<PAGE> 1
As filed with the Securities and Registration No. 2-96219
Exchange Commission on July 30, 1997. 811-4182
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 24 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ ]
Amendment No. 26 [x]
(Check appropriate box or boxes)
------------------------
HOTCHKIS AND WILEY FUNDS
(Exact name of registrant as specified in charter)
800 West 6th Street, Fifth Floor
Los Angeles, California 90017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (213) 362-8900
Gracie Fermelia
800 West 6th Street, Fifth Floor
Los Angeles, California 90017
(Name and address of Agent for Service)
with a copy to:
Paul H. Dykstra, Esq.
Gardner, Carton & Douglas
321 North Clark Street
Chicago, IL 60610-4795
Approximate date of proposed public offering: As soon as practicable
after the effective date of the registration statement.
It is proposed that this filing will become effective (check
appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[x] on September 30, 1997 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
================================================================================
Registrant has previously elected to register an indefinite number of
its shares of beneficial interest pursuant to Rule 24f-2 under the Investment
Company Act of 1940.
Registrant will file its Rule 24f-2 Notice for the fiscal year ended
June 30, 1997 by August 30, 1997.
<PAGE> 2
HOTCHKIS AND WILEY FUNDS
CROSS-REFERENCE SHEET
(REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
Location in the Prospectus of the Equity
Income Fund, Mid-Cap Fund, Small Cap Fund,
International Fund, Global Equity Fund,
Balanced Income Fund, Low Duration
N-1A Fund, Short-Term Investment Fund Location in the Prospectus of the
Item No. and Total Return Bond Fund Equity Fund for Insurance Companies
-------- ------------------------------------------- -----------------------------------
Part A:
<S> <C> <C> <C>
Item 1. Cover Page Cover Page Cover Page
Item 2. Synopsis Fee Table Fee Table
Item 3. Condensed Financial Financial Highlights Financial Highlights
Information
Item 4. General Description of Cover Page; General Information; Investment Cover Page; General
Registrant Objectives and Policies; Securities and Information; Investment Objective and
Techniques Used by the Funds; Investment Policies; Principal Investment
Risks; Principal Investment Restrictions Restrictions
Item 5. Management of the Fund Organization and Management; General Organization and Management; General
Information Information
Item 5A. Management's Discussion Performance Information Performance Information
of Fund Performance
Item 6. Capital Stock and Other General Information; Dividends and Tax General Information; Dividends and Tax
Securities Status; Organization and Management Status; Organization and Management
Item 7. Purchase of Securities How to Purchase Shares How to Purchase Shares
Being Offered
Item 8. Redemption or How to Redeem Shares How to Redeem Shares
Repurchase
Item 9. Pending Legal Not Applicable Not Applicable
Proceedings
</TABLE>
<TABLE>
<CAPTION>
Part B: Location in the Statement of Additional Information
---------------------------------------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History General Information about the Trust
Item 13. Investment Objectives and Investment Objective and Policies
Policies
Item 14. Management of the Registrant Management
Item 15. Control Persons and Principal General Information about the Trust
Holders of Securities
Item 16. Investment Advisory and Other Management
Securities
Item 17. Brokerage Allocation and Other Management
Practices
Item 18. Capital Stock and Other General Information about the Trust
Securities
Item 19. Purchase, Redemption and Net Asset Value
Pricing of Securities Being
Offered
Item 20. Tax Status Dividends and Tax Status
Item 21. Underwriters Not Applicable
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
</TABLE>
Part C:
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Post-Effective
Amendment to the Registration Statement.
<PAGE> 3
PROSPECTUS
SEPTEMBER 30, 1997
[LOGO]
HOTCHKIS
AND
WILEY
FUNDS
800 WEST SIXTH STREET
FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90017
800-236-4479
HOTCHKIS
AND
WILEY
FUNDS
Equity Income Fund
Mid-Cap Fund
Small Cap Fund
International Fund
Global Equity Fund
Balanced Income Fund
Total Return Bond Fund
Low Duration Fund
Short-Term Investment Fund
Hotchkis and Wiley: Investment Advisor
<PAGE> 4
PROSPECTUS
HOTCHKIS AND WILEY
FUNDS [LOGO]
HOTCHKIS AND WILEY FUNDS (THE "TRUST") IS AN OPEN-END, MANAGEMENT INVESTMENT
COMPANY HAVING TEN SEPARATE DIVERSIFIED PORTFOLIOS (THE "FUNDS"), EACH OF WHICH
IS A SEPARATE MUTUAL FUND.
EQUITY INCOME FUND
Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests primarily in domestic equity securities.
MID-CAP FUND
Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests primarily in stocks of domestic companies
with market capitalizations between $750 million and $5 billion.
SMALL CAP FUND
Seeks capital appreciation. The Fund invests primarily in stocks of domestic
companies with market capitalizations of $1 billion or less.
INTERNATIONAL FUND
Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests in international equity securities.
GLOBAL EQUITY FUND
Seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The Fund invests in domestic and international equity
securities.
BALANCED INCOME FUND
Seeks to preserve capital while producing a high total return. It is expected
that the Fund's assets will be allocated among equity securities, fixed-income
securities and money market obligations.
TOTAL RETURN BOND FUND
Seeks to maximize long-term total return. The Fund invests in a diversified
portfolio of fixed-income securities of varying maturities with a portfolio
duration of two to eight years.
LOW DURATION FUND
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.
SHORT-TERM INVESTMENT FUND
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 up to one year.
THE EQUITY FUND FOR INSURANCE COMPANIES
Offered through a separate prospectus.
This Prospectus provides you with the basic information you should know before
investing in any of the Funds. You should read it and keep it for future
reference. A Statement of Additional Information dated September 30, 1997,
containing additional information about the Trust and each Fund has been filed
with the Securities and Exchange Commission and is incorporated by reference in
its entirety into this Prospectus. You may obtain a copy of the Statement of
Additional Information without charge by calling the Trust at 800-236-4479 or
writing the Trust at 800 West Sixth Street, Fifth Floor, Los Angeles, California
90017.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank, nor are they federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other agency. Investment
in a Fund's shares involves risk, including the possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
There can be no assurance that the investment objective of any Fund will be
achieved.
HOTCHKIS AND WILEY FUNDS
800 West 6th Street, Fifth Floor, Los Angeles, California 90017
800-236-4479
Investment Advisor: Hotchkis and Wiley
SEPTEMBER 30, 1997
<PAGE> 5
FEE TABLE
- --------------------------------------------------------------------------------
The following information is provided in order to assist you in understanding
the various costs and expenses that, as an investor in the Funds, you will bear
directly or indirectly:
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases............................................ None
Maximum Deferred Sales Load........................................................ None
Maximum Sales Load Imposed on Reinvested Dividends................................. None
Redemption and Exchange Fees....................................................... None
</TABLE>
Investment dealers and other firms may independently charge additional fees for
shareholder transactions or for advisory services. Please see their materials
for details.
<TABLE>
<CAPTION>
ANNUAL FUND
OPERATING EXPENSES Equity Mid- Small Inter- Global Balanced Total Low Short-Term
(as a percentage of average net Income Cap Cap national Equity Income Return Duration Investment
assets) Fund Fund Fund Fund Fund Fund Bond Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees............. .75% .75% .75% .75% .75% .75% .55% .46% .40%
Other expenses after expense
reimbursement............... .13% .25% .25% .25% .25% .23% .10% .12% .08%
------ ---- ----- --------- ------ -------- --- --- ---
Total Fund operating
expenses after expense
reimbursement............... .88% 1.00% 1.00% 1.00% 1.00% .98% .65% .58% .48%
===== ==== ==== ====== ==== ====== ======= ====== =======
</TABLE>
Although not required to do so, Hotchkis and Wiley (the "Advisor"), has agreed
to limit the annual operating expenses of the Equity Income Fund, Mid-Cap Fund,
Small Cap Fund, International Fund, Global Equity Fund and Balanced Income Fund
to 1% of each Fund's average net assets. Additionally, the Advisor has agreed to
limit the annual expenses of the Total Return Bond Fund to .65%, the Low
Duration Fund to .58% and the Short-Term Investment Fund to .48% of each Fund's
average net assets. If the Advisor had not limited the Funds' expenses, other
expenses of the Mid-Cap Fund, Small Cap Fund, International Fund, Global Equity
Fund, Total Return Bond Fund, Low Duration Fund and Short-Term Investment Fund
would have been 7.51%, .55%, .32%, 3.68%, .40%, .20% and .56%, respectively, and
the total operating expenses of the Mid-Cap Fund, Small Cap Fund, International
Fund, Global Equity Fund, Total Return Bond Fund, Low Duration Fund and
Short-Term Investment Fund would have been 8.26%, 1.30%, 1.07%, 4.43%, .95%,
.66% and .96%, respectively, for the year ended June 30, 1997. Expenses for the
Mid-Cap Fund and Global Equity Fund are estimated and based on expenses during
the period from commencement of operations on January 2, 1997 through June 30,
1997.
<TABLE>
<CAPTION>
EXAMPLE
You would pay the following
expenses on a $1,000
investment, assuming:
(1) 5% annual return, and Equity Mid- Small Inter- Global Balanced Total Low Short-Term
(2) redemption at the Income Cap Cap national Equity Income Return Duration Investment
end of each time period: Fund Fund Fund Fund Fund Fund Bond Fund Fund Fund
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Year....................... $ 9 $ 10 $ 10 $ 10 $ 10 $ 10 $ 7 $ 6 $ 5
Three Years.................... $ 28 $ 32 $ 32 $ 32 $ 32 $ 31 $21 $ 19 $ 15
Five Years..................... $ 49 -- $ 55 $ 55 -- $ 54 $36 $ 32 $ 27
Ten Years...................... $ 108 -- $ 122 $ 122 -- $120 $81 $ 73 $ 60
</TABLE>
The Example should not be considered a representation of past or future
expenses; actual Fund expenses may be greater or less than those shown. The
assumption in the Example of a 5% annual return is required by regulations of
the Securities and Exchange Commission applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of any Fund.
3
<PAGE> 6
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each period)
- --------------------------------------------------------------------------------
The financial highlights relating to the Equity Income Fund, Small Cap Fund,
International Fund, Balanced Income Fund, Total Return Bond Fund, Low Duration
Fund and Short-Term Investment Fund for each of the one year periods presented
through June 30, 1996 have been audited by Price Waterhouse LLP, independent
accountants, whose unqualified report covering each of the most recent five
years through June 30, 1996, is incorporated by reference herein and is included
in the Statement of Additional Information, which is available from the Trust.
This information should be read in conjunction with the financial statements and
accompanying notes, which appear in the Statement of Additional Information.
Further performance information is contained in the Funds' annual report to
shareholders, which may be obtained without cost.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------------
EQUITY INCOME FUND 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $ 18.91 $17.24 $15.07 $15.50 $14.51 $12.53 $12.59 $13.43 $11.60 $12.48
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... 0.49 0.45(1) 0.49 0.46 0.44 0.40 0.48 0.59 0.57 0.53
Net realized and unrealized
gain (loss) on
investments................. 4.15 2.89 2.48 0.10 1.21 1.99 0.24 (0.62) 1.90 (0.92)
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations.................. 4.64 3.34 2.97 0.56 1.65 2.39 0.72 (0.03) 2.47 (0.39)
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS:
Dividends (from net investment
income)..................... (0.48) (0.57) (0.44) (0.46) (0.43) (0.41) (0.48) (0.60) (0.58) (0.49)
Distributions (from realized
gains)...................... (1.82) (1.10) (0.36) (0.53) (0.23) -- (0.30) (0.21) (0.06) --
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions........... (2.30) (1.67) (0.80) (0.99) (0.66) (0.41) (0.78) (0.81) (0.64) (0.49)
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value, End of Year...... $ 21.25 $18.91 $17.24 $15.07 $15.50 $14.51 $12.53 $12.59 $13.43 $11.60
====== ====== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN...................... 26.15% 20.04% 20.49% 3.40% 11.67% 19.28% 6.92% -0.44% 21.96% -2.69%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of Year
(millions)...................... $185.90 $182.5 $127.1 $87.2 $86.7 $71.6 $63.0 $64.9 $47.2 $29.3
Ratio of expenses to average net
assets:
Before expense reimbursement.... 0.88% 0.98% 1.02% 1.05% 1.02% 1.02% 1.07% 1.05% 1.27% 1.41%
After expense reimbursement..... 0.88% 0.98% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to
average net assets:
Before expense
reimbursement............... 2.49% 2.56% 3.11% 2.85% 2.97% 2.93% 4.16% 4.37% 4.42% 4.71%
After expense reimbursement... 2.49% 2.56% 3.14% 2.90% 2.99% 2.95% 4.23% 4.42% 4.68% 5.11%
Portfolio turnover rate........... 44% 24% 50% 36% 25% 32% 39% 39% 9% 20%
Average commission rate per
share........................... $0.0472 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
4
<PAGE> 7
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------
SMALL CAP FUND 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................. $21.33 $21.53 $19.53 $19.88 $18.10 $17.30 $20.39 $17.88 $18.05 $19.28
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (loss)... 0.03 0.05(1) (0.06) (0.01) 0.27 0.09 0.13 0.03 0.17 --
Net realized and unrealized
gain (loss) on investments... 5.62 2.80 2.84 0.78 3.18 3.09 0.10 3.51 (0.32) (1.17)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................... 5.65 2.85 2.78 0.77 3.45 3.18 0.23 3.54 (0.15) (1.17)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment
income)...................... (0.09) -- -- (0.20) (0.04) (0.13) (0.09) (0.18) (0.02) --
Distributions (from realized
gains)....................... (3.06) (3.05) (0.78) (0.92) (1.63) (2.25) (3.23) (0.85) -- (0.06)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions............ (3.15) (3.05) (0.78) (1.12) (1.67) (2.38) (3.32) (1.03) (0.02) (0.06)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of Year....... $23.83 $21.33 $21.53 $19.53 $19.88 $18.10 $17.30 $20.39 $17.88 $18.05
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN....................... 29.74% 14.24% 14.79% 3.77% 19.80% 19.04% 5.60% 20.49% -0.82% -5.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(millions)....................... $27.5 $16.5 $20.5 $13.1 $10.8 $8.8 $7.2 $7.7 $7.9 $8.2
Ratio of expenses to average net
assets:
Before expense reimbursement..... 1.30% 1.21% 1.49% 1.65% 1.40% 1.45% 1.60% 1.60% 1.82% 1.82%
After expense reimbursement...... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income
(loss) to average net assets:
Before expense reimbursement..... (0.20)% 0.03% (0.82)% (0.71)% 1.03% (0.06)% 0.11% (0.42)% 0.16% (0.81)%
After expense reimbursement...... 0.10% 0.24% (0.34)% (0.06)% 1.42% 0.40% 0.71% 0.18% 0.98% 0.01%
Portfolio turnover rate............ 88% 119% 81% 44% 20% 26% 32% 37% 38% 35%
Average commission rate per
share............................ $0.046 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
(1)Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
5
<PAGE> 8
<TABLE>
<CAPTION>
October
1,
1990*
Year Ended June 30, through
-------------------------------------------------------------- June 30,
INTERNATIONAL FUND 1997 1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........ $20.44 $17.70 $16.79 $14.63 $13.97 $12.56 $ 12.50
------ ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... 0.59 0.56) 0.28 0.26 0.23 0.22 0.42
Net realized and unrealized gain (loss)
on investments........................ 3.78 2.51 1.52 2.19 0.74 3.09 (0.21)
------ ----- ----- ----- ----- -----
Total from investment operations........ 4.37 3.07 1.80 2.45 0.97 3.31 0.21
------ ----- ----- ----- ----- -----
LESS DISTRIBUTIONS:
Dividends (from net investment
income)............................... (0.48) (0.14) (0.44) (0.14) -- (0.61) (0.15)
Distributions (from realized gains)..... (0.16) (0.19) (0.45) (0.15) (0.31) (1.29) --
------ ----- ----- ----- ----- -----
Total Distributions..................... (0.64) (0.33) (0.89) (0.29) (0.31) (1.90) (0.15)
------ ----- ----- ----- ----- -----
Net Asset Value, End of Period.............. $24.17 $20.44 $17.70 $16.79 $14.63 $13.97 $ 12.56
====== ===== ===== ===== ===== =====
TOTAL RETURN................................ 21.59% 18.61% 11.08% 16.71% 7.36% 27.48% 2.22%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........ $888.5 $331.0 $51.5 $26.0 $6.6 $4.0 $1.3
Ratio of expenses to average net assets:
Before expense reimbursement.............. 1.07% 1.11% 1.39% 1.61% 2.44% 4.19% 5.50%+
After expense reimbursement............... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%+
Ratio of net investment income to average
net assets:
Before expense reimbursement.............. 2.59% 2.67% 2.45% 2.01% 1.14% 0.42% (0.53)%
After expense reimbursement............... 2.66% 2.78% 2.83% 2.62% 2.58% 3.61% 3.96%+
Portfolio turnover rate..................... 18% 12% 24% 23% 24% 88% 224%
Average commission rate per share........... $0.0147 N/A N/A N/A N/A N/A N/A
</TABLE>
* Commencement of operations.
+ Annualized.
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
6
<PAGE> 9
<TABLE>
<CAPTION>
January 2,
1997*
through
June 30,
MID-CAP FUND 1997
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period............................................................... $10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................................................................... 0.07
Net realized and unrealized gain on investments................................................ 1.64
-------
Total from investment operations............................................................... 1.71
-------
LESS DISTRIBUTIONS:
Dividends (from net investment income)......................................................... (0.06)
Distributions (from realized gains)............................................................ --
-------
Total Distributions............................................................................ (0.06)
-------
Net Asset Value, End of Period..................................................................... $11.65
=======
TOTAL RETURN....................................................................................... 17.15%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)............................................................... $2.0
Ratio of expenses to average net assets:
Before expense reimbursement..................................................................... 8.26%+
After expense reimbursement...................................................................... 1.00%+
Ratio of net investment income to average net assets:
Before expense reimbursement..................................................................... (5.39)%+
After expense reimbursement...................................................................... 1.87%+
Portfolio turnover rate............................................................................ 23%
Average commission rate per share.................................................................. $0.0330
</TABLE>
* Commencement of operations.
+ Annualized.
7
<PAGE> 10
<TABLE>
<CAPTION>
January 2,
1997*
through
June 30,
GLOBAL EQUITY FUND 1997
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period............................................................... $10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................................................................... 0.14
Net realized and unrealized gain on investments................................................ 1.09
-------
Total from investment operations............................................................... 1.23
-------
LESS DISTRIBUTIONS:
Dividends (from net investment income)......................................................... (0.14)
Distributions (from realized gains)............................................................ --
-------
Total Distributions............................................................................ (0.14)
-------
Net Asset Value, End of Period..................................................................... $11.09
=======
TOTAL RETURN....................................................................................... 12.32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)............................................................... $3.7
Ratio of expenses to average net assets:
Before expense reimbursement..................................................................... 4.43%+
After expense reimbursement...................................................................... 1.00%+
Ratio of net investment income to average net assets:
Before expense reimbursement..................................................................... 0.07%+
After expense reimbursement...................................................................... 3.50%+
Portfolio turnover rate............................................................................ 18%
Average commission rate per share.................................................................. $0.0144
</TABLE>
* Commencement of operations.
+ Annualized.
8
<PAGE> 11
<TABLE>
<CAPTION>
Year Ended June 30,
BALANCED --------------------------------------------------------------------------------------------
INCOME FUND 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................ $ 18.27 $16.74 $15.71 $16.69 $16.35 $15.23 $15.13 $15.95 $14.40 $15.17
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... 0.98 0.94 0.89 0.89 0.77 0.79 0.82 0.88 0.87 0.79
Net realized and
unrealized gain (loss)
on investments......... 1.78 1.53 1.53 (0.27) 0.82 1.45 0.49 0.09 1.57 (0.08)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............. 2.76 2.47 2.42 0.62 1.59 2.24 1.31 0.97 2.44 0.71
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net
investment income)..... (0.99) (0.92) (0.80) (0.94) (0.74) (0.76) (0.81) (0.93) (0.89) (0.72)
Distributions (from
realized gains)........ (0.66) (0.02) (0.57) (0.66) (0.51) (0.36) (0.40) (0.86) -- (0.76)
Return of capital........ -- -- (0.02) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions...... (1.65) (0.94) (1.39) (1.60) (1.25) (1.12) (1.21) (1.79) (0.89) (1.48)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of
Year....................... $ 19.38 $18.27 $16.74 $15.71 $16.69 $16.35 $15.23 $15.13 $15.95 $14.40
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN................. 15.75% 15.04% 16.40% 3.60% 10.10% 15.10% 9.35% 6.20% 17.48% 5.46%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of year
(millions)................. $ 90.2 $70.6 $32.1 $36.0 $30.3 $ 16.7 $ 11.6 $ 9.6 $ 7.9 $ 6.7
Ratio of expenses to average
net assets:
Before expense
reimbursement............ 0.98% 1.06% 1.19% 1.20% 1.15% 1.27% 1.44% 1.66% 1.92% 2.39%
After expense
reimbursement............ 0.98% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment
income to average net
assets:
Before expense
reimbursement............ 4.77% 5.20% 5.44% 5.04% 4.62% 4.64% 5.14% 4.93% 4.85% 4.11%
After expense
reimbursement............ 4.77% 5.26% 5.63% 5.24% 4.77% 4.90% 5.58% 5.59% 5.77% 5.51%
Portfolio turnover rate...... 117% 92% 51% 97% 155% 36% 75% 78% 97% 112%
Average commission rate per
share...................... $0.0392 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
December 6,
1994*
Year Ended June 30, through
---------------------- June 30,
TOTAL RETURN BOND FUND 1997 1996 1995
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............................................. $ 12.78 $ 12.94 $ 12.00
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................................ 0.97(1) 0.84(1) 0.46
Net realized and unrealized gain on investments.............................. 0.32 0.06 0.94
------ ------ -------
Total from investment operations............................................. 1.29 0.90 1.40
------ ------ -------
LESS DISTRIBUTIONS:
Dividends (from net investment income)....................................... (0.92) (0.93) (0.46)
Distributions (from realized gains).......................................... (0.11) (0.13) --
Total Distributions.......................................................... (1.03) (1.06) (0.46)
------ ------ -------
Net Asset Value, End of Period................................................... $ 13.04 $ 12.78 $ 12.94
====== ====== =======
TOTAL RETURN..................................................................... 10.48% 7.05% 11.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)............................................. $14.3 $43.4 $15.3
Ratio of expenses to average net assets:
Before expense reimbursement................................................... 0.95% 0.98% 2.93%+
After expense reimbursement.................................................... 0.65% 0.68% 0.80%+
Ratio of net investment income to average net assets:
Before expense reimbursement................................................... 6.78% 6.86% 4.92%+
After expense reimbursement.................................................... 7.08% 7.16% 7.05%+
Portfolio turnover rate.......................................................... 173% 51% 68%
</TABLE>
* Commencement of operations.
+ Annualized.
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
10
<PAGE> 13
<TABLE>
<CAPTION>
May 18,
1993*
Year Ended June 30, through
-------------------------------------------------------- June 30,
LOW DURATION FUND 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $ 10.12 $ 10.15 $ 9.93 $ 10.00 $ 10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................. 0.65 0.68 0.75 0.77 0.05
Net realized and unrealized gain on investments.... 0.11 0.06 0.23 0.11 0.00
------ ------ ------ ------ ------
Total from investment operations................... 0.76 0.74 0.98 0.88 0.05
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)............. (0.64) (0.72) (0.75) (0.77) (0.05)
Dividends (from realized gains).................... (0.01) (0.05) (0.01) (0.18) --
------ ------ ------ ------ ------
Total Distributions................................ (0.65) (0.77) (0.76) (0.95) (0.05)
------ ------ ------ ------ ------
Net Asset Value, End of Period......................... $ 10.23 $ 10.12 $ 10.15 $ 9.93 $ 10.00
====== ====== ====== ====== ======
TOTAL RETURN........................................... 7.79% 7.47% 10.23% 9.02% 4.36%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)................... $171.2 $189.2 $123.3 $36.5 $7.6
Ratio of expenses to average net assets:
Before expense reimbursement......................... 0.66% 0.60% 0.75% 1.10% 4.94%+
After expense reimbursement.......................... 0.58% 0.58% 0.58% 0.58% 0.58%+
Ratio of net investment income to average net assets:
Before expense reimbursement......................... 6.26% 7.07% 7.43% 6.82% 1.93%+
After expense reimbursement.......................... 6.34% 7.09% 7.61% 7.34% 6.28%+
Portfolio turnover rate................................ 202% 50% 71% 254% 34%
</TABLE>
* Commencement of operations.
+ Annualized.
11
<PAGE> 14
<TABLE>
<CAPTION>
May 18,
1993*
Year Ended June 30, through
-------------------------------------------------------- June 30,
SHORT-TERM INVESTMENT FUND 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $ 10.17 $ 10.12 $ 10.21 $ 10.00 $ 10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................. 0.59 0.66 0.66 0.53 0.03
Net realized and unrealized gain (loss) on
investments...................................... (0.02) 0.05 (0.09) 0.21 --
------ ------ ------ ------ ------
Total from investment operations................... 0.57 0.71 0.57 0.74 0.03
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)............. (0.59) (0.66) (0.66) (0.53) (0.03)
Return of capital.................................. -- (0.00) -- -- --
------ ------ ------ ------ ------
Total Distributions................................ (0.59) (0.66) (0.66) (0.53) (0.03)
------ ------ ------ ------ ------
Net Asset Value, End of Period......................... $ 10.15 $ 10.17 $ 10.12 $ 10.21 $ 10.00
====== ====== ====== ====== ======
TOTAL RETURN........................................... 5.77% 7.23% 5.78% 7.47% 2.30%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)................... $21.7 $18.7 $19.8 $10.5 $.003
Ratio of expenses to average net assets:
Before expense reimbursement......................... 0.96% 0.88% 1.26% 2.06% 57.02%+
After expense reimbursement.......................... 0.48% 0.48% 0.48% 0.48% 0.48%+
Ratio of net investment income (loss) to average net
assets:
Before expense reimbursement......................... 5.34% 6.15% 5.74% 4.16% (56.99)%+
After expense reimbursement.......................... 5.82% 6.55% 6.52% 5.74% 2.32%+
Portfolio turnover rate................................ 154% 60% 81% 135% 0%
</TABLE>
* Commencement of operations.
+ Annualized.
12
<PAGE> 15
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
GENERAL
The following descriptions are designed to help you choose the Fund that best
fits your investment objective. Each Fund's net asset value per share will
fluctuate. Investors should consider a Fund as a supplement to an overall
investment program and should invest only if they are willing to undertake the
risks involved. Each Fund's investment objective is a fundamental policy, which
cannot be changed without the approval of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). There can be no assurance that any objective will be met. For
a discussion of certain risks associated with investment in the Funds, including
their use of derivatives, see "Investment Risks" on page 27.
HOTCHKIS AND WILEY, a division of The Merrill Lynch Capital Management Group of
Merrill Lynch Asset Management, L.P. (the "Advisor"), acts as investment advisor
to each Fund.
THE EQUITY INCOME FUND
The investment objective of the EQUITY INCOME FUND is to provide current income
and long-term growth of income, accompanied by growth of capital.
The EQUITY INCOME FUND will attempt to achieve its objective by investing in
equity securities. In selecting investments for the Fund, the Advisor focuses on
securities that it believes to have superior values. In arriving at this
determination, the Advisor will generally seek securities of companies that have
such characteristics as earnings yield at least 3% greater than the yield on
long-term bonds, dividend yield which exceeds the composite yield on the
securities comprising the Standard & Poor's Index of 500 Common Stocks ("S&P
500"), and overall financial strength.
Under normal market conditions, the EQUITY INCOME FUND will invest at least 80%
of its total assets in income-producing equity securities issued by companies
with a record of earnings and dividends. The remainder of its portfolio may be
invested in securities of companies which pay no dividends or interest but have
potential for growth unrecognized by the market or changes in business or
management that indicate possible growth.
The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities to be invested in by the Fund will be rated investment grade or, if
unrated, be of comparable quality in the opinion of the Advisor, provided,
however, that the Fund may invest up to 5% of its net assets in convertible
securities rated at least B by Moody's Investors Service ("Moody's") or Standard
& Poor's Ratings Group ("S&P") or, if unrated, of comparable quality in the
opinion of the Advisor. For a description of "investment grade" see "The
BALANCED INCOME FUND." See the Appendix for a further description of ratings.
Securities rated Baa are considered by Moody's to have speculative
characteristics. For Baa/BBB rated securities, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
Securities rated below BBB or Baa are judged to be predominantly speculative
with respect to their capacity to pay interest and repay principal in accordance
with the terms of their obligations and are commonly known as "junk bonds." See
"Investment Risks -- Risks of Investing in Fixed-Income Securities" on page 28.
Investors should carefully consider the relative risks associated with
investments in securities which carry lower ratings and in comparable non-rated
securities.
Subsequent to its purchase by the Fund, a security may be assigned a lower
rating or cease to be rated. Such an event would not require the sale of the
security, but the Advisor will consider such an event in determining
13
<PAGE> 16
whether the Fund should continue to hold the security in its portfolio.
For liquidity purposes and pending investment of cash receipts, the Fund may
invest in short-term debt securities of the U.S. Government, its agencies and
instrumentalities, bank certificates of deposit, bankers' acceptances, high
quality commercial paper, demand notes, certificates of deposit and repurchase
agreements.
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, the Fund may invest all or part of
its assets in investment grade debt obligations maturing in one year or less
from the date of the Fund's purchase (that is, short-term), such as U.S.
Treasury bills, bank certificates of deposit, bankers' acceptances, [high
quality] commercial paper and repurchase agreements.
The EQUITY INCOME FUND has the right to invest its assets on a "global" basis;
although it is not required to. See "Securities and Techniques Used by the
Funds -- Foreign Securities" on page 21.
THE MID-CAP FUND
The investment objective of the MID-CAP FUND is to provide current income and
long-term growth of income, accompanied by growth of capital. The MID-CAP FUND
will attempt to achieve its objective by investing, under normal market
conditions at least 65% of its total assets in equity securities of mid-size
U.S. companies that, in the opinion of the Advisor, are undervalued. A "mid-size
company" is one which has a market capitalization of $750 million to $5 billion
at the time of investment.
In selecting investments for the Fund, the Advisor focuses on securities that it
believes have superior value. In arriving at this determination, the Advisor
will generally seek securities of companies that have such characteristics as
earnings yield at least 3% greater than the yield on long-term bonds, dividend
yield which exceeds the composite yield on the securities comprising the Russell
Mid-Cap Index, and overall financial strength. In addition, the Advisor will
seek equity securities of companies that are undervalued as determined by a low
price/earnings ratio relative to their expected growth rate.
There are risks associated with the MID-CAP FUND'S investment in the securities
of smaller issuers. See "Investment Risks -- Risks of Investing in Small and
Mid-Size Companies" on page 27.
The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities will be securities of an issuer having an outstanding issue of debt
securities rated at least A by Moody's or S&P or, if unrated, be of comparable
quality in the opinion of the Advisor.
Under normal market conditions, the MID-CAP FUND will invest at least 50% of its
total assets in income-producing equity securities issued by companies with a
record of earnings and dividends. The remainder of its portfolio may be invested
in securities of companies which pay no dividends or interest but have potential
for growth unrecognized by the market or changes in business or management that
indicate possible growth.
For liquidity purposes and pending investment of cash receipts, the Fund may
invest in short-term debt securities of the U.S. Government, its agencies and
instrumentalities, bank certificates of deposit, bankers' acceptances, high
quality commercial paper, demand notes, certificates of deposit and repurchase
agreements.
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, the Fund may invest all or part of
its assets in short-term investment grade debt obligations.
The MID-CAP FUND can invest on a "global" basis; it may invest in foreign
securities if thereafter not more than 20% of its total assets would be invested
in the securities of foreign issuers, although there is no requirement that the
Fund invest in any foreign securities. See "Securities and Techniques Used by
the Funds -- Foreign Securities" on page 23.
14
<PAGE> 17
THE SMALL CAP FUND
The investment objective of the SMALL CAP FUND is capital appreciation. The
SMALL CAP FUND will attempt to achieve its objective by investing, under normal
circumstances, in the common stock of issuers which, in the opinion of the
Fund's Advisor, are undervalued as determined by a low price/earnings ratio
relative to their expected growth rate. Current income is a secondary
consideration.
It has been the Advisor's experience that investment opportunities are
frequently found in the securities of companies that are "undervalued" because
they are part of an industry that is out of favor with investors generally. Even
in such industries, however, individual companies may have high rates of growth
of earnings and be financially sound. At the same time, the price of their
common stock may be depressed because investors associate the companies with
their industries. The Advisor will attempt to identify such companies and invest
in their securities when, in the Advisor's judgment, opportunities for capital
appreciation exist.
Under normal circumstances, the SMALL CAP FUND invests at least 65% of its total
assets in the stock of small domestic companies. In general, the Advisor will
seek to fully invest its assets in the stock of small companies. A "small
company" is one which has market capitalization of $1 billion or less at the
time of investment.
In selecting investments for the Fund, the Advisor focuses on securities that it
believes to have superior value. In arriving at this determination, the Advisor
will generally seek securities of companies that have such characteristics as
earning yield at least 3% greater than the yield on long-term bonds, dividend
yield which exceeds the composite yield on the securities comprising the Russell
2000 Index ("Russell 2000"), and overall financial strength. In addition, the
Advisor will seek equity securities of companies that are undervalued as
determined by a price/earnings ratio relative to their expected growth rate. To
the extent that the SMALL CAP FUND does invest in small issuers, there is the
risk that such securities will be less marketable or may be subject to greater
fluctuations in price than securities of larger issuers. See "Investment
Risks -- Risks of Investing in Small and Mid-Size Companies" on page 27.
Common stock of companies described above includes rights or warrants for their
purchase and securities convertible into common stocks. See "The EQUITY INCOME
FUND" for a description of the ratings of the convertible securities to be
invested in by the SMALL CAP FUND.
For liquidity purposes and pending investment of cash receipts, the Fund may
invest in short-term debt securities of the U.S. Government, its agencies and
instrumentalities, bank certificates of deposit, bankers' acceptances, high
quality commercial paper, demand notes, certificates of deposit and repurchase
agreements.
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, the Fund may invest all or part of
its assets in short-term investment grade debt obligations.
The SMALL CAP FUND can invest on a "global" basis; as a fundamental policy it
may invest in foreign securities if thereafter not more than 20% of its total
assets would be invested in the securities of foreign issuers, although there is
no requirement that the Fund invest in any foreign securities. See "Securities
and Techniques Used by the Funds -- Foreign Securities" on page 23.
