<PAGE> 1
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, WISCONSIN 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, N.A.
615 EAST MICHIGAN STREET
MILWAUKEE, WISCONSIN 53202
THIS MATERIAL MUST BE PRECEDED
OR ACCOMPANIED BY A PROSPECTUS.
ANNUAL REPORT
DECEMBER 31, 1999
LOGO
HOTCHKIS AND WILEY VARIABLE TRUST LOGO
LOW DURATION VIP PORTFOLIO
-------------------------------------------------------
Seeks to maximize total return, consistent with preservation of capital. The
Fund invests in bonds 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:
We are pleased to present to you the annual report of the Hotchkis and Wiley
Variable Trust Low Duration VIP Portfolio.
Interest rates continued climbing during 1999 as continued strength in the U.S.
economy, resumed growth overseas, Y2K concerns and Federal Reserve tightening
combined to weigh heavily on the markets. The Fed increased the Fed Funds rate,
the rate at which financial institutions lend to each other, by 25 basis points
on three separate occasions, moving first on June 30th in an attempt to slow the
economy. Admitting that productivity gains have produced the optimal combination
of strong growth and low inflation, the Fed put the rate hikes in the context of
taking back 1998's easings. The bond market anticipated these moves, as well as
additional moves in the year 2000; hence, interest rates on U.S. Treasuries rose
from 80 basis points to 180 basis points higher across maturities. The benchmark
thirty-year Treasury ended the year yielding 6.48% from 5.09% at the beginning
of 1999. Yields on intermediate securities, which are highly sensitive to the
Fed's actual and anticipated activity, rose the most.
While signs of inflation remained limited throughout the year, the market
reacted to continued strong gross domestic product growth numbers. Consumers
remained extremely optimistic due to income and wealth gains and were key
drivers of the latter part of this historical expansion. The GDP estimate for
the third quarter of 1999 came in at an unsustainable 5.7%, while the price
deflator, an inflation barometer, registered only 1.1%. The market has been
concerned that strong growth increases the odds of future inflation, an
historical relationship which seems to be on hold in this "Goldilocks" economy
(not too hot, not too cold). The laws of supply and demand have not been
repealed and concern centers on resource constraints which may affect price
increases. On the one hand, an excess supply of goods and services and strong
competition has kept a lid on prices at almost all levels of the economy. On the
other hand, the supply of some resources may be at its limit. Labor is the prime
example, with the unemployment rate at 4.1% at year-end and more individuals in
the work force than ever before. The pool of available workers is at all time
lows, indicating, perhaps, lower productivity growth going forward and/or
increasing labor costs.
As rates rose, our below-market interest rate sensitivity aided relative
performance. Investors began re-entering non-Treasury sectors in the latter half
of the year. Mortgage-backed and asset-backed securities strongly outperformed
as increasing yields reduced prepayment risk. Significant overweights of both of
these sectors contributed to returns. Corporate securities lagged, in general,
due to heavy issuance related to Y2K and the perception of increasing defaults
amidst decreasing profit growth as rates increased. Our overweight of corporates
relative to the all-Treasury indexes had a negative impact on returns.
Unfortunately, holdings in Rite Aid were hit as the company revealed accounting
problems in late September. The bonds traded down through most of October and
November before rebounding in December.
With Y2K concerns out of the way, we expect the Fed to resume tightening in
2000, beginning at its first meeting in February. Although the Fed went on the
record in December as being neutral, its statement clearly indicated a fear of
mounting inflationary pressures. If economic growth remains near 4% in the next
few quarters, we would not be surprised to
<PAGE> 3
see 50 to 75 basis points of further tightening from the Fed. We also anticipate
continued outperformance of non-Treasury sectors as valuations remain attractive
due to year-end liquidity concerns.
As always, we appreciate the trust you place in us. We thank you for your
continued support and we look forward to reporting to you again in six months.
Sincerely,
Nancy D. Celick sig
Nancy D. Celick
President
HOTCHKIS AND WILEY VARIABLE TRUST
The opinions expressed above are as of December 31, 1999. They are subject to
change and any forecast made cannot be guaranteed. The Portfolio might not
continue to hold any specific securities mentioned and has no obligation to
disclose purchases or sales in these securities.
