be
worth more or less than their original cost. Past performance is no guarantee of
future results.
There are special risk considerations when investing in foreign companies
through an international fund, 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.
The Nasdaq Composite Index is an unmanaged index which covers 4,500 stocks
traded over-the-counter. It represents many small company stocks, but is heavily
influenced by about 100 of the largest Nasdaq stocks. It is a value-weighted
index calculated on price change only and does not include income.
The MSCI EAFE Index is an arithmetical average weighted by market value of the
performance of over 1,000 non-U.S. companies representing 20 stock markets in
Europe, Australia, New Zealand and the Far East.
The indexes do not reflect payment of transaction costs, fees and expenses
associated with an investment in the Fund. The Fund's value disciplines may
prevent or restrict investment in major stocks in its benchmark index, the MSCI
EAFE Index. It is not possible to invest directly in an index.
The opinions expressed in the Shareholder letter are as of June 30, 2000. They
are subject to change and any forecasts made cannot be guaranteed. The Fund may
not continue to hold any securities mentioned and has no obligation to disclose
purchases or sales in these securities.
2
<PAGE> 4
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
COMMON STOCKS -- 95.6% Shares Value
------------------------------------------------------------
<S> <C> <C>
AUSTRALIA -- 3.7%
------------------------------------------------------------
AIRLINES -- 1.1%
............................................................
Qantas Airways Limited 2,051,705 $ 4,163,772
------------------------------------------------------------
INSURANCE: MULTI-LINE -- 1.1%
............................................................
QBE Insurance Group, Ltd. 804,361 3,946,706
------------------------------------------------------------
REGIONAL BANKS -- 1.5%
............................................................
Australia and New Zealand
Banking Group, Ltd. 728,030 5,599,558
..................... ...................... -----------
13,710,036
Total Australia
------------------------------------------------------------
AUSTRIA -- 0.3%
------------------------------------------------------------
STEEL -- 0.3%
............................................................
Boehler -- Uddeholm AG 37,620 1,323,560
..................... ...................... -----------
1,323,560
Total Austria
------------------------------------------------------------
CANADA -- 4.9%
------------------------------------------------------------
INSURANCE: MULTI-LINES -- 4.0%
............................................................
Manulife Financial Corporation 416,693 7,340,006
............................................................
Sun Life Financial Services of
Canada # 445,314 7,498,538
..................... ...................... -----------
14,838,544
------------------------------------------------------------
TELECOMMUNICATIONS -- 0.9%
............................................................
BCE Inc. 134,890 3,195,410
..................... ...................... -----------
18,033,954
Total Canada
------------------------------------------------------------
FINLAND -- 0.8%
------------------------------------------------------------
PAPER -- 0.8%
............................................................
UPM-Kymmene OYJ 114,170 2,845,767
..................... ...................... -----------
2,845,767
Total Finland
------------------------------------------------------------
FRANCE -- 9.5%
------------------------------------------------------------
BEVERAGES -- 1.2%
............................................................
Pernod Ricard SA 81,650 4,461,749
------------------------------------------------------------
CHEMICALS -- 2.1%
............................................................
Aventis SA 105,538 7,735,001
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
OFFICE EQUIPMENT & SUPPLIES -- 1.3%
............................................................
BIC 101,806 $ 5,006,852
------------------------------------------------------------
OIL -- INTERNATIONAL -- 2.2%
............................................................
Total Fina Elf SA 52,888 8,142,856
------------------------------------------------------------
REGIONAL BANKS -- 2.7%
............................................................
BNP Paribas 101,726 9,830,295
..................... ...................... -----------
35,176,753
Total France
------------------------------------------------------------
GERMANY -- 2.1%
------------------------------------------------------------
CHEMICALS -- 0.4%
............................................................
SGL Carbon AG # 21,233 1,418,790
..................... ...................... -----------
1,418,790
------------------------------------------------------------
DIVERSIFIED MANUFACTURING OPERATIONS -- 1.3%
............................................................
E.On AG 97,111 4,785,261
------------------------------------------------------------
MONEY CENTER BANKS -- 0.4%
............................................................