THE INTERNATIONAL FUND
The investment objective of the INTERNATIONAL FUND is to provide current income
and long-term growth of income, accompanied by growth of capital. The Fund will
attempt to achieve its objective by investing at least 65% of its total assets
in equity securities in at least three non-U.S. markets. Ordinarily, the Fund
will invest in equity securities issued by companies located in some or all of
the developed foreign equity markets. These markets generally include 14 markets
in Europe as well as Australia, New Zealand, Japan, Hong Kong, Singapore,
Malaysia, Canada and South Korea. There are risks associated with investment in
foreign securities, as described under "Investment Risks -- Risks of Investing
15
<PAGE> 18
in Emerging Market and Other Foreign Securities" on page 28.
In selecting investments for the Fund, the Advisor will, in general, use the
same criteria as those used in selecting investments for the EQUITY INCOME FUND;
that is, it will focus on securities that it believes have superior values. The
Advisor will generally seek equity securities of companies in each country that
have such characteristics as dividend yield greater than the local market
average; earnings yield at least three percentage points greater than the
country's 10-year government bond yield (or low price-to-earnings ratios
relative to the local market), and financial strength.
Under normal market conditions, the INTERNATIONAL FUND will invest at least 80%
of its total assets in income-producing equity securities issued by companies
with a record of earnings and dividends. The remainder of its portfolio may be
invested in securities of companies which pay no dividends or interest, but have
potential for growth unrecognized by the market or changes in business or
management that indicate possible growth. The Fund will not invest in foreign
fixed-income securities with a maturity in excess of one year.
The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities will be securities of an issuer having an outstanding issue of debt
securities rated at least A by Moody's or S&P or, if unrated, be of comparable
quality in the opinion of the Advisor.
For liquidity purposes and pending investment of cash receipts, the Fund may
invest in short-term debt securities of the U.S. Government, its agencies and
instrumentalities, bank certificates of deposit, bankers' acceptances, high
quality commercial paper, demand notes, certificates of deposit and repurchase
agreements.
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, the Fund may invest all or part of
its assets in short-term investment grade debt obligations.
THE INTERNATIONAL FUND may purchase foreign currency options or enter into
forward foreign currency exchange contracts for the purpose of hedging against
the effect that currency fluctuations will have on the value of Fund assets or
liabilities. See "Securities and Techniques Used by the Funds -- Other
Derivative Instruments" on page 26.
THE GLOBAL EQUITY FUND
The investment objective of the GLOBAL EQUITY FUND is to provide current income
and long-term growth of income, accompanied by growth of capital. The GLOBAL
EQUITY FUND will attempt to achieve its objective by investing in equity
securities in at least three different countries, which may include the U.S.,
but no country, other than the U.S., may represent more than 30% of it's assets.
Ordinarily, the Fund will invest in equity securities issued by companies
located in the U.S. and developed foreign equity markets. These markets
generally include 14 markets in Europe as well as Australia, New Zealand, Japan,
Hong Kong, Singapore, Malaysia, Canada and South Korea. There are risks
associated with investment in foreign securities, as described under "Investment
Risks -- Risks of Investing in Emerging Market and Other Foreign Securities" on
page 28.
In selecting investments for the Fund, the Advisor will generally use the same
criteria as those used in selecting investments for the INTERNATIONAL FUND; that
is, it will focus on securities that it believes have superior values. The
Advisor will generally seek equity securities of companies in each country that
have such characteristics as dividend yield greater than the local market
average; earnings yield at least three percentage points greater than the
country's 10-year government bond yield (or low price-to-earnings ratios
relative to the local market), and financial strength.
Under normal market conditions, the GLOBAL EQUITY FUND will invest at least 80%
of its total assets in income-producing equity securities issued by companies
16
<PAGE> 19
with a record of earnings and dividends. The remainder of its portfolio may be
invested in securities of companies which pay no dividends or interest, but have
potential for growth unrecognized by the market or changes in business or
management that indicate possible growth. The Fund will not invest in foreign
fixed-income securities with a maturity in excess of one year.
The equity securities that the Fund may purchase consist of common stocks or
securities having characteristics of common stocks, such as convertible
preferred stocks, convertible debt securities or warrants. Any such convertible
securities will be securities of an issuer having an outstanding issue of debt
securities rated at least A by Moody's or S&P or, if unrated, be of comparable
quality in the opinion of the Advisor.
The Advisor intends that the Fund normally be fully invested, if sufficient
value can be found in global markets. Investments will be made based primarily
on the evaluation of each company, rather than characteristics of the country or
market in which the company is located.
For liquidity purposes and pending investment of cash receipts, the Fund may
invest short-term debt securities of the U.S. Government, its agencies and
instrumentalities, bank certificates of deposit, bankers' acceptances, high
quality commercial paper, demand notes, certificates of deposit and repurchase
agreements.
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, the Fund may invest all or part of
its assets in short-term investment grade debt obligations.
The GLOBAL EQUITY FUND may purchase foreign currency options or enter into
forward foreign currency exchange contracts for the purpose of hedging against
the effect that currency fluctuations will have on the value of Fund assets or
liabilities. See "Securities and Techniques Used by the Funds -- Other
Derivative Instruments" on page 26.
THE BALANCED INCOME FUND
The investment objective of the BALANCED INCOME FUND is to preserve capital
while producing a high total return. The BALANCED INCOME FUND will attempt to
achieve this high total return through a combination of income and capital
growth. The BALANCED INCOME FUND will attempt to achieve preservation of capital
through the investment policies discussed below and through careful selection
and supervision of the securities purchased. While not an objective of the Fund,
the Advisor's current goal is a return at least 4% greater than the rate of
inflation as measured by the Consumer Price Index.
While it is not a fundamental policy, it is expected that the BALANCED INCOME
FUND'S assets will be allocated among equity securities, fixed-income
securities, and money market obligations. The amount of the BALANCED INCOME
FUND'S assets invested in each category of securities is derived from a
proprietary model employed by the Advisor as to what relative portions of the
Fund's assets in each category will contribute to the achievement of the Fund's
objective; however, it is expected that investments in equity securities will
comprise at least 20% of the Fund's total assets and fixed-income senior
securities will comprise at least 25% of the Fund's total assets, except due to
changes in the market value of securities held. In the event that, due to such
market value changes, the percentage of the Fund's assets in either such
category comprises less than the requisite percentage of the Fund's total
assets, the Fund may, but is not required to, purchase additional securities of
that category. From inception to the date of this Prospectus, the Fund's
allocation to equity securities has ranged from 27% to 59%, and to fixed-income
securities has ranged from 41% to 73%.
The BALANCED INCOME FUND attempts to achieve growth of capital through its
investment in equity securities. The equity securities that the BALANCED INCOME
FUND may purchase consist of common stocks or securities having characteristics
of common stocks (such as convertible preferred stocks, convertible debt
securities or warrants) of domestic or foreign issuers. In selecting
17
<PAGE> 20
equity securities, the Advisor will generally seek securities of companies that
have such characteristics as earnings yield at least 3% greater than the yield
on long-term bonds, dividend yield which exceeds the composite yield on the
securities comprising the S&P 500, and overall financial strength.
The BALANCED INCOME FUND attempts to earn current income and at the same time
reduce the fluctuation in the net asset value of the Fund's shares by investing
a portion of its assets in fixed-income securities. The fixed-income securities
that the BALANCED INCOME FUND may purchase must be investment grade and will
consist of: (1) debt securities maturing in more than one year from the date of
purchase that are issued by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities"); (2) debt securities (such as
bonds and debentures) of other domestic or foreign issuers, maturing in more
than one year from the date of purchase; (3) preferred stocks of domestic or
foreign issuers having an outstanding issue of investment grade debt securities;
(4) mortgage- and other asset-backed securities, including collateralized
mortgage obligations ("CMOs") and Real Estate Mortgage Investment Conduits
("REMICs"); (5) variable and floating rate debt securities (including inverse
floaters); (6) debt securities that are convertible into or exchangeable for
equity securities; (7) structured debentures, bonds and notes; and (8)
repurchase agreements, reverse repurchase agreements and dollar rolls. See
"Securities and Techniques Used by the Funds" on page 21.
"Investment grade" means the debt securities have been rated at least (1) Baa by
Moody's or BBB by S&P, Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps
Credit Rating Co. ("Duff & Phelps"); (2) A-2 by S&P, P-2 by Moody's, F-2 by
Fitch or D-2 by Duff & Phelps for short-term obligations; or (3) of comparable
quality as determined by the Advisor in the case of unrated securities. All
ratings are determined at the time of investment. See the Appendix for a
description of ratings.
Securities rated Baa are considered by Moody's to have speculative
characteristics. For Baa/BBB rated securities, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
See "Investment Risks" on page 27.
After its purchase by the Fund, a security may be assigned a lower rating or
cease to be rated. This would not require the sale of the issue, but the Advisor
will consider such an event in determining whether the Fund should continue to
hold the security. While not required, it is expected that the average credit
quality of the Fund's debt securities will be AA or higher.
The BALANCED INCOME FUND also attempts to earn current income and reduce the
fluctuation in the net asset value of its shares by investing a portion of its
assets in money market obligations. The money market obligations that the
BALANCED INCOME FUND may purchase consist of short-term (i.e., maturing in one
year or less from the date of purchase), dollar-denominated debt obligations
which are (1) U.S. Government securities; (2) issued by domestic banks; or (3)
issued by domestic corporations, if such corporate debt obligations are of
investment grade as described above. Money market obligations also include
investment grade debt securities that are subject to repurchase agreements.
Because the BALANCED INCOME FUND intends to allocate its assets among equities,
fixed-income securities and money market obligations, it may not be able to
achieve, at times, a total return as high as that of a portfolio with complete
freedom to invest its assets in any one type of security. Likewise, because at
least 25% of the BALANCED INCOME FUND'S portfolio will normally consist of debt
obligations, the Fund may not achieve the degree of capital appreciation that a
portfolio investing solely in equity securities might achieve. Although the
BALANCED INCOME FUND intends to invest in fixed-income securities to reduce the
price volatility of the Fund's shares, intermediate and long-term debt
securities do fluctuate in value more than money market obligations.
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For liquidity purposes and pending investment of cash receipts, the Fund may
invest in short-term debt securities of the U.S. Government, its agencies and
instrumentalities, bank certificates of deposit, bankers' acceptance, high
quality commercial paper, demand notes, certificates of deposit and repurchase
agreements.
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is inappropriate, the Fund may invest all or part
of its assets in short-term investment grade debt obligations.
The BALANCED INCOME FUND can invest on a "global" basis; as a fundamental policy
it may invest in foreign securities if thereafter not more than 20% of its total
assets would be invested in the securities of foreign issuers, although there is
no requirement that the Fund invest in any foreign securities. See "Securities
and Techniques Used by the Funds -- Foreign Securities" on page 23.
THE FIXED-INCOME FUNDS:
THE TOTAL RETURN BOND FUND
The investment objective of the TOTAL RETURN BOND FUND is to maximize long-term
total return. The Fund invests in a diversified portfolio of fixed-income
securities of varying maturities with a portfolio duration of from two to eight
years. Portfolio holdings will be concentrated in areas of the bond market
(based on quality, sector, coupon or maturity) which the Advisor believes to be
relatively undervalued. The Advisor views bonds to be any interest-bearing
security that obligates the issuer to pay the bondholder specified sums of money
on specified dates and generally requires the issuer to repay the principal
amount of the loan at maturity.
THE LOW DURATION FUND
The investment objective of the LOW DURATION FUND is 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 from one to three years. The total rate of return for this Fund is
expected to exhibit less volatility than that of a longer duration fixed-income
fund such as the TOTAL RETURN BOND FUND.
THE SHORT-TERM INVESTMENT FUND
The investment objective of the SHORT-TERM INVESTMENT FUND is to maximize total
return, consistent with preservation of capital. The Fund invests in a
diversified portfolio of fixed-income securities of varying maturities,
including long-term securities. The Fund generally seeks to maintain a portfolio
duration which will generally not exceed one year. The Fund also seeks to
maintain a dollar-weighted average effective maturity which will generally not
exceed three year. The Fund is not a money market fund and its share price will
fluctuate. The Fund is designed for investors who are willing to accept some
fluctuation in principal in order to pursue a higher level of income than is
generally available from money market funds. Because its share price may decline
from time to time, the Fund is not an appropriate investment for those whose
primary objective is absolute principal stability.
INVESTMENT POLICIES OF THE
FIXED-INCOME FUNDS
The TOTAL RETURN BOND FUND, the LOW DURATION FUND and the SHORT-TERM INVESTMENT
FUND (the "FIXED INCOME FUNDS") will attempt to achieve their objectives by
investing in the following types of securities which may be issued by domestic
or foreign entities: (1) U.S. Government securities; (2) corporate debt
securities, including bonds, notes and debentures; (3) corporate commercial
paper; (4) mortgage- and other asset-backed securities, including CMOs and
REMICs; (5) variable and floating rate debt securities (including inverse
floaters); (6) structured debentures, bonds and notes; (7) bank certificates of
deposit; (8) fixed time deposits and bankers' acceptances; (9) repurchase
agreements, reverse repurchase agreements and dollar rolls; (10) preferred stock
of issuers whose assets consist of mortgage-backed securities of U.S. Government
agencies; (11) debt securities that are convertible into or exchangeable for
equity securities ("convertible securities"); (12) obligations of foreign
governments or their
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subdivisions, agencies and instrumentalities; and (13) obligations of
international agencies (such as the Agency for International Development) or
supranational entities. There is no limitation on the percentage of a Fund's
assets that may be committed to any of these types of securities, except to the
extent that a security may be deemed to be illiquid. See "Securities and
Techniques Used by the Funds" on page 21.
Under normal circumstances, the TOTAL RETURN BOND FUND will invest at least 70%
of its net assets in debt instruments rated at least investment grade, i.e., (1)
Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps; (2) A-2 by S&P, Prime-2 by
Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term debt obligations;
or (3) of comparable quality as determined by the Advisor in the case of unrated
securities. Up to 15% of the TOTAL RETURN BOND FUND'S net assets may be invested
in securities rated below investment grade but rated B or higher by one of the
nationally recognized rating agencies or, if unrated, of comparable quality in
the opinion of the Advisor.
Under normal circumstances, the LOW DURATION FUND and the SHORT-TERM INVESTMENT
FUND will invest at least 70% of their net assets in securities rated at least:
(1) A by Moody's, S&P, Fitch or Duff & Phelps; (2) A-2 by S&P, Prime-2 by
Moody's, F-2 by Fitch or D-2 by Duff & Phelps for short-term debt obligations;
or (3) of comparable quality as determined by the Advisor in the case of unrated
securities. Up to 10% of the LOW DURATION FUND'S and the SHORT-TERM INVESTMENT
FUND'S net assets may be invested in securities rated below investment grade but
rated B or higher by one of the nationally recognized rating agencies or, if
unrated, of comparable quality in the opinion of the Advisor. The remainder of
the LOW DURATION FUND'S and the SHORT-TERM INVESTMENT FUND'S investments will be
rated Baa or BBB by at least one of these rating agencies or, if unrated, of
comparable quality in the opinion of the Advisor.
Securities rated Baa are considered by Moody's to have speculative
characteristics. For Baa/BBB rated securities, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade securities.
Securities rated below BBB or Baa are judged to be predominantly speculative
with respect to their capacity to pay interest and repay principal in accordance
with the terms of their obligations and are commonly known as "junk bonds." See
"Investment Risks -- Risks of Investing in Fixed-Income Securities" on page 28.
After its purchase by one of the Funds, a security may be assigned a lower
rating or cease to be rated. This would not require the sale of the issue, but
the Advisor will consider such an event in determining whether the Fund should
continue to hold the security in the portfolio.
Each of the FIXED-INCOME FUNDS may invest up to 15% of its net assets in
emerging market foreign securities, which are generally considered to be of a
credit quality below investment grade.
Each of the FIXED-INCOME FUNDS may invest up to 25% of its total assets in
securities of foreign issuers that are denominated in U.S. dollars. Investment
by these Funds in securities of foreign issuers that are not denominated in U.S.
dollars will be limited to a maximum of 15% of each FIXED-INCOME FUND'S total
assets. See "Securities and Techniques Used by the Funds -- Foreign Securities"
on page 23.
The FIXED-INCOME FUNDS each invest in a diversified portfolio of fixed-income
securities of varying maturities. The effective maturity is the weighted average
period over which a security's principal is expected to be paid. Stated maturity
is the date when the issuer is scheduled to make the final payment of principal.
Effective maturity differs from stated maturity in that it estimates the
anticipated effect of expected principal prepayments and call provisions.
The effective maturity of a debt security will be the stated maturity, except
(1) in the case of a security with a call provision, the maturity date will be
considered the call date if there is a high probability, in the opinion of the
Advisor, that the security will be called, (2) in the case of securities with
unconditional put provisions entitling the security holder to receive the
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security's approximate amortized cost, the maturity will be considered to be the
next put date, (3) in the case of mortgage-backed or other amortizing
securities, the maturity will be considered to be the average life remaining
(the length of time it is expected to take to retire half of the remaining
principal through amortizing payments) based on prepayment assumptions that the
Advisor believes appropriate, and (4) in the case of a variable or floating rate
investment grade security which, in the Advisor's opinion, will have a market
value approximating amortized cost on the next interest rate reset date, the
maturity will be considered to be the next reset date. However, no FIXED-INCOME
FUND will invest more than 5% of its net assets at the time of purchase in
floating or variable rate instruments of any one issuer, nor invest more than
20% of its net assets at the time of purchase in floating or variable rate
instruments of issuers within the same industry.
The FIXED-INCOME FUNDS each invest in a diversified portfolio of fixed-income
securities of varying maturities with a different portfolio "duration." Duration
is a commonly used measure of the potential volatility of the price of a debt
security, or the aggregate market value of a portfolio of debt securities, prior
to maturity. Duration measures the magnitude of the change in price of a debt
security relative to a given change in the market interest rate. Duration
incorporates a bond's yield, coupon interest payments, final maturity, call and
put features and prepayment exposure into one measure.
For any fixed-income security with interest payments occurring prior to the
payment of principal, duration is ordinarily less than maturity. In general, all
other things being equal, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security. A Fund's computation of duration is based
on estimated rather than known factors. Thus, there can be no assurance that a
particular portfolio duration will at all times be achieved by a Fund.
Duration is used in the management of the Funds as a tool to measure interest
rate risk. For example, a Fund with a 2-year duration would be expected to
change in value 2% for every 1% move in interest rates. Assuming an expected
average duration of 2 years for the LOW DURATION FUND, a 1% decline in interest
rates would cause the Fund to gain 2% in price; likewise, a 1% rise in interest
rates would produce a decline of 2% in the Fund's price. Assuming an expected
average duration of .75 years for the SHORT-TERM INVESTMENT FUND, a 1% decline
in interest rates would cause the Fund to gain .75% in price; likewise, a 1%
rise in interest rates would produce a decline of .75% in the Fund's price.
Assuming an expected average duration of 4.5 years for the TOTAL RETURN BOND
FUND, a 1% decline in interest rates would cause the Fund to gain 4.5% in price;
likewise, a 1% rise in interest rates would produce a decline of 4.5% in the
Fund's price. Other factors such as changes in credit quality, prepayments, the
shape of the yield curve and liquidity affect the net asset value of the Funds
and may be correlated with changes in interest rates. These factors can
exacerbate swings in the Fund's share prices during periods of volatile interest
rate changes.
For a more detailed discussion of duration, see "Investment Objectives and
Policies -- Duration" in the Statement of Additional Information.
SECURITIES AND TECHNIQUES USED BY THE FUNDS
- --------------------------------------------------------------------------------
The following provides a summary of the securities and techniques used by the
Funds. The Statement of Additional Information contains more detailed
information about these investments and the risks associated with them.
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U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government securities. U.S. Government securities
include direct obligations issued by the United States Treasury, such as
Treasury bills, certificates of indebtedness, notes, bonds and component parts
of notes or bonds (including the principal of such obligations or the interest
payments scheduled to be paid on such obligations). U.S. Government agencies and
instrumentalities that issue or guarantee securities include, but are not
limited to, the Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), Federal Home Loan Banks, Federal
Financing Bank, and Student Loan Marketing Association.
All Treasury securities are backed by the full faith and credit of the United
States. Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some, such
as the Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as securities issued
by FNMA, are supported only by the credit of the instrumentality and not by the
Treasury. If the securities are not backed by the full faith and credit of the
United States, the owner of the securities must look principally to the agency
issuing the obligation for repayment and may not be able to assert a claim
against the United States in the event that the agency or instrumentality does
not meet its commitment.
Among the U.S. Government securities that may be purchased by the Funds are
certain "mortgage-backed securities" of GNMA, the Federal Home Loan Mortgage
Corporation ("FHLMC") and FNMA. See the discussion of Mortgage-Related
Securities on page 25.
CORPORATE AND OTHER OBLIGATIONS
Each Fund may invest in corporate debt securities, variable and floating rate
debt securities and corporate commercial paper in the rating categories
described above. Floating rate securities normally have a rate of interest which
is set as a specific percentage of a designated base rate, such as the rate on
Treasury bonds or bills or the prime rate at a major commercial bank. The
interest rate on floating rate securities changes periodically when there is a
change in the designated base rate. Variable rate securities provide for a
specified periodic adjustment in the interest rate based on prevailing market
rates.
The BALANCED INCOME FUND and FIXED-INCOME FUNDS may invest in structured
debentures and structured notes, which are hybrid instruments with
characteristics of both bonds and swap agreements. Like a bond, these securities
make regular coupon payments and generally have fixed principal amounts.
However, the coupon payments are typically tied to a swap agreement which can be
affected by changes in a variety of factors such as exchange rates, the shape of
the yield curve and foreign interest rates. Because of these factors, structured
debentures and structured notes can display price behavior that is more volatile
than and often not correlated to other fixed-income securities.
The BALANCED INCOME FUND and FIXED-INCOME FUNDS may also invest in inverse
floaters and tiered index bonds. An inverse floater is a type of derivative that
bears a floating or variable interest rate that moves in the opposite direction
to the interest rate on another security or index level. Changes in the interest
rate of the other security or index inversely affect the residual interest rate
paid on the inverse floater, with the result that the inverse floater's price
will be considerably more volatile than that of a fixed-rate bond. Tiered index
bonds are also a type of derivative instrument. The interest rate on a tiered
index bond is tied to a specified index or market rate. So long as this index or
market rate is below a predetermined "strike" rate, the interest rate on the
tiered index bond remains fixed. If, however, the specified index or market rate
rises above the "strike" rate, the interest rate on the tiered index bond will
decrease. In general, the interest rates on tiered index bonds and inverse
floaters move in the opposite direction of prevailing interest rates. The market
for inverse floaters and tiered index bonds is relatively new. These corporate
debt obligations may have characteristics similar to those of mortgage-related
securities, but corporate debt obligations, unlike mortgage-related securities,
are not subject to prepayment
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risk other than through contractual call provisions which generally impose a
penalty for prepayment.
ASSET-BACKED SECURITIES
The BALANCED INCOME FUND and FIXED-INCOME FUNDS may invest in securities whose
principal and interest payouts are backed by, or supported by, any of various
types of assets. These assets most typically include receivables related to the
purchase of automobiles, credit card loans, and home equity loans. These
securities generally take the form of a structured type of security, including
pass-through, pay-through, and stripped interest payout structures.
FOREIGN SECURITIES
Each Fund may invest in foreign securities. Foreign economies may differ from
the U.S. economy; individual foreign companies may differ from domestic
companies in the same industry; and foreign currencies may be stronger or weaker
than the U.S. dollar. The Advisor believes that the ability to invest abroad
will enable the Funds to take advantage of these differences when they are
favorable.
Fixed-income securities that may be purchased by the INTERNATIONAL, GLOBAL
EQUITY, BALANCED INCOME and FIXED-INCOME FUNDS include debt obligations issued
or guaranteed by foreign governments, their subdivisions, agencies or
instrumentalities, or by supranational entities that have been constituted by
the governments of several countries to promote economic development, such as
The World Bank and The Asian Development Bank. Foreign investment in certain
foreign government debt is restricted or controlled to varying degrees.
The FIXED-INCOME FUNDS may invest in fixed-income securities of issuers located
in emerging foreign markets. Such markets generally include every country in the
world other than the U.S., Canada, Japan, Australia, Malaysia, New Zealand, Hong
Kong, Singapore, South Korea and most Western European countries. From time to
time, emerging markets have offered the opportunity for higher returns but
involve a higher level of risk. Accordingly, the Advisor believes that the
FIXED-INCOME FUNDS' limited ability to invest in emerging markets throughout the
world may enable the Funds to obtain a wider range of attractive investment
opportunities. Emerging market securities include securities issued or
guaranteed by governments, their agencies, instrumentalities or central banks
("sovereign debt"); securities of issuers organized and operated to restructure
the investment characteristics of sovereign debt; securities of banks and other
business entities; and securities denominated in or indexed to currencies of
emerging markets. These securities include "Brady Bonds," which afford emerging
market countries a means to restructure their outstanding commercial bank debt.
Foreign governmental issuers of debt or the governmental authorities that
control repayment of the debt may be unable or unwilling to repay principal or
pay interest when due and all or a portion of the interest payments and/or
principal repayment with respect to Brady Bonds may be uncollateralized.
Emerging market securities are generally considered to be of a credit quality
below investment grade, even though they often are not rated by any nationally
recognized rating agency. The Advisor seeks to reduce the risk associated with
emerging market securities by limiting the amount of such securities held by the
Funds, by the depth of its own credit analysis, and evaluation of political,
economic, currency and other factors that may be pertinent.
There are risks in investing in emerging market and other foreign securities.
See "Investment Risks -- Risks of Investing in Emerging Market and Other Foreign
Securities" on page 28.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements involving U.S. Government
securities with commercial banks or broker-dealers, whereby the seller of a
security agrees to repurchase the security on an agreed-upon date in the future.
While each Fund intends to be fully "collateralized" as to such agreements, and
the collateral will be marked to market daily, if the person obligated to
repurchase from the Fund defaults, there may be possible delays and expenses in
liquidating the securities
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subject to the repurchase agreement, a decline in their value and loss of
interest.
REVERSE REPURCHASE AGREEMENTS
The BALANCED INCOME FUND and FIXED-INCOME FUNDS may enter into reverse
repurchase agreements, whereby a Fund sells securities concurrently with
entering into an agreement to repurchase those securities at a later date at a
fixed price. During the reverse repurchase agreement period, the Fund continues
to receive principal and interest payments on those securities. Reverse
repurchase agreements are speculative techniques involving leverage and are
considered borrowings by the Fund for purposes of the limit applicable to
borrowings.
DOLLAR ROLLS
The BALANCED INCOME FUND and the FIXED-INCOME FUNDS may use dollar rolls as part
of their investment strategy. In a dollar roll, a Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar securities (same type and coupon) on a specified future
date from the same party. During the roll period, the Fund forgoes principal and
interest paid on the securities. The Fund is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar roll
for which there is an offsetting cash position or cash equivalent security
position that matures on or before the forward settlement date of the dollar
roll transaction.
The BALANCED INCOME FUND and the FIXED-INCOME FUNDS will establish a segregated
account with the Custodian in which they will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to their obligations in respect of dollar
rolls. Dollar rolls involve the risk that the market value of the securities
retained by the Fund may decline below the price of the securities the Fund has
sold but is obligated to repurchase under the agreement. If the buyer of the
securities under a dollar roll files for bankruptcy or becomes insolvent, the
Fund's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities. Dollar rolls are speculative
techniques involving leverage and are considered borrowings by the Funds,
subject to their limitations on borrowings.
BORROWING
As a fundamental policy, the EQUITY INCOME, MID-CAP, BALANCED INCOME, SMALL CAP,
INTERNATIONAL and GLOBAL EQUITY FUNDS may borrow money, but only from banks for
temporary or emergency purposes in amounts not exceeding 10% of each Fund's
total assets. The FIXED-INCOME FUNDS may borrow for temporary, emergency or
investment purposes. This borrowing may be unsecured. The 1940 Act requires a
Fund to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. Borrowing subjects a Fund to interest costs which may or may not be
recovered by appreciation of the securities purchased, and can exaggerate the
effect on net asset value of any increase or decrease in the market value of a
Fund's portfolio. This is the speculative factor known as leverage.
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, the FIXED-INCOME FUNDS may lend their
portfolio securities, provided: (1) the loan is secured continuously by
collateral consisting of short-term, high quality debt securities, including
U.S. Government securities, negotiable certificates of deposit, bankers'
acceptances or letters of credit, maintained on a daily marked-to-market basis
in an amount at least equal to the current market value of the securities
loaned; (2) the Fund may at any time call the loan and obtain the return of the
securities loaned; (3) the Fund will receive any interest or dividends paid on
the loaned securities; and (4) the aggregate market value of securities loaned
will not at any time exceed one-third of the total assets of the Fund.
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WHEN-ISSUED SECURITIES
The BALANCED INCOME FUND, INTERNATIONAL FUND, GLOBAL EQUITY FUND and
FIXED-INCOME FUNDS may purchase securities on a when-issued or delayed-delivery
basis, generally in connection with an underwriting or other offering.
When-issued and delayed-delivery transactions occur when securities are bought
with payment for and delivery of the securities scheduled to take place at a
future time, beyond normal settlement dates, generally from 15 to 45 days after
the transaction. The price that the Fund is obligated to pay on the settlement
date may be different from the market value on that date. While securities may
be sold prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them, unless a sale would be
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security each day in determining the Fund's net asset
value. The Fund will also establish a segregated account with its custodian in
which it will hold cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets, marked-to-market daily, equal in value to its
obligations for when-issued securities.
SHORT SALES AGAINST-THE-BOX
Each Fund may make short sales of securities (i.e., sales of securities the Fund
does not own) or maintain a short position only if (1) at all times when the
short position is open, the Fund owns an equal amount of such securities or
securities convertible into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in amount to, the
securities sold short (a short sale "against-the-box"); and (2) not more than
25% of the Fund's net assets (taken at current value) is held as collateral for
such sales at any one time. Short sales against-the-box will be made primarily
to defer realization of gain or loss for federal income tax purposes.
REAL ESTATE INVESTMENT TRUSTS
Each Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet certain
Internal Revenue Code requirements. To qualify, a REIT must distribute at least
95% of its taxable income to its shareholders and receive at least 75% of that
income from rents, mortgages and sales of property. REITs offer investors
greater liquidity and diversification than direct ownership of a handful of
properties, as well as greater income potential than an investment in common
stocks. Like any investment in real estate, though, a REIT's performance depends
on several factors, such as its ability to find tenants for its properties, to
renew leases and to finance property purchases and renovations.
MORTGAGE-RELATED SECURITIES
The BALANCED INCOME FUND and the FIXED-INCOME FUNDS may invest in
mortgage-related securities, including mortgage pass-through securities and
collateralized mortgage obligations. Mortgage pass-through securities are
securities representing interests in pools of mortgages in which payments of
both interest and principal on the securities are generally made monthly, in
effect "passing through" monthly payments made by the individual borrowers on
the residential mortgage loans which underlie the securities (net of fees paid
to the issuer or guarantor of the securities). For a discussion of certain risks
associated with investment in mortgage-related securities, including their
volatility, see "Investment Risks -- Risks of Investing in Fixed-Income
Securities" on page 28.
Payment of principal and interest on some mortgage-related securities (but not
the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
GNMA) or by agencies or instrumentalities of the U.S. Government (in the case of
securities guaranteed by FNMA or the FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit, which
may be
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issued by governmental entities, private insurers or the mortgage poolers.
Collateralized mortgage obligations ("CMOs"), including CMOs that have elected
to be treated as Real Estate Mortgage Investment Conduits ("REMICs"), are hybrid
instruments with characteristics of both bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage loans but
are more typically collateralized by portfolios of securities guaranteed by
GNMA, FHLMC or FNMA or of mortgage pass-through securities created by
non-governmental issuers. CMOs are structured into multiple classes, with each
class bearing a different stated maturity. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes receive principal
only after the first class has been retired.
Other mortgage-related securities include those that directly or indirectly
represent a participation in or are secured by and payable from mortgage loans
on real property, such as CMO residuals, stripped mortgage-backed securities,
variable rate securities (including inverse floaters), or tiered index bonds and
may be structured in classes with rights to receive varying proportions of
principal and interest. Stripped mortgage-backed securities are derivative,
multi-class mortgage securities. The BALANCED INCOME FUND and the FIXED-INCOME
FUNDS may invest in stripped mortgage-backed securities issued by the U.S.
Government, its agencies and instrumentalities. Stripped mortgage-backed
securities are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. In certain cases, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yields to maturity on IOs and
POs are sensitive to the rate of principal repayments (including prepayments) on
the related underlying mortgage assets, and principal payments may have a
material effect on yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a Fund may not
fully recoup its initial investment in IOs. Conversely, if the underlying
mortgage assets experience less than expected prepayments of principal, the
yield on POs could be materially adversely affected. Such securities will be
considered liquid only if so determined in accordance with guidelines
established by the Trustees. The BALANCED INCOME FUND and the FIXED-INCOME FUNDS
also may invest in stripped mortgage-backed securities that are privately
issued. These securities will be considered illiquid for purposes of each Fund's
limit on illiquid securities.
CMOs and other mortgage-related securities that are issued or guaranteed by the
U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities for purposes of applying a Fund's
diversification tests. Generally, the entity that has the ultimate
responsibility for the payment of interest and principal on a security is deemed
to be the issuer of an obligation.
OTHER DERIVATIVE INSTRUMENTS
In addition to the asset-backed securities and mortgage-related securities
(including tiered index bonds and inverse floaters) which may be purchased only
by the BALANCED INCOME FUND and the FIXED-INCOME FUNDS, all Funds may utilize
certain other financial instruments whose performance is derived from the
performance of an underlying asset ("derivatives"). The Funds may purchase and
write call and put options on securities, securities indexes and on foreign
currencies, and enter into futures contracts and use options on futures
contracts. The Funds also may enter into swap agreements with other
institutional investors with respect to foreign currencies, interest rates, and
securities indexes. The Funds may use these techniques to hedge against changes
in interest rates, foreign currency exchange rates or securities prices, for
liquidity or as part of their overall investment strategies. Each Fund will
maintain segregated accounts consisting of cash, U.S. Government securities,
equity securities or other liquid, unencumbered assets, marked-to-market daily
(or, as permitted by applicable regulation, enter into certain offsetting
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<PAGE> 29
positions), to cover its obligations under options, futures contracts and swap
agreements to avoid leveraging of the Fund. See "Investment Risks -- Risks of
Using Certain Derivatives" on page 29.