<PAGE> 4
LOW DURATION VIP PORTFOLIO
MARCH 18, 1998 - DECEMBER 31, 1999
[LINGE GRAPH]
<TABLE>
<CAPTION>
Ended 12/31/99
--------------
ML 1-3
Fund U.S. Treasury
<S> <C> <C>
- -------------------------------------------------------------------------
One year 2.8% 3.1%
- -------------------------------------------------------------------------
Since Inception (3/18/98) 4.0% 4.8%
- -------------------------------------------------------------------------
</TABLE>
HOW A $10,000 INVESTMENT HAS GROWN:
The chart above shows the growth of a $10,000 investment in the Portfolio as
compared to the performance of a representative market index. The table below
the chart shows the average annual total returns on an investment for the period
shown since inception and a total return for the one year period.
Total returns and average annual total returns are net of all charges and
fees and assume the reinvestment of capital gain 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 of the Portfolio in excess of 0.58% 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
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. The
Portfolio may also invest a portion of its assets in foreign securities, which
involve 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 Note Index is an unmanaged index of
Treasury securities with maturities of one to three years, which securities are
guaranteed as to the timely payment of interest and principal 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> 5
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 27.4% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
BANKS -- 2.9%
............................................................
Sovereign Bancorp, 6.625%,
3/15/2001 $ 50,000 $ 48,755
- ------------------------------------------------------------
EUROBANKS -- 10.2%
............................................................
National Westminster Bank P.L.C
6.62%, 9/16/2002 # 75,000 75,125
............................................................
Okobank, CLB 9/09/2002, 6.62%,
9/29/2049 # 50,000 49,252
............................................................
Svenska Hndls Banken, CLB
3/03/2002, 6.6212%, 3/29/2049 # 50,000 49,331
...................... ....................... ---------
173,708
- ------------------------------------------------------------
FINANCIAL SERVICES -- 4.4%
............................................................
Lehman Brothers Holdings, 7.000%,
10/01/2002 25,000 24,773
............................................................
U.S. West Capital Funding,
(Acquired 6/03/1999, cost
$50,000), 6.5712%, 6/15/2000 # r 50,000 49,990
...................... ....................... ---------
74,763
- ------------------------------------------------------------
OIL -- INTEGRATED -- 2.9%
............................................................
Occidental Petroleum Corp., 6.24%,
11/24/2000 50,000 49,661
- ------------------------------------------------------------
RETAIL -- 2.5%
............................................................
Rite Aid Corp., (Acquired
12/16/1998, cost $49,914),
5.500%, 12/15/2000 r 50,000 43,250
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.6%
............................................................
Sprint Spectrum L.P., CLB
8/15/2001, 11.00%, 8/15/2006 25,000 27,641
- ------------------------------------------------------------
TRANSPORTATION -- 2.9%
............................................................
Bombardier Capital, Inc.,
(Acquired 1/22/1999, cost
$49,897), 6.00%, 1/15/2002 r 50,000 48,757
...................... ....................... ---------
Total corporate bonds and notes 466,535
(cost $476,538)
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 8.8% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.7%
............................................................
Federal National Mortgage Association,
............................................................
1993-142 SA, 8.957%, 10/25/2022
# $ 7,329 $ 6,818
............................................................
1997-76 FT, 6.8687%, 9/17/2027 # 22,142 20,622
............................................................
Pool # 508757, 6.3610%,
8/01/2029 122,992 119,764
...................... ....................... ---------
147,204
- ------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.1%
............................................................
Federal National Mortgage
Association,
1998-48 CI (IO), 6.50%,
8/25/2028 8,050 1,664
...................... ....................... ---------
Total government agency mortgage-
backed securities
148,868
(cost $152,007)
- ------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES -- 32.1%
- ------------------------------------------------------------
ASSET-BACKED SECURITIES -- 25.2%
............................................................
Asset Backed Funding Certificates,
CLB, 1999-1 A2F, 7.641%,
10/25/2030 24,940 24,885
............................................................
Associates Manufactured Housing
Pass Through Certificates, CLB,
1996-2 A4, 6.60%, 6/15/2027 75,000 74,172
............................................................
Champion Auto Grantor Trust,
(Acquired 3/18/1998, cost
$10,827) CLB, 1998-A A, 6.11%,
10/15/2002 r 10,827 10,814
............................................................
Chemical Master Credit Card Trust
1, CLB, 1995-2 A, 6.23%,
6/15/2003 25,000 24,948
............................................................
CIT Marine Trust, CLB, 1999-A A2,
5.80%, 4/15/2010 50,000 48,214
............................................................
DiTech Home Loan Owner Trust, CLB,
1997-1 A2, 6.59%, 4/15/2013 9,548 9,530
............................................................
Green Tree Recreational, Equipment
& Consumer Trust, CLB:
............................................................
1996-B CTFS, 7.70%, 7/15/2018 50,000 48,009
............................................................
1996-C A1, 6.7025%, 10/15/2017 # 45,016 45,043
............................................................