DePfa Deutsche Pfanbriefbank 15,520 1,569,706
..................... ...................... -----------
7,773,757
Total Germany
------------------------------------------------------------
HONG KONG -- 5.6%
------------------------------------------------------------
BUILDING & CONSTRUCTION -- MISC. -- 0.4%
............................................................
New World Development Co.,
Ltd. 1,468,000 1,614,832
------------------------------------------------------------
ELECTRIC: MISC. -- 3.0%
............................................................
Hong Kong Electric Holdings 1,712,500 5,514,060
............................................................
Shandong International Power
Development Company Limited 38,380,000 5,662,001
..................... ...................... -----------
11,176,061
------------------------------------------------------------
REAL ESTATE -- 2.2%
............................................................
Hang Lung Development Company 2,321,000 1,801,348
............................................................
Henderson Land Developments 1,430,000 6,292,125
..................... ...................... -----------
8,093,473
..................... ...................... -----------
20,884,366
Total Hong Kong
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 5
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
IRELAND -- 3.4%
------------------------------------------------------------
FOODS -- 0.8%
............................................................
Greencore Group PLC 1,084,240 $ 2,910,432
------------------------------------------------------------
PAPER -- 1.0%
............................................................
Jefferson Smurfit Group PLC 2,163,892 3,734,067
------------------------------------------------------------
REGIONAL BANKS -- 1.6%
............................................................
Allied Irish Banks PLC 680,672 6,114,367
..................... ...................... -----------
12,758,866
Total Ireland
------------------------------------------------------------
ITALY -- 1.7%
------------------------------------------------------------
TELECOMMUNICATIONS -- 1.7%
............................................................
Telecom Italia SPA 444,600 6,137,705
..................... ...................... -----------
6,137,705
Total Italy
------------------------------------------------------------
JAPAN -- 10.3%
------------------------------------------------------------
LEISURE/TOYS -- 4.9%
............................................................
Namco, Inc. 230,800 8,332,847
............................................................
Nintendo Co., Ltd. 56,100 9,819,696
..................... ...................... -----------
18,152,543
------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES -- 1.6%
............................................................
Canon, Inc. 122,000 6,088,187
------------------------------------------------------------
RETAIL: CONVENIENCE STORE -- 1.6%
............................................................
Circle K Japan Company, Ltd. 158,000 5,749,261
------------------------------------------------------------
SMALL LOANS & FINANCE -- 2.2%
............................................................
Promise Company, Ltd. 55,400 4,387,812
............................................................
Sanyo Shinpan Finance Co.,
Ltd. 109,700 3,898,421
..................... ...................... -----------
8,286,233
..................... ...................... -----------
38,276,224
Total Japan
------------------------------------------------------------
NETHERLANDS -- 9.1%
------------------------------------------------------------
CHEMICALS -- 1.8%
............................................................
Akzo Nobel N.V. 152,270 6,496,036
------------------------------------------------------------
ELECTRONICS -- 2.9%
............................................................
Philips Electronics 230,581 10,920,025
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
INSURANCE -- MULTI-LINE -- 2.0%
............................................................
ING Groep N.V. 109,010 $ 7,399,011
------------------------------------------------------------
REGIONAL BANKS -- 1.1%
............................................................
ABN AMRO Holding N.V. 166,070 4,085,281
------------------------------------------------------------
TELECOMMUNICATIONS -- 1.3%
............................................................
Koninklije KPN N.V. 104,870 4,710,152
..................... ...................... -----------
33,610,505
Total Netherlands
------------------------------------------------------------
NEW ZEALAND -- 1.7%
------------------------------------------------------------
TELECOMMUNICATIONS -- 1.7%
............................................................
Telecom Corporation of New
Zealand 1,800,826 6,316,457
..................... ...................... -----------
6,316,457
Total New Zealand
------------------------------------------------------------
NORWAY -- 0.4%
------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.4%
............................................................
Kvaerner ASA -- Class A 142,246 1,497,729
............................................................