The Funds may buy or sell interest rate futures contracts, options on interest
rate futures contracts and options on debt securities for the purpose of hedging
against changes in the value of securities which a Fund owns or anticipates
purchasing due to anticipated changes in interest rates. The Funds also may
engage in currency exchange transactions by means of buying or selling foreign
currency on a spot basis, entering into forward foreign currency exchange
contracts, and buying and selling foreign currency options, futures and options
on futures. Foreign currency exchange transactions may be entered into for the
purpose of hedging against foreign currency exchange risk arising from the
Funds' investment or anticipated investment in securities denominated in foreign
currencies. A Fund will not enter into futures contracts or options thereon for
non-hedging purposes if, immediately thereafter, the aggregate initial margin
deposits on the Fund's futures positions and premiums paid for options thereon
would exceed 5% of the liquidation value of the Fund's total assets. There is no
other percentage limitation on a Fund's use of options, futures and options
thereon, except for the limitation on foreign currency option contracts
described below.
Also, the Funds may enter into interest rate, index and currency exchange rate
swap agreements for the purpose of attempting to obtain a particular desired
return at a lower cost to a Fund than if the Fund had invested directly in an
instrument that yielded that desired return. In a standard swap agreement, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on a particular predetermined investment or investments. Swap
agreements are subject to the Funds' overall limit that no more than 15% of net
assets may be invested in illiquid securities, and a Fund will not enter into a
swap agreement with any single party if the net amount owed or to be received
under existing contracts with that party would exceed 5% of the Fund's assets.
The Funds may purchase foreign currency options or enter into forward foreign
currency exchange contracts for the purpose of hedging against the effect that
currency fluctuations will have on the value of Fund liabilities, such as known
or expected redemptions or the payment of any declared dividends. During the
coming year, no Fund will enter into foreign currency option contracts if the
premiums on such options exceed 5% of the Fund's total assets. See "Investment
Objectives and Policies -- Derivative Instruments" in the Statement of
Additional Information.
INVESTMENT RISKS
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The investment practices described above involve certain risks. The net asset
value of any of the Funds may increase or decrease for many reasons. These
include changes in the market prices of portfolio securities. This means an
investor's shares may be worth more or less at redemption than at the time of
purchase. The following provides a summary of the more significant risks
associated with investing in the Funds. The Statement of Additional Information
contains more detailed information about these investments and the risks that
are associated with them.
RISKS OF INVESTING IN SMALL AND MID-SIZE COMPANIES
The MID-CAP FUND and SMALL CAP FUND invest a significant proportion of their
assets in the securities of small and medium-size companies. Investment in small
and medium-size companies involve greater risk than is customarily associated
with more established companies. These companies often have sales and earnings
growth rates which exceed those of large companies. Such growth rates may in
turn be reflected in more rapid share price appreciation. However, smaller
companies often have limited operating histories, product lines,
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<PAGE> 30
markets, or financial resources, and they may be dependent upon one-person
management. These companies may be subject to intense competition from larger
entities, and the securities of such companies may have limited marketability
and may be subject to more abrupt or erratic movements in price than securities
of larger companies or the market averages in general. Therefore, the net asset
values of the MID-CAP and SMALL CAP FUNDS' shares may fluctuate more widely than
the popular market averages.
RISKS OF INVESTING IN EMERGING MARKET AND OTHER FOREIGN SECURITIES
Investments in emerging market and other foreign securities involve certain risk
considerations not typically associated with investing in securities of U.S.
issuers, including: (1) currency devaluations and other currency exchange rate
fluctuations; (2) political uncertainty and instability; (3) more substantial
government involvement in the economy; (4) higher rates of inflation; (5) less
government supervision and regulation of the securities markets and participants
in those markets; (6) controls on foreign investment and limitations on
repatriation of invested capital and on a Fund's ability to exchange local
currencies for U.S. dollars; (7) greater price volatility; (8) substantially
less liquidity and significantly smaller capitalization of securities markets;
(9) absence of uniform accounting and auditing standards; (10) generally higher
commission expenses; (11) delay in settlement of securities transactions; and
(12) greater difficulty in enforcing shareholder rights and remedies.
RISKS OF INVESTING IN
FIXED-INCOME SECURITIES
The Funds which invest in fixed-income securities are subject primarily to
interest rate and credit risk. Interest rate risk is the potential for a decline
in bond prices due to rising interest rates. In general, bond prices vary
inversely with interest rates. The change in bond price depends on several
factors, including the bond's maturity date. In general, bonds with longer
maturities are more sensitive to changes in interest rates than bonds with
shorter maturities. Credit risk is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a Fund.
Each of the FIXED-INCOME FUNDS may invest in longer-term fixed-income
securities. Under normal circumstances, the SHORT-TERM INVESTMENT FUND will
invest in long-term fixed-income securities only if the securities amortize,
have call provisions or otherwise have characteristics which cause the effective
maturity and duration of the securities to be significantly less than typical
long-term securities. If interest rates rise while the Fund holds these
securities, the effective maturity and duration of such securities may increase
substantially, which could require the Fund to sell the securities at losses in
order to maintain its targeted duration and dollar-weighted average effective
maturity.
Each of the FIXED-INCOME FUNDS may invest in securities denominated in
currencies other than the U.S. dollar. To the extent any of such Funds do so,
their net asset values may be adversely affected by unfavorable changes in the
exchange rates for such currencies relative to the dollar.
The BALANCED INCOME FUND and FIXED-INCOME FUNDS may invest in mortgage- and
asset-backed securities. The yield characteristics of mortgage-backed and asset-
backed securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if a Fund purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if a Fund purchases these securities at a
discount, faster than expected prepayments will increase yield to maturity,
while slower than expected prepayments will reduce yield to maturity. Although
the extent of prepayments on a pool of mortgage loans depends on various
economic and other factors, as a general rule, prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of
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<PAGE> 31
rising interest rates. Asset-backed securities, although less likely to
experience the same prepayment rates as mortgage-backed securities, may respond
to certain of the same factors influencing prepayments, while at other times
different factors will predominate. Mortgage- and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because of
the risk of prepayment.
The BALANCED INCOME FUND and FIXED-INCOME FUNDS may invest in stripped mortgage-
or asset-backed securities, which receive differing proportions of the interest
and principal payments from the underlying assets. The market value of such
securities generally is more sensitive to changes in prepayment and interest
rates than is the case with traditional mortgage- and asset-backed securities,
and in some cases the market value may be extremely volatile. With respect to
certain stripped securities, such as interest only ("IO") and principal only
("PO") classes, a rate of prepayment that is faster or slower than anticipated
may result in a Fund failing to recover all or a portion of its investment, even
though the securities are rated investment grade. Certain of the stripped
mortgage- and asset-backed securities held by the Funds are considered to be
illiquid under guidelines established by the Trustees.
The FIXED-INCOME FUNDS and, to a limited extent, the EQUITY INCOME FUND may
invest a portion of their assets in non-investment grade debt securities,
commonly referred to as "junk bonds." Low-rated and comparable unrated
securities, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as speculative with
respect to the issuer's capacity to pay interest and to repay principal. The
market values of certain of these securities tend to be more sensitive to
individual corporate development and changes in economic conditions than higher
quality bonds. In addition, low-rated and comparable unrated securities tend to
be less marketable than higher-quality debt securities because the market for
them is not as broad or active. The lack of a liquid secondary market may have
an adverse effect on market price and a Fund's ability to sell particular
securities.
RISKS OF USING CERTAIN DERIVATIVES
Participation in the options or futures markets involves investment risks and
transaction costs to which a Fund would not be subject absent the use of these
strategies. If the Advisor's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
a Fund may leave the Fund in a worse position than if such strategies were not
used. Risks inherent in the use of options, futures contracts and options on
futures contracts include: (1) dependence on the Advisor's ability to predict
correctly movements in the direction of interest rates and securities prices;
(2) imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the absence of a liquid secondary
market for any particular instrument at any time; (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences; and (6)
the possible inability of a Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need for
the Fund to sell the security at a disadvantageous time, due to the requirement
that the Fund maintain "cover" or segregate securities in connection with
hedging transactions. The loss from investing in futures transactions is
potentially unlimited. There also is no assurance that a liquid secondary market
will exist for futures contracts and options thereon in which a Fund may invest.
See "Investment Objectives and Policies -- Derivative Instruments" in the
Statement of Additional Information.
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PRINCIPAL INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
Each Fund is subject to certain investment restrictions which are fundamental
policies. Fundamental policies are those that cannot be changed without the
approval of a majority (as defined in the 1940 Act) of that Fund's outstanding
voting securities. Each Fund's investment objective is a fundamental policy.
Among its restrictions, a Fund may not (1) with respect to 75% of its total
assets, invest more than 5% of its total assets (determined at the time of
investment) in securities of any one issuer (other than U.S. Government
securities); (2) with respect to 75% of its total assets, purchase more than 10%
of the outstanding voting securities of any one issuer; or (3) invest more than
25% of its total assets (determined at the time of investment) in one or more
issuers having their principal business activities in a single industry.
Additional information about each Fund's investment restrictions is contained in
the Statement of Additional Information. It is the position of the Securities
and Exchange Commission that open-end investment companies such as the Funds
should not make certain investments if thereafter more than 15% of the value of
their net assets would be invested in these securities. As a matter of operating
policy (though not a fundamental policy), the Funds limit such investments to no
more than 15% of the value of their net assets. The investments in this 15%
limit include: (1) those which are restricted, i.e., those which cannot freely
be sold for legal or contractual reasons; (2) fixed time deposits subject to
withdrawal penalties (other than overnight deposits); and (3) repurchase
agreements having a maturity of more than seven days. The 15% limitation does
not include obligations which are payable at principal amount plus accrued
interest within seven days after purchase.
ORGANIZATION AND MANAGEMENT
- --------------------------------------------------------------------------------
ORGANIZATION AND VOTING RIGHTS
The Trust was organized on August 22, 1984 as a Massachusetts business trust. It
is a diversified, open-end, management investment company currently consisting
of ten separate series. The Trust's Board of Trustees decides on matters of
general policy and reviews the activities of the Advisor, and the Trust's
officers conduct and supervise the daily business operations of the Trust. Each
Fund is a series of shares, each having separate assets and liabilities, of the
Trust. The Board of Trustees may, at its own discretion, create additional
series of shares and classes within series.
Generally, the Funds will not hold an annual meeting of shareholders unless
required by the 1940 Act. Shareholders have one vote per share owned. Matters
submitted to shareholders must be approved by a majority of the outstanding
securities of each Fund, unless it is clear that the interests of each Fund in
the matter are identical or the matter does not affect a Fund. At the request of
the holders of at least 10% of the shares, the Trust will hold a meeting to vote
on the removal of a Trustee, which can occur by a vote of a majority of the
outstanding shares. Ten shareholders holding the lesser of $25,000 worth or one
percent of a Fund's shares may advise the Trustees in writing that they wish to
communicate with other shareholders for the purpose of requesting a meeting to
remove a Trustee. The Trustees will then, if requested by the applicants, mail
at the applicants' expense the applicants' communications to all other
shareholders.
THE INVESTMENT ADVISOR
HOTCHKIS AND WILEY is located at 800 West 6th Street, Los Angeles, California
90017, acts as investment advisor to the Funds and generally administers the
affairs of the Trust. The Advisor is a division of The Merrill Lynch Capital
Management Group of Merrill Lynch Asset Management, L.P., and a separate
business unit of Merrill Lynch & Co., a financial services holding company
incorporated in Delaware. Subject to the direction and control of the Board of
Trustees, the
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Advisor supervises and arranges the purchase and sale of securities held in the
portfolios of the Funds.
For the services of the Advisor to the Funds other than the Fixed-Income Funds,
the Advisor is paid a fee, computed daily and payable monthly, at an annual rate
of 0.75% of each Fund's average daily net assets. This fee is higher than that
paid by most mutual funds, but does not reflect the reimbursement of certain of
the Funds' expenses as described below.
The Advisor is paid a fee, computed daily and payable monthly, at an annual rate
of 0.55% of the TOTAL RETURN BOND FUND'S average daily net assets.
The Advisor is paid a fee, computed daily and payable monthly, at an annual rate
of 0.46% of the LOW DURATION FUND'S average daily net assets.
The Advisor is paid a fee, computed daily and payable monthly, at an annual rate
of 0.40% of the SHORT-TERM INVESTMENT FUND'S, average daily net assets under
$100,000,000, 0.35% of the Fund's average daily net assets from $100,000,000 up
to $250,000,000, 0.30% of the Fund's average daily net assets from $250,000,000
up to $500,000,000, and 0.25% of the Fund's average daily net assets over
$500,000,000.
In addition to the fee payable to the Advisor, each Fund is responsible for its
operating expenses including: (1) interest and taxes; (2) brokerage commissions;
(3) insurance premiums; (4) compensation and expenses of the Trust's Trustees
other than those affiliated with the Advisor; (5) legal and audit expenses; (6)
fees and expenses of the Fund's custodian and any subcustodian, shareholder
servicing or transfer agent and accounting services agent; (7) expenses incident
to the issuance of its shares, including issuance on the payment of, or
reinvestment of, dividends; (8) fees and expenses incident to the registration
under federal or state securities laws of the Trust or its shares; (9) expenses
of preparing, printing and mailing reports and notices and proxy material to
shareholders of the Trust; (10) all other expenses incident to holding meetings
of the Trust's shareholders; (11) dues or assessments of or contributions to the
Investment Company Institute or any successor; and (12) such non-recurring
expenses as may arise, including litigation affecting the Trust and the legal
obligations which the Trust may have to indemnify its officers and Trustees with
respect thereto.
Although not required to do so, the Advisor has agreed to reimburse each Fund to
the extent necessary so that the regular annual operating expenses of a Fund
(other than the FIXED-INCOME FUNDS) will not exceed 1% of the Fund's average
daily net assets. The Advisor has agreed to limit the regular annual operating
expenses of the TOTAL RETURN BOND FUND to 0.65%, the LOW DURATION FUND to 0.58%
and the SHORT-TERM INVESTMENT FUND to 0.48% of each Fund's average daily net
assets. The Advisor will give shareholders at least 30 days' notice of any
decision to change this reimbursement policy.
The Advisor also manages individual investment advisory accounts. The Advisor
credits the fees charged to individual advisory accounts by the amount of the
investment advisory fee and expenses charged to that portion of the client's
assets that are invested in any Fund.
The Advisor is allowed to allocate brokerage based on sales of shares of funds
managed by the Advisor but has not done so yet.
THE ADMINISTRATOR
Firstar Trust Company, 615 East Michigan Street, Milwaukee, Wisconsin 53202,
serves as administrator to the Trust pursuant to a Fund Administration Servicing
Agreement.
PORTFOLIO MANAGERS
The portfolio managers have responsibility for the day-to-day management of the
Funds' portfolios.
EQUITY INCOME FUND
The current portfolio managers of the Equity Income Fund are Gail Bardin and
Sheldon Lieberman. Ms. Bardin is a managing director of the Advisor. She began
co-managing the Fund in April 1994. Ms. Bardin has been a portfolio manager of
the Advisor since 1988. Mr. Lieberman joined the Advisor in 1994 and began
co-managing the Fund in August 1997. Prior to joining the Advisor, Mr. Lieberman
was the Chief Investment Officer for the Los Angeles County Employees Retirement
Association.
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MID - CAP FUND
The current portfolio managers of the MID-CAP FUND are Michael Baxter and Jim
Miles. They have served as portfolio managers of the Fund since its inception in
January 1997. Mr. Baxter is a managing director and has been a portfolio manager
of the Advisor since 1990. Mr. Miles is a portfolio manager and joined the
Advisor in May 1995. Prior to joining the Advisor, Mr. Miles was with BT
Securities Corporation (an affiliate of Bankers Trust New York Corporation) as
vice president in the BT Securities Finance Group from 1988 to 1995.
SMALL CAP FUND
The current portfolio managers of the SMALL CAP FUND are Jim Miles and David
Green. Mr. Miles began co-managing the Fund in May 1995 when he joined the
Advisor. Mr. Miles' background is described under "MID-CAP FUND" above. Mr.
Green joined the Advisor in 1997. Prior to joining the Advisor, Mr. Green was
associated with Goldman Sachs Asset Management, where he had worked as an
investment analyst from November 1995. Prior to that, he was an investment
manager and analyst with Prudential Investment Advisors.
INTERNATIONAL FUND
The current portfolio managers of the INTERNATIONAL FUND are Sarah Ketterer,
Harry Hartford and David Chambers, portfolio managers of the advisor. Ms.
Ketterer is a managing director of the Advisor and has served as portfolio
manager of the Fund since its inception in October 1990. Prior to joining the
Advisor, Ms. Ketterer was with Bankers Trust Company as an Associate from 1987
to 1990 and a Financial Analyst with Dean Witter Reynolds from 1983 to 1985. Mr.
Hartford has served as a portfolio manager of the Fund since May 1994. Prior to
joining the Advisor, Mr. Hartford was with the Investment Bank of Ireland as a
Senior Manager, International and Global Equities, from 1985 to 1994. Mr.
Chambers has served as a portfolio manager of the Fund since October 1996. Prior
to joining the Advisor, Mr. Chambers was with Baring Asset Management, Inc. as
Senior Vice President, Global Equities from 1992 to 1995 and Baring Brothers,
London, England as Assistant Director, Corporate Finance from 1990 to 1991.
GLOBAL EQUITY FUND
The current portfolio managers of the GLOBAL EQUITY FUND are Sarah Ketterer and
Patricia McKenna. They have served as portfolio managers of the Fund since its
inception in January 1997. Ms. Ketterer's background is described under
"INTERNATIONAL FUND" above. Prior to joining the Advisor in July 1995, Ms.
McKenna was with Trust Company of the West as an Equity Research Analyst from
1992 to 1995 and Fieldstone Private Capital Group where she was responsible for
structuring private placements and tax leases from 1990 to 1992.
BALANCED INCOME FUND
The current portfolio managers of the BALANCED INCOME FUND are Roger DeBard and
Michael Sanchez. Mr. DeBard has responsibility for the day-to-day management of
the equity portion of the Fund's portfolio. Mr. DeBard is a managing director of
the Advisor and has served as portfolio manager of the Fund since its inception
in August 1985. Mr. DeBard and Mr. Sanchez have responsibility for the
day-to-day management of the fixed-income portion of the Fund's portfolio. Mr.
Sanchez has served as a portfolio manager of the Fund since joining the Advisor
in August 1996. Prior to joining the Advisor, Mr. Sanchez was with Provident
Investment Counsel as a Senior Vice President and portfolio manager from 1991 to
1995 and with ARCO Investment Management Company as Director of Fixed Income
Investments from 1988 to 1991.
FIXED-INCOME FUNDS
The current portfolio managers of the FIXED-INCOME FUNDS are Roger DeBard,
Michael Sanchez and John Queen. Mr. DeBard and Mr. Sanchez have served as
portfolio managers for the Funds since August 1996 and their backgrounds are
described under "BALANCED INCOME FUND" above. Mr. Queen joined the Advisor in
1997. Prior to joining the Advisor, Mr. Queen was associated with the Capital
Group, as a member of an analyst team responsible for $8 billion in fixed-income
assets.
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HOW TO PURCHASE SHARES
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The minimum initial investment in each Fund is $10,000. There is no minimum
subsequent investment. The Trust reserves the right to waive its minimum
investment requirements.
INVESTING BY WIRE
Investors may invest in any Fund by wiring the amount to be invested to HOTCHKIS
AND WILEY FUNDS in care of Firstar Trust Company ("Transfer Agent"), at the
following address:
Firstar Bank
ABA #0750-00022
For credit to Firstar Trust Company
Account #112-952-137
For further credit to HOTCHKIS AND WILEY FUNDS
[Name of Fund]
Account # [Shareholder account number]
Prior to wiring any funds, the shareholder should call 800-236-4479 to notify
the Trust of the wire to insure proper credit when the wire is received. If the
wire represents an initial investment, the investor should mail an application
form to the Transfer Agent by regular mail to:
Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
or by express, registered or certified mail to:
Firstar Trust Company
615 East Michigan Avenue, 3rd Floor
Milwaukee, Wisconsin 53202
INVESTING BY MAIL
Investors may also purchase shares by sending a check or money order payable to
HOTCHKIS AND WILEY FUNDS, together with the application form to the address
above.
Checks should be drawn on a U.S. bank and must be payable in U.S. dollars.
Shares of a Fund will be purchased for the account of the investor at the net
asset value next determined after receipt by the Transfer Agent, or an
authorized sub-agent, of the investor's check or money order. The Trust will not
accept cash, drafts or third party checks. In the event a check is not honored
by the investor's bank, the investor will be liable for any loss sustained by
the Fund, as well as a service charge imposed by the Transfer Agent in the
amount of $20. Forms for additional contributions by check or change of address
are provided on account statements.
AUTOMATIC INVESTMENT PLAN (AIP)
The Trust offers an AIP whereby a shareholder may purchase shares on a regular
scheduled basis ($50 minimum per transaction up to four times per month.) Under
the AIP, the shareholder's designated bank account is debited a preauthorized
amount and applied to purchase shares. The financial institution must be a
member of the ACH network. There is no charge for this service. A $20 fee will
be charged by the transfer agent if there are insufficient funds in the account
at the time of the scheduled transaction. The program will automatically
terminate upon redemption of all shares in an account.
ADDITIONAL INFORMATION ABOUT INVESTMENT PURCHASES
The Trust may also accept orders from certain qualified institutions, with
payment made to the Fund at a later time. The Advisor is responsible for
insuring that such payment is made on a timely basis. A broker-dealer which
effects such a purchase for an investor may charge the investor a reasonable
service fee, no part of which will be paid to the Fund or the Advisor.
The Advisor may make payments out of its own resources to dealers and other
persons who distribute shares of the Funds.
The Trust does not consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposit in the mail or with such
services does not constitute receipt by the Transfer Agent.
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<PAGE> 36
The Trust reserves the right to suspend the offering of shares for a period of
time, and it reserves the right to reject any specific purchase order.
Shareholder inquiries should be directed to the Trust at 800-236-4479.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
REDEEMING BY MAIL
A shareholder wishing to redeem shares may do so at any time by delivering
written instructions by regular mail to the Transfer Agent at P.O. Box 701,
Milwaukee, Wisconsin 53201-0710. If you would like to send your redemption
request via overnight mail to the Transfer Agent, the address is 615 East
Michigan Street, Third Floor, Milwaukee, Wisconsin 53202. The redemption request
should identify the Fund, the account name, the account number, the number of
shares or dollar amount to be redeemed and be signed by all registered owners
exactly as the account is registered. The redemption request will not be
accepted unless it contains all required documents in proper form, as described
below. If the request is in proper form, the shares will be redeemed at the net
asset value next determined after receipt of the request by the Transfer Agent.
REDEEMING BY TELEPHONE
You may redeem shares (minimum of $1,000 per transaction) by telephone and have
the proceeds wired to the bank account or mailed to the address as stated on the
Transfer Agent's records. In order to redeem by telephone, you must select the
appropriate box on the account application and shares must be held in non-
certificate form. In order to arrange for telephone redemptions after an account
has been opened or to change the bank account or address designated to receive
redemption proceeds, a written request must be sent to the Trust. The request
must be signed by each shareholder of the account, with the signatures
guaranteed as described below. Once this feature has been requested, shares may
be redeemed by calling Investor Services at 800-236-4479 and giving the account
name, account number, and amount of redemption. Joint accounts require only one
of the shareholders to telephone. A signature guarantee is required for any
redemption where the account address has been changed within the prior 15 days.
If an investor redeems shares by telephone and requests wire payment, payment of
the redemption proceeds will normally be made in federal funds on the next
business day provided that the redemption order is received by the Transfer
Agent before 3:00 p.m. (Central time).
PROPER FORM
If any shares being redeemed are represented by share certificates, the
certificates must be returned. The certificates must either be endorsed or
accompanied by a stock power signed by the registered owners, exactly as the
certificates are registered. If the proceeds of any redemption (1) exceed
$50,000; (2) are paid to a person other than the record owner; (3) are sent to
an address or bank account other than as shown on the Transfer Agent's records;
or (4) are paid to a corporation, a partnership, trust or fiduciary, the
signatures on the redemption request and on the certificates, if any, must be
guaranteed. You may obtain a signature guarantee from: (1) a bank which is a
member of the FDIC; (2) a trust company; (3) a member firm of a national
securities exchange; or (4) another eligible guarantor institution. Guarantees
must be signed by an authorized signatory of the guarantor institution and be
accompanied by the words "Signature Guaranteed." The Transfer Agent will not
accept signature guarantees from notaries public. Additional documents may be
required from corporations or other organizations, fiduciaries or anyone other
than the shareholder of record. Any questions concerning documents needed should
be directed to 800-236-4479.
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PAYMENTS
After the Transfer Agent has received the redemption request and all proper
documents, payment for shares tendered will generally be made within three
business days. Payment may be delayed under circumstances specified in the 1940
Act. Payment will be sent only to shareholders at the address of record. In
addition, if the shares being redeemed were purchased by check, the Trust
reserves the right to delay up to 12 days payment of the redemption proceeds
until it is satisfied that the check has been honored by the investor's bank.
If the redemption proceeds are to be mailed or wired to the shareholder's bank
account, the bank must be a commercial bank located within the United States.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
The redemption privilege may be modified or terminated at any time on thirty
days' notice to shareholders. In an effort to prevent unauthorized or fraudulent
redemption requests by telephone, the Trust and the Transfer Agent employ
reasonable procedures specified by the Funds to confirm that such instructions
are genuine. Among the procedures used to determine authenticity, investors
electing to redeem or exchange by telephone will be required to provide their
account number. All such telephone transactions will be tape recorded and
confirmed in writing to the shareholder. The Trust may implement other
procedures from time to time. If reasonable procedures are not implemented, the
Trust and/or the Transfer Agent may be liable for any loss due to unauthorized
or fraudulent transactions. IN ALL OTHER CASES, THE SHAREHOLDER IS LIABLE FOR
ANY LOSS FOR UNAUTHORIZED TRANSACTIONS.
In periods of severe market or economic conditions, the telephone redemption of
shares may be difficult to implement and shareholders should redeem shares by
writing to the Transfer Agent at the address listed above. If for any other
reason a shareholder is unable to redeem by telephone, shareholders should
redeem shares by writing to the Transfer Agent at the address shown on page .
REDEMPTION IN KIND
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of any Fund to make payment wholly in
cash, the Fund may pay the redemption price in part by a distribution in kind of
readily marketable securities from the portfolio of that Fund, in lieu of cash.
The Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which each Fund is obligated to redeem shares solely in cash up to the lesser
of $250,000 or one percent of the net asset value of the Fund during any 90 day
period for any one shareholder. Should redemptions by any shareholder exceed
such limitation the Fund will have the option of redeeming the excess in cash or
in kind. If shares are redeemed in kind, the redeeming shareholder would incur
brokerage costs in converting the assets into cash.
REDEMPTION OF SMALL ACCOUNTS
The Board of Trustees may redeem all of the shares of any shareholder whose
account has declined to a net asset value of less than $1,000, as a result of a
transfer or redemption, at the net asset value determined as of the close of
business on the business day preceding the sending of the proceeds of such
redemption. The Trust would give shareholders whose shares were being redeemed
60 days' prior written warning in which to purchase sufficient shares to avoid
such redemption.
REPURCHASES
The Trust may accept orders for the repurchase of its shares from certain
qualified institutions. Such an institution may charge the shareholder a fee for
its services. The Trust may also waive or modify its requirements as to proper
form for such institutions.
WITHHOLDING
The Funds may be required to withhold federal income tax, at a rate of 31%, from
proceeds of redemptions, if the shareholder is subject to backup withholding.
Failure to provide a certified tax identification number at the time an account
is opened will cause tax to be withheld.
35
<PAGE> 38
HOW TO EXCHANGE SHARES
- --------------------------------------------------------------------------------
Shareholders are permitted to exchange their shares in a Fund for shares of
other Funds in the Trust, provided that such shares may legally be sold in the
state of the investor's residence. Shares subject to an exchange must have a
current value of at least $1,000.
BY MAIL
A shareholder wishing to exchange shares may do so at any time by delivering
written instructions by regular mail to the Transfer Agent at P.O. Box 701,
Milwaukee, Wisconsin 53201-0701, or by overnight mail to the Transfer Agent at
615 East Michigan Street, Third Floor, Milwaukee, Wisconsin 53201-0701. The
exchange request should identify the account name, account number and the number
of shares to be exchanged. The exchange request should be signed by all
registered owners exactly as the account is registered.
BY TELEPHONE
Shareholders are permitted to exchange their shares in a Fund for shares of
other Funds in the Trust by telephone provided that the shareholder has selected
the appropriate box on the Account Application, and shares are held in
non-certificate form. Telephone exchange requests should be directed to Investor
Services at 800-236-4479. In order to arrange for telephone exchange after an
account has been opened, a written request must be sent to the Transfer Agent at
its address listed above. The request must be signed by each shareholder of the
account, with the signatures guaranteed as described above. In order to request
an exchange by telephone, an investor must give the account name, account number
and the amount or number of shares to be exchanged.
ADDITIONAL INFORMATION ABOUT INVESTMENT EXCHANGES
For purposes of processing exchanges, the value of the shares redeemed and the
value of shares acquired are the net asset values of such shares next computed
after receipt of the exchange order. An exchange of shares is treated for
federal income tax purposes as a redemption (sale) of shares given in exchange
by the shareholder and an exchanging shareholder may, therefore, realize a
taxable gain or loss in connection with the exchange.
The Funds reserve the right to reject any exchange request and the exchange
privilege may be modified or terminated at any time on 30 days' notice to
shareholders. In periods of severe market or economic conditions, the telephone
exchange of shares may be difficult to implement and shareholders should redeem
shares by writing to the Transfer Agent at the address listed above.
In an effort to prevent unauthorized or fraudulent exchange requests by
telephone, the Trust and the Transfer Agent employ reasonable procedures
specified by the Funds to confirm that such instructions are genuine. Among the
procedures used to determine authenticity, investors electing to exchange by
telephone will be required to provide their account number. All such telephone
transactions will be tape recorded and confirmed in writing to the shareholder.
The Trust may implement other procedures from time to time. If reasonable
procedures are not implemented, the Trust and/or the Transfer Agent may be
liable for any loss due to unauthorized or fraudulent transactions. IN ALL OTHER
CASES, THE SHAREHOLDER IS LIABLE FOR ANY LOSS FOR UNAUTHORIZED TRANSACTIONS.
36
<PAGE> 39
DIVIDENDS AND TAX STATUS
- --------------------------------------------------------------------------------
The SMALL CAP FUND expects to pay income dividends, if any, annually; the EQUITY
INCOME and BALANCED INCOME FUNDS expect to pay income dividends quarterly; the
MID-CAP, INTERNATIONAL and GLOBAL EQUITY FUNDS expect to pay income dividends
semi-annually; and the FIXED-INCOME FUNDS expect to declare income dividends
daily and pay them monthly to shareholders.
Distributions from net realized short-term gains, if any, and distributions from
any net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) realized through October 31st of each year and not
previously paid out will be paid out after that date; each Fund may also pay
supplemental distributions after the end of the Trust's fiscal year. Dividends
and distributions are paid in full and fractional shares of each Fund based on
the net asset value per share at the close of business on the record date,
unless the shareholder requests, in writing to the Trust, payment in cash. The
Trust will notify each shareholder after the close of its fiscal year of both
the dollar amount and the tax status of that year's distributions.
[The MID-CAP FUND and GLOBAL EQUITY FUND intend to elect to qualify and remain
qualified as regulated investment companies under Subchapter M of the Internal
Revenue Code (the "Code").] Each other Fund has qualified as a regulated
investment company during the last taxable year, and each intends to do so in
the future. Each Fund is taxed as a separate entity under Subchapter M and
qualifies on a separate basis. If so qualified, each Fund will not be subject to
federal income taxes on its net investment income and capital gains, if any,
realized during any fiscal year which it distributes to its shareholders
provided that at least 90% of its net investment income earned in the fiscal
year is distributed.
All dividends from net investment income together with distributions of
short-term capital gains (collectively, "income dividends"), will be taxable as
ordinary income to the shareholders even though paid in additional shares. Any
net capital gains ("capital gains distributions") distributed to shareholders
are taxable as long-term capital gains to the shareholders regardless of the
length of time a shareholder has owned his shares.
The Code provides for a dividends-received deduction (the "deduction") by
corporations. Special provisions are contained in the Code as to the eligibility
of dividends for the deduction. The basic test under the Code for determining
the extent to which the dividends paid by each Fund are eligible for the
deduction is the extent to which the Fund's income is derived from qualifying
dividends received from domestic corporations. See "Dividends and Tax Status" in
the Statement of Additional Information for additional information about the
deduction.
Dividends and interest received by a Fund may be subject to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate these foreign taxes, and foreign
countries generally do not impose taxes on capital gains on investments by
foreign investors. If more than 50% of the value of the INTERNATIONAL and GLOBAL
EQUITY FUNDS' total assets at the close of their taxable year consists of
securities of foreign corporations, the Funds may elect to enable shareholders
of the Funds to receive the benefit of the foreign tax credit with respect to
any foreign income taxes paid by the Funds.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. Any such loss, however, on shares
that are held for six months or less will be treated as long-term capital loss
to the extent of any capital gain distributions received by the shareholder.
37
<PAGE> 40
The Funds may be required to impose backup withholding at a rate of 31% from
income dividends and capital gains distributions and upon payment of redemption
proceeds if provisions of the law relating to the furnishing and certification
of taxpayer identification numbers and reporting of dividends are not complied
with by a shareholder.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per share of each Fund is determined on each day that the
New York Stock Exchange is open for trading, as of the close of regular trading
on the New York Stock Exchange (currently 4:00 p.m., Eastern time). The net
asset value per share is the value of the Fund's assets, less its liabilities,
divided by the number of shares of the Fund outstanding. The value of a Fund's
portfolio securities is determined on the basis of the market value of such
securities or, if market quotations are not readily available, at fair value
under guidelines established by the Trustees. Short-term investments maturing in
less than 60 days are valued at amortized cost. See "Net Asset Value" in the
Statement of Additional Information for further information.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Funds may quote average annual total return ("standardized
return") in advertisements or promotional materials. Advertisements and
promotional materials reflecting standardized return ("performance
advertisements") will show percentage rates reflecting the average annual change
in the value of an assumed initial investment in a Fund at the end of one, five
and ten year periods. If such periods have not yet elapsed, data will be given
as of the end of a shorter period corresponding to the duration of the Fund.