</TABLE>
See Notes to the Financial Statements
1
<PAGE> 6
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------
LOW DURATION VIP PORTFOLIO
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
Nationslink Funding Corporation,
CLB, 1999-SL A1V, 6.8187%,
4/10/2007 # $ 64,750 $ 64,772
............................................................
Navistar Financial Corporation
Owner Trust, CLB, 1996-B A3,
6.33%, 4/21/2003 38,999 39,006
............................................................
Nomura Asset Securities
Corporation, CLB, 1995-MD3 A1A,
8.17%, 3/04/2020 38,227 38,787
...................... ....................... ---------
428,180
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 6.9%
............................................................
Citicorp Mortgage Securities,
Inc., CLB, 1997-3 A2, 6.92%,
8/25/2027 2,861 2,854
............................................................
First Union-Lehman Brothers
Commercial Mortgage Trust, CLB,
1997-C1 A1, 7.15%, 2/18/2004 23,157 23,017
............................................................
Nomura Depositor Trust, (Acquired
9/03/1999, cost $49,104), 1998-
ST1A A3A, 7.0125%, 1/15/2003 # r 50,000 49,031
............................................................
Ocwen Residential MBS Corp.,
(Acquired 6/18/1998, cost
$29,431), CLB, 1998-R2
AP,6.4416%, 11/25/2034 # r 29,468 29,192
............................................................
Residential Funding Mortgage
Securities, Inc., CLB, 1998-S17
A6, 6.75%, 8/25/2028 12,856 12,815
...................... ....................... ---------
116,909
...................... ....................... ---------
Total non-agency mortgage-backed securities 545,089
(cost $553,828)
- ------------------------------------------------------------
<CAPTION>
U.S. TREASURY Principal
OBLIGATIONS -- 24.Amount Value
- ------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY NOTES:
............................................................
5.50%, 2/29/2000 $125,000 $ 125,078
............................................................
6.25%, 6/30/2002 185,000 184,942
............................................................
5.75%, 10/31/2002 100,000 98,625
...................... ....................... ---------
Total U.S. Treasury obligations 408,645
(cost $413,402)
- ------------------------------------------------------------
VARIABLE RATE
DEMAND NOTES* -- 6.0%
- ------------------------------------------------------------
General Mills, Inc., 6.095% 60,723 60,723
............................................................
Pitney Bowes, Inc., 6.095% 41,653 41,653
...................... ....................... ---------
Total variable rate demand notes
102,376
(cost $102,376)
- ------------------------------------------------------------
Total investments -- 98.3%
(cost $1,698,151) 1,671,513
............................................................
Other assets in excess of liabilities -- 1.7% 29,372
...................... ....................... ---------
$1,700,885
Total net assets -- 100.0%
- ------------------------------------------------------------
</TABLE>
# -- Variable rate security. The rate listed is as of December 31, 1999.
* -- 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, 1999.
IO -- Interest only.
CLB -- Callable.
r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may be limited to qualified
institutional buyers.
See Notes to the Financial Statements
2
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LOW DURATION VIP PORTFOLIO December 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $1,671,513
Cash...................................................... 4,523
Receivable from Advisor................................... 22,855
Dividends and interest receivable......................... 14,404
Organizational expenses, net of accumulated
amortization............................................ 11,987
Prepaid expenses.......................................... 15
----------
Total assets.......................................... 1,725,297
----------
LIABILITIES:
Dividends payable......................................... 8,187
Accrued expenses and other liabilities.................... 16,225
----------
Total liabilities..................................... 24,412
----------
Net assets............................................ $1,700,885
==========
NET ASSETS CONSIST OF:
Paid in capital........................................... $1,744,882
Undistributed net investment income....................... 2,784
Accumulated net realized loss on securities............... (20,143)
Net unrealized depreciation of securities................. (26,638)
----------
Net assets............................................ $1,700,885
==========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 174,932
Net asset value per share (offering and redemption
price).................................................. $ 9.72
==========
*Cost of Investments........................................ $1,698,151
==========
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 8
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
LOW DURATION VIP PORTFOLIO December 31, 1999
- -------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income
Interest................................................ $100,600
--------
Total income........................................ 100,600
--------
Expenses
Advisory fee............................................ 7,842
Legal and auditing fees................................. 537
Custodian fees and expenses............................. 5,040
Accounting and transfer agent fees and expenses......... 36,501
Administration fee...................................... 773
Trustees' fees and expenses............................. 669
Reports to shareholders................................. 12,445
Registration fees....................................... 38
Amortization of organizational expenses................. 4,196
Other expenses.......................................... 74
--------
Total expenses...................................... 68,115
Less, expense reimbursement............................. (58,227)
--------
Net expenses........................................ 9,888
--------
Net investment income................................... 90,712
--------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on securities......................... (17,121)