Kvaerner ASA -- Class A Rights
# 72,995 40,991
..................... ...................... -----------
1,538,720
Total Norway
------------------------------------------------------------
PORTUGAL -- 1.3%
------------------------------------------------------------
TELEPHONE -- 1.3%
............................................................
Portugal Telecom SA 431,743 4,867,508
..................... ...................... -----------
4,867,508
Total Portugal
------------------------------------------------------------
SINGAPORE -- 4.1%
------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES -- 1.8%
............................................................
Creative Technology, Ltd. 285,457 6,815,286
------------------------------------------------------------
DIVERSIFIED COMPANIES -- 0.7%
............................................................
Jardine Matheson Holdings,
Ltd. 550,000 2,409,000
------------------------------------------------------------
MONEY CENTER BANKS -- 1.6%
............................................................
United Overseas Bank Ltd. 887,928 5,803,115
..................... ...................... -----------
15,027,401
Total Singapore
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 6
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
SPAIN -- 3.5%
------------------------------------------------------------
OIL COMP -- INTEGRATED -- 1.7%
............................................................
Repsol YPF, S.A. 313,900 $ 6,274,389
------------------------------------------------------------
TELECOMMUNICATIONS -- 1.8%
............................................................
Telefonica S.A. 303,498 6,546,549
..................... ...................... -----------
12,820,938
Total Spain
------------------------------------------------------------
SWEDEN -- 1.2%
------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.2%
............................................................
Electrolux AB -- Class B 288,640 4,492,003
..................... ...................... -----------
4,492,003
Total Sweden
------------------------------------------------------------
SWITZERLAND -- 5.4%
------------------------------------------------------------
BUILDING MATERIALS -- 1.7%
............................................................
Geberit International AG 18,828 6,310,350
------------------------------------------------------------
MACHINERY & EQUIPMENT -- 2.1%
............................................................
Saurer AG "registered" 7,146 4,473,666
............................................................
Sulzer AG "registered" # 4,707 3,140,702
..................... ...................... -----------
7,614,368
------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 1.6%
............................................................
Novartis AG "registered" 3,727 5,922,494
..................... ...................... -----------
19,847,212
Total Switzerland
------------------------------------------------------------
UNITED KINGDOM -- 26.6%
------------------------------------------------------------
AEROSPACE/DEFENSE -- 2.0%
............................................................
BAE Systems PLC 1,182,940 7,378,823
------------------------------------------------------------
AIRLINES -- 2.0%
............................................................
BAA PLC 942,390 7,561,948
------------------------------------------------------------
AUTO -- 0.6%
............................................................
Lex Service PLC 443,570 2,239,676
------------------------------------------------------------
BEVERAGES -- 1.5%
............................................................
Allied Domecq PLC 1,019,210 5,400,810
------------------------------------------------------------
BUILDING MATERIALS -- 1.7%
............................................................
Hanson PLC 897,890 6,348,443
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
DIVERSIFIED COMPANIES -- 5.7%
............................................................
Cookson Group PLC 1,233,760 $ 4,118,760
............................................................
TI Group PLC 796,250 4,339,894
............................................................
Tomkins PLC 2,043,980 6,645,643
............................................................
Williams PLC 1,023,895 5,968,199
..................... ...................... -----------
21,072,496
------------------------------------------------------------
FOODS -- 2.8%
............................................................
Tesco PLC 1,515,350 4,714,677
............................................................
Unilever PLC 933,030 5,650,447
..................... ...................... -----------
10,365,124
------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 1.1%
............................................................
Reckitt Benckiser PLC 382,519 4,285,603
------------------------------------------------------------
INSURANCE: MULTI-LINE -- 2.9%
............................................................
Allied Zurich AG PLC 422,705 5,001,423
............................................................
CGU PLC 335,120 5,581,105
..................... ...................... -----------
10,582,528
------------------------------------------------------------
PUBLISHING -- 2.8%
............................................................
Reed International PLC 713,530 6,211,654
............................................................
United News & Media PLC 284,128 4,086,625
..................... ...................... -----------
10,298,279
------------------------------------------------------------
REGIONAL BANKS -- 1.7%
............................................................