Standardized return assumes the reinvestment of all dividends and capital gain
distributions.
The FIXED-INCOME FUNDS also may refer in advertising and promotional materials
to yield. The Funds' yield shows the rate of income that a Fund earns on its
investments, expressed as a percentage of the net asset value of Fund shares. A
Fund calculates yield by determining the interest income it earned from its
portfolio investments for a specified thirty-day period (net of expenses),
dividing such income by the average number of Fund shares outstanding, and
expressing the result as an annualized percentage based on the net asset value
at the end of that thirty-day period. Yield accounting methods differ from the
methods used for other accounting purposes; accordingly, a Fund's yield may not
equal the dividend income actually paid to investors or the income reported in
the Fund's financial statements.
In addition to standardized return, performance adver-tisements also may include
other total return performance data ("non-standardized return").
Non-standardized return may be quoted for the same or different periods as those
for which standardized return is quoted and may consist of aggregate or average
annual percentage rate of return, actual year by year rates or any combination
thereof. Further performance information is contained in the Funds' annual
reports to shareholders, which may be obtained without cost.
All data included in performance advertisements will reflect past performance
and is not indicative of future results. The investment return and principal
value of an investment in a Fund will fluctuate, and an investor's proceeds upon
redeeming Fund shares may be more or less than the original cost of the shares.
38
<PAGE> 41
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The Declaration of Trust contains an express disclaimer of shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or its Trustees. The Declaration of Trust provides for indemnification
and reimbursement of expenses out of the Trust's property for any shareholder
held personally liable for its obligations. While Massachusetts law permits a
shareholder of a trust such as this to be held personally liable as a partner
under certain circumstances, the risk of a shareholder incurring financial loss
on account of shareholder liability is highly unlikely and is limited to the
relatively remote circumstances in which the Trust would be unable to meet its
obligations.
Common expenses incurred by the Trust are allocated among the Funds based upon
(1) relative net assets; (2) as incurred on a specific identification basis; or
(3) evenly among the Funds, depending on the nature of the expenditure.
Except for (1) changes which do not adversely affect the rights of Trust
shareholders; (2) a change in the name of the Trust, or a series or class
thereof; (3) authorization of a new series or class; (4) changes to supply any
omission or correct any ambiguous or defective provision; or (5) changes
required by any federal or state or similar regulatory authority or required by
the Code to eliminate or reduce any federal, state or local taxes which may be
payable by a Fund or its shareholders, no amendment may be made to the
Declaration of Trust without the affirmative vote of the holders of at least 67%
of the Trust's outstanding shares at a meeting at which more than 50% of its
outstanding shares are present in person or represented by proxy. The holders of
shares have no preemptive or conversion rights. Shares when issued are fully
paid and non-assessable, except as set forth above.
The Trust's custodian is Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin 53202 and its subcustodian for foreign securities is The
Chase Manhattan Bank, N.A., Four Chase MetroTech Center, Brooklyn, New York
11245.
As of June 30, 1997, the Retirement Plan for Employees of Texas Utilities
Company System owned 26.47% of the BALANCED INCOME FUND and may be deemed to be
a controlling person of that Fund. As of June 30, 1997, United Airlines, Inc.
Group Administration Trust beneficially owned 30.75% of the outstanding shares
of the SHORT-TERM INVESTMENT FUND and may be deemed to be a controlling person
of that Fund. As of June 30, 1997, Mr. John F. Hotchkis, Trustee of the Funds
and Chairman of the Advsior, through personal and trust accounts for the benefit
of certain family members, owned 27.00% of the SMALL CAP FUND and may be deemed
to be a controlling person of that Fund. As of June 30, 1997, YMCA of
Metropolitan Los Angeles owned 34.74% of the TOTAL RETURN BOND FUND and may be
deemed to be a controlling person of that Fund. As of June 30, 1997, Mr. John F.
Hotchkis owned 42.07% of the GLOBAL EQUITY FUND and may be deemed to be a
controlling person of that Fund.
39
<PAGE> 42
APPENDIX -- DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE
- ----------------------------------------------------------
BOND RATINGS:
"AAA" -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"AA" -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa through B. The modifier "1" indicates that the obligation
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the company
ranks in the lower end of that generic rating category.
"A" -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
"BAA" -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"BA" -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
"B" -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
"PRIME-1" -- Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
"PRIME-2" -- Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S
RATINGS GROUP
- ----------------------------------------------------------
BOND RATINGS:
"AAA" -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
"AA" -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
40
<PAGE> 43
"A" -- Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
"BBB" -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Debt rated BB and B is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
- ----------------------------------------------------------
COMMERCIAL PAPER RATINGS:
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
"A-1" -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC.
- ----------------------------------------------------------
BOND RATINGS:
The following summarizes the ratings used by Fitch for corporate bonds:
"AAA" -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
"A" -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
"BB" -- Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.
"B" -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
PLUS (+) MINUS (-) -- Plus and minus signs are used with a rating symbol to
indicate the relative position of
41
<PAGE> 44
a credit within the rating category. Plus and minus signs, however, are not used
in the "AAA" category.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:
"F-1+" -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
"F-1" -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
"F-2" -- Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" or "F-1" ratings.
DUFF & PHELPS
CREDIT RATING CO.
- ----------------------------------------------------------
BOND RATINGS:
The following summarizes the ratings used by Duff & Phelps for long-term debt:
"AAA" -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
"AA+," "AA," "AA-" -- High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.
"A+," "A," "A-" -- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
"BBB+," "BBB," "BBB-" -- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
"BB+," "BB," "BB-" -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
"B+," "B," "B-" -- Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
- ----------------------------------------------------------
SHORT-TERM DEBT RATINGS:
"D-1+" -- Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
"D-1" -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
"D-1-" -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
"D-2" -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
42
<PAGE> 45
HOTCHKIS AND WILEY FUNDS
ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
For individual, custodial, trust, profit-sharing or pension plan accounts. Do
not use this form for IRA's -- a special form is available from the Funds. For
information please call 1-800-236-4479.
ACCOUNT REGISTRATION
- --------------------------------------------------------------------------------
Name of Owner(s) (Individual, Joint, Custodian, Company or Trustee)
- --------------------------------------------------------------------------------
Mailing Address
- --------------------------------------------------------------------------------
City State Zip
- --------------------------------------------------------------------------------
Daytime Telephone Number
- --------------------------------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Citizen of [ ] United States [ ] Other (specify)
- ------------------------------------------------------
FUND SELECTION Please indicate the amount you wish to invest in each fund you
check.
<TABLE>
<S> <C> <C> <C>
[ ] EQUITY INCOME FUND $ [ ] BALANCED INCOME FUND $
------------- -------------
[ ] MID-CAP FUND $ [ ] TOTAL RETURN BOND FUND $
------------- -------------
[ ] SMALL CAP FUND $ [ ] LOW DURATION FUND $
------------- -------------
[ ] INTERNATIONAL FUND $ [ ] SHORT-TERM INVESTMENT FUND $
------------- -------------
[ ] GLOBAL EQUITY FUND $
-------------
</TABLE>
INVESTMENT INFORMATION Please indicate the amount you wish to invest ($10,000
minimum).
[ ] By check made payable to Hotchkis and Wiley Funds $
- -------------
[ ] By wire. (See section on "How to Purchase Shares")
Indicate date and amount of wire: Date
------------------------------ $ ---------------
DISTRIBUTION OPTIONS Distributions will be reinvested in additional shares
unless one of the following boxes is checked.
[ ] Send me a check for all dividends and distributions.
[ ] Send me a check for dividends, but reinvest capital gain distributions.
AUTOMATIC INVESTMENT PLAN Add to your Hotchkis and Wiley Fund account
automatically and regularly. Complete below and each month Hotchkis and Wiley
will deduct money from your bank checking account to purchase additional shares
for you. Your bank must be an Automated Clearing House (ACH) member. Your
account must be established at the minimum investment level ($10,000) before
this automatic investment plan goes into effect.
Please start my Automatic Investment Plan as described in the Prospectus
beginning: month -----------------------
year
- ---------. I hereby instruct Firstar Trust Company, Transfer Agent to the
Hotchkis and Wiley Funds, to automatically transfer $
- ------------------ (minimum $50 per Fund) directly from my bank account on the
- --------- of each month or the first business day thereafter. These instructions
apply to each of the Hotchkis and Wiley Funds you list here:
================================================================================
================================================================================
<PAGE> 46
- --------------------------------------------------------------------------------
The HOTCHKIS AND WILEY FUNDS require the following bank information:
- --------------------------------------------------------------------------------
Bank Name
- --------------------------------------------------------------------------------
Bank Account Number Name(s) on Bank Account
- --------------------------------------------------------------------------------
Bank Address City State Zip
- --------------------------------------------------------------------------------
Signature of Bank Account Owner Signature of Joint Owner
Note: Your bank should be a member of the Federal Reserve, or have a
correspondent relationship with a member bank, to use the telephone redemption
service. Please attach a voided check or preprinted deposit slip for your bank
account.
TELEPHONE PRIVILEGES
[ ]TELEPHONE EXCHANGE OPTION -- I/we wish to take advantage of this option which
allows the exchange of shares between Funds by telephone (minimum exchange of
$1,000).
[ ]TELEPHONE REDEMPTION -- I/we want to be able to receive proceeds by mail or
federal funds wired to my/our bank account (minimum transfer $1,000).
SIGNATURES AND CERTIFICATION
I am (we are) of legal age, have received and read the Prospectus and agree to
the terms therein. I (we) certify (1) that my Social Security or Taxpayer
Identification Number provided above is correct and (2) that I am not subject to
backup withholding either because I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result of a
failure to report all interest dividends, or the IRS has notified me that I am
no longer subject to backup withholding. The IRS does not require your consent
to any provision of this document other than the certifications requested to
avoid backup withholding. If I (we) have elected telephone privileges, I (we)
acknowledge that neither the Hotchkis and Wiley Funds nor their agents will be
liable for any loss, expense or cost arising out of any telephone request
pursuant to these privileges, and the account holder will bear the risk of loss,
so long as the Funds or their agents reasonably believe, based upon reasonable
verification procedures, that the telephone instructions are genuine.
- --------------------------------------------------------------------------------
Signature of Owner, Trustee or Custodian Date
- --------------------------------------------------------------------------------
Signature of Joint Owner (Required if Joint
Registration) Date
Overnight Express
Mail to: Hotchkis and Wiley Mail to: Hotchkis and Wiley
c/o Firstar Trust Company c/o Firstar Trust Company
Mutual Fund Services Mutual Fund Services
P.O. Box 701 615 E. Michigan St., 3rd
Milwaukee, WI 53201-0701 Floor
Milwaukee, WI 53202-5207
<PAGE> 47
TABLE OF CONTENTS
FEE TABLE ................................. 3
FINANCIAL HIGHLIGHTS ...................... 4
INVESTMENT OBJECTIVES AND POLICIES ........ 12
SECURITIES AND TECHNIQUES USED BY THE FUNDS 20
INVESTMENT RISKS .......................... 26
PRINCIPAL INVESTMENT RESTRICTIONS ......... 28
ORGANIZATION AND MANAGEMENT ............... 28
HOW TO PURCHASE SHARES .................... 31
HOW TO REDEEM SHARES ...................... 32
HOW TO EXCHANGE SHARES .................... 34
DIVIDENDS AND TAX STATUS .................. 35
NET ASSET VALUE ........................... 36
PERFORMANCE INFORMATION ................... 36
GENERAL INFORMATION ....................... 37
APPENDIX -- DESCRIPTION OF RATINGS ........ 38
The application for investing in the HOTCHKIS AND WILEY FUNDS is included in
this prospectus.
[LOGO]
IMPORTANT TELEPHONE NUMBER
CLIENT SERVICES AND SHAREHOLDER INQUIRIES 800-236-4479
<PAGE> 48
HOTCHKIS AND
WILEY FUNDS
Equity Fund For Insurance Companies
PROSPECTUS
-----------------------------------------------------------------------
September 30, 1997
800 West 6th Street, Fifth Floor
Los Angeles, CA 90017
(213) 362-8888
Investment Advisor: HOTCHKIS AND WILEY
<PAGE> 49
HOTCHKIS AND WILEY
FUNDS
- -------------------------------------------------------------------------------
Equity Fund for Insurance Companies
Hotchkis and Wiley Funds (the "Trust") is an open-end, management investment
company having ten separate diversified portfolios (the "Funds"), each of which
is a separate mutual fund having its own objective, assets, liabilities and net
asset value. This Prospectus describes the Equity Series for Insurance Companies
(the "Equity Fund for Insurance Companies" or the "Fund"), the investment
objective of which is to provide current income and long-term growth of income,
accompanied by growth of capital. There is no assurance that the investment
objective of the Fund will be achieved. The minimum initial investment in the
Fund is $1 million; there is no subsequent minimum investment requirement.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated September 30, 1997, containing
additional information about the Trust and each Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this Prospectus. You may obtain a copy of the Statement of
Additional Information without charge by calling the Trust at (213) 362-8888 or
writing the Trust at 800 West Sixth Street, Fifth Floor, Los Angeles, CA 90017.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is September 30, 1997.
<PAGE> 50
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
Fee Table................................ 2 How to Purchase Shares............. 7
Financial Highlights..................... 3 How to Redeem Shares............... 8
Investment Objective and Policies........ 4 Dividends and Tax Status........... 9
Principal Investment Restrictions........ 5 Performance Information............ 9
Organization and Management ............. 6 General Information................ 10
</TABLE>
FEE TABLE
Hotchkis and Wiley Funds impose no sales load, exchange fee or redemption fee on
the purchase or redemption of shares of the Fund.
<TABLE>
<CAPTION>
EQUITY FUND
ANNUAL FUND OPERATING EXPENSES FOR INSURANCE
(as a percentage of average net assets) COMPANIES
- --------------------------------------------------------------------------------
<S> <C>
Management fee............................................ 0.54%
Other expenses............................................ -0-% *
-----
Total Fund operating expenses............................. 0.54%
=====
</TABLE>
*The Advisor pays all of the Fund's operating expenses other than the management
fee; see "Organization and Management."
<TABLE>
<CAPTION>
EXAMPLE 1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment in the Fund,
assuming (1) 5% annual return and
(2) redemption at the end of each time period.............................. $6 $17 $30 $68
</TABLE>
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. For a more complete description of the various costs and
expenses, see "Organization and Management." The Example should not be
considered a representation of past or future expenses and actual expenses may
be greater or less than those shown. The assumption in the example of a 5%
annual return is required by regulations of the Securities and Exchange
Commission applicable to all mutual funds. The assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual performance of
the Fund.
2
<PAGE> 51
FINANCIAL HIGHLIGHTS
The following financial highlights for the four years ended June 30, 1996 have
been audited by Price Waterhouse LLP, independent accountants, whose unqualified
report thereon is incorporated by reference herein and is included in the
Statement of Additional Information, which is available from the Fund. This
information should be read in conjunction with the financial statements and
accompanying notes which appear in the Statement of Additional Information.
Further performance information is contained in the Fund's annual report to
shareholders, which may be obtained without cost.
<TABLE>
<CAPTION>
Year Ended June 30, January 29, 1993*
------------------------------------- through
1997 1996 1995 1994 June 30, 1993
---- ---- ---- ---- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................$13.51 $11.53 $9.89 $10.31 $10.00
------ ----- ---- ----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............................. 0.39 0.34 0.41 0.40 0.16
Net realized and unrealized gain (loss)
on investments.................................. 3.30 2.26 1.59 (0.24) 0.30
---- ---- ---- ------ ------
Total from investment operations................... 3.69 2.60 2.00 0.16 0.46
---- ---- ---- ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)............ (0.40) (0.40) (0.34) (0.38) (0.15)
Distributions (from realized gains)............... (0.48) (0.22) (0.02) (0.20) (0.00)
------ ------ ------ ------ ------
Total Distributions.............................. (0.88) (0.62) (0.36) (0.58) (0.15)
------ ------ ------ ------ ------
Net Asset Value, End of Period...................... $16.32 $13.51 $11.53 $ 9.89 $10.31
====== ====== ====== ====== ======
Total Return........................................ 28.20% 22.93% 20.62% 1.38% 11.45%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)................. $33.0 $24.6 $17.4 $10.5 $7.1
Ratio of expenses to average net assets:
Before expense reimbursement...................... 0.75% 0.76% 1.05% 1.20% 1.45%+
After expense reimbursement....................... 0.53% 0.54% 0.58% 0.60% 0.60%+
Ratio of net income to average net assets:
Before expense reimbursement...................... 2.50% 2.78% 3.58% 3.32% 2.81%+
After expense reimbursement....................... 2.72% 3.00% 4.03% 3.91% 3.66%+
Portfolio turnover rate.............................. 22% 21% 29% 26% 2%
Average commission rate per share.................. $0.0458 N/A N/A N/A N/A
</TABLE>
* Commencement of operations.
+ Annualized.
3
<PAGE> 52
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide current income and
long-term growth of income, accompanied by growth of capital. There is no
assurance that the Fund will achieve its objective. Hotchkis and Wiley, a
division of The Merrill Lynch Capital Management Group of Merrill Lynch Asset
Management, L.P., (the "Advisor") acts as investment advisor to the Fund.
The Fund will attempt to achieve its objective by investing in equity
securities. The equity securities that the Fund may purchase consist of common
stocks or securities having characteristics of common stocks, such as
convertible preferred stocks, convertible debt securities or warrants. In
selecting investments for the Fund, the Advisor focuses on securities that it
believes to have superior values. In arriving at this determination, the Advisor
will generally seek securities of companies that have such characteristics as
earnings yield at least 3% greater than the yield on long-term bonds, dividend
yield which exceeds the composite yield on the securities comprising the
Standard & Poor's Index of 500 Common Stocks ("S&P 500"), and overall financial
strength.
Under normal market conditions, the Fund will invest at least 80% of its
total assets in income-producing equity securities issued by companies with a
record of earnings and dividends. The remainder of its portfolio may be invested
in securities of companies which pay no dividends or interest but have
unrecognized potential for growth or changes in business or management that
indicate possible growth.
When market or economic conditions indicate, in the view of the Advisor,
that a temporary defensive investment strategy is appropriate, all or part of
the Fund's assets may be invested temporarily in high quality debt obligations
maturing in one year or less from the date of the Fund's purchase, such as U.S.
Treasury bills, bank certificates of deposit, bankers' acceptances, commercial
paper and repurchase agreements. High quality means the obligations have been
rated at least Prime- 1 by Moody's Investors Service ("Moody's") or A-1 by
Standard & Poor's Ratings Group ("S&P"), or have an outstanding issue of debt
securities rated at least A by Moody's or S&P, or are of comparable quality in
the opinion of the Advisor. In addition, the Fund may invest part of its assets
temporarily in such debt obligations, pending the investment of the proceeds of
sales of shares of the Fund or portfolio securities.
Because the Fund invests in equity-type securities such as common and
preferred stock, the Fund is subject to market risk, for example, the
possibility that common stock prices will decline over a short or even extended
periods. The stock markets tend to be cyclical, with periods when stock prices
generally rise and periods when prices generally decline.
GENERAL
FOREIGN SECURITIES. The Fund has the right to invest in foreign securities
although there is no requirement that it do so. Foreign economies may differ
from the U.S. economy; individual foreign companies may differ from domestic
companies in the same industry; and foreign currencies may be stronger or weaker
than the U.S. dollar. The Advisor believes that the ability to invest abroad
will enable the Fund to take advantage of these differences when they are
favorable.
4
<PAGE> 53
There are risks in investing in foreign securities. An investment may be
affected by changes in currency rates and in exchange control regulations, and
the Fund may incur transaction charges in exchanging currencies. Foreign
companies are frequently not subject to the accounting and financial reporting
standards applicable to domestic companies, and there may be less information
available about foreign issuers. Foreign stock markets have substantially less
volume than the New York Stock Exchange, and securities of foreign issuers are
generally less liquid and more volatile than those of comparable domestic
issuers. There is frequently less government regulation of exchanges,
broker-dealers and issuers than in the United States. In addition, investments
in foreign countries are subject to the possibility of expropriation or
confiscatory taxation, political or social instability or diplomatic
developments that could adversely affect the value of those investments.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
involving U.S. Government securities with commercial banks or broker-dealers,
whereby the seller of a security agrees to repurchase the security on an agreed
upon date in the future. While the Fund intends to be fully "collateralized" as
to such agreements, and the collateral will be marked to market daily, if the
person obligated to repurchase from the Fund defaults, there may be possible
delays and expenses in liquidating the securities subject to the repurchase
agreement, a decline in their value and loss of interest. See the Statement of
Additional Information for further details about repurchase agreements.
REAL ESTATE INVESTMENT TRUST. The Fund may invest in securities of real
estate investment trusts or REIT's. Unlike corporations, REITs do not have to
pay income taxes if they meet certain Internal Revenue Code requirements. To
qualify, a REIT must distribute at least 95% of its taxable income to its
shareholders and receive at least 75% of that income from rents, mortgages and
sales of property. REITs offer investors greater liquidity and diversification
than direct ownership of a handful of properties, as well as greater income
potential than an investment in common stocks. Like any investment in real
estate, though, a REIT's performance depends on several factors, such as its
ability to find tenants for its properties, to renew leases and to finance
property purchases and renovations.
BORROWING. As a fundamental policy, the Fund may borrow money, but only
from banks for temporary or emergency purposes in amounts not exceeding 10% of
the Fund's total assets. See the Statement of Additional Information for
details.
PRINCIPAL INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which are
fundamental policies that cannot be changed without the approval of a majority
of the Fund's outstanding voting securities (as defined in the Investment
Company Act of 1940, referred to as the "1940 Act"). The Fund's investment
objective is such a fundamental policy. Among its restrictions, the Fund may not
(1) with respect to 75% of its total assets, invest more than 5% of its total
assets in securities of any one issuer (other than U.S. Government securities);
(2) with respect to 75% of its total assets, purchase more than 10% of the
outstanding voting securities of any one issuer; or (3) invest more than 25% of
its total assets (determined at the time of investment) in one or more issuers
having their principal business activities in a single industry. Additional
information about the Fund's investment restrictions is contained in the
Statement of Additional Information.
5
<PAGE> 54
As discussed in the Statement of Additional Information, the Fund may, as a
fundamental policy and within limits, engage in short sales but only those which
are "against the box." Such short sales are a method of locking in unrealized
capital gains without current recognition of such gains.
It is the position of the Securities and Exchange Commission (and an
operating although not a fundamental policy of the Fund) that open-end
investment companies such as the Fund should not make certain investments if
thereafter more than 15% of the value of their net assets would be so invested.
The investments included in this 15% limit include (1) those which are
restricted, i. e., those which cannot freely be sold for legal or contractual
reasons (which the Fund does not expect to own); (2) fixed time deposits subject
to withdrawal penalties (other than overnight deposits); and (3) repurchase
agreements having a maturity of more than seven days. The 15% limitation does
not include obligations which are payable at principal amount plus accrued
interest within seven days after purchase.
It is an operating policy, although not a fundamental policy, of the Fund
that no more than 55% of the value of the total assets of the Fund can be
invested in cash and cash items (including receivables), U.S. Government
securities and securities of other regulated investment companies, as required
by Section 817(h)(2)(B) of the Internal Revenue Code of 1986, as amended.
ORGANIZATION AND MANAGEMENT
ORGANIZATION AND VOTING RIGHTS
The Trust was organized on August 22, 1984 as a Massachusetts business
trust. It is a diversified, open-end, management investment company currently
consisting of ten separate series. The Trust's name was changed to Hotchkis and
Wiley Funds effective October 7, 1994. The Trust's Board of Trustees decides on
matters of general policy and reviews the activities of the Advisor. The Trust's
officers conduct and supervise the daily business operations of the Trust. The
Fund is one of ten series of shares, each having separate assets and
liabilities, of the Trust. The Board of Trustees may, at its own discretion,
create additional series of shares.
Generally, the Fund will not hold an annual meeting of shareholders unless
required by the 1940 Act. Shareholders have one vote per share owned. Matters
submitted to shareholders must be approved by a majority of the outstanding
securities of the Fund. At the request of the holders of at least 10% of the
shares, the Trust will hold a meeting to vote on the removal of a Trustee, which
can occur by a vote of more than two-thirds of the outstanding shares.
INVESTMENT ADVISOR
Hotchkis and Wiley, located at 800 West 6th Street, Los Angeles, California
90017, acts as investment advisor to the Fund and generally administers the
affairs of the Trust. The Advisor is a division of The Merrill Lynch Capital
Management Group of Merrill Lynch Asset Management, L.P., and a separate
business unit of Merrill Lynch & Co., a financial services holding company
incorporated in Delaware. Subject to the directions and control of the Board of
Trustees, the Advisor supervises and arranges the purchase and sale of
securities held in the portfolio of the Fund.
6
<PAGE> 55
For its services, the Advisor is paid a fee, computed daily and payable
monthly, at an annual rate of 0. 60% of the first $10 million of the Fund's
average daily net assets, and 0. 50% of average daily net assets in excess of
$10 million. The Advisor pays all of the regular annual operating expenses
relating to the Fund, including: (1) interest and taxes; (2) brokerage
commissions; (3) insurance premiums; (4) compensation and expenses of the
Trustees other than those affiliated with the Advisor; (5) legal and audit
expenses; (6) fees and expenses of the Fund's custodian, shareholder servicing
or transfer agent and accounting services agent; (7) expenses incident to the
issuance of its shares, including issuance on the payment of, or reinvestment
of, dividends; (8) fees and expenses incident to the registration under Federal
or state securities laws of the Trust or its shares; (9) expenses of preparing,
printing and mailing reports and notices and proxy material to shareholders;
(10) all other expenses incident to holding meetings of shareholders; (11) dues
or assessments of or contributions to the Investment Company Institute or any
successor; and (12) such non-recurring expenses as may arise, including
litigation affecting the Trust and the legal obligations which the Trust may
have to indemnify its officers and Trustees with respect thereto.
The Agreement permits the Advisor to allocate brokerage based on sales of
shares of the funds managed by the Advisor. No such allocation has been made to
date.
PORTFOLIO MANAGER
The current portfolio managers of the Fund are Gail Bardin and Sheldon
Lieberman. Ms. Bardin and Mr. Lieberman have responsibility for the day-to-day
management of the Fund's portfolio. Ms. Bardin is a managing director of the
Advisor. She began co-managing the Fund in April 1994. Ms. Bardin has been a
portfolio manager of the Advisor since 1988. Mr. Lieberman joined the Advisor
in 1994 and began co-managing the Fund in August 1997. Prior to joining the
Advisor, Mr. Lieberman was the Chief Investment Officer for the Los Angeles
County Employees Retirement Association. Ms. Bardin and Mr. Lieberman also
serve as portfolio managers of the Equity Income Fund, another series of the
Trust that is managed by the Advisor.
HOW TO PURCHASE SHARES
Shares of the Fund are offered only to insurance companies. The minimum
initial investment in the Fund is $1,000,000. There is no minimum subsequent
investment. The Trust reserves the right to reject any order.
Investors may invest in the Fund by wiring the amount to be invested to
Hotchkis and Wiley Funds in care of the custodian bank, at the following
address:
Firstar Bank
ABA #0750-00022
For credit to Firstar Trust Company
Account #112-952-137
For further credit to Hotchkis and Wiley Funds
Equity Fund for Insurance Companies
Account # [Shareholder account number]
7
<PAGE> 56
The wire should indicate that the investment is being made in the Equity
Fund for Insurance Companies. Shares of the Fund will be purchased for the
account of the investor at the net asset value next determined after receipt of
the investor's wire. Shareholder inquiries should be directed to the Fund.
NET ASSET VALUE
The net asset value per share of the Fund is determined on each day that
the New York Stock Exchange is open for trading, as of the close of regular
trading on that Exchange (currently 4:00 p. m., Eastern time), provided that
the net asset value may not be calculated on a day on which no order to purchase
or redeem shares of the Fund is received. The net asset value per share is the
value of the Fund's assets, less its liabilities, divided by the number of
shares of the Fund outstanding. The value of portfolio securities is determined
on the basis of the market value of such securities. Short-term investments
maturing in less than 60 days are valued at amortized cost. See the Statement of
Additional Information for further information.
HOW TO REDEEM SHARES
A shareholder wishing to redeem shares may do so at any time by writing or
delivering instructions to the Trust at 800 West 6th Street, Fifth Floor, Los
Angeles, California 90017. The redemption request should identify the Fund,
specify the number of shares to be redeemed and be signed by a duly authorized
officer of the insurance company. If the request is in proper form, the shares
specified will be redeemed at the net asset value next determined after receipt
of the request. In addition to written instructions, if any shares being
redeemed are represented by share certificates, the certificates must be
surrendered. The certificates must either be endorsed or accompanied by a stock
power signed by a duly authorized officer of the insurance company. Any
questions concerning documents needed should be directed to (213) 362-8888.
PAYMENTS. Payment for shares tendered will be made within seven days after
receipt by the Trust of instructions and certificates, if any. However, payment
may be delayed under unusual circumstances, as specified in the 1940 Act or as
determined by the Securities and Exchange Commission. Payment will be sent only
to shareholders at the address of record.
REDEMPTION IN KIND. If the Board of Trustees determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly in cash, the Fund may pay the redemption price in part by a
distribution in kind of readily marketable securities from the portfolio of the
Fund, in lieu of cash. The Trust has elected to be governed by Rule 18f-1 under
the 1940 Act pursuant to which the Fund is obligated to redeem shares solely in
cash up to the lesser of $250,000 or one per cent of the net asset value of the
Fund during any 90 day period for any one shareholder. Should redemptions by any
shareholder exceed such limitation the Fund will have the option of redeeming
the excess in cash or in kind. If shares are redeemed in kind, the redeeming
shareholder would incur brokerage costs in converting the assets into cash.
8
<PAGE> 57
DIVIDENDS AND TAX STATUS
The Fund expects to pay income dividends quarterly. Distributions from net
realized short-term gains, if any, and distributions from any excess of net
long-term capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be paid out after
that date; the Fund may also pay supplemental distributions after the end of the
Trust's fiscal year. Dividends and distributions are paid in full and fractional
shares of the Fund based on the net asset value per share at the close of
business on the record date, unless the shareholder requests, in writing to the
Trust, payment in cash. The Trust will notify each shareholder after the close
of its fiscal year of both the dollar amount and the tax status of that year's
distributions.
The Fund qualified as a "regulated investment company" under Subchapter M
of the Internal Revenue Code (the "Code") during its last fiscal year and
intends to continue to do so in the future. The Fund is taxed as a separate
entity under Subchapter M and will qualify on a separate basis. If so qualified,
the Fund will not be subject to federal income taxes on its net investment
income and capital gains, if any, realized during any fiscal year which it
distributes to its shareholders provided that at least 90% of its net investment
income earned in the fiscal year is distributed. All dividends from net
investment income together with distributions of short-term capital gains
(collectively, "income dividends"), will be taxable as ordinary income to the
shareholders even though paid in additional shares. Any net capital gains
("capital gains distributions") distributed to shareholders are taxable as
long-term capital gains to the shareholders regardless of the length of time a
shareholder has owned his shares.
The Code provides for a dividends-received deduction (the "deduction") by
corporations. Special provisions are contained in the Code as to the eligibility
of payments to shareholders by mutual funds for the deduction. The basic test
for determining whether, and the extent to which, dividends paid by the Fund are
eligible for the deduction is whether the aggregate dividends received by the
Fund from domestic corporations comprise 100% of its gross income. If that
percentage test is not met, there is a proportionate reduction of the
eligibility of those payments. See the Statement of Additional Information for
more information.
PERFORMANCE INFORMATION
From time to time the Fund may quote average annual total return
("standardized return") in advertisements or promotional materials.
Advertisements and promotional materials reflecting standardized return
("performance advertisements") will show percentage rates reflecting the average
annual change in the value of an assumed initial investment in the Fund at the
end of one, five and ten year periods. If such periods have not yet elapsed,
data will be given as of the end of a shorter period corresponding to the
duration of the Fund. Standardized return assumes the reinvestment of all
dividends and capital gain distributions.
In addition to standardized return, performance advertisements also may
include other total return performance data ("non-standardized return").
Non-standardized return may be quoted for the same or different periods as those
for which standardized return is quoted and may consist of aggregate or average
annual percentage rate of return, actual year by year rates or any combination
thereof. Further performance information is contained in the Fund's annual
report to shareholders, which may be obtained without charge.
9
<PAGE> 58
All data included in performance advertisements will reflect past
performance and is not indicative of future results. The investment return and
principal value of an investment in the Fund will fluctuate, and an investor's
proceeds upon redeeming Fund shares may be more or less than the original cost
of the shares.
GENERAL INFORMATION
The Declaration of Trust contains an express disclaimer of shareholder
liability for its acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations. While Massachusetts
law permits a shareholder of a trust such as this to be held personally liable
as a partner under certain circumstances, the risk of a shareholder incurring
financial loss on account of shareholder liability is highly unlikely and is
limited to the relatively remote circumstances in which the Trust would be
unable to meet its obligations.
Common expenses incurred by the Trust are allocated among the Funds based
upon (1) relative net assets; (2) as incurred on a specific identification
basis; or (3) evenly among the Funds, depending on the nature of the
expenditure.
Except for (1) changes which do not adversely affect the rights of Trust
shareholders, (2) a change in the name of the Trust, or a series or class
thereof, (3) authorization of a new series or class, (4) changes to supply any
omission or correct any ambiguous or defective provision or (5) changes required
by any federal or state or similar regulatory authority or required by the Code
to eliminate or reduce any federal, state or local taxes which may be payable by
a Fund or its shareholders, no amendment may be made to the Declaration of Trust
without the affirmative vote of the holders of at least 67% of the Trust's
outstanding shares at a meeting at which more than 50% of its outstanding shares
are present in person or represented by proxy. The holders of shares have no
preemptive or conversion rights. Shares when issued are fully paid and
non-assessable, except as set forth above.
As of June 30, 1997, The Prudential Insurance Company of America owned of
record and beneficially 100% of the outstanding shares of the Fund and may be
deemed a controlling person of the Fund.