Net change in unrealized depreciation of securities..... (25,481)
--------
Net loss on investments................................... (42,602)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 48,110
========
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 18, 1998**
Year Ended through
LOW DURATION VIP PORTFOLIO December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 90,712 $ 61,726
Net realized loss on securities......................... (17,121) (143)
Net change in unrealized depreciation of securities..... (25,481) (1,157)
---------- ----------
Net increase in net assets resulting from
operations.......................................... 48,110 60,426
---------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (91,719) (64,700)
---------- ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 227,553 1,713,346
Shares issued in connection with payment of dividends
and distributions...................................... 91,307 56,925
Cost of shares redeemed................................. (298,114) (42,249)
---------- ----------
Net increase in net assets from Fund share
transactions........................................ 20,746 1,728,022
---------- ----------
Total increase (decrease) in net assets..................... (22,863) 1,723,748
NET ASSETS:
Beginning of period..................................... 1,723,748 --
---------- ----------
End of period*.......................................... $1,700,885 $1,723,748
========== ==========
*Including undistributed net investment income of: $ 2,784 $ 1,612
========== ==========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 22,957 171,309
Shares issued in connection with payment of dividends
and distributions...................................... 9,271 5,683
Shares redeemed......................................... (30,071) (4,217)
---------- ----------
Net increase........................................ 2,157 172,775
========== ==========
** Commencement of operations.
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 10
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
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 total return,
consistent with preservation 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 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 broker-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 disposition of
such securities may differ from values previously furnished by such methods.
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 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.
6
<PAGE> 11
RESTRICTED SECURITIES: The Fund owns investment securities which are
unregistered and thus restricted as to resale. Resale to the public may require
registration or may be limited to qualified institutional buyers. At December
31, 1999, the Fund had restricted securities with an aggregate market value of
$231,034, representing 14% 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 within the capital accounts.
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 year ended December 31, 1999, the Adviser paid $58,227 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.
CREDIT FACILITY. Effective December 3, 1999, the Fund 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 Fund together with certain other open-end
investment companies advised by Merrill Lynch Asset Management, 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 in 1999.
NOTE 4.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended December 31, 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............................ $1,266,280 $968,247 $1,483,209 $712,763
</TABLE>
As of December 31, 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.................................. $(26,638) $410 $(27,048)
</TABLE>
At December 31, 1999, the cost of investments for federal income tax purposes
was $1,698,151. Any differences between book and tax are due primarily to wash
sale losses.
At December 31, 1999, the Fund had accumulated net realized capital loss
carryovers of $3,361 expiring in 2006 and $16,782 expiring in 2007. To the
extent that the Fund realizes future net capital gains, those gains will be
offset by any unused capital loss carryover.
NOTE 5.
FEDERAL TAX DISCLOSURE (UNAUDITED). For the year ended December 31, 1999, 23% of
dividends distributed were derived from interest on U.S. government securities
which is generally exempt from state income tax.
8
<PAGE> 13
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 18, 1998*
Year Ended through
LOW DURATION VIP PORTFOLIO December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................ $ 9.98 $ 10.00
---------- ----------
Income from Investment Operations:
Net investment income................................... 0.54 0.46
Net realized and unrealized loss on investments......... (0.27) (0.03)
---------- ----------
Total from investment operations........................ 0.27 0.43
---------- ----------
Less Distributions:
Dividends (from net investment income).................. (0.53) (0.45)
---------- ----------
Net Asset Value, End of Period.............................. $ 9.72 $ 9.98
========== ==========
Total Return................................................ 2.80% 4.40%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $1,700,885 $1,723,748
Ratio of expenses to average net assets
Before expense reimbursement............................ 4.00% 5.56%(2)
After expense reimbursement............................. 0.58% 0.58%(2)
Ratio of net investment income to average net assets
Before expense reimbursement............................ 1.90% 0.47%(2)
After expense reimbursement............................. 5.32% 5.45%(2)
Portfolio turnover rate..................................... 137% 296%(1)
</TABLE>
* Commencement of operations.
(1) Not annualized.
(2) Annualized.
See Notes to the Financial Statements
9
<PAGE> 14
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Hotchkis and Wiley Variable Trust:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Low Duration VIP Portfolio (one
of the four portfolios of Hotchkis and Wiley Variable Trust, the "Fund") at
December 31, 1999, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, 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 audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, WI
February 17, 2000
10