Lloyds TSB Group PLC 388,503 3,670,339
............................................................
Royal Bank of Scotland Group
PLC 164,597 2,756,162
..................... ...................... -----------
6,426,501
------------------------------------------------------------
TELECOMMUNICATIONS -- 0.9%
............................................................
British Telecommunications PLC 246,128 3,182,336
------------------------------------------------------------
TOBACCO -- 0.9%
............................................................
B.A.T. Industries PLC 475,992 3,178,084
..................... ...................... -----------
98,320,651
Total United Kingdom
..................... ...................... -----------
353,762,383
Total common stocks (cost $320,593,547)
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 7
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
INTERNATIONAL VIP PORTFOLIO
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS -- 0.4%
------------------------------------------------------------
GERMANY -- 0.4%
------------------------------------------------------------
BUILDING MATERIALS -- 0.4%
............................................................
Dyckerhoff AG 56,835 $ 1,443,896
..................... ...................... -----------
1,443,896
Total Germany
..................... ...................... -----------
Total preferred stocks (cost 1,443,896
$1,988,223)
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CERTIFICATES OF Principal
DEPOSIT -- 4.6% Amount Value
------------------------------------------------------------
<S> <C> <C>
Brown Brothers Call Deposit,
5.5000% $17,085,362 17,085,362
............................................................
Total certificates of deposit
(cost $17,085,362) 17,085,362
------------------------------------------------------------
Total investments -- 100.6%
(cost $339,667,132) 372,291,641
............................................................
Liabilities in excess of other
assets -- (0.6)% (2,272,937)
..................... ...................... -----------
$370,018,704
Total net assets -- 100.0%
------------------------------------------------------------
</TABLE>
# -- Non-income producing security.
See Notes to the Financial Statements
6
<PAGE> 8
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 2000
INTERNATIONAL VIP PORTFOLIO (Unaudited)
-------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $372,291,641
Foreign currency**........................................ 4,120,876
Dividends and interest receivable......................... 1,212,731
Receivable for investments sold........................... 7,391,097
Receivable for Fund shares sold........................... 1,376,045
Organizational expenses, net of accumulated
amortization............................................ 10,883
Prepaid expenses.......................................... 2,957
------------
Total assets.......................................... 386,406,230
------------
LIABILITIES:
Payable to Adviser........................................ 223,930
Payable to custodian...................................... 339,405
Payable for investments purchased......................... 15,598,282
Payable for Fund shares repurchased....................... 23,950
Accrued expenses and other liabilities.................... 201,959
------------
Total liabilities..................................... 16,387,526
------------
Net assets............................................ $370,018,704
============
NET ASSETS CONSIST OF:
Paid in capital........................................... $326,576,485
Undistributed net investment income....................... 6,096,941
Undistributed net realized gain on securities and foreign
currency transactions................................... 4,707,893
Net unrealized appreciation of securities and foreign
currency................................................ 32,637,385
------------
Net assets............................................ $370,018,704
============
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 31,104,844
Net asset value per share (offering and redemption
price).................................................. $ 11.90
============
*Cost of Investments........................................ $339,667,132
============
**Cost of Foreign currency.................................. $ 4,086,648
============
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 9
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000
INTERNATIONAL VIP PORTFOLIO (Unaudited)
------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income*
Dividends............................................... $ 5,137,773
Interest................................................ 315,612
-----------
Total income........................................ 5,453,385
-----------
Expenses
Advisory fee............................................ 1,211,104
Legal and auditing fees................................. 52,176
Custodian fees and expenses............................. 229,243
Accounting and transfer agent fees and expenses......... 43,180
Administration fee...................................... 44,529
Trustees' fees and expenses............................. 30,052
Reports to shareholders................................. 25,871
Registration fees....................................... 11,100
Amortization of organizational expenses................. 1,826
Other expenses.......................................... 7,407
-----------
Total expenses...................................... 1,656,488
-----------
Net investment income................................... 3,796,897
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on securities and foreign currency