10
<PAGE> 59
<TABLE>
==============================================================================================================
<S> <C> <C> <C>
Investment Advisor Legal Counsel Independent Accountants Custodian and Transfer Agent
Hotchkis and Wiley Gardner, Carton & Douglas Price Waterhouse LLP Firstar Trust Company
800 West 6th Street 321 North Clark Street 100 East Wisconsin Avenue 615 East Michigan Street
Fifth Floor Chicago, IL 60610 Milwaukee, WI 53202 Milwaukee, WI 53202
Los Angeles, CA 90017
</TABLE>
<PAGE> 60
HOTCHKIS AND WILEY FUNDS
Statement of Additional Information
Dated September 30, 1997
This Statement of Additional Information is not a prospectus, and it
should be read in conjunction with the prospectus dated September 30, 1997 of
the Equity Income Series (the "Equity Income Fund"), the Mid-Cap Series (the
"Mid-Cap Fund"), the Small Cap Series (the "Small Cap Fund"), the International
Series (the "International Fund"), the Global Equity Series (the "Global Equity
Fund"), the Balanced Income Series (the "Balanced Income Fund"), the Total
Return Bond Series (the "Total Return Bond Fund"), the Low Duration Series (the
"Low Duration Fund") and the Short-Term Investment Series (the "Short-Term
Investment Fund"), and the prospectus of the Equity Fund for Insurance Companies
Series (the "Equity Fund for Insurance Companies") of Hotchkis and Wiley Funds
dated September 30, 1997. Copies of the prospectuses may be obtained at no
charge from the Trust, 800 West 6th Street, Los Angeles, CA 90017. In this
Statement of Additional Information, the Equity Income Fund, the Mid-Cap Fund,
the Small Cap Fund, the International Fund, the Global Equity Fund, the Balanced
Income Fund, the Total Return Bond Fund, the Low Duration Fund, the Short-Term
Investment Fund and the Equity Fund for Insurance Companies may be referred to
collectively as "the Funds" or individually as "a Fund." The Total Return Bond
Fund, the Low Duration Fund and the Short-Term Investment Fund also may be
referred to as the "Fixed-Income Funds." Hotchkis and Wiley (the "Advisor") is
the investment advisor to the Funds.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies B-2
Investment Restrictions B-2
Repurchase Agreements B-3
U.S. Government Securities B-3
Corporate Debt Securities B-4
Convertible Securities B-4
Mortgage-Related Securities B-4
Asset-Backed Securities B-7
Risk Factors Relating to Investing in
Mortgage-Related and Asset-Backed
Securities B-7
Duration B-8
Derivative Instruments B-8
Foreign Securities B-12
Foreign Currency Options and Related Risks B-13
Forward Foreign Currency Exchange Contracts B-14
Risk Factors Relating to Investing in High Yield
Securities B-15
Illiquid Securities B-16
Management B-17
The Advisor B-19
Portfolio Transactions and Brokerage B-20
Net Asset Value B-21
Dividends and Tax Status B-22
Performance Information B-23
General Information About the Trust B-24
Financial Statements B-28
</TABLE>
B-1
<PAGE> 61
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Equity Income Fund and the Equity Fund for
Insurance Companies is to provide current income and long-term growth of income,
accompanied by growth of capital.
The investment objective of the Mid-Cap Fund is to provide current income
and long-term growth of income, accompanied by growth of capital.
The investment objective of the Small Cap Fund is capital appreciation.
The investment objective of the International Fund and the Global Equity
Fund is to provide current income and long-term growth of income, accompanied by
growth of capital.
The investment objective of the Balanced Income Fund is to preserve
capital while producing a high total return.
The investment objective of the Total Return Bond Fund is to maximize
long-term total return.
The investment objective of the Low Duration Fund and the Short-Term
Investment Fund is to maximize total return, consistent with preservation of
capital.
The portfolio and strategies with respect to the composition of each Fund
are described in the Funds' prospectuses.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions (in addition to those
indicated in the prospectuses) as fundamental policies, which may not be changed
without the favorable vote of the holders of a "majority" of that Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940
(the "1940 Act"). Under the 1940 Act, the vote of the holders of a "majority" of
a Fund's outstanding voting securities means the vote of the holders of the
lesser of (i) 67% of the shares of the Fund represented at a meeting at which
the holders of more than 50% of its outstanding shares are represented or (ii)
more than 50% of the outstanding shares.
Except as noted, none of the Funds may:
1. Purchase any security, other than obligations of the U.S.
Government, its agencies, or instrumentalities ("U.S. Government
securities"), if as a result: (i) with respect to 75% of its
total assets, more than 5% of the Fund's total assets (determined
at the time of investment) would then be invested in securities
of a single issuer, or (ii) more than 25% of the Fund's total
assets (determined at the time of investment) would be invested
in one or more issuers having their principal business activities
in a single industry.
2. Purchase securities on margin (but any Fund may obtain such
short-term credits as may be necessary for the clearance of
transactions), provided that the deposit or payment by a Fund of
initial or maintenance margin in connection with futures or
options is not considered the purchase of a security on margin.
3. Make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the
securities sold short (short sale against-the-box), and unless
not more than 25% of the Fund's net assets (taken at current
value) is held as collateral for such sales at any one time.
4. Issue senior securities, borrow money or pledge its assets except
that any Fund may borrow from a bank for temporary or emergency
purposes in amounts not exceeding 10% (taken at the lower of cost
or current value) of its total assets (not including the amount
borrowed) and pledge its assets to secure such borrowings; none
of the Funds (except the Fixed-Income Funds) will purchase any
additional portfolio securities while such borrowings are
outstanding. (The Fixed-Income Funds may borrow from banks or
enter into reverse repurchase agreements and pledge assets in
connection therewith, but only if immediately after each
borrowing there is asset coverage of 300%.)
5. Purchase any security (other than U.S. Government securities) if
as a result, with respect to 75% of the Fund's total
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assets, the Fund would then hold more than 10% of the outstanding
voting securities of an issuer.
6. Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell
securities which are secured by real estate and securities of
companies which invest or deal in real estate. (For the purposes
of this restriction, forward foreign currency exchange contracts
are not deemed to be commodities or commodity contracts. This
restriction does not apply to the Fixed-Income Funds.)
7. Act as underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be
an underwriter under certain federal securities laws.
8. Make investments for the purpose of exercising control or
management.
9. Participate on a joint or joint and several basis in any trading
account in securities.
10. Make loans, except through repurchase agreements. (This
restriction does not apply to the Fixed-Income Funds, which may
lend portfolio securities having an aggregate market value of up
to one-third of the total assets of the Fund.)
11. Purchase or sell foreign currencies. (This restriction does not
apply to the International Fund, the Global Equity Fund or the
Fixed-Income Funds.)
REPURCHASE AGREEMENTS
The Small Cap Fund may purchase debt securities maturing in more than one
year from the date of purchase only if they are purchased subject to repurchase
agreements. The Equity Income, Mid-Cap, International, Global Equity, Balanced
Income, and Fixed-Income Funds, as well as the Equity Fund for Insurance
Companies, have no such restriction on maturities of portfolio securities. A
repurchase agreement is an agreement where the seller agrees to repurchase a
security from a Fund at a mutually agreed-upon time and price. The period of
maturity is usually quite short, possibly overnight or a few days, although it
may extend over a number of months. The resale price is more than the purchase
price, reflecting an agreed-upon rate of return effective for the period of time
a Fund's money is invested in the repurchase agreement. A Fund's repurchase
agreements will at all times be fully collateralized in an amount at least equal
to the resale price. The instruments held as collateral are valued daily, and if
the value of instruments declines, a Fund will require additional collateral. In
the event of a default, insolvency or bankruptcy by a seller, the Fund will
promptly seek to liquidate the collateral. In such circumstances, the Fund could
experience a delay or be prevented from disposing of the collateral. To the
extent that the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the repurchase price, the Fund will
suffer a loss.
U.S. GOVERNMENT SECURITIES
U.S. Government agencies or instrumentalities which issue or guarantee
securities include, but are not limited to, the Federal National Mortgage
Association, Government National Mortgage Association, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks,
Federal Land Banks, Tennessee Valley Authority, Inter-American Development Bank,
Asian Development Bank, Student Loan Marketing Association and the International
Bank for Reconstruction and Development.
Except for U.S. Treasury securities, obligations of U.S. Government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while still others, such as
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitment. Each Fund will
invest in securities of such instrumentality only when the Advisor is satisfied
that the credit risk with respect to any instrumentality is acceptable.
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The Funds may invest in component parts of U.S. Treasury notes or bonds,
namely, either the corpus (principal) of such Treasury obligations or one of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-
entries at a Federal Reserve member bank representing ownership of Treasury
obligation components; or (4) receipts evidencing the component parts (corpus or
coupons) of Treasury obligations that have not actually been stripped. Such
receipts evidence ownership of component parts of Treasury obligations (corpus
or coupons) purchased by a third party (typically an investment banking firm)
and held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. These custodial receipts are known by various names, including "Treasury
Receipts," "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATS"), and are not issued by the U.S.
Treasury; therefore they are not U.S. Government securities, although the
underlying bonds represented by these receipts are debt obligations of the U.S.
Treasury.
CORPORATE DEBT SECURITIES
A Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments) which meet the minimum ratings criteria set forth
for the Fund, or, if unrated, are in the Advisor's opinion comparable in quality
to corporate debt securities in which the Fund may invest. The rate of return or
return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities of domestic or foreign
issuers, which meet the ratings criteria set forth in the Prospectus. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
MORTGAGE-RELATED SECURITIES
The Fixed-Income Funds and the Balanced Income Fund may invest in
residential or commercial mortgage-related securities, including mortgage
pass-through securities, collateralized mortgage obligations ("CMOs"),
adjustable rate mortgage securities, CMO residuals, stripped mortgage-related
securities, floating and inverse floating rate securities and tiered index
bonds.
Mortgage Pass-Through Securities. Mortgage pass-through securities
represent interests in pools of mortgages in which payments of both principal
and interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers on the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the issuer
or guarantor of the securities). Mortgage pass-through securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to the sale of underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Fund to a lower rate of return upon reinvestment of principal. Also, if
a security subject to repayment has been purchased at a premium, in the event of
prepayment, the value of the premium would be lost.
There are currently three types of mortgage pass-through securities: (1)
those issued by the U.S. Government or one of its
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agencies or instrumentalities, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"); (2) those issued by private
issuers that represent an interest in or are collateralized by pass-through
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but usually having some form of
private credit enhancement.
GNMA is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by the institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage banks), and backed by pools of FHA-insured or VA-guaranteed mortgages.
Obligations of FNMA and FHLMC are not backed by the full faith and credit
of the United States Government. In the case of obligations not backed by the
full faith and credit of the United States Government, the Fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. FNMA and FHLMC may borrow from the U.S. Treasury to meet its
obligations, but the U.S. Treasury is under no obligation to lend to FNMA or
FHLMC.
Private mortgage pass-through securities are structured similarly to GNMA,
FNMA, and FHLMC mortgage pass-through securities and are issued by originators
of and investors in mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing.
Pools created by private mortgage pass-through issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the private pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. The insurance and guarantees and the credit worthiness
of the issuers thereof will be considered in determining whether a
mortgage-related security meets the Funds' investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. Private
mortgage pass-through securities may be bought without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Advisor determines that the securities
meet the Funds' quality standards.
Collateralized Mortgage Obligations. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by residential or commercial
mortgage loans or residential or commercial mortgage pass-through securities.
Interest and prepaid principal are generally paid monthly. CMOs may be
collateralized by whole mortgage loans or private mortgage pass-through
securities but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. The issuer of a
series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC"). All future references to CMOs also include REMICs.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral which is ordinarily unrelated to the stated
maturity date. CMOs often provide for a modified form of call protection through
a de facto breakdown of the underlying pool of mortgages according to how
quickly the loans are repaid. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.
Certain issuers of CMOs are not considered investment companies pursuant
to a rule adopted by the Securities and Exchange Commission ("SEC"), and the
Funds may invest in the securities of such issuers without the limitations
imposed by the 1940 Act on investments by the Fund in other investment
companies. In addition, in reliance on an earlier SEC interpretation, the Fund's
investments in certain other qualifying CMOs, which cannot or do not rely on the
rule, are also not subject to the limitation of the 1940 Act on acquiring
interests in other investment companies. In order to be able to rely on the
SEC's interpretation, these CMOs must be unmanaged, fixed asset issuers, that
(1) invest primarily in mortgage-backed securities; (2) do not issue redeemable
securities; (3) operate under general exemptive orders exempting them from all
provisions of the 1940 Act and (4) are not registered or regulated under the
1940 Act as investment companies. To the extent that the Funds select CMOs that
cannot rely on the rule or do not meet the above requirements, the Funds may not
invest more than 10% of their assets in all such entities and may not acquire
more than 3% of the voting securities of any single such entity.
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The Fixed-Income Funds and the Balanced Income Fund may also invest in,
among other things, parallel pay CMOs, Planned Amortization Class CMOs ("PAC
bonds"), sequential pay CMOs, and floating rate CMOs. Parallel pay CMOs are
structured to provide payments of principal on each payment date to more than
one class. PAC bonds generally require payments of a specified amount of
principal on each payment date. Sequential pay CMOs generally pay principal to
only one class while paying interest to several classes. Floating rate CMOs are
securities whose coupon rate fluctuates according to some formula related to an
existing market index or rate. Typical indices would include the eleventh
district cost-of-funds index ("COFI"), the London Interbank Offered Rate
("LIBOR"), one-year Treasury yields, and ten-year Treasury yields.
Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
("ARMs") are pass-through securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
The ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the security. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period. In the
event that market rates of interest rise more rapidly to levels above that of
the ARM's maximum rate, the ARM's coupon may represent a below market rate of
interest. In these circumstances, the market value of the ARM security will
likely have fallen.
Certain ARMs contain limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an ARM, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
If the monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is then utilized to reduce the
outstanding principal balance of the ARM.
CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances a Fund may fail to recoup fully its initial investment in a CMO
residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has recently developed and CMO residuals currently may not have
the liquidity of other more established securities trading in other markets.
Transactions in CMO residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the Securities Act. CMO residuals, whether or not registered under such Act, may
be subject to certain restrictions on transferability, and may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities.
Stripped Mortgage-Related Securities. Stripped mortgage-related securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks, and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on
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a pool of mortgage assets. A common type of SMBS will have one class receiving
some of the interest and most of the principal from the mortgage assets, while
the other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the interest
(the IO class), while the other class will receive all of the principal (the PO
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may fail to fully recoup its initial investment in these securities even if
the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently introduced. As a result, established trading markets have not
yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities. See "Securities and Techniques Used by the Funds-Mortgage-Related
Securities" in the Prospectus.
Inverse Floaters. An inverse floater is a debt instrument with a floating
or variable interest rate that moves in the opposite direction to the interest
rate on another security or index level. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.
Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed rate bond.
ASSET-BACKED SECURITIES
The Fixed-Income Funds and the Balanced Income Fund may invest in various
types of asset-backed securities. Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables and home equity loans, are being securitized in pass-through
structures similar to the mortgage pass-through or in a pay-through structure
similar to the CMO structure. Investments in these and other types of
asset-backed securities must be consistent with the investment objectives and
policies of the Funds.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES
The yield characteristics of mortgage-related and asset-backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if the Funds
purchase such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Funds purchase these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. The Funds may invest a portion of their assets in
derivative mortgage-related securities which are highly sensitive to changes in
prepayment and interest rates. The Advisor will seek to manage these risks (and
potential benefits) by diversifying its investments in such securities and
through hedging techniques.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-related securities can be expected to accelerate.
Accordingly, a Fund's ability to maintain positions in high-yielding
mortgage-related securities will be affected by reductions in the principal
amount of such securities resulting from such prepayments, and its ability to
reinvest the returns of principal at comparable yields is subject to generally
prevailing interest rates at that time. Conversely, slower than expected
prepayments may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities tend to fluctuate more in response to interest rate changes, leading
to increased net asset value volatility. Prepayments may also result in the
realization of capital losses with respect to higher yielding securities that
had been bought at a premium or the loss of opportunity to realize capital gains
in the future from possible future appreciation.
Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example,
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credit card receivables generally are unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, some of
which may reduce the ability to obtain full payment. In the case of automobile
receivables, due to various legal and economic factors, proceeds from
repossessed collateral may not always be sufficient to support payments on these
securities.
DURATION
In selecting securities for the Fixed-Income Funds and the Balanced Income
Fund, the Advisor makes use of the concept of duration for fixed-income
securities. Duration is a measure of the expected life of a fixed-income
security. Duration incorporates a bond's yield, coupon interest payments, final
maturity and call features into one measure. Most debt obligations provide
interest ("coupon") payments in addition to a final ("par") payment at maturity.
Some obligations also have call provisions. Depending on the relative magnitude
of these payments, the market values of debt obligations may respond differently
to changes in the level and structure of interest rates.
Duration is a measure of the expected life of a fixed-income security on a
present value basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a callable bond, expected to be received, and weights them by
the present values of the cash to be received at each future point in time. For
any fixed-income security with interest payments occurring prior to the payment
of principal, duration is always less than maturity. In general, all other
things being the same, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a Fund's duration by approximately the
same amount that holding an equivalent amount of the underlying securities
would.
Short futures or put options positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Advisor will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
DERIVATIVE INSTRUMENTS
As indicated in the Prospectus, to the extent consistent with their
investment objectives and policies, the Funds may purchase and write call and
put options on securities, securities indexes and on foreign currencies and
enter into futures contracts and use options on futures contracts. The Funds
also may enter into swap agreements with respect to foreign currencies, interest
rates and securities indexes. The Funds may use these techniques to hedge
against changes in interest rates, foreign currency exchange rates, or
securities prices or as part of their overall investment strategies. The
International and the Fixed-Income Funds may also purchase and sell options
relating to foreign currencies for the purpose of increasing exposure to a
foreign currency or to shift exposure to foreign currency fluctuations from one
country to another. Each Fund will maintain segregated accounts consisting of
cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily (or, as permitted by applicable
regulation, enter into certain offsetting positions), to cover its obligations
under options and futures contracts to avoid leveraging of the Fund.
Options on Securities and on Securities Indexes. A Fund may purchase put
options on securities to protect holdings in an underlying or related security
against a substantial decline in market value. A Fund may purchase call options
on securities to protect against substantial increases in prices of securities
the Fund intends to purchase pending its ability to invest in such securities in
an orderly manner. A Fund may sell put or call options it has previously
purchased, which could result in a net gain or loss depending on whether the
amount realized on the sale is more or less than the premium and other
transaction costs paid on the put or call option
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which is sold. A Fund may write a call or put option only if the option is
"covered" by the Fund holding a position in the underlying securities or by
other means which would permit immediate satisfaction of the Fund's obligation
as writer of the option. Prior to exercise or expiration, an option may be
closed out by an offsetting purchase or sale of an option of the same series.
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, a Fund may be
unable to close out a position.
There are several risks associated with transactions in options on
securities and on indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If a Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If a Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, a Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were imposed,
the Fund might be unable to exercise an option it had purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Futures Contracts and Options on Futures Contracts. A Fund may use
interest rate, foreign currency or index futures contracts, as specified for
that Fund in the Prospectus. An interest rate, foreign currency or index futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time. A futures contract on an index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering
several indexes as well as a number of financial instruments and foreign
currencies, including: the S & P 500; the S & P 100; the NYSE composite; U.S.
Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit; the
Australian dollar; the Canadian dollar; the British pound; the German mark; the
Japanese yen; the French franc; the Swiss franc; the Mexican peso; and certain
multinational currencies, such as the European Currency Unit ("ECU"). It is
expected that other futures contracts will be developed and traded in the
future.
A Fund may purchase and write call and put options on futures. Options on
futures possess many of the same characteristics as options on securities and
indexes (discussed above). An option on a futures contract gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
Each Fund will use futures contracts and options on futures contracts in
accordance with the rules of the Commodity Futures Trading Commission ("CFTC").
For example, a Fund might use futures contracts to hedge against anticipated
changes in interest
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rates that might adversely affect either the value of the Fund's securities or
the price of the securities which the Fund intends to purchase. A Fund's hedging
activities may include sales of futures contracts as an offset against the
effect of expected increases in interest rates, and purchases of futures
contracts as an offset against the effect of expected declines in interest
rates. Although other techniques could be used to reduce that Fund's exposure to
interest rate fluctuations, the Fund may be able to hedge its exposure more
effectively and perhaps at a lower cost by using futures contracts and options
on futures contracts.
A Fund will only enter into futures contracts and options on futures
contracts which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin", equal to the daily change in value of the futures contract.
This process is known as "marking to market". Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark to
market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Limitations on Use of Futures and Options Thereon. When purchasing a
futures contract, a Fund will maintain with its custodian (and mark-to-market on
a daily basis) cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets that, when added to the amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract. Alternatively, the Fund may "cover" its position by purchasing
a put option on the same futures contract with a strike price as high or higher
than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning the instruments underlying the contract (or,
in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Trust's custodian).
When selling a call option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that equal
the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
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In order to comply with current applicable regulations of the CFTC
pursuant to which the Trust avoids being deemed a "commodity pool operator," the
Funds are limited in their futures trading activities to positions which
constitute "bona fide hedging" positions within the meaning and intent of
applicable CFTC rules, or to non-hedging positions for which the aggregate
initial margin and premiums will not exceed 5% of the liquidation value of the
Fund's assets.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures contracts, options
thereon or forward contracts. See "Dividends and Tax Status."
Risks Associated with Futures and Options on Futures Contracts. There are
several risks associated with the use of futures contracts and options on
futures contracts as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund securities being hedged.
In addition, there are significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variation in
speculative market demand for futures and options on futures, including
technical influences in futures trading and options on futures, and differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to whether,
when and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures contract or an option on futures position, and
that Fund would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures Contracts, and Forward Currency Exchange Contracts and Options Thereon.
Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees; and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by: (1) other complex foreign political, legal and economic
factors; (2) lesser availability than in the United States of data on which to
make trading decisions; (3) delays in the Funds' ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States; and (4) lesser trading volume.
FOREIGN SECURITIES
The Funds may invest in American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other securities convertible into securities of
issuers based in foreign countries. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts, usually issued by a U.S. bank or trust company,
evidencing ownership of the underlying securities; EDRs are European receipts
evidencing a similar arrangement. Generally, ADRs are issued in registered form,
denominated in U.S. dollars, and are designed for use in the U.S. securities
markets; EDRs are issued in bearer form, denominated in other currencies, and
are designed for use in European securities markets.
The Fixed-Income Funds may also invest in fixed-income securities of
issuers located in emerging foreign markets. Emerging markets generally include
every country in the world other than the United States, Canada, Japan,
Australia, Malaysia, New Zealand, Hong Kong, South Korea, Singapore and most
Western European countries. In determining what countries constitute emerging
markets, the Advisor will consider, among other things, data, analysis and
classification of countries published or disseminated by the International Bank
for Reconstruction and Development (commonly known as the World Bank) and the
International Finance
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Corporation. Currently, investing in many emerging markets may not be desirable
or feasible, because of the lack of adequate custody arrangements for a Fund's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop,
the Funds expect to expand and further broaden the group of emerging markets in
which they invest.
From time to time, emerging markets have offered the opportunity for
higher returns in exchange for a higher level of risk. Accordingly, the Advisor
believes that each Fixed-Income Fund's ability to invest in emerging markets
throughout the world may enable the achievement of results superior to those
produced by funds, with similar objectives to those of these Fund, that invest
solely in securities in developed markets. There is no assurance that any
Fixed-Income Funds will achieve these results.
The Fixed-Income Funds may invest in the following types of emerging
market fixed-income securities: (1) fixed-income securities issued or guaranteed
by governments, their agencies, instrumentalities or political subdivisions, or
by government owned, controlled or sponsored entities, including central banks
(collectively, "Sovereign Debt"), including Brady Bonds (described below); (2)
interests in issuers organized and operated for the purpose of restructuring the
investment characteristics of Sovereign Debt; (3) fixed-income securities issued
by banks and other business entities; and (4) fixed-income securities
denominated in or indexed to the currencies of emerging markets. Fixed-income
securities held by the Funds may take the form of bonds, notes, bills,
debentures, bank debt obligations, short-term paper, loan participations,
assignments and interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of any of the foregoing.
There is no requirement with respect to the maturity of fixed-income securities
in which the Funds may invest.
The Fixed-Income Funds may invest in Brady Bonds and other Sovereign Debt
of countries that have restructured or are in the process of restructuring
Sovereign Debt pursuant to the Brady Plan. "Brady Bonds" are debt securities
issued under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external commercial bank indebtedness.
In restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Bank for Reconstruction and Development
(the "World Bank") and the International Monetary Fund ("IMF"). The Brady Plan
framework, as it has developed, contemplates the exchange of commercial bank
debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect of
new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.
Emerging market fixed-income securities generally are considered to be of
a credit quality below investment grade, even though they often are not rated by
any nationally recognized statistical rating organizations. Investment in
emerging market fixed-income securities will be allocated among various
countries based upon the Advisor's analysis of credit risk and its consideration
of a number of factors, including: (1) prospects for relative economic growth
among the different countries in which the Fixed-Income Funds may invest; (2)
expected levels of inflation; (3) government policies influencing business
conditions; (4) the outlook for currency relationships; and (5) the range of the
individual investment opportunities available to international investors. The
Advisor's emerging market sovereign credit analysis includes an evaluation of
the issuing country's total debt levels, currency reserve levels, net
exports/imports, overall economic growth, level of inflation, currency
fluctuation, political and social climate and payment history. Particular
fixed-income securities will be selected based upon credit risk analysis of
potential issuers, the characteristics of the security and interest rate
sensitivity of the various debt issues available with respect to a particular
issuer, analysis of the anticipated volatility and liquidity of the particular
debt instruments, and the tax implications to the Fund. The emerging market
fixed-income securities in which the Fixed-Income Funds may invest are not
subject to any minimum credit quality standards.
FOREIGN CURRENCY OPTIONS AND RELATED RISKS
The Funds may take positions in options on foreign currencies to hedge
against the risk of foreign exchange rate fluctuations on foreign securities the
Funds hold in their portfolios or intend to purchase. For example, if a Fund
were to enter into a contract to purchase securities denominated in a foreign
currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if a
Fund held securities denominated in a foreign currency and anticipated a decline
in the value of that currency against the U.S. dollar, it could hedge against
such a decline by purchasing a put option on the currency involved. The markets
in foreign currency options are relatively new, and a Fund's ability to
establish and close out positions in such options is subject to the maintenance
of a liquid secondary market. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.
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The quantities of currencies underlying option contracts represent odd
lots in a market dominated by transactions between banks, and as a result extra
transaction costs may be incurred upon exercise of an option.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations be firm or revised on a
timely basis. Quotation information is generally representative of very large
transactions in the interbank market and may not reflect smaller transactions
where rates may be less favorable. Option markets may be closed while round-the-
clock interbank currency markets are open, and this can create price and rate
discrepancies.
Risks of Options Trading. The Funds may effectively terminate their rights
or obligations under options by entering into closing transactions. Closing
transactions permit a Fund to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option. The value of a
foreign currency option depends on the value of the underlying currency relative
to the U.S. dollar. Other factors affecting the value of an option are the time
remaining until expiration, the relationship of the exercise price to market
price, the historical price volatility of the underlying currency and general
market conditions. As a result, changes in the value of an option position may
have no relationship to the investment merit of a foreign security. Whether a
profit or loss is realized on a closing transaction depends on the price
movement of the underlying currency and the market value of the option.
Options normally have expiration dates of up to nine months. The exercise
price may be below, equal to or above the current market value of the underlying
currency. Options that expire unexercised have no value, and a Fund will realize
a loss of any premium paid and any transaction costs. Closing transactions may
be effected only by negotiating directly with the other party to the option
contract, unless a secondary market for the options develops. Although the Funds
intend to enter into foreign currency options only with dealers which agree to
enter into, and which are expected to be capable of entering into, closing
transactions with the Funds, there can be no assurance that a Fund will be able
to liquidate an option at a favorable price at any time prior to expiration. In
the event of insolvency of the counter-party, a Fund may be unable to liquidate
a foreign currency option. Accordingly, it may not be possible to effect closing
transactions with respect to certain options, with the result that a Fund would
have to exercise those options that it had purchased in order to realize any
profit.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Funds may use forward contracts to protect against uncertainty in the
level of future exchange rates. The Funds will not speculate with forward
contracts or foreign currency exchange rates.
A Fund may enter into forward contracts with respect to specific
transactions. For example, when a Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock in" the U.S. dollar
price of the security or the U.S. dollar equivalent of the payment, by entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars or foreign currency, of the amount of foreign currency involved in the
underlying transaction. A Fund will thereby be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
currency exchange rates during the period between the date on which the security
is purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
A Fund also may use forward contracts in connection with portfolio
positions to lock in the U.S. dollar value of those positions, to increase the
Fund's exposure to foreign currencies that the Advisor believes may rise in
value relative to the U.S. dollar or to shift the Fund's exposure to foreign
currency fluctuations from one country to another. For example, when the Advisor
believes that the currency of a particular foreign country may suffer a
substantial decline relative to the U.S. dollar or another currency, it may
enter into a forward contract to sell the amount of the former foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. This investment practice generally is
referred to as "cross-hedging" when another foreign currency is used.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
movements will
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not be accurately predicted, causing the Fund to sustain losses on these
contracts and transaction costs. A Fund may enter into forward contracts or
maintain a net exposure to such contracts only if (1) the consummation of the
contracts would not obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency or (2) the Fund maintains in a segregated account
cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, in an amount not less than the
value of the Fund's total assets committed to the consummation of the contracts.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, the Advisor believes it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will be served.
At or before the maturity date of a forward contract that requires a Fund
to sell a currency, the Fund may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, a Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would realize
a gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate between the currencies
involved moved between the execution dates of the first and second contracts.
The cost to the Fund of engaging in forward contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. The use of
forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does fix a
rate of exchange in advance. In addition, although forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, at the same
time they limit any potential gain that might result should the value of the
currencies increase.
Although the Funds value their assets daily in terms of U.S. dollars, they
do not intend to convert holdings of foreign currencies into U.S. dollars on a
daily basis. The Funds may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Swap Agreements. The Funds may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded the desired return. Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. The "notional amount" of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. A Fund's obligations
(or rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative values
of the positions held by each party to the agreement (the "net amount"). A
Fund's obligations under a swap agreement will be accrued daily (offset against
any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a
swap counter-party will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets marked-to-market daily, to avoid any potential
leveraging of the Fund's portfolio. A Fund will not enter into a swap agreement
with any single party if the net amount owed or to be received under existing
contracts with that party would exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective of total return will depend on the Advisor's ability
correctly to predict whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counter-party. The Advisor will cause a Fund to
enter into swap agreements only with counter-parties that would be eligible for
consideration as repurchase agreement counter-parties. Restrictions imposed by
the Internal Revenue Code may limit the Funds' ability to use swap agreements.
The swaps market is a
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relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect a Fund's ability to terminate existing swap agreements or
to realize amounts to be received under such agreements.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
Lower-rated or unrated (i.e., high yield) securities are more likely to
react to developments affecting market risk (such as interest rate sensitivity,
market perception of creditworthiness of the issuer and general market
liquidity) and credit risk (such as the issuer's inability to meet its
obligations) than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The Advisor considers both
credit risk and market risk in making investment decisions for the Funds.
Investors should carefully consider the relative risk of investing in high yield
securities and understand that such securities are not generally meant for
short-term trading.
The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged buyout
activity. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Advisor could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. Prices realized upon the sale of
such lower-rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Funds' net asset value.
Lower-rated or unrated debt obligations also present risks based on
payment expectations. If an issuer calls the obligation for redemption, the Fund
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.
ILLIQUID SECURITIES
A Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities include repurchase agreements which have a
maturity of longer than seven days, and securities that are illiquid by virtue
of the absence of a readily available market (either within or outside of the
Unites States) or legal or contractual restrictions of resale. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act, securities which are otherwise not readily marketable and
repurchase agreements have a maturity of longer than seven days. Securities
which have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly from the
issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainly in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemption within seven days. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Also market quotations are less readily available. The judgment of
the Advisor may at times play a greater role in valuing these securities than in
the case of unrestricted securities. A mutual fund might also have to register
such restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A established a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
B-15
<PAGE> 75
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Advisor will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the Advisor will consider, inter alia, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). In addition, in order for
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act to be considered liquid, (1) it much be rated in one of the two highest
rating categories by at least two nationally recognized statistical rating
organizations ("NRSRO"), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the investment
adviser; and (2) it must not be "traded flat" (i.e., without accrued interest)
or in default as to principal or interest. Investing in Rule 144A securities
could have the effect of increasing the level of Fund illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
MANAGEMENT
The Trustees and officers of the Trust are:
<TABLE>
<CAPTION>
Position
Name, address & age with Trust Principal occupations during past five years
- ------------------- ---------- --------------------------------------------
<S> <C> <C>
Robert L. Burch III (63) Trustee Managing Partner, A.W. Jones Co. (investments); Chairman,
885 Third Avenue Jonathan Mfg. Corp. (slide manufacturing).
New York, NY 10022
John A. G. Gavin (66) Trustee Chairman, Gamma Services Corp. (venture capital) (since 1968);
2100 Century Park West Principal, Gavin, Dailey & Partners (consulting) (since 1993); U.S.
Los Angeles, CA 90067 Ambassador to Mexico (1981-1986); Director, Atlantic Richfield Co.,
Dresser Industries, Inc., Pinkertons, International Wire Corp. and Kap
Resources.
Joe Grills (62) Trustee Member of the Committee of Investment of Employee Benefit Assets 183
Soundview Lane of the Financial Executives Institute ("CIEBA") (since 1986); member New
Canaan, CT 06840 of CIEBA's Executive Committee since 1988 and its Chairman (1991-
1992); Assistant Treasurer of International Business Machines
Incorporated ("IBM") and Chief Investment Officer of the IBM
Retirement Funds (1986-1993); Member of the Investment Advisory
Committee of the State of New York Common Retirement Fund; Director
of Duke Management Company, KIMCO Realty Corp. and LaSalle Street
Fund; Investment Advisory Committee, Howard Hughes Medical
Institute; Trustee or Director of a number of investment companies for
which Merrill Lynch Asset Management is the advisor.
John F. Hotchkis* (66) Trustee Chairman and Portfolio Manager of the Advisor.
800 West 6th Street
Los Angeles, CA 90017
Robert B. Hutchinson (77) Trustee Former Chairman (1987-88) and Director (1976-88), Prudential Bank
c/o Simpson Investment Co. (savings bank); Director and former Senior Vice President, Finance and
1201 3rd Avenue Secretary, Simpson Investment Co. (holding company for a wood Seattle,
WA 98101 products company, pulp and paper company and a PVC products
company); Director, Enterprises International, Inc. (industrial strapping
material manufacturer).
</TABLE>
B-16
<PAGE> 76
<TABLE>
<S> <C> <C>
Michael L. Quinn* (51) Trustee Chief Executive Officer of the Advisor (since November 1996); Head
Merrill Lynch Capital of Merrill Lynch Capital Management Group (since 1995); co-head
Management Group of the Equity Division of Merrill Lynch, Pierce, Fenner & Smith Inc. 800
Scudders Mill Road (1991-1995); Trustee, Valley Hospital and the University of Denver.
Plainsboro, NJ 08536 University of Denver
Merle T. Welshans (79) Trustee Adjunct Professor of Finance, Washington University; Chairperson of
14360 Ladue Road Investment Committee of the Missouri United Methodist Foundation;
Chesterfield, MO 63017 Retired, Financial Vice President, Union Electric Company of Missouri.
Richard R. West (59) Trustee Dean Emeritus of New York University's Leonard N. Stern School of
Box 604 Business (since 1993); formerly Dean (1984-1993) and Professor of Genoa,
NV 89411 of Finance (1984-1995), New York University's Leonard N. Stern School
of Business; Director, Bornado, Inc., Alexander's Inc., Bowne & Co.,
Inc. and Smith Corona Corp.; Trustee or Director of a number of
investment companies for which Merrill Lynch Asset Management is the
advisor.
Nancy D. Celick (46) President and Chief Financial Officer and Director of the Advisor; Chief Financial 800
West 6th Street Principal Officer of Kennedy-Wilson, Inc. (auction marketing services) (1992-1993);
Los Angeles, CA 90017 Executive Officer Chief Financial of Officer of First National Corporation (bank holding
company) (1984-1992).
Roger DeBard, PhD (55) Executive Managing Director of the Advisor (since 1995); Partner of the Advisor
800 West 6th Street Vice President (1994-1995); Principal of the Advisor (1992-1994); Portfolio Manager
Los Angeles, CA 90017 of the Advisor (1985-1992).
Mark D. Cone (29) Vice President Vice President of the Advisor; Retail Account Manager, Neuberger &
800 West 6th Street Berman (1991-1994).
Los Angeles, CA 90017
Gracie Fermelia (35) Secretary, Vice President of the Advisor; Senior Manager, Price Waterhouse
800 West 6th Street Treasurer, and (1985-1994).
Los Angeles, CA 90017 Principal
Financial and
Accounting Officer
</TABLE>
- ----------------
* "Interested" Trustee, as defined in the 1940 Act, due to the relationship
indicated with the Advisor.
The Trust does not pay salaries to any of its officers or fees to any of
its Trustees affiliated with the Advisor. The following table sets forth the
aggregate compensation paid to the Trustees during the Trust's fiscal year ended
June 30, 1997 and the aggregate compensation paid to the Trustees for service on
the Trust's Board and that of any other fund for which the Advisor serves as
investment advisor or has an investment adviser that is an affiliated person of
the advisor ("Fund Complex") for the year ended December 31, 1996.
B-17
<PAGE> 77
<TABLE>
<CAPTION>
Total 1996
Pension or Compensation
Retirement Estimated Annual from Trust
Aggregate Benefits Accrued Benefits and Fund
Compensation as Part of Fund Upon Complex Paid
Name and Position from Fund Expenses Retirement to Trustees *
- ----------------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Robert L. Burch III, $12,000 none n/a $12,000
Trustee
John A. G. Gavin, $10,500 none n/a $9,000
Trustee
Joe Grills, $9,000 none n/a $190,166
Trustee
John F. Hotchkis, $ -0- none n/a $ -0-
Trustee
Robert B. Hutchinson, $12,000 none n/a $12,000
Trustee
Michael L. Quinn, $ -0- none n/a $ -0-
Trustee
Merle T. Welshans, $10,500 none n/a $12,000
Trustee
Richard R. West, $9,000 none n/a $272,833
Trustee
</TABLE>
* The compensation from the Fund Complex includes service on the boards of
investment companies advised by Merrill Lynch Asset Management, LP and its
advisory affiliates (Mr. Grills serves 18 registered investment companies
representing 38 portfolios and Mr. West serves 41 registered investment
companies representing 54 portfolios).
For information as to ownership of shares by officers and Trustees of the
Trust, see below under "General Information About the Trust."
THE ADVISOR
The Advisor provides the Funds with management and investment advisory
services. Hotchkis and Wiley is a division of The Merrill Lynch Capital
Management Group of Merrill Lynch Asset Management, L.P., located at 800 West
6th Street, Los Angeles, California, 90017 and a separate business unit of
Merrill Lynch & Co., Inc., a financial services holding company incorporated in
Delaware.
Each Fund, except for the Equity Fund for Insurance Companies and the
Fixed-Income Funds, pays the Advisor for the services performed a fee at the
annual rate of 0.75% of the Fund's average daily net assets. The Equity Fund for
Insurance Companies pays the Advisor a fee at the annual rate of 0.60% on the
first $10,000,000 of its average daily net assets and 0.50% of average daily net
assets in excess of $10,000,000. The Total Return Bond Fund pays the Advisor a
fee at the annual rate of 0.55% of its average daily net assets, although prior
to October 31, 1995, the Total Return Bond Fund paid the Advisor a fee at the
annual rate of 0.70% of its average daily net assets. The Low Duration Fund pays
the Advisor a fee at the annual rate of 0.46% of its average daily net assets.
Prior to October 31, 1995, the Low Duration Fund paid the Advisor at the same
annual rate as the Short-Term Investment Fund. The Short-Term Investment Fund
pays a fee at the annual rate of 0.40% of the Fund's average daily net assets
under $100,000,000, 0.35% of the Fund's average daily net assets from
$100,000,000 up to $250,000,000, 0.30% of the Fund's average daily net assets
from $250,000,000 up to $500,000,000, and 0.25% of the Fund's average daily net
assets over $500,000,000.
B-18
<PAGE> 78
In addition, the Advisor has voluntarily agreed to limit the regular
annual operating expenses of the Equity Income Fund, Mid-Cap Fund, Small Cap
Fund, International Fund, Global Equity Fund, and Balanced Income Fund to 1% of
each Fund's average net assets. Additionally, the Advisor has agreed to limit
the regular annual operating expenses of the Total Return Bond Fund to 0.65%,
the Low Duration Fund to 0.58%, and the Short-Term Investment Fund to 0.48% of
the Fund's average net assets. There is no such limitation on the annual
expenses of the Equity Fund for Insurance Companies.
As a result of its agreement to limit Fund expenses, the Advisor waived a
portion of its fee for the year ended June 30, 1997, with respect to the Small
Cap Fund, International Fund, Total Return Bond Fund, Low Duration Fund and
Short-Term Investment Fund in the amounts of $54,357, $391,595, $83,124,
$134,885, and $88,511, respectively, and for the period from commencement of
operations on January 2, 1997 through June 30, 1997, with respect to the Mid-Cap
Fund and Global Equity Fund in the amounts of $48,881 and $45,349, respectively.
For the year ended June 30, 1997, the Equity Income Fund, Small Cap Fund,
Balanced Income Fund, International Fund, Total Return Bond Fund, Low Duration
Fund paid $1,411,861, $82,914, $562,261, $3,694,456, $70,395 and $662,940,
respectively, to the Advisor. For the year ended June 30, 1997, the Short-Term
Investment Fund paid no advisory fee and was reimbursed $15,943 and for
the period from January 2, 1997 through June 30, 1997, the Mid-Cap Fund and
Global Equity Fund paid no advisory fees and were reimbursed $43,832 and
$35,429, respectively, by the Advisor.
As a result of its agreement to limit Fund expenses, for the year ended
June 30, 1996, the Advisor waived a portion of its fee with respect to the Small
Cap Fund, Balanced Income Fund, International Fund, Total Return Bond Fund, Low
Duration Fund and Short-Term Investment Fund in the amounts of $44,825, $31,555,
$169,480, $84,461, $29,763 and $69,867, respectively. For the year ended June
30, 1996, the Equity Income Fund, Small Cap Fund, Balanced Income Fund,
International Fund, Total Return Bond Fund, Low Duration Fund and Short-Term
Investment Fund paid $1,238,052, $114,521, $345,917, $939,065, $80,247,
$676,352, and $1,164, respectively, to the Advisor.
As a result of its agreement to limit Fund expenses, for the year ended
June 30, 1995, the Advisor waived a portion of its fee with respect to the
Equity Income Fund, Small Cap Fund, Balanced Income Fund, International Fund,
Total Return Bond Fund, Low Duration Fund, and Short-Term Investment Fund in the
amounts of $24,311, $77,404, $65,858, $125,088, $106,712, $132,208, and
$100,162, respectively. For the year ended June 30, 1995, the Equity Income
Fund, Small Cap Fund, Balanced Income Fund, International Fund, and Low Duration
Fund paid $772,117, $41,867, $189,426, $117,974, and $176,601, respectively, to
the Advisor. The Total Return Bond Fund and Short-Term Investment Fund did not
pay advisory fees for the year ended June 30, 1995.
For the fiscal years ended June 30, 1997, 1996 and 1995, the Equity Fund
for Insurance Companies paid $147,583, $67,516, and $76,848, respectively, to
the Advisor. The Advisor pays all of the regular annual operating expenses,
except for the advisory fees, of the Equity Fund for Insurance Companies.
Each of the ten Investment Advisory Agreements provides that the Advisor
shall not be liable to the Trust for any error of judgment by the Advisor or for
any loss sustained by any of the Funds except in the case of a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages will be limited as provided in the 1940 Act) or
of willful misfeasance, bad faith, gross negligence or reckless disregard of
duty.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Advisory Agreements state that in connection with its
duties to arrange for the purchase and the sale of securities held in the
portfolio of each Fund by placing purchase and sale orders for that Fund, the
Advisor shall select such broker-dealers ("brokers") as shall, in the Advisor's
judgment, implement the policy of the Trust to achieve "best execution", i.e.,
prompt and efficient execution at the most favorable securities price. In making
such selection, the Advisor is authorized in the Agreements to consider the
reliability, integrity and financial condition of the broker. The Advisor is
also authorized by the Agreements to consider whether the broker provides
brokerage and/or research services to the Fund and/or other accounts of the
Advisor. The Agreements state that the commissions paid to brokers may be higher
than another broker would have charged if a good faith determination is made by
the Advisor that the commission is reasonable in relation to the services
provided, viewed in terms of either that particular transaction or the Advisor's
overall responsibilities as to the accounts as to which it exercises investment
discretion and that the Advisor shall use its judgment in determining that the
amount of commissions paid are reasonable in relation to the value of brokerage
and research services provided and need not place or attempt to place a specific
dollar value on such services or on the portion of commission rates reflecting
such services. The Agreements provide that to demonstrate that such
determinations were in good faith, and to show the overall reasonableness of
commissions paid, the Advisor shall be prepared to show that commissions paid
(1) were for purposes contemplated by the Agreements; (2) were for products or
services which provide lawful and appropriate assistance to the Advisor's
decision-making process; and (3) were within a reasonable range as compared to
the rates charged by brokers to other institutional investors as such rates may
become known from available information. The Advisor is also authorized to
consider sales of shares of each Fund and/or of any other investment companies
for which the
B-19
<PAGE> 79
Advisor acts as Advisor as a factor in the selection of brokers to execute
brokerage and principal transactions, subject to the requirements of "best
execution", as defined above, although the Advisor is not currently doing so.
The research services discussed above may be in written form or through
direct contact with individuals and may include information as to particular
companies and securities as well as market, economic or institutional areas and
information assisting the Trust in the valuation of the Funds' investments. The
research which the Advisor receives for the Funds' brokerage commissions,
whether or not useful to a Fund, may be useful to the Advisor in managing the
accounts of the Advisor's other advisory clients. Similarly, the research
received for the commissions of such accounts may be useful to any Fund.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission although the price of the security usually includes a profit to the
dealer. Money market instruments usually trade on a "net" basis as well. On
occasion, certain money market instruments may be purchased by the Funds
directly from an issuer in which case no commissions or discounts are paid. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount.
The International Fund and the Global Equity Fund anticipate that their
brokerage transactions involving securities of companies headquartered in
countries other than the U.S. will be conducted primarily on the principal
exchanges of such countries. Transactions on foreign exchanges are usually
subject to fixed commissions which are generally higher than negotiated
commissions on U.S. transactions, although the Trust will endeavor to achieve
the best net results in effecting its portfolio transactions. There is generally
less government supervision and regulation of exchanges and brokers in foreign
countries than in the U.S.
The increase in portfolio turnover from fiscal 1996 to fiscal 1997 for
the Fixed Income Funds was attributable to increases in portfolio transactions
to satisfy the Funds' liquidity needs.
During the three most recent fiscal years of the Trust, the following
brokerage commissions were paid by the Funds:
<TABLE>
<CAPTION>
Fund Ended 6/30/97 Ended 6/30/96 Ended 6/30/95
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Income $230,762 ** $152,950 $ 175,248
Mid Cap $1,984 * - -
Small Cap $31,024 $45,342 $ 48,006
International $1,506,506 ** $905,601 ** $ 118,165
Global Equity $11,449 * - -
Balanced Income $25,414 $28,215 $ 16,004
Low Duration $ - 0 - $ - 0 - $ - 0 -
Total Return Bond $ - 0 - $ - 0 - $ - 0 -
Short-Term Investment $ - 0 - $ - 0 - $ - 0 -
Equity Fund for Insurance Companies $14,527 $24,542 $ 17,419
</TABLE>
* Period from commencement of operations on January 2, 1997 through June 30,
1997.
** The increase in commissions paid by the Equity Income Fund and
International Fund were due to a significant increase in the Funds'
assets, resulting in an increase in investment purchases.
NET ASSET VALUE
As indicated in each Prospectus, the net asset value per share of each
Fund's shares will be determined on each day that the New York Stock Exchange is
open for trading. That Exchange annually announces the days on which it will not
be open for trading; the most recent announcement indicates that it will not be
open on the following days: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, that Exchange may close on days not
included in that announcement. Also, no Fund is required to compute its net
asset value on any day on which no order to purchase or redeem its shares is
received.
Securities are valued by an independent pricing agent to the extent
possible. In determining the net asset value of each Fund's shares, equity
securities that are listed on a securities exchange (whether domestic or
foreign) or quoted by the NASDAQ National Market System are valued at the last
sale price on that day as of the close of regular trading on the New York Stock
Exchange (which is currently 4:00 p.m., New York time), or, in the absence of
recorded sales, at the average of readily available closing bid and asked prices
on such exchange or on such System. Unlisted equity securities that are not
included in such National Market System are valued at the average of the quoted
bid and asked prices in the over-the-counter market.
B-20
<PAGE> 80
Fixed-income securities which are traded on a national securities exchange
will be valued at the last sale price or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such exchange.
However, securities with a demand feature exercisable within one to seven days
are valued at par. Prices for fixed-income securities may be based on quotations
received from one or more market-makers in the securities, or on evaluations
from pricing services. Fixed-income securities for which quotations or prices
are not readily available are valued at their fair value as determined by the
Advisor under guidelines established by the Board of Trustees, with reference to
fixed-income securities whose prices are more readily obtainable or to 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 their recorded value. Debt securities 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 value as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days.
Options, futures contracts and options thereon which are traded on
exchanges are valued at their last sale or settlement price as of the close of
the exchanges or, if no sales are reported, at the average of the quoted bid and
asked prices as of the close of the exchange.
Trading in securities listed on foreign securities exchanges or
over-the-counter markets is normally completed before the close of regular
trading on the New York Stock Exchange. In addition, foreign securities trading
may not take place on all business days in New York and may occur on days on
which the New York Stock Exchange is not open. In addition, foreign currency
exchange rates are generally determined prior to the close of trading on the New
York Stock Exchange. Events affecting the values of foreign securities and
currencies will not be reflected in the determination of net asset value unless
the Board of Trustees determines that the particular event would materially
affect net asset value, in which case an adjustment will be made. 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 exchange transactions conducted on a spot basis are valued at the spot
rate prevailing in the foreign exchange market.
Securities and other assets for which market quotations are not readily
available are valued at their fair value as determined by the Advisor under
guidelines established by and under the general supervision and responsibility
of the Board of Trustees.
DIVIDENDS AND TAX STATUS
[The Mid-Cap Fund and Global Equity Fund intend to elect to qualify and
remain qualified as regulated investment companies under Subchapter M of the
Internal Revenue Code.] Each [other] Fund has qualified as a regulated
investment company. Qualification as a regulated investment company requires,
among other things, that (1) at least 90% of each Fund's annual gross income,
without offset for losses from the sale or other disposition of securities, be
derived from payments with respect to securities loans, interest, dividends and
gains from the sale or other disposition of securities, foreign currencies or
options (including forward contracts) thereon; (2) each Fund derive less than
30% of its gross income from gains (without offset for losses) from the sale or
other disposition of securities or options thereon held for less than three
months; and (3) each Fund diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash, U.S. Government securities and other securities
limited in respect of any one issuer to an amount not greater than 5% of the
Fund's assets and 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its assets is invested in the securities
of any one issuer (other than U.S. Government securities). In addition, in order
not to be subject to federal taxation, each Fund must distribute to its
shareholders at least 90% of its net investment income, other than net capital
gains, earned in each year.
A Fund is required to pay an excise tax to the extent it does not
distribute to its shareholders during such calendar year at least 98% of its
ordinary income for that calendar year, 98% of its capital gains over capital
losses for the one-year period ending October 31 in such calendar year, and all
undistributed ordinary income and capital gains for the preceding respective
one-year period. The Funds intend to meet these distribution requirements to
avoid excise tax liability. The Funds also intend to continue distributing to
shareholders all of the excess of net long-term capital gain over net short-term
capital loss on sales of securities. If the net asset value of shares of a Fund
should, by reason of a distribution of realized capital gains, be reduced below
a shareholder's cost, such distribution would to that extent be a return of
capital to that shareholder even though taxable to the shareholder, and a sale
of shares by a shareholder at net asset value at that time would establish a
capital loss for federal tax purposes.
In determining the extent to which a Fund's dividends may be eligible for
the 70% dividends received deduction by corporate shareholders, interest income,
capital gain net income, gain or loss from Section 1256 contracts, dividend
income from foreign corporations and income from other sources will not
constitute qualified dividends. Corporate shareholders should consult their tax
advisors regarding other requirements applicable to the dividends received
deduction.
B-21
<PAGE> 81
Special rules apply to the treatment of certain forward foreign currency
exchange contracts (Section 1256 contracts). At the end of each year, such
investments held by a Fund must be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Except to the
extent that such gains or losses are treated as "Section 988" gains or losses,
as described below, sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or loss.
Similarly, gains or losses on forward foreign currency exchange contracts or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition are also treated as
ordinary gain or loss. These gains, referred to as "Section 988" gains or
losses, increase or decrease the amount of a Fund's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the Fund's net capital gain. If Section 988
losses exceed other investment company taxable income during a taxable year, the
Fund would not be able to make any ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary dividend, reducing
the basis of each shareholder's shares.
Any loss realized on a sale, redemption or exchange of shares of a Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
received in connection with the payment of a dividend by a Fund constitute a
replacement of shares.
PERFORMANCE INFORMATION
Total Return. Average annual total return quotations used in the Funds'
advertising and promotional materials are calculated according to the following
formula:
P(1 + T)(n) = ERV
where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the period.
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication. Average annual
total return, or "T" in the above formula, is computed by finding the average
annual compounded rates of return over the period that would equate the initial
amount invested to the ending redeemable value. Average annual total return
assumes the reinvestment of all dividends and distributions.
Average annual total returns for the periods ended June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Income Fund 26.2% 16.1% 12.3% 12.2% (Since 6/24/87)
Mid Cap Fund -- -- -- 17.1% (Since 1/2/97)
Small Cap Fund 29.7% 16.2% 11.6% 13.9% (Since 9/20/85)
Global Equity Fund -- -- -- 12.3% (Since 1/2/97)
International Fund 21.6% 15.0% -- 15.2% (Since 12/1/90)
Balanced Income Fund 15.7% 12.1% 11.4% 12.3% (Since 8/13/85)
Total Return Bond Fund 10.5% -- -- 11.5% (Since 12/6/94)
Low Duration Fund 7.8% -- -- 8.5% (Since 5/18/93)
Short-Term Investment Fund 5.8% -- -- 6.4% (Since 5/18/93)
Equity Fund for Insurance Companies 28.2% -- -- 17.2% (Since 1/29/93)
</TABLE>
Yield. Annualized yield quotations used in a Fund's advertising and
promotional materials are calculated by dividing the Fund's interest income for
a specified thirty-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
B-22
<PAGE> 82
YIELD = 2 [ ( a-b + 1)(6) -1 ]
----
cd
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and "d" equals the maximum offering price per share on the
last day of the period.
Except as noted below, in determining net investment income earned during
the period ("a" in the above formula), a Fund calculates interest earned on each
debt obligation held by it during the period by (1) computing the obligation's
yield to maturity, based on the market value of the obligation (including actual
accrued interest) on the last business day of the period or, if the obligation
was purchased during the period, the purchase price plus accrued interest; (2)
dividing the yield to maturity by 360 and multiplying the resulting quotient by
the market value of the obligation (including actual accrued interest). Once
interest earned is calculated in this fashion for each debt obligation held by
the Fund, net investment income is then determined by totaling all such interest
earned.
For purposes of these calculations, the maturity of an obligation with one
or more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.
The 30-day yields for the Total Return Bond Fund, Low Duration Fund, and
Short-Term Investment Fund for the period ended June 30, 1997 were 7.2%, 6.9%,
and 5.7%, respectively.
Other information. Each Fund's performance data quoted in advertising and
other promotional materials represents past performance and is not intended to
predict or indicate future results. The return and principal value of an
investment in a Fund will fluctuate, and an investor's redemption proceeds may
be more or less than the original investment amount. In advertising and
promotional materials a Fund may compare its performance with data published by
Lipper Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc.
("CDA"). The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper or CDA. Advertising and promotional materials also may refer
to discussions of the Fund and comparative mutual fund data and ratings reported
in independent periodicals including, but not limited to, The Wall Street
Journal, Money Magazine, Forbes, Business Week, Financial World and Barron's.
GENERAL INFORMATION ABOUT THE TRUST
The Trustees changed the name of the Trust to Hotchkis and Wiley Funds
effective October 7, 1994. The Declaration of Trust permits the Trustees to
issue an unlimited number of full and fractional shares of beneficial interest
and to divide or combine the shares into a greater or lesser number of shares
without thereby changing the proportionate beneficial interest in each Fund.
Each share represents an interest in a Fund proportionately equal to the
interest of each other share. Upon the Trust's liquidation, all shareholders
would share pro rata in the net assets of the Fund in question available for
distribution to shareholders. If they deem it advisable and in the best interest
of shareholders, the Board of Trustees may create classes of shares. The Board
of Trustees has created ten series of shares, and may create additional series
in the future, which have separate assets and liabilities; each of such series
has or will have a designation including the word "Series." Income and operating
expenses not specifically attributable to a particular Fund are allocated fairly
among the Funds by the Trustees, generally on the basis of the relative net
assets of each Fund.
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon.
Ten shareholders holding the lesser of $25,000 worth or one percent of a
Fund's shares may advise the Trustees in writing that they wish to communicate
with other shareholders for the purpose of requesting a meeting to remove a
Trustee. The Trustees will then, if requested by the applicants, mail at the
applicants' expense the applicants' communication to all other shareholders.
The Trust or any Fund may be terminated if approved by the vote of a
majority of the Trustees or by the approval of the holders of a majority of the
Trust's outstanding shares, as defined in the 1940 Act. If not so terminated,
the Trust will continue indefinitely.
Rule 18f-2 under the 1940 Act provides that as to any investment company
which has two or more series outstanding and as to any matter required to be
submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless
B-23
<PAGE> 83
approved by the holders of a "majority" (as defined in the Rule) of the voting
securities of each series affected by the matter. Such separate voting
requirements do not apply to the election of Trustees or the ratification of the
selection of accountants. The Rule contains special provisions for cases in
which an advisory contract is approved by one or more, but not all, series. A
change in investment policy may go into effect as to one or more series whose
holders so approve the change even though the required vote is not obtained as
to the holders of other affected series.
The Trust's custodian, Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin, is responsible for holding the Funds' assets and acts as
the Trust's accounting services agent. The Chase Manhattan Bank, N.A., through
its global custody network, provides custodial services for assets of the Trust
held outside the U.S. The Trust's independent accountants, Price Waterhouse LLP,
100 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, examine the Trust's
financial statements and assist in the preparation of certain reports to the
Securities and Exchange Commission.
- -------------------------------------------------------------------------------
As of June 30, 1997, the Trust's officers and Trustees as a group owned
0.04% of the Equity Income Fund's outstanding shares.
As of June 30, 1997, the following persons owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Equity Income Fund:
Lykes Bros. Inc., P.O. Box 1690, Tampa, FL 33601 - 7.77%
Oklahoma State University Foundation, 560 Student Union, Stillwater, OK
74078-7070 - 6.08%
George Wiley, 800 West 6th Street, Los Angeles, CA 90017 - 5.38%
Achmea Investments, 7300 AJ Apeldoorn, The Netherlands - 5.69%
McDonalds Charities Inv., State Street Bank, Custodian, 225 Franklin St.,
Boston, MA 02110-2804 - 10.21%
First Trust NA Trustee for Northern States Power, P.O. Box 64482, St.
Paul, MN 55164-0482 - 7.09%
As of June 30, 1997, the following person owned of record, but not
beneficially, more than five percent of the outstanding shares of the Equity
Income Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104
- - 12.75%
- ------------------------------------------------------------------------------
As of June 30, 1997, Mr. John F. Hotchkis, Trustee of the Trust and
Chairman of the Advisor, through personal and trust accounts and accounts of or
for the benefit of certain family members, may be deemed to be the beneficial
owner of 1.10% of the Balanced Income Fund's outstanding shares. The Trust's
officers and Trustees as a group owned 3.44% of the Balanced Income Fund's
outstanding shares.
As of June 30, 1997, Retirement Plan for Employees of Texas Utilities
Company System, P.O. Box 320, Pittsburgh, PA 15230- 0320, owned of record and
beneficially 26.47% of the Balanced Income Fund's shares and may be deemed a
controlling person of that Fund.
As of June 30, 1997, the following persons owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Balanced Income Fund:
Key Trust Co Trustee for certain plans of Gibson Greetings Inc., P.O. Box
94870, Cleveland, OH 44101 - 5.13%
As of June 30, 1997, the following person owned of record, but not
beneficially, more than five percent of the outstanding shares of the Balanced
Income Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104
- - 36.01%
- --------------------------------------------------------------------------------
B-24
<PAGE> 84
As of June 30, 1997, Mr. John F. Hotchkis, Trustee of the Trust and
Chairman of the Advisor, through personal and trust accounts and accounts of or
for the benefit of certain family members, may be deemed to be the beneficial
owner of 27.00% of the Small Cap Fund's outstanding shares and may be deemed a
controlling person of that Fund. The Trust's officers and Trustees as a group
owned 32.16% of the Small Cap Fund's outstanding shares.
As of June 30, 1997, the following persons owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Small Cap Fund:
Preston Hotchkis, 125 E. Victoria Street, Suite L, Santa Barbara, CA 93101
- - 7.28%
As of June 30, 1997, the following person owned of record, but not
beneficially, more than five percent of the outstanding shares of the Small Cap
Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104
- - 10.78%
- -------------------------------------------------------------------------------
As of June 30, 1997, Mr. John F. Hotchkis, Trustee of the Trust and
Chairman of the Advisor, through personal and trust accounts and accounts of or
for the benefit of certain family members, may be deemed to be the beneficial
owner of 0.38% of the International Fund's outstanding shares. The Trust's
officers and Trustees as a group owned 0.53% of the International Fund's
outstanding shares.
As of June 30, 1997, the following persons owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the International Fund:
Smith Barney, 333 West 34th Street, Floor 7, New York, NY 10001 - 10.85%
Retirement Plan for Employees of Texas Utilities Company System, P.O. Box
320, Pittsburgh, PA 15230-0320 - 5.25%
As of June 30, 1997, the following person owned of record, but not
beneficially, more than five percent of the outstanding shares of the
International Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104
- - 39.54%
- -------------------------------------------------------------------------------
As of June 30, 1997, Mr. John F. Hotchkis, Trustee of the Trust and
Chairman of the Advisor, through personal and trust accounts and accounts of or
for the benefit of certain family members, may be deemed to be the beneficial
owner of 9.27% of the Low Duration Fund's outstanding shares. The Trust's
officers and Trustees as a group owned 9.37% of the Low Duration Fund's
outstanding shares.
As of June 30, 1997, the following person owned of record, but not
beneficially, more than five percent of the outstanding shares of the Low
Duration Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104
- - 48.03%
- -------------------------------------------------------------------------------
As of June 30, 1997, Trussell & Co., for the benefit of United Airlines
Group, P.O. Box 771072, Detroit, MI 48277-1072, owned of record and beneficially
30.75% of the Short-Term Investment Fund's shares and may be deemed a
controlling person of that Fund.
As of June 30, 1997, the following persons owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Short-Term Investment Fund:
Citibank NA, trustees for Mercantile Stores Company, 111 Wall St.,
EBF/20th Flr, NY, NY 10043 - 8.67%
Susan Shanor, 4336 Town Commons Circle, Atlanta, GA 30319 - 7.24%
PAMCAH-UA LOCAL 675, 1109 Bethel St., Ste 403, Honolulu, HI 96813-2218 -
7.13%
B-25
<PAGE> 85
Hotchkis and Wiley, Division of Merrill Lynch Capital Management Group,
800 West Sixth Street, 5th Floor, L.A., CA 90017 - 14.17%
As of June 30, 1997, Dim & Co., for the benefit of YMCA of Metropolitan
Los Angeles, P.O. Box 9800, Calabasas, CA 91372-0800, owned of record and
beneficially 34.74% of the Total Return Bond Fund's shares and may be deemed a
controlling person of that Fund.
As of June 30, 1997, the following person owned of record, but not
beneficially, more than five percent of the outstanding shares of the Total
Return Bond Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104
- - 38.94%
- -------------------------------------------------------------------------------
As of June 30, 1997, Mr. John F. Hotchkis, Trustee of the Trust and
Chairman of the Advisor, through personal and trust accounts and accounts of or
for the benefit of certain family members, may be deemed to be the beneficial
owner of 16.21% of the Mid-Cap Fund's outstanding shares. The Trust's officers
and Trustees as a group owned 16.76% of the Mid-Cap Fund's outstanding shares.
As of June 30, 1997, the following persons owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Mid-Cap Fund:
Michael F. Baxter, 800 West Sixth Street, 5th Floor, L.A., CA 90017 -
8.55%
John P. Anderson, P.O. Box 1086, Idyllwild, CA 92549-1086 - 8.08%
Hep & Co., P.O. Box 9800, Calabasas, CA 91372-0800 - 10.94%
As of June 30, 1997, the following person owned of record, but not
beneficially, more than five percent of the outstanding shares of the Mid-Cap
Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA 94104
- - 5.65%
- -------------------------------------------------------------------------------
As of June 30, 1997, Mr. John F. Hotchkis, Trustee of the Trust and
Chairman of the Advisor, through personal and trust accounts and accounts of or
for the benefit of certain family members, may be deemed to be the beneficial
owner of 42.79%of the Global Equity Fund's outstanding shares and may be deemed
a controlling person of that Fund. The Trust's officers and Trustees as a group
owned 43.55% of the Global Equity Fund's outstanding shares.
As of June 30, 1997, the following persons owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Global Equity Fund:
Sarah Ketterer, 800 West Sixth Street, 5th Floor, L.A., CA 90272-3809 -
9.04%
Hotchkis and Wiley, a division of Merrill Lynch Asset Management, L.P.,
800 West Sixth Street, 5th Floor, L.A., CA 90017 - 15.94%
B-26
<PAGE> 86
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 98.6% Shares Value
<S> <C> <C>
- --------------------------------------------------------
AEROSPACE -- 2.1%
........................................................
Lockheed Martin Corporation 23,079 $ 1,938,636
........................................................
Northrop Grumman Corporation 28,318 1,929,164
........................................ ============
3,867,800
- --------------------------------------------------------
AUTO-RELATED -- 2.8%
........................................................
Dana Corporation 106,636 3,305,716
........................................................
PACCAR, Incorporated 35,161 1,722,889
........................................ ============
5,028,605
- --------------------------------------------------------
AUTOS & TRUCKS -- 8.3%
........................................................
Chrysler Corporation 30,000 1,860,000
........................................................
Ford Motor Company 185,954 6,020,261
........................................................
General Motors Corporation 140,000 7,332,500
........................................ ============
15,212,761
- --------------------------------------------------------
BANKS -- 8.6%
........................................................
BankAmerica Corporation 33,038 2,502,628
........................................................
The Chase Manhattan
Corporation 16,105 1,137,416
........................................................
First Chicago NBD Corporation 83,349 3,261,030
........................................................
First Hawaiian, Inc. 37,757 1,076,075
........................................................
First of America Bank
Corporation 32,477 1,453,346
........................................................
KeyCorp 57,415 2,224,831
........................................................
National City Corporation 38,758 1,361,375
........................................................
Regions Financial Corporation 56,636 2,647,733
........................................ ============
15,664,434
- --------------------------------------------------------
BEVERAGES -- 0.7%
........................................................
Anheuser-Busch Companies, Inc. 16,991 1,274,325
- --------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 1.4%
........................................................
Weyerhaeuser Company 60,016 2,550,680
- --------------------------------------------------------
CHEMICALS -- 2.2%
........................................................
Goodrich (B.F.) Company 60,412 2,257,898
........................................................
PPG Industries, Inc. 16,479 803,351
........................................................
Witco Corporation 27,631 949,816
........................................ ============
4,011,065
- --------------------------------------------------------
COAL & GAS -- 1.8%
........................................................
Eastern Enterprises 99,393 3,304,817
- --------------------------------------------------------
DIVERSIFIED -- 5.5%
........................................................
Ogden Corporation 173,655 3,147,497
........................................................
Olin Corporation 23,598 2,106,121
........................................................
Tenneco, Inc. 94,754 4,844,298
........................................ ============
10,097,916
- --------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
DRUGS -- 1.2%
........................................................
Merck & Company, Inc. 34,925 $ 2,257,028
- --------------------------------------------------------
ENGINEERING AND CONSTRUCTION -- 1.0%
........................................................
Harsco Corporation 26,241 1,764,707
- --------------------------------------------------------
FINANCIAL SERVICES -- 6.1%
........................................................
Great Western Financial
Corporation 109,027 2,603,020
........................................................