transactions........................................... 4,166,786
Net change in unrealized appreciation of securities and
foreign currency....................................... 6,474,870
-----------
Net gain on investments................................... 10,641,656
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $14,438,553
===========
*Net of Foreign Taxes Withheld.............................. $ 650,381
===========
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 10
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 Year Ended
INTERNATIONAL VIP PORTFOLIO (Unaudited) December 31, 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 3,796,897 $ 3,656,525
Net realized gain on securities and foreign currency
transactions.......................................... 4,166,786 4,289,725
Net change in unrealized appreciation of securities and
foreign currency...................................... 6,474,870 28,388,537
------------ -------------
Net increase in net assets resulting from
operations........................................ 14,438,553 36,334,787
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... -- (1,524,275)
------------ -------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 130,794,895 114,485,146
Shares issued in connection with payment of dividends
and distributions..................................... -- 1,524,275
Cost of shares redeemed................................. (60,048,607) (155,121,028)
------------ -------------
Net increase (decrease) in assets resulting from
Fund share transactions........................... 70,746,288 (39,111,607)
------------ -------------
Total increase (decrease) in net assets..................... 85,184,841 (4,301,095)
NET ASSETS:
Beginning of period..................................... 284,833,863 289,134,958
------------ -------------
End of period*.......................................... $370,018,704 $ 284,833,863
============ =============
*Including undistributed net investment income of:.......... $ 6,096,941 $ 3,197,003
============ =============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 11,598,118 10,476,787
Shares issued in connection with payment of dividends
and distributions..................................... -- 136,340
Shares redeemed......................................... (5,227,754) (16,258,425)
------------ -------------
Net increase (decrease)............................. 6,370,364 (5,645,298)
============ =============
</TABLE>
See Notes to the Financial Statements
9
<PAGE> 11
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000 (UNAUDITED)
NOTE 1.
ACCOUNTING POLICIES. The International VIP Portfolio (the "Fund") is a series of
Hotchkis and Wiley Variable Trust (the "Trust"), an open-end, management
investment company organized as a Massachusetts business trust on February 4,
1997 and registered under the Investment Company Act of 1940. The Fund commenced
operations on June 10, 1998. The Fund seeks current income and long-term growth
of income, accompanied by growth of capital. Shares of the Fund are not offered
to the general public but may only be purchased by the separate accounts of
participating insurance companies for the purpose of funding variable annuity
contracts and/or variable life insurance contracts. In addition to the Fund, the
Trust offers the Equity Income VIP Portfolio, the Low Duration VIP Portfolio and
the Total Return 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. Securities for which market quotations are not
otherwise available are valued at fair value as determined in good faith by
Mercury Advisors (the "Adviser"), formerly Hotchkis and Wiley, under procedures
established by the Board of Trustees. Short-term investments which mature in
less than 60 days are valued at amortized cost (unless the Board of Trustees
determines that this method does not represent fair value), if their original
maturity was 60 days or less, or by amortizing the values as of the 61st day
prior to maturity, if their original term to maturity exceeded 60 days.
Investments quoted in foreign currency are valued daily in U.S. dollars on the
basis of the foreign currency exchange rate prevailing at the time of valuation.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis: (i) market value of investment securities, assets and
liabilities at the daily rates of exchange, and (ii) purchases and sales of
investment securities, dividend and interest income and certain expenses at the
rates of exchange prevailing on the respective dates of such transactions. The
Fund does not isolate and treat as ordinary income that portion of the results
of operations arising as a result of changes in the exchange rate from the
fluctuations arising from changes in the market prices of securities held during
the period. However, for federal income tax purposes, the Fund does isolate and
treat as ordinary income the effect of changes in foreign exchange rates arising
from actual foreign currency transactions and the effect of changes in foreign
exchange rates arising from trade date and settlement date differences.
10
<PAGE> 12
FORWARD CURRENCY EXCHANGE CONTRACTS: The Fund utilizes forward currency exchange
contracts for the purpose of hedging foreign currency risk. Under these
contracts, the Fund is obligated to exchange currencies at specific future
dates. Risks arise from the possible inability of counter-parties to meet the
terms of their contracts and from movements in currency values.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and the Fund
intends to distribute substantially all of its investment company net taxable
income and net capital gains to shareholders. Therefore, no federal income tax
provision is required.