H.F. Ahmanson & Company 102,253 2,760,831
........................................................
Household International, Inc. 49,084 3,730,384
........................................................
Transamerica Corporation 25,486 2,064,366
........................................ ============
11,158,601
- --------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 0.2%
........................................................
Whirlpool Corporation 7,200 357,300
- --------------------------------------------------------
INSURANCE -- 6.0%
........................................................
Allstate Corporation 22,042 1,005,666
........................................................
Aon Corporation 102,183 5,185,787
........................................................
Lincoln National Corporation 41,699 1,928,579
........................................................
USLIFE Corporation 83,963 2,760,284
........................................ ============
10,880,316
- --------------------------------------------------------
MACHINERY -- 1.9%
........................................................
Deere & Company 84,954 3,398,160
- --------------------------------------------------------
METALS & MINING -- 0.6%
........................................................
Phelps Dodge Corporation 16,555 1,032,618
- --------------------------------------------------------
OIL -- DOMESTIC -- 2.9%
........................................................
Atlantic Richfield Company 3,776 447,456
........................................................
Occidental Petroleum
Corporation 121,589 3,009,328
........................................................
Sun Company, Inc. 57,237 1,738,574
........................................ ============
5,195,358
- --------------------------------------------------------
OIL -- INTERNATIONAL -- 3.2%
........................................................
Amoco Corporation 28,000 2,026,500
........................................................
Chevron Corporation 20,000 1,180,000
........................................................
Exxon Corporation 10,000 868,750
........................................................
Mobil Corporation 1,632 182,988
........................................................
Royal Dutch Petroleum Company
ADR 1,888 290,280
........................................................
TransCanada Pipelines Ltd. 93,071 1,372,797
........................................ ============
5,921,315
- --------------------------------------------------------
PAPER -- 1.9%
........................................................
Georgia Pacific Corporation 50,000 3,550,000
- --------------------------------------------------------
</TABLE>
See Notes to Financial Statements
1
<PAGE> 87
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.7%
........................................................
Eastman Kodak Company 40,589 $ 3,155,795
- --------------------------------------------------------
POLLUTION CONTROL -- 3.5%
........................................................
Browning-Ferris Industries,
Inc. 220,000 6,380,000
- --------------------------------------------------------
PROFESSIONAL SERVICES -- 1.5%
........................................................
PHH Corporation 47,385 2,700,945
- --------------------------------------------------------
RAILROADS -- 4.3%
........................................................
Burlington Northern Santa Fe
Corp. 24,542 1,984,834
........................................................
Norfolk Southern Corporation 37,757 3,199,906
........................................................
Union Pacific Corporation 37,757 2,638,270
........................................ ============
7,823,010
- --------------------------------------------------------
RETAIL -- GENERAL -- 4.6%
........................................................
J.C. Penney Co., Incorporated 44,323 2,326,957
........................................................
Kmart Corporation 144,671 1,790,304
........................................................
May Department Stores Company 47,196 2,064,825
........................................................
Sears, Roebuck & Company 47,196 2,294,906
........................................ ============
8,476,992
- --------------------------------------------------------
STEEL -- 7.7%
........................................................
Allegheny Ludlum Corporation 397,900 7,510,362
........................................................
Lukens, Inc. 120,000 2,865,000
........................................................
USX-U.S. Steel Group, Inc. 128,941 3,658,701
........................................ ============
14,034,063
- --------------------------------------------------------
TELECOMMUNICATIONS -- 1.2%
........................................................
Comsat Corporation 84,954 2,208,804
- --------------------------------------------------------
TOBACCO -- 7.5%
........................................................
American Brands, Inc. 165,000 7,486,875
........................................................
Philip Morris Companies, Inc. 26,150 2,719,600
........................................................
UST, Inc. 101,029 3,460,243
........................................ ============
13,666,718
- --------------------------------------------------------
TRUCKING -- 0.9%
........................................................
Ryder System, Inc. 56,636 1,592,887
- --------------------------------------------------------
UTILITY -- ELECTRIC -- 3.1%
........................................................
CMS Energy Corporation 70,795 2,185,796
........................................................
New York State Electric & Gas
Corporation 15,197 370,427
........................................................
Peco Energy Company 75,000 1,950,000
........................................................
Public Service Enterprises
Group 43,893 1,201,571
........................................ ============
5,707,794
- --------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
UTILITY -- TELEPHONE -- 4.2%
........................................................
BellSouth Corporation 35,114 $ 1,487,956
........................................................
Cincinnati Bell, Incorporated 60,000 3,127,500
........................................................
GTE Corporation 9,439 422,395
........................................................
NYNEX Corporation 56,636 2,690,210
........................................ ============
7,728,061
- --------------------------------------------------------
Total common stocks (cost
$145,227,490) 180,002,875
- --------------------------------------------------------
PREFERRED STOCKS -- 1.2%
- --------------------------------------------------------
Armco Incorporated Class A
........................................................
$2.10 Cum. Cv. Preferred 21,238 493,783
........................................................
$4.50 Cum. Cv. Preferred 6,702 315,832
........................................................
Bethlehem Steel Corporation
........................................................
$2.50 Cum. Cv. Preferred 4,600 122,475
........................................................
$5.00 Cum. Cv. Preferred 22,865 1,188,980
........................................ ============
Total preferred stocks
(cost $2,168,760) 2,121,070
- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE RATE Principal
DEMAND NOTES* -- 0.3% Amount
<S> <C> <C>
- --------------------------------------------------------
General Mills, Inc., 5.14% $241,721 241,721
........................................................
Pitney Bowes, Inc., 5.1441% 400,000 400,000
........................................ ============
Total variable rate demand
notes 641,721
(cost $641,721)
- --------------------------------------------------------
Total investments -- 100.1%
(cost $148,037,971) 182,765,666
........................................................
Liabilities in excess of
other
assets -- (0.1%) (227,561)
........................................ ============
Total net assets -- 100.0% $182,538,105
- --------------------------------------------------------
</TABLE>
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of June 30, 1996.
ADR -- American Depository Receipt.
See Notes to Financial Statements
2
<PAGE> 88
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 96.5% Shares Value
<S> <C> <C>
- --------------------------------------------------------
APPAREL & TEXTILES -- 3.8%
........................................................
Donnkenny, Inc. # 15,000 $ 292,500
........................................................
Kellwood Company 7,000 128,625
........................................................
Kenneth Cole Productions, Class
A # 10,000 197,500
......................................... ===========
618,625
- --------------------------------------------------------
APPLIANCES & HOUSEHOLD FURNITURE -- 4.8%
........................................................
Open Plan Systems, Inc. # 20,000 240,000
........................................................
REX Stores Corporation # 35,000 538,125
......................................... ===========
778,125
- --------------------------------------------------------
AUTO PARTS -- 4.0%
........................................................
APS Holding Corporation, Class
A # 30,000 660,000
- --------------------------------------------------------
AUTO-RELATED -- 2.4%
........................................................
Special Devices, Inc. # 25,000 400,000
- --------------------------------------------------------
BANKS -- 4.3%
........................................................
Coastal Bancorp, Inc. 30,000 540,000
........................................................
Commercial Bank of New York 16,000 176,000
......................................... ===========
716,000
- --------------------------------------------------------
BUILDING MATERIALS -- 3.1%
........................................................
NCI Building Systems, Inc. # 15,000 506,250
- --------------------------------------------------------
CHEMICALS -- 1.8%
........................................................
Dexter Corporation 10,000 297,500
- --------------------------------------------------------
COMMUNICATIONS & MEDIA -- 6.7%
........................................................
Century Communications
Corporation, Class A # 50,000 425,000
........................................................
EIS International, Inc. # 15,000 382,500
........................................................
VTEL Corporation # 30,000 288,750
......................................... ===========
1,096,250
- --------------------------------------------------------
COMPUTERS -- 0.9%
........................................................
Key Tronic Corporation # 23,000 149,500
- --------------------------------------------------------
COMPUTER-RELATED -- 3.1%
........................................................
Applied Voice Technology, Inc.
# 45,000 517,500
- --------------------------------------------------------
COMPUTER SERVICES -- 0.5%
........................................................
AMX Corporation # 10,000 78,750
- --------------------------------------------------------
ELECTRONICS -- 3.7%
........................................................
FLIR Systems, Inc. # 50,000 612,500
- --------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.4%
........................................................
Stewart and Stevenson Services,
Inc. 10,000 227,500
- --------------------------------------------------------
FOODS -- 2.1%
........................................................
Michael Foods, Inc. 30,000 348,750
- --------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
HOMEBUILDERS -- 1.8%
........................................................
Del Webb Corporation 15,000 $ 300,000
- --------------------------------------------------------
HOSPITAL SUPPLIES & SERVICES -- 3.8%
........................................................
Healthcare Services Group, Inc.
# 70,000 630,000
- --------------------------------------------------------
INSURANCE -- 7.5%
........................................................
GCR Holdings, Ltd. 5,000 132,500
........................................................
Omni Insurance Group, Inc. # 60,000 555,000
........................................................
PXRE Corporation 22,500 545,625
......................................... ===========
1,233,125
- --------------------------------------------------------
OIL -- DOMESTIC -- 5.3%
........................................................
Abraxas Petroleum Corporation # 40,000 272,500
........................................................
Tom Brown, Inc. # 35,000 599,375
......................................... ===========
871,875
- --------------------------------------------------------
REAL ESTATE -- 10.2%
........................................................
NHP, Inc. # 20,000 412,500
........................................................
Redwood Trust, Inc. 45,000 1,260,000
......................................... ===========
1,672,500
- --------------------------------------------------------
RETAIL -- GENERAL -- 2.7%
........................................................
Orchard Supply Hardware Stores
Corporation # 15,000 451,875
- --------------------------------------------------------
RETAIL -- SPECIALTY APPAREL -- 2.0%
........................................................
Haggar Corporation 25,000 337,500
- --------------------------------------------------------
SAVINGS & LOANS -- 7.1%
........................................................
CENFED Financial Corporation 8,800 195,800
........................................................
First Republic Bancorp, Inc. # 40,000 615,000
........................................................
Metropolitan Bancorp
Corporation # 26,500 357,750
......................................... ===========
1,168,550
- --------------------------------------------------------
SEMICONDUCTORS -- 2.9%
........................................................
Lattice Semiconductor
Corporation # 20,000 482,500
- --------------------------------------------------------
STEEL FABRICATOR -- 1.8%
........................................................
Citation Corporation # 25,000 300,000
- --------------------------------------------------------
TOYS -- 2.5%
........................................................
Toy Biz, Inc., Class A # 20,000 405,000
- --------------------------------------------------------
TRANSPORTATION EQUIPMENT -- 1.3%
........................................................
Tranz Rail Holdings Ltd. -- ADR
# 15,000 208,125
- --------------------------------------------------------
</TABLE>
See Notes to Financial Statements
3
<PAGE> 89
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
TRUCKING & SHIPPING -- 5.0%
........................................................
Covenant Transport, Inc. --
Class A # 15,000 $ 255,000
........................................................
Rollins Truck Leasing
Corporation 45,000 466,875
........................................................
USA Truck, Inc. # 10,000 105,000
......................................... ===========
826,875
- --------------------------------------------------------
Total common stocks
(cost $14,773,851) 15,895,175
- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE RATE Principal
DEMAND NOTES* -- 0.9% Amount
<S> <C> <C>
- --------------------------------------------------------
General Mills, Inc., 5.14% $153,675 153,675
......................................... ===========
Total variable rate demand
notes 153,675
(cost $153,675)
- --------------------------------------------------------
Total investments -- 97.4%
(cost $14,927,526) 16,048,850
........................................................
Other assets in excess of
liabilities -- 2.6% 431,836
......................................... ===========
Total net assets -- 100.0% $16,480,686
- --------------------------------------------------------
# Non-income producing security.
* 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 June 30, 1996.
ADR -- American Depository Receipt.
</TABLE>
See Notes to Financial Statements
4
<PAGE> 90
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 93.0%
- ---------------------------------------------------------
AUSTRALIA -- 5.2% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
BANKING -- 1.9%
.........................................................
Australia and New Zealand
Banking Group, Ltd. 1,338,000 $ 6,339,525
- ---------------------------------------------------------
BUILDING MATERIALS -- 1.2%
.........................................................
Pioneer International, Ltd. 1,352,000 3,937,155
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 0.2%
.........................................................
Pacific Dunlop, Ltd. 389,000 875,628
- ---------------------------------------------------------
INSURANCE -- 1.9%
.........................................................
GIO Australia Holdings, Ltd. 1,731,786 4,266,215
.........................................................
QBE Insurance Group, Ltd. 320,646 1,905,359
......................................... ============
6,171,574
......................................... ============
Total Australia 17,323,882
- ---------------------------------------------------------
AUSTRIA -- 1.6%
- ---------------------------------------------------------
STEEL -- 1.6%
.........................................................
Boehler-Uddeholm AG 70,000 5,423,663
......................................... ============
Total Austria 5,423,663
- ---------------------------------------------------------
BELGIUM -- 0.8%
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 0.8%
.........................................................
Groupe Bruxelles Lambert, S.A. 20,100 2,514,986
.........................................................
Groupe Bruxelles Lambert rights
# 60 17
......................................... ============
Total Belgium 2,515,003
- ---------------------------------------------------------
CANADA -- 5.8%
- ---------------------------------------------------------
BANKS -- 2.7%
.........................................................
Bank of Nova Scotia 152,038 3,696,241
.........................................................
Canadian Imperial Bank of
Commerce 168,000 5,419,077
......................................... ============
9,115,318
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.5%
.........................................................
IMASCO, Ltd. 238,000 4,862,405
- ---------------------------------------------------------
METALS & MINERALS -- 0.5%
.........................................................
Noranda, Inc. 79,000 1,616,884
- ---------------------------------------------------------
RAILROADS -- 1.1%
.........................................................
Canadian National Railway 201,000 3,701,724
......................................... ============
Total Canada 19,296,331
- ---------------------------------------------------------
<CAPTION>
FINLAND -- 1.7% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
FOREST PRODUCTS & PAPER -- 1.7%
.........................................................
UPM-Kymmene OY # 270,000 $ 5,584,924
......................................... ============
Total Finland 5,584,924
- ---------------------------------------------------------
FRANCE -- 4.3%
- ---------------------------------------------------------
BUILDING MATERIALS & COMPONENTS -- 1.5%
.........................................................
LaFarge Coppee SA 83,173 5,032,623
- ---------------------------------------------------------
OIL & GAS -- 1.5%
.........................................................
Societe Nationale Elf
Acquitaine 66,000 4,853,762
- ---------------------------------------------------------
STEEL -- 1.3%
.........................................................
Unisor Sacilor # 297,000 4,283,580
......................................... ============
Total France 14,169,965
- ---------------------------------------------------------
GERMANY -- 3.1%
- ---------------------------------------------------------
CHEMICALS -- 1.6%
.........................................................
Bayer AG 155,000 5,453,017
- ---------------------------------------------------------
MANUFACTURING -- 1.5%
.........................................................
Buderus AG 11,500 4,873,077
......................................... ============
Total Germany 10,326,094
- ---------------------------------------------------------
HONG KONG -- 9.6%
- ---------------------------------------------------------
BANKS -- 1.8%
.........................................................
HSBC Holdings, PLC 392,800 5,937,285
- ---------------------------------------------------------
PRINTING & PUBLISHING -- 2.1%
.........................................................
Oriental Press Group, Ltd. 4,953,000 2,655,504
.........................................................
South China Morning Post
(Holdings), Ltd. 6,010,000 4,115,105
......................................... ============
6,770,609
- ---------------------------------------------------------
RETAIL -- SPECIALTY -- 1.5%
.........................................................
Dickson Concepts International,
Ltd. 2,850,000 3,645,110
.........................................................
Harbour Ring International
Holdings 11,426,000 1,239,950
......................................... ============
4,885,060
- ---------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 2.9%
.........................................................
Hang Lung Development Co., Ltd. 1,955,000 3,674,856
.........................................................
New World Development Co., Ltd. 1,305,000 6,052,510
......................................... ============
9,727,366
- ---------------------------------------------------------
UTILITY -- TELECOMMUNICATIONS -- 1.3%
.........................................................
Hong Kong Telecommunications
Ltd. 2,480,000 4,453,455
......................................... ============
Total Hong Kong 31,773,775
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
5
<PAGE> 91
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
IRELAND -- 1.7% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
PAPER -- 1.7%
.........................................................
Jefferson Smurfit Group PLC 2,129,430 $ 5,715,229
......................................... ============
Total Ireland 5,715,229
- ---------------------------------------------------------
ITALY -- 1.2%
- ---------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.2%
.........................................................
Danieli & Company 1,086,000 3,860,985
......................................... ============
Total Italy 3,860,985
- ---------------------------------------------------------
JAPAN -- 14.4%
- ---------------------------------------------------------
AUTOS & TRUCKS -- 1.3%
.........................................................
Bridgestone Corporation 165,000 3,144,104
.........................................................
Suzuki Motor Corporation 105,000 1,378,537
......................................... ============
4,522,641
- ---------------------------------------------------------
BUILDING MATERIAL & COMPONENTS -- 1.7%
.........................................................
Sekisui Chemical Co., Ltd. 469,000 5,729,864
- ---------------------------------------------------------
CONSTRUCTION & HOUSING -- 0.9%
.........................................................
Daiwa House Industry Co., Ltd. 187,000 2,898,392
- ---------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.3%
.........................................................
Nintendo Co., Ltd. 57,300 4,262,962
- ---------------------------------------------------------
ELECTRICAL MACHINERY -- 3.2%
.........................................................
Nichicon Corporation 339,000 4,914,320
.........................................................
Sony Corporation 87,400 5,745,309
......................................... ============
10,659,629
- ---------------------------------------------------------
FINANCIAL SERVICES -- 1.1%
.........................................................
Promise Company Ltd. 74,500 3,667,893
- ---------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.0%
.........................................................
Hokushin 250,600 3,198,717
- ---------------------------------------------------------
INSURANCE -- 1.3%
.........................................................
Nippon Fire & Marine Insurance 645,000 4,204,675
- ---------------------------------------------------------
IRON/STEEL -- 1.6%
.........................................................
Yodogawa Steel Works 701,000 5,349,462
- ---------------------------------------------------------
PHARMACEUTICALS -- 1.0%
.........................................................
Terumo 259,000 3,282,322
......................................... ============
Total Japan 47,776,557
- ---------------------------------------------------------
<CAPTION>
MALAYSIA -- 2.2% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
BUILDING MATERIALS -- 0.4%
.........................................................
Kedah Cement Holdings BHD 679,000 $ 1,257,187
- ---------------------------------------------------------
FINANCIAL SERVICES -- 0.9%
.........................................................
Arab Malaysian Finance Berhad 663,000 2,896,198
- ---------------------------------------------------------
TRUCKING & SHIPPING -- 0.9%
.........................................................
Malaysian International
Shipping Corporation BHD 1,013,000 3,146,294
......................................... ============
Total Malaysia 7,299,679
- ---------------------------------------------------------
NETHERLANDS -- 7.4%
- ---------------------------------------------------------
CHEMICALS -- 1.8%
.........................................................
Akzo Nobel NV 50,500 6,050,027
- ---------------------------------------------------------
CONSTRUCTION & HOUSING -- 1.4%
.........................................................
Hollandsche Beton Groep NV 24,479 4,689,365
- ---------------------------------------------------------
FINANCIAL SERVICES -- 1.4%
.........................................................
Internationale Nederlanden
Groep NV 155,857 4,647,471
- ---------------------------------------------------------
INSURANCE -- 1.3%
.........................................................
Fortis AMEV NV 147,843 4,235,267
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 1.5%
.........................................................
KPN 127,763 4,835,153
......................................... ============
Total Netherlands 24,457,283
- ---------------------------------------------------------
NEW ZEALAND -- 1.8%
- ---------------------------------------------------------
BUILDING MATERIALS -- 1.0%
.........................................................
Fletcher Challenge Building 1,697,500 3,314,267
- ---------------------------------------------------------
FOREST PRODUCTS & PAPER -- 0.4%
.........................................................
Fletcher Challenge Paper 695,000 1,342,662
- ---------------------------------------------------------
OIL & GAS -- 0.4%
.........................................................
Fletcher Challenge Energy 522,500 1,152,590
......................................... ============
Total New Zealand 5,809,519
- ---------------------------------------------------------
NORWAY -- 1.3%
- ---------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.1%
.........................................................
Kvaerner AS--Class A 10,227 432,138
- ---------------------------------------------------------
PHARMACEUTICALS & HEALTH CARE -- 0.8%
.........................................................
Nycomed ASA -- Class B # 200,000 2,770,794
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 0.4%
.........................................................
Hafslund ASA -- Class B 200,000 1,262,251
......................................... ============
Total Norway 4,465,183
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
6
<PAGE> 92
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
SINGAPORE -- 2.7% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
DIVERSIFIED INDUSTRIES -- 2.2%
.........................................................
Jardine Matheson 1,002,200 $ 7,366,170
- ---------------------------------------------------------
MACHINERY & ENGINEERING -- 0.5%
.........................................................
Sembawang Corporation 291,000 1,443,204
......................................... ============
Total Singapore 8,809,374
- ---------------------------------------------------------
SPAIN -- 3.3%
- ---------------------------------------------------------
BANKS -- 1.7%
.........................................................
Banco Santander SA 122,500 5,713,633
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 1.6%
.........................................................
Telefonica De Espana 290,000 5,338,080
......................................... ============
Total Spain 11,051,713
- ---------------------------------------------------------
SWEDEN -- 3.1%
- ---------------------------------------------------------
COMPUTER SOFTWARE -- 0.7%
.........................................................
Enator AB # 101,500 2,332,727
- ---------------------------------------------------------
DEFENSE -- 0.4%
.........................................................
Celsius Industrier AB 101,500 1,330,802
- ---------------------------------------------------------
DIVERSIFIED -- 2.0%
.........................................................
Marieberg Tidnings AB -- Class
A 263,000 6,579,485
......................................... ============
Total Sweden 10,243,014
- ---------------------------------------------------------
SWITZERLAND -- 7.3%
- ---------------------------------------------------------
BUILDING MATERIALS -- 1.2%
.........................................................
Sarna Kunststoff Holding AG
"registered" 3,750 3,954,808
- ---------------------------------------------------------
BUSINESS SERVICES -- 0.5%
.........................................................
SGS Surveillance Holding SA 3,900 1,713,750
- ---------------------------------------------------------
CHEMICALS -- 1.2%
.........................................................
Ciba-Geigy AG "registered" 3,300 4,020,722
- ---------------------------------------------------------
FOOD PRODUCERS -- 0.2%
.........................................................
Nestle SA "registered" 735 839,150
- ---------------------------------------------------------
INSURANCE -- 1.6%
.........................................................
Swiss Reinsurance Co.
"registered" 5,000 5,133,261
- ---------------------------------------------------------
MACHINERY & EQUIPMENT -- 2.6%
.........................................................
Sig Schweizerische Industrie --
Gesellschaft Holding AG 2,010 4,753,440
.........................................................
Sulzer Gebruder AG (P.C.) 6,400 3,834,965
......................................... ============
8,588,405
......................................... ============
Total Switzerland 24,250,096
- ---------------------------------------------------------
<CAPTION>
UNITED KINGDOM -- 14.5% Shares Value
- ---------------------------------------------------------
<S> <C> <C>
BANKS -- 1.5%
.........................................................
National Westminster Bank, PLC 529,000 $ 5,063,275
- ---------------------------------------------------------
BUILDING MATERIALS -- 1.1%
.........................................................
Redland PLC 600,000 3,738,443
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.2%
.........................................................
Hanson, PLC 1,350,000 3,786,222
- ---------------------------------------------------------
FOOD PRODUCERS -- 1.5%
.........................................................
Hillsdown Holdings, PLC 1,840,000 4,974,646
- ---------------------------------------------------------
HOUSING CONSTRUCTION -- 0.7%
.........................................................
Barratt Developments PLC 562,500 2,219,992
- ---------------------------------------------------------
INSURANCE -- 0.7%
.........................................................
Commercial Union, PLC 270,000 2,433,251
- ---------------------------------------------------------
RETAIL -- 1.9%
.........................................................
Argyll Group PLC 1,150,000 6,200,439
- ---------------------------------------------------------
TOBACCO -- 1.4%
.........................................................
BAT Industries, PLC 602,500 4,690,184
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 1.7%
.........................................................
Powergen ORD 770,000 5,635,166
- ---------------------------------------------------------
UTILITY -- GAS -- 1.2%
.........................................................
British Gas PLC 1,400,000 3,915,576
- ---------------------------------------------------------
UTILITY -- WATER -- 1.6%
.........................................................
Hyder PLC 465,000 5,158,771
......................................... ============
Total United Kingdom 47,815,965
- ---------------------------------------------------------
Total common stocks -- 93.0%
(cost $291,115,551) 307,968,234
.........................................................
Other assets in excess of liabilities --
7.0% 23,025,209
......................................... ============
Total net assets -- 100% $330,993,443
- ---------------------------------------------------------
</TABLE>
# Non-income producing security.
P.C. -- Participation Certificates.
See Notes to Financial Statements
7
<PAGE> 93
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 41.2% Shares Value
<S> <C> <C>
- --------------------------------------------------------
AEROSPACE -- 1.8%
........................................................
Northrop Grumman Corporation 5,200 $ 354,250
........................................................
Rockwell International
Corporation 7,100 406,475
........................................................
United Technologies
Corporation 4,700 540,500
........................................ ============
1,301,225
- --------------------------------------------------------
AUTO-RELATED -- 0.4%
........................................................
Dana Corporation 10,000 310,000
- --------------------------------------------------------
AUTOS & TRUCKS -- 2.5%
........................................................
Ford Motor Company 30,100 974,486
........................................................
General Motors Corporation 14,500 759,438
........................................ ============
1,733,924
- --------------------------------------------------------
BANKS -- 2.4%
........................................................
BankAmerica Corporation 3,500 265,125
........................................................
The Chase Manhattan
Corporation 4,680 330,525
........................................................
Comerica, Inc. 5,500 245,438
........................................................
First Chicago NBD Corporation 3,300 129,113
........................................................
First of America Bank
Corporation 8,700 389,325
........................................................
National City Corporation 10,500 368,813
........................................ ============
1,728,339
- --------------------------------------------------------
BEVERAGES -- 0.5%
........................................................
Anheuser-Busch Companies, Inc. 5,000 375,000
- --------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 0.8%
........................................................
Weyerhaeuser Company 14,000 595,000
- --------------------------------------------------------
CHEMICALS -- 1.0%
........................................................
Dow Chemical Company 4,800 364,800
........................................................
Dupont (E.I.) De Nemours &
Company 4,800 379,800
........................................ ============
744,600
- --------------------------------------------------------
DIVERSIFIED -- 1.4%
........................................................
Hanson PLC, ADR 26,000 370,500
........................................................
Tenneco, Inc. 12,400 633,950
........................................ ============
1,004,450
- --------------------------------------------------------
DRUGS -- 1.5%
........................................................
American Home Products
Corporation 5,000 300,625
........................................................
Baxter International, Inc. 6,200 292,950
........................................................
Bristol-Myers Squibb Company 2,800 252,000
........................................................
Merck & Company, Inc. 3,600 232,650
........................................ ============
1,078,225
- --------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
FINANCIAL SERVICES -- 4.1%
........................................................
Beneficial Corporation 6,200 $ 347,975
........................................................
Great Western Financial
Corporation 31,000 740,125
........................................................
H.F. Ahmanson & Company 36,000 972,000
........................................................
Household International, Inc. 4,200 319,200
........................................................
Transamerica Corporation 6,000 486,000
........................................ ============
2,865,300
- --------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 0.1%
........................................................
Whirlpool Corporation 1,300 64,513
- --------------------------------------------------------
INSURANCE -- 1.4%
........................................................
Aetna Life & Casualty Company 4,600 328,900
........................................................
Aon Corporation 7,500 380,625
........................................................
USLIFE Corporation 7,700 253,138
........................................ ============
962,663
- --------------------------------------------------------
MACHINERY -- 0.6%
........................................................
Deere & Company 10,600 424,000
- --------------------------------------------------------
METALS & MINING -- 2.0%
........................................................
Aluminum Company of America 10,900 625,387
........................................................
Phelps Dodge Corporation 8,000 499,000
........................................................
Reynolds Metals Company 5,000 260,625
........................................ ============
1,385,012
- --------------------------------------------------------
OIL -- DOMESTIC -- 1.7%
........................................................
Atlantic Richfield Company 5,500 651,750
........................................................
Ultramar Corporation 2,500 72,500
........................................................
USX-Marathon Group, Inc. 22,500 452,812
........................................ ============
1,177,062
- --------------------------------------------------------
OIL -- INTERNATIONAL -- 2.4%
........................................................
Chevron Corporation 6,000 354,000
........................................................
Exxon Corporation 4,000 347,500
........................................................
Mobil Corporation 2,000 224,250
........................................................
Royal Dutch Petroleum Company
-- ADR 3,500 538,125
........................................................
TransCanada Pipelines Ltd. 14,000 206,500
........................................ ============
1,670,375
- --------------------------------------------------------
</TABLE>
See Notes to Financial Statements
8
<PAGE> 94
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
PAPER -- 1.7%
........................................................
Georgia Pacific Corporation 5,000 $ 355,000
........................................................
International Paper Company 14,525 535,609
........................................................
Union Camp Corporation 6,000 292,500
........................................ ============
1,183,109
- --------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 0.5%
........................................................
Eastman Kodak Company 4,200 326,550
- --------------------------------------------------------
POLLUTION CONTROL -- 0.5%
........................................................
Browning-Ferris Industries,
Inc. 13,200 382,800
- --------------------------------------------------------
RAILROADS -- 1.3%
........................................................
Conrail, Inc. 8,500 564,188
........................................................
Norfolk Southern Corporation 3,800 322,050
........................................ ============
886,238
- --------------------------------------------------------
RETAIL -- GENERAL -- 2.6%
........................................................
J.C. Penney Co., Inc. 13,000 682,500
........................................................
May Department Stores Company 12,000 525,000
........................................................
Sears, Roebuck & Company 8,000 389,000
........................................................
Woolworth Corporation() 10,000 225,000
........................................ ============
1,821,500
- --------------------------------------------------------
SAVINGS & LOANS -- 0.4%
........................................................
Federal National Mortgage
Association 9,400 314,900
- --------------------------------------------------------
STEEL -- 0.7%
........................................................
USX-U.S. Steel Group, Inc. 17,500 496,562
- --------------------------------------------------------
TOBACCO -- 2.5%
........................................................
American Brands, Incorporated 16,000 726,000
........................................................
Philip Morris Companies,
Incorporated 9,700 1,008,800
........................................ ============
1,734,800
- --------------------------------------------------------
TRUCKING -- 0.6%
........................................................
Ryder System, Inc. 15,000 421,875
- --------------------------------------------------------
<CAPTION>
Shares Value
<S> <C> <C>
- --------------------------------------------------------
UTILITY -- ELECTRIC -- 3.3%
........................................................
CMS Energy Corporation 20,000 $ 617,500
........................................................
DTE Energy Company 7,500 231,563
........................................................
Edison International 19,300 340,162
........................................................
Entergy Corporation 1,100 31,213
........................................................
Illinova Corporation 5,000 143,750
........................................................
New York State Electric & Gas
Corporation 9,000 219,375
........................................................
Niagara Mohawk Power Company 13,500 104,625
........................................................
Peco Energy Company 11,000 286,000
........................................................
Public Service Enterprises
Group, Inc. 14,000 383,250
........................................ ============
2,357,438
- --------------------------------------------------------
UTILITY -- GAS PIPELINE -- 0.8%
........................................................
British Gas PLC, ADR 4,700 131,600
........................................................
Nicor, Inc. 6,000 170,250
........................................................
Peoples Energy Corporation 7,500 251,250
........................................ ============
553,100
- --------------------------------------------------------
UTILITY -- TELEPHONE -- 1.7%
........................................................
NYNEX Corporation 10,500 498,750
........................................................
Pacific Telesis Group 10,500 354,375
........................................................
US West, Inc. 10,000 318,750
........................................ ============
1,171,875
- --------------------------------------------------------
Total common stocks
(cost $25,525,390) 29,070,435
- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CORPORATE Principal
BONDS -- 14.8% Amount
<S> <C> <C>
- --------------------------------------------------------
BANKS -- 4.3%
........................................................
Okobank,
6.9687%, 9/27/2049 # $ 700,000 717,990
........................................................
Midland Bank PLC,
5.9125%, 6/29/2049 # 500,000 419,000
........................................................
Westpac Banking,
5.6187%, 9/29/2049 # 2,200,000 1,895,740
........................................ ============
3,032,730
- --------------------------------------------------------
</TABLE>
See Notes to Financial Statements
9
<PAGE> 95
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- --------------------------------------------------------
FINANCIAL SERVICES -- 3.0%
........................................................
Salomon, Inc.:
5.65%, 2/10/1998 $ 500,000 $ 492,352
........................................................
6.58%, 12/01/1998 # 500,000 500,563
........................................................
5.799%, 4/05/1999 # 1,100,000 1,093,074
........................................ ============
2,085,989
- --------------------------------------------------------
PRINTING & PUBLISHING -- 0.7%
........................................................
Time Warner, Inc.,
6.46%, 8/15/2000 # 500,000 502,132
- --------------------------------------------------------
REAL ESTATE -- 2.1%
........................................................
Taubman Realty Group,
6.00%, 11/03/1997 # 1,500,000 1,492,200
- --------------------------------------------------------
SOVEREIGN -- 1.4%
........................................................
Swedish Export Credit Corp.,
9.875%, 3/15/2038 900,000 982,080
- --------------------------------------------------------
TELECOMMUNICATIONS -- 1.1%
........................................................
Southern New England Telephone,
8.70%, 8/15/2031 750,000 769,989
- --------------------------------------------------------
TRANSPORTATION -- 0.2%
........................................................
Delta Air Lines ETC,
9.90%, 1/02/2002 150,000 165,407
- --------------------------------------------------------
UTILITY -- ELECTRIC -- 2.0%
........................................................
CTC Mansfield Funding Corp. CLB,
11.125%, 9/30/2016 1,400,000 1,447,821
- --------------------------------------------------------
Total corporate bonds
(cost $10,435,557) 10,478,348
- --------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 5.1%
- --------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.0%
........................................................
Federal Home Loan Mortgage
Corporation, 1316 Z, 8.00%,
6/15/2022 674,076 671,488
........................................................
Federal National Mortgage
Association:
1993-202 VS, 9.75%,
2/25/2023 # 599,328 481,004
........................................................