EXPENSE ALLOCATION: Common expenses incurred by the Trust are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid annually. 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 within the capital accounts.
NOTE 2.
INVESTMENT ADVISORY AGREEMENTS. The Fund has an investment advisory agreement
with the Adviser, with which certain officers and Trustees of the Trust are
affiliated. The Adviser is an indirect wholly-owned subsidiary of Merrill Lynch
& Co., Inc. The Adviser receives a fee, computed daily and payable monthly, at
the annual rate of 0.75% as applied to the Fund's daily net assets. The Adviser
has contractually agreed to pay all operating expenses in excess of 1.35% as
applied to the Fund's daily net assets through April 30, 2001.
The Adviser has entered into subadvisory agreements with Merrill Lynch
Investment Managers International Limited and Merrill Lynch Asset Management
U.K. Limited, affiliated investment advisers that are indirect subsidiaries of
Merrill Lynch & Co., Inc. The subadvisory arrangements are for investment
research, recommendations, and other investment-related services to be provided
to the Fund. There is no increase in the aggregate fees paid by the Fund for
these services.
The Fund paid $23,827 in commissions on Fund transactions with an affiliated
broker during the six months ended June 30, 2000.
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.
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<PAGE> 13
NOTE 3.
CREDIT FACILITY. Effective December 3, 1999, the Trust entered into a one year
Credit Agreement with a syndicate of bank lenders led by Bank of America
intended to provide the Fund with a source of cash to be used to meet redemption
requests from Fund shareholders. The Trust together with certain other open-end
investment companies advised by Merrill Lynch Investment Managers, L.P. and/or
its affiliates may borrow in the aggregate up to $1,000,000,000, except that in
no event may the borrowing by the Fund or any participating fund be in excess of
that permitted by its prospectus and Statement of Additional Information or by
applicable law. The Fund had no borrowings under the Credit Agreement for the
six months ended June 30, 2000.
NOTE 4.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the six months ended June 30, 2000, were
$127,648,105 and $52,657,136, respectively.
As of June 30, 2000, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
Appreciated Depreciated
Fund Net Appreciation Securities Securities
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International VIP Portfolio................................. $32,637,385 $59,643,146 $(27,005,761)
</TABLE>
At June 30, 2000, the cost of investments for federal income tax purposes was
$339,667,120. Any differences between book and tax are due primarily to wash
sale losses and mark-to-market adjustments for passive foreign investment
companies.
At June 30, 2000, the Fund deferred, on a tax basis, post-October losses of
$1,291,782. This amount may be used to offset future capital gains.
NOTE 5.
RESTRUCTURING. The Board of Trustees has approved, effective on or about October
5, 2000, a change in the name of the Fund to Mercury HW International Value VIP
Portfolio.
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<PAGE> 14
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 10, 1998*
June 30, 2000 Year Ended through
INTERNATIONAL VIP PORTFOLIO (Unaudited) December 31, 1999 December 31, 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $ 11.52 $ 9.52 $ 10.00
------------ ------------ ------------
Income from Investment Operations:
Net investment income................................ 0.07 0.15 0.04
Net realized and unrealized gain (loss) on
investments........................................ 0.31 1.91 (0.48)
------------ ------------ ------------
Total from investment operations..................... 0.38 2.06 (0.44)
------------ ------------ ------------
Less Distributions:
Dividends (from net investment income)............... -- (0.06) (0.04)
------------ ------------ ------------
Net Asset Value, End of Period........................... $ 11.90 $ 11.52 $ 9.52
============ ============ ============
Total Return............................................. 3.30%(1) 21.68% (4.38)%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................ $370,018,704 $284,833,863 $289,134,958
Ratio of expenses to average net assets.................. 1.02%(2) 1.01% 1.05%(2)
Ratio of net investment income to average net assets..... 2.35%(2) 1.63% 1.09%(2)
Portfolio turnover rate.................................. 17%(1) 71% 24%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
13