1994-2 SB, 10.00%,
1/25/2024 # 591,732 524,792
........................................................
1994-13 SJ, 8.75%,
2/25/2009 # 525,000 454,946
........................................ ============
2,132,230
- --------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- --------------------------------------------------------
PASS-THROUGH SECURITIES -- 1.4%
........................................................
Federal Home Loan Bank,
6.44%, 12/21/2000 $1,000,000 $ 981,475
- --------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.7%
........................................................
Federal Home Loan Mortgage
Corporation, 1543 TH (IO),
3.559%, 1/15/2019 # 8,644,287 493,329
- --------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $3,806,515) 3,607,034
- --------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED
SECURITIES -- 15.5%
- --------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--13.2%
........................................................
Bear Stearns Mortgage
Securities,
Inc., 1993-8 A9, 7.50%,
8/25/2024 926,596 877,996
........................................................
Citicorp Mortgage Securities,
Inc.:
........................................................
1988-3 A2, 9.00%, 4/01/2018 246,281 253,665
........................................................
1991-7 M, 8.75%, 5/25/2021 743,831 753,985
........................................................
Donaldson, Lufkin & Jenrette,
1992-MF3 A3, 7.1375%,
6/18/2007 # 500,000 503,600
........................................................
Greenwich Capital Acceptance,
Inc., 1994-LB1, 7.6364%,
4/25/2024 # 1,442,198 1,461,235
........................................................
Independent National Mortgage
Corporation, 1995-N A5,
7.50%, 10/25/2025 1,500,000 1,397,850
........................................................
Marine Midland, 1991-3 AM,
8.00%, 12/25/2022 1,051,623 1,045,142
........................................................
PNC Mortgage Securities
Corporation, 1996-1 A11,
Class Z, 7.50%, 6/25/2026 1,577,864 1,462,285
........................................................
Ryland Mortgage Securities Corp.,
1992-15 B1, 7.5159%,
11/25/2022 # 1,682,653 1,559,651
........................................ ==========
9,315,409
- --------------------------------------------------------
PASS-THROUGH SECURITIES -- 0.0%
........................................................
Citicorp Mortgage Securities, Inc.,
1987-14, 9.50%, 9/25/2002 29,778 30,480
- --------------------------------------------------------
</TABLE>
See Notes to Financial Statements
10
<PAGE> 96
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- --------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.3%
........................................................
Bear Stearns, 1993-06 AS2
(Inverse IO),
3.5812%, 6/25/2024 # $7,784,458 $ 362,911
........................................................
Donaldson, Lufkin & Jenrette:
1993-Q16 IS (IO),
3.7392%, 11/25/2023 # 318,932 23,875
........................................................
1993-Q16 IIS (IO),
2.1783%, 11/25/2023 # 7,583,468 317,444
........................................................
1993-Q18 SC (IO),
3.0627%, 1/25/2024 # 5,275,913 255,671
........................................................
GE Capital Mortgage Services,
Inc.,
1993-1 G (IO),
657.2504%, 2/25/2022 # 29,415 411,800
........................................................
Greenwich Capital Acceptance,
Inc., 1992-LB8 (IO),
2.5542%, 2/25/2023 # 2,275,330 28,669
........................................................
Structured Mortgage Asset
Residential Trust:
1991-1 I (IO),
1000%, 6/25/2022 3,005 48,111
........................................................
1991-7 I (IO),
14669.70%, 12/25/2022 # 637 168,159
........................................ ============
1,616,640
- --------------------------------------------------------
Total non-agency mortgage-
backed securities
(cost $10,677,877) 10,962,529
- --------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 21.0%
- --------------------------------------------------------
U.S. Treasury Notes:
........................................................
5.375%, 5/31/1998 1,000,000 986,875
........................................................
8.00%, 8/15/1999 2,000,000 2,092,500
........................................................
6.75%, 4/30/2000 900,000 909,843
........................................................
6.375%, 3/31/2001 3,000,000 2,986,875
........................................................
7.25%, 5/15/2004 755,000 781,897
........................................................
7.50%, 2/15/2005 250,000 262,969
........................................................
6.50%, 5/15/2005 3,700,000 3,649,125
........................................ ============
11,670,084
- --------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- --------------------------------------------------------
U.S. Treasury Bonds:
8.125%, 8/15/2019 $ 250,000 $ 280,469
........................................................
7.25%, 8/15/2022 500,000 512,500
........................................ ============
792,969
- --------------------------------------------------------
U.S. Treasury Bill,
5.64%, 5/29/1997 2,500,000 2,376,882
- --------------------------------------------------------
Total U.S. Treasury
obligations
(cost $14,942,811) 14,839,935
- --------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 1.5%
- --------------------------------------------------------
........................................................
Pitney Bowes, Inc., 5.1441% 127,670 127,670
........................................................
Southwestern Bell, Inc.,
5.1239% 900,935 900,935
........................................ ============
Total variable rate demand
notes
(cost $1,028,605) 1,028,605
- --------------------------------------------------------
Total investments -- 99.1%
(cost $66,416,755) 69,986,886
........................................................
Other assets in excess
of liabilities -- 0.9% 611,307
........................................ ============
Total net assets -- 100% $ 70,598,193
- --------------------------------------------------------
</TABLE>
() Non-income producing security.
# Variable rate security. The rate listed is as of June 30, 1996.
* 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 June 30, 1996.
IO -- Interest only.
ETC -- Equipment Trust Certificate.
ADR -- American Depository Receipt.
CLB -- Callable.
See Notes to Financial Statements
11
<PAGE> 97
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 39.0% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
BANKS -- 7.7%
.........................................................
Den Norske Bank,
5.40%, 8/29/2049 # $ 400,000 $ 325,640
.........................................................
Kansallis-Osake-Pankki,
7.53%, 9/30/2043 # 500,000 515,700
.........................................................
Midland Bank PLC,
5.9125%, 6/29/2049 # 650,000 544,700
.........................................................
Swedbank,
6.8125%, 12/29/2049 # 1,500,000 1,508,550
.........................................................
Westpac Banking,
5.6187%, 9/29/2049 # 500,000 430,850
.......................................... ===========
3,325,440
- ---------------------------------------------------------
FINANCIAL SERVICES -- 4.1%
.........................................................
Salomon, Inc.:
6.3937%, 4/01/1997 # 600,000 602,094
.........................................................
6.00%, 7/28/1998 250,000 246,163
.........................................................
6.58%, 12/01/1998 # 150,000 150,169
.........................................................
5.799%, 4/05/1999 # 600,000 596,222
.........................................................
6.26%, 5/20/1999 # 200,000 198,080
.......................................... ===========
1,792,728
- ---------------------------------------------------------
FOOD, BEVERAGE & TOBACCO -- 4.1%
.........................................................
RJR Nabisco, Inc.:
8.00%, 7/15/2001 350,000 347,558
.........................................................
7.625%, 9/15/2003 1,200,000 1,150,415
.........................................................
8.75%, 8/15/2005 300,000 297,351
.......................................... ===========
1,795,324
- ---------------------------------------------------------
PRINTING & PUBLISHING -- 3.1%
.........................................................
Valassis Inserts,
9.375%, 3/15/1999 1,300,000 1,319,348
- ---------------------------------------------------------
REAL ESTATE -- 3.4%
.........................................................
Taubman Reality Group,
6.00%, 11/03/1997 # 1,500,000 1,492,200
- ---------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
RETAIL -- 2.0%
.........................................................
Woolworth Corporation,
7.00%, 10/15/2002 $ 900,000 $ 853,640
- ---------------------------------------------------------
SAVINGS & LOAN -- 1.2%
.........................................................
Western Financial Savings,
8.50%, 7/01/2003 500,000 505,361
- ---------------------------------------------------------
SOVEREIGN -- 2.7%
.........................................................
Government of Mexico,
10.8125%, 7/21/1997 # 850,000 884,000
.........................................................
Republic of Argentina,
5.25%, 3/31/2023 # 500,000 275,312
.......................................... ===========
1,159,312
- ---------------------------------------------------------
TRANSPORTATION -- 0.6%
.........................................................
Delta Air Lines ETC,
9.90%, 1/02/2002 250,000 275,679
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 10.1%
.........................................................
Cleveland Electric Illum,
7.375%, 6/01/2003 800,000 724,294
.........................................................
Greece Public Power
Corporation,
7.25%, 11/15/2000 1,400,000 1,411,340
.........................................................
Hydro-Quebec,
9.40%, 2/01/2021 200,000 232,536
.........................................................
Northern States Power Co.
CLB,
9.125%, 4/01/2021 500,000 532,684
.........................................................
Westinghouse Electric Corporation:
9.30%, 6/07/1999 1,200,000 1,235,976
.........................................................
8.93%, 6/22/1999 250,000 258,472
.......................................... ===========
4,395,302
- ---------------------------------------------------------
Total corporate bonds
(cost $16,674,552) 16,914,334
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 98
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 19.1% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 16.0%
.........................................................
Federal Home Loan Mortgage
Corporation:
1261 J, 8.00%, 7/15/2021 $ 553,935 $ 551,946
.........................................................
1316 Z, 8.00%, 6/15/2022 550,266 548,153
.........................................................
1468 S, 11.877%, 2/15/2023
# 449,224 446,557
.........................................................
1564 SE, 8.3612%, 8/15/2008
# 353,637 281,031
.........................................................
1627 SD, 9.50%, 12/15/2023
# 598,273 437,218
.........................................................
1761 Z, 8.50%, 11/15/2024 1,143,517 1,164,741
.........................................................
Federal National Mortgage
Association:
G93-27 SB, 6.6606%,
8/25/2023 # 115,176 62,356
.........................................................
1993-37 SB, 7.5396%,
3/25/2023 # 224,549 156,834
.........................................................
1993-45 SA, 9.0043%,
6/25/2022 # 550,360 429,797
.........................................................
1993-165 SJ, 10.25%,
1/25/2022 # 1,341,956 1,191,294
.........................................................
1993-202 VS, 9.75%,
2/25/2023 # 998,878 801,672
.........................................................
X-10B Z, 6.50%, 3/25/2024 1,072,751 880,740
.......................................... ===========
6,952,339
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.8%
.........................................................
Federal Home Loan Mortgage
Corporation, 1543 TH (IO),
3.559%, 1/15/2019 # 5,762,858 328,886
- ---------------------------------------------------------
GOVERNMENT AGENCY NOTE -- 2.3%
.........................................................
Federal Home Loan Mortgage
Corporation (CLB on
5/20/1997), 8.14%,
5/20/2004 1,000,000 1,001,884
- ---------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $8,254,996) 8,283,109
- ---------------------------------------------------------
<CAPTION>
NON-AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 26.5% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 23.7%
.........................................................
CMC Securities Corporation,
1994-G, 7.00%, 9/25/2024 $ 200,000 $ 180,208
.........................................................
Citicorp Mortgage Securities,
Inc.:
1990-D A1, 9.50%,
10/25/2005 263,904 262,716
.........................................................
1991-5 A, 6.248%, 5/25/2021
# 661,689 549,202
.........................................................
Collateralized Mortgage
Obligations Trust,
57-D, 9.90%, 2/01/2019 600,000 655,464
.........................................................
Countrywide Funding
Corporation, 1994-2 A12T,
9.00%, 2/25/2009 # 465,685 416,508
.........................................................
GE Capital Mortgage Services,
Inc.:
1993-17 A17, 9.00%,
12/25/2023 # 197,759 168,177
.........................................................
1994-24 A4, 7.00%,
7/25/2024 169,843 153,343
.........................................................
Greenwich Capital Acceptance,
Inc.,
1992-1 B1, 6.9252%,
1/25/2023 # 496,254 394,373
.........................................................
Guardian Savings & Loan
Assoc.:
1989-1 A, 7.47519%,
2/25/2019 # 287,791 250,608
.........................................................
1989-3 A, 7.7233%,
5/25/2019 # 283,238 255,141
.........................................................
Housing Securities, Inc.:
1994-1 AB2, 6.50%,
3/25/2009 540,316 383,287
.........................................................
1994-2 B1, 6.50%, 7/25/2009 274,629 234,012
.........................................................
Independent National Mortgage
Corporation:
1995-F, 8.25%, 5/25/2010 1,000,000 1,012,749
.........................................................
1995-MO A, 7.50%, 9/25/2025 1,000,000 930,800
.........................................................
1995-N A5, 7.50%,
10/25/2025 1,300,000 1,211,470
.........................................................
Resident Funding Mortgage
Securities I:
1993-S47 A15, 9.00%,
12/25/2023 # 1,116,689 698,489
.........................................................
1993-S47 A16, 5.4844%,
12/25/2023 # 1,753,018 619,890
.........................................................
</TABLE>
See Notes to Financial Statements
13
<PAGE> 99
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
Resolution Trust Corp.:
1991-M4 A1, 6.341%,
2/25/2020 # $ 275,131 $ 269,986
.........................................................
1995-2 B6, 6.8362%,
5/25/2029 # 491,825 479,382
.........................................................
1995-2 B7, 7.2303%,
5/25/2029 # 721,387 692,315
.........................................................
Saxon Mortgage Securities
Corporation,
1994-6 B2, 8.1857%,
6/25/2024 # 488,810 485,193
.......................................... ===========
10,303,313
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.8%
.........................................................
Nomura Asset Securities
Corporation:
1994-2A 1 (IO), 2.1298%,
5/25/2024 # 9,331,045 360,598
.........................................................
1994-4A 2 (IO), 1.3988%,
9/25/2024 # 15,654,137 404,080
.........................................................
Ryland Mortgage Securities
Corporation, 42 2X1 (IO),
3428.23022%, 6/25/2023 # 8,233 452,844
.......................................... ===========
1,217,522
- ---------------------------------------------------------
Total non-agency mortgage-backed
securities
(cost $12,109,258) 11,520,835
- ---------------------------------------------------------
<CAPTION>
U.S. TREASURY Principal
OBLIGATIONS -- 8.5% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
U.S. Treasury Bonds:
8.125%, 8/15/2019 $ 1,875,000 $ 2,103,516
.........................................................
8.75%, 8/15/2020 585,000 699,623
.........................................................
7.875%, 2/15/2021 400,000 438,375
.........................................................
6.25%, 8/15/2023 500,000 453,125
.......................................... ===========
Total U.S. Treasury
obligations
(cost $3,956,894) 3,694,639
- ---------------------------------------------------------
DISCOUNT NOTES -- 5.8%
- ---------------------------------------------------------
American Bankers Institute,
5.54%, 7/02/1996 1,000,000 999,846
.........................................................
Columbia/HCA Healthcare
Corp.,
5.60%, 8/16/1996 919,000 912,424
.........................................................
Source One Mortgage Services
Corp.,
5.60%, 7/08/1996 600,000 599,347
.......................................... ===========
Total discount notes
(cost $2,511,617) 2,511,617
- ---------------------------------------------------------
VARIABLE RATE DEMAND NOTE* -- 0.1%
- ---------------------------------------------------------
General Mills, Inc., 5.14% 60,945 60,945
.......................................... ===========
Total variable rate demand
note (cost $60,945) 60,945
- ---------------------------------------------------------
Total investments--99.0%
(cost $43,568,262) 42,985,479
.........................................................
Other assets in excess
of liabilities--1.0% 434,713
.......................................... ===========
Total net assets--100% $43,420,192
- ---------------------------------------------------------
</TABLE>
# Variable rate security. The rate listed is as of June 30, 1996.
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rate changes periodically on specified dates. The
rate listed is as of June 30, 1996.
IO -- Interest only.
CLB -- Callable.
See Notes to Financial Statements
14
<PAGE> 100
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES Principal
- -- 39.9% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
BANKS -- 17.3%
.........................................................
Den Norske Bank,
5.40%, 8/29/2049 # $ 2,600,000 $ 2,116,660
.........................................................
Kansallis-Osake-Pankki,
7.53%, 9/30/2043 # 4,660,000 4,806,324
.........................................................
Midland Bank PLC,
5.9125%, 6/29/2049 # 3,650,000 3,058,700
.........................................................
National Australia Bank,
5.8062%, 10/29/2049 # 4,150,000 3,592,447
.........................................................
Okobank,
6.9687%, 9/27/2049 # 6,700,000 6,872,190
.........................................................
Swedbank:
7.3359%, 10/29/2049 # 6,000,000 6,154,800
.........................................................
6.8125%, 12/29/2049 # 900,000 905,130
.........................................................
Westpac Banking,
5.6187%, 9/29/2049 # 6,100,000 5,256,370
......................................... ============
32,762,621
- ---------------------------------------------------------
FINANCIAL SERVICES -- 7.3%
.........................................................
Lehman Brothers, Inc.:
9.50%, 6/15/1997 800,000 823,334
.........................................................
5.04%, 12/15/2003,
putable 10/15/1996 # 3,300,000 3,264,459
.........................................................
Salomon, Inc.:
6.0515%, 11/26/1996 # 720,000 720,000
.........................................................
5.20%, 1/20/1997 1,000,000 995,088
.........................................................
8.67%, 2/14/1997 400,000 405,938
.........................................................
5.53%, 1/30/1998 2,100,000 2,065,005
.........................................................
5.65%, 2/10/1998 200,000 196,941
.........................................................
5.70%, 2/11/1998 2,000,000 1,970,870
.........................................................
9.43%, 3/15/1998 1,000,000 1,042,998
.........................................................
6.125%, 5/15/1998 315,000 311,621
.........................................................
6.58%, 12/01/1998 # 1,500,000 1,501,690
.........................................................
6.26%, 5/20/1999 # 500,000 495,200
......................................... ============
13,793,144
- ---------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
HEALTH -- 0.1%
.........................................................
Health & Rehabilitation
Property Trust,
CLB 7/13/1996, 6.2551%,
7/13/1999 # $ 200,000 $ 198,300
- ---------------------------------------------------------
INDUSTRIALS -- 0.3%
.........................................................
Westinghouse Credit Co.,
9.07%, 7/25/1996 500,000 500,949
- ---------------------------------------------------------
PRINTING & PUBLISHING -- 5.2%
.........................................................
Time Warner, Inc.,
6.46%, 8/15/2000 # 3,195,000 3,208,626
.........................................................
Valassis Inserts,
9.375%, 3/15/1999 6,600,000 6,698,227
......................................... ============
9,906,853
- ---------------------------------------------------------
REAL ESTATE -- 2.8%
.........................................................
Taubman Reality Group,
6.00%, 11/03/1997 # 5,400,000 5,371,920
- ---------------------------------------------------------
SOVEREIGN -- 3.0%
.........................................................
Government of Mexico,
10.8125%, 7/21/1997 # 4,600,000 4,784,000
.........................................................
Republic of Argentina,
5.25%, 3/31/2023 # 1,550,000 853,469
......................................... ============
5,637,469
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 0.2%
.........................................................
Illinois Bell Telephone Co.
CLB, 7.625%, 4/01/2006 300,000 304,810
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
15
<PAGE> 101
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 3.7%
.........................................................
Cleveland Electric Illum:
9.25%, 7/29/1999 $ 1,900,000 $ 1,935,786
.........................................................
8.55%, 11/15/2001 2,000,000 1,931,632
.........................................................
CTC Mansfield Funding Corp.
CLB, 11.125%, 9/30/2016 350,000 361,955
.........................................................
Gulf States Utilities CLB,
6.75%, 10/01/1998 700,000 692,763
.........................................................
Northern States Power Co.
CLB, 9.125%, 4/01/2021 2,000,000 2,130,738
......................................... ============
7,052,874
- ---------------------------------------------------------
Total corporate bonds and
notes (cost $73,923,633) 75,528,940
- ---------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 13.4%
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.2%
.........................................................
Federal Home Loan Mortgage
Corporation:
GNMA Series 16 PU,
4.50%, 10/25/2006 215,797 215,044
.........................................................
1081 I, 7.00%, 12/15/2019 392,030 394,417
.........................................................
1096 D, 7.00%, 6/15/2020 92,744 93,285
.........................................................
1194 G, 6.50%, 10/15/2006 500,000 487,440
.........................................................
1201 D, 7.00%, 10/15/2020 763,575 767,935
.........................................................
1262 F, 7.50%, 3/15/2015 500,000 508,594
.........................................................
1267 O, 7.25%, 12/15/2005 100,000 101,195
.........................................................
1336 H, 7.75%, 1/15/2021 400,000 403,248
.........................................................
1358 F, 6.75%, 1/15/2019 600,000 600,780
.........................................................
1499 SB, 9.9088%,
4/15/2023 # 1,282,435 1,066,825
.........................................................
1543 KE, 9.4456%,
9/15/2022 # 1,046,602 684,870
.........................................................
1617 D, 6.50%, 11/15/2023 71,000 61,637
.........................................................
1686 SG, 7.00%, 2/15/2024 # 924,490 721,969
.........................................................
1761 Z, 8.50%, 11/15/2024 1,143,517 1,164,741
- ---------------------------------------------------------
<CAPTION>
Principal
Amount Value
- ---------------------------------------------------------
<S> <C> <C>
Federal National Mortgage
Association:
1988-26 C, 7.50%,
7/25/2018 $ 154,670 $ 156,607
.........................................................
1990-112 E, 8.50%,
7/25/2019 149,733 153,507
.........................................................
1991-147 K, 7.00%,
1/25/2021 5,000 4,883
.........................................................
1991-153 N, 7.50%,
2/25/2007 300,000 306,234
.........................................................
G92-9 K, 7.00%, 1/25/2020 250,000 251,005
.........................................................
1992-138 O, 7.50%,
7/25/2022 88,509 85,203
.........................................................
1992-158 Z, 7.75%,
3/25/2021 1,344,642 1,302,031
.........................................................
1992-163 E, 6.75%,
9/25/2022 500,000 494,490
.........................................................
1993-45 SB, 9.118%,
4/25/2023 # 1,500,000 1,070,157
.........................................................
1993-141 SB, 9.4456%,
3/25/2023 # 2,103,469 1,403,409
.........................................................
1994-2 SB, 10.00%,
1/25/2024 # 373,185 330,969
.........................................................
1994-13 SJ, 8.75%,
2/25/2009 # 800,000 693,250
.........................................................
1994-27 SE, 10.00%,
3/25/2023 # 725,668 597,089
.........................................................
1994-60 D, 7.00%,
4/25/2024 30,000 25,894
.........................................................
Government National
Mortgage Association,
1995-2 G, 8.50%,
3/20/2020 1,300,000 1,347,359
......................................... ============
15,494,067
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
16
<PAGE> 102
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
GOVERNMENT AGENCY NOTES -- 2.9%
.........................................................
Federal Home Loan Bank,
6.44%, 12/21/2000 $ 1,500,000 $ 1,472,212
.........................................................
Federal Home Loan Mortgage
Corporation:
8.14%, 5/20/2004 (CLB
5/20/1997) 2,000,000 2,003,768
.........................................................
8.44%, 10/27/2004 (CLB
10/27/1997) 2,000,000 2,038,682
......................................... ============
5,514,662
- ---------------------------------------------------------
PASS-THROUGH SECURITIES -- 1.8%
.........................................................
Federal Home Loan Mortgage
Corporation,
255452, 8.50%, 2/01/2008 722,090 748,331
.........................................................
Federal National Mortgage
Association:
21130, 8.00%, 9/01/2000 19,820 19,842
.........................................................
308798, 7.311%,
4/01/2025 # 1,926,798 1,980,162
.........................................................
312155, 7.317%,
3/01/2025 # 633,796 641,275
......................................... ============
3,389,610
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.5%
.........................................................
Federal Home Loan Mortgage
Corporation, 1543 TH
(IO), 3.559%, 1/15/2019 # 11,640,973 664,350
.........................................................
Federal National Mortgage
Association,
1993-97 L (IO), 7.50%,
5/25/2023 2,371,152 304,456
......................................... ============
968,806
- ---------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $25,228,143) 25,367,145
- ---------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED
SECURITIES -- 31.1%
- ---------------------------------------------------------
ASSET-BACKED SECURITIES -- 0.1%
.........................................................
Western Financial Grantor
Trust, 1992-3, 4.70%,
1/01/1998 202,774 202,267
- ---------------------------------------------------------
<CAPTION>
Principal
Amount Value
- ---------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 29.0%
.........................................................
Bear Stearns Mortgage
Securities, Inc.,
1993-8 A9, 7.50%,
8/25/2024 $ 1,667,874 $ 1,580,394
.........................................................
Capstead Securities Corp.:
1992-2 C, 7.80%,
2/25/2022 437,774 439,153
.........................................................
1992-11 1B, 7.875%,
8/25/2022 440,881 420,910
.........................................................
Chemical Mortgage
Securities, Inc.,
1993-3 A1, 7.125%,
7/25/2023 407,827 407,297
.........................................................
Citicorp Mortgage
Securities, Inc.:
1987-9 A1, 9.00%,
7/25/2002 740,157 756,167
.........................................................
1988-3 A2, 9.00%,
4/01/2018 49,256 50,733
.........................................................
1989-8 A1, 10.50%,
6/25/2019 664,203 717,040
.........................................................
1989-17 A1, 7.1347%,
10/25/2019 # 1,233,201 1,235,544
.........................................................
1989-18 A1, 9.50%,
11/25/2004 202,631 202,065
.........................................................
1990-D A1, 9.50%,
10/25/2005 527,808 525,433
.........................................................
1990-4 A5, 9.50%,
3/25/2005 652,629 655,240
.........................................................
1991-5 A, 6.248%,
5/25/2021 # 1,386,395 1,150,708
.........................................................
1993-13 A6, 8.50%,
11/25/2008 # 285,000 226,853
.........................................................
</TABLE>
See Notes to Financial Statements
17
<PAGE> 103
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
Countrywide Funding Corp.,
1994-17 A9, 8.00%,
7/25/2024 $ 4,000 $ 3,996
.........................................................
Donaldson, Lufkin &
Jenrette: 1992-M10 A1,
7.3125%, 12/22/2002 # 3,412,729 3,488,833
.........................................................
1992-MF3 A3, 7.1375%,
6/18/2007 # 4,000,000 4,028,800
.........................................................
First Bank Systems,
1993 AT T2, 8.25%,
3/25/2023 405,964 407,832
.........................................................
Fleet Mortgage Securities,
1992-2 2A4, 8.55%,
6/25/2023 2,632,953 2,677,450
.........................................................
GE Capital Mortgage
Services, Inc.:
1992-7A A6, 8.30%,
7/25/2023 1,962,448 2,009,468
.........................................................
1993-17 A17, 9.00%,
12/25/2023 # 461,538 392,499
.........................................................
Greenwich Capital
Acceptance, Inc.:
1992-1 B1, 6.9252%,
1/25/2023 # 2,481,270 1,971,865
.........................................................
1994-LB1, 7.6364%,
4/25/2024 # 961,466 974,157
.........................................................
Guardian Savings &
Loan Assoc.,
1991-1 A1, 7.2201%,
1/25/2021 # 1,581,927 1,158,306
.........................................................
Housing Securities, Inc.,
1994-2 B1, 6.50%,
7/25/2009 245,853 209,491
.........................................................
Independent National
Mortgage Corporation:
1995-A4, 8.75%, 3/25/2025 18,000 18,950
.........................................................
1995-MA4 A, 7.50%,
9/25/2025 1,000,000 930,800
.........................................................
Marine Midland,
1991-3 AM, 8.00%,
12/25/2022 4,503,750 4,475,994
.........................................................
Paine Webber Mortgage,
1993-9 A6, 7.00%,
10/25/2023 3,121,299 2,980,060
.........................................................
<CAPTION>
Principal
Amount Value
- ---------------------------------------------------------
<S> <C> <C>
Prudential Home Mortgage
Securities, Co.:
1993-36 A10, 7.25%,
10/25/2023 $ 500,000 $ 481,720
.........................................................
Residential Funding Corp.,
1993-S9 A8, 8.75%,
2/25/2008 # 125,305 86,365
.........................................................
Residential Funding
Mortgage
Securities, Inc.:
1989-SW1 A, 7.065%,
1/25/2019 # 808,144 791,577
.........................................................
1992-S5 A5, 7.50%,
2/25/2007 1,350,000 1,348,434
.........................................................
Resolution Trust Corp.:
1991-6 B6, 8.7563%,
3/25/2021 # 1,600,000 1,642,320
.........................................................
1991-M4 A1, 6.341%,
2/25/2020 # 2,109,336 2,069,891
.........................................................
1995-2 B6, 6.8362%,
5/25/2029 # 3,977,999 3,877,356
.........................................................
1995-2 B7, 7.2303%,
5/25/2029 # 3,428,390 3,290,226
.........................................................
Ryland Mortgage Securities
Corp.:
1989-8 E, 9.00%,
8/25/2020 931,556 929,599
.........................................................
1992-15 B1, 7.5159%,
11/25/2022 # 967,651 896,915
.........................................................
Saxon Mortgage
Securities Corp.,
1994-6 B2, 8.1844%,
6/25/2024 # 2,427,430 2,409,467
.........................................................
Structured Mortgage Asset
Residential Trust:
1991-1H, 8.25%, 6/25/2022 351,103 336,953
.........................................................
1992-3 A, 8.00%,
10/25/2007 272,501 262,746
.........................................................
1993-5A AA, 6.9456%,
6/25/2024 # 435,453 422,041
.........................................................
SML, Inc.,
1994-C 1, 6.4375%,
9/20/1999 # 2,000,000 2,006,700
......................................... ============
54,948,348
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
18
<PAGE> 104
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
PASS-THROUGH SECURITIES -- 0.1%
.........................................................
Citicorp Mortgage
Securities, Inc.:
1987-5, 8.50%, 4/25/2017 $ 32,771 $ 32,831
.........................................................
1987-14, 9.50%, 9/25/2002 59,556 60,961
.........................................................
1988-16 A1, 10.00%,
11/25/2018 64,242 68,623
......................................... ============
162,415
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 1.9%
.........................................................
Donaldson, Lufkin &
Jenrette: 1993-Q16 IIS
(IO), 2.1783%, 11/25/2023 # 4,139,371 173,274
.........................................................
1993-Q16 IS (IO),
3.7392%, 11/25/2023 # 917,744 68,702
.........................................................
1993-Q18 SC (IO),
3.0627%, 1/25/2024 # 2,374,161 115,052
.........................................................
1994-Q8 IIS (IO), 1.95%,
5/25/2024 # 24,032,772 979,095
.........................................................
Nomura Asset Securities
Corporation:
1994-2A 1 (IO), 2.2144%,
5/25/2024 # 27,952,580 1,080,227
.........................................................
1994-5A 1 (IO), 1.0681%,
11/25/2024 # 51,111,414 762,838
.........................................................
Residential Funding Corp.,
1992-S2 A16 (IO), 0.50%,
1/25/2022 36,029,672 270,006
.........................................................
Structured Mortgage Asset
Residential Trust,
1991-2 I (IO), 28.1035%,
6/25/2022 # 53,325 68,795
......................................... ============
3,517,989
- ---------------------------------------------------------
Total non-agency mortgage-
backed securities
(cost $59,585,128) 58,831,019
- ---------------------------------------------------------
<CAPTION>
Principal
Amount Value
- ---------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 10.9%
- ---------------------------------------------------------
U.S. Treasury Notes:
5.375%,11/30/1997 $ 1,000,000 $ 991,875
.........................................................
5.00%, 1/31/1998 2,000,000 1,968,750
.........................................................
7.875%, 4/15/1998 7,000,000 7,210,000
.........................................................
7.50%, 10/31/1999 600,000 620,062
.........................................................
6.125%, 7/31/2000 950,000 939,609
.........................................................
6.25%, 8/31/2000 1,000,000 993,437
.........................................................
5.75%, 8/15/2003 7,885,000 7,505,534
.........................................................
U.S. Treasury Bonds,
8.75%, 8/15/2020 300,000 358,781
......................................... ============
Total U.S. Treasury
obligations
(cost $20,808,303) 20,588,048
- ---------------------------------------------------------
DISCOUNT NOTES -- 3.7%
- ---------------------------------------------------------
Columbia/HCA Healthcare
Corp.:
5.52%, 7/10/1996 3,000,000 2,995,860
.........................................................
5.50%, 8/15/1996 3,000,000 2,979,375
.........................................................
Source One Mortgage
Services Corporation,
5.60%, 7/08/1996 1,000,000 998,911
......................................... ============
Total discount notes
(cost $6,974,146) 6,974,146
- ---------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 0.1%
- ---------------------------------------------------------
Pitney Bowes, Inc.,
5.1441% 256,243 256,243
......................................... ============
Total variable rate demand
note (cost $256,243) 256,243
- ---------------------------------------------------------
Total investments -- 99.1%
(cost $186,775,596) 187,545,541
.........................................................
Other assets in excess of
liabilities -- 0.9% 1,615,641
......................................... ============
Total net assets -- 100% $189,161,182
- ---------------------------------------------------------
</TABLE>
# Variable rate security. The rate listed is as of June 30, 1996.
* 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 June 30, 1996.
IO -- Interest Only.
CLB -- Callable.
See Notes to Financial Statements
19
<PAGE> 105
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
Principal
CORPORATE BONDS -- 30.5% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
BANKS -- 18.1%
.........................................................
Den Norske Bank,
5.75%, 11/29/2049 # $ 700,000 $ 574,875
.........................................................
Kansallis-Osake-Pankki,
7.53%, 9/30/2043 # 200,000 206,280
.........................................................
National Australia Bank,
5.8062%, 10/29/2049 # 1,000,000 865,650
.........................................................
Okobank,
6.9687%, 9/27/2049 # 900,000 923,130
.........................................................
Swedbank,
7.3359%, 10/29/2049 # 800,000 820,640
.......................................... ===========
3,390,575
- ---------------------------------------------------------
FINANCIAL SERVICES -- 4.8%
.........................................................
Salomon, Inc.:
5.53%, 1/30/1998 500,000 491,668
.........................................................
6.58%, 12/01/1998 # 400,000 400,451
.......................................... ===========
892,119
- ---------------------------------------------------------
SOVEREIGN -- 3.0%
.........................................................
Government of Mexico,
10.8125%, 7/21/1997 # 550,000 572,000
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 0.8%
.........................................................
Illinois Bell Telephone Co.
CLB, 7.625%, 4/01/2006 150,000 152,405
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 3.8%
.........................................................
Gulf States Utilities CLB,
6.75%, 10/01/1998 300,000 296,899
.........................................................
Westinghouse Electric
Corporation,
9.30%, 6/07/1999 400,000 411,992
.......................................... ===========
708,891
- ---------------------------------------------------------
Total corporate bonds
(cost $5,589,648) 5,715,990
- ---------------------------------------------------------
<CAPTION>
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 8.8% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.1%
.........................................................
Federal Home Loan Mortgage
Corporation:
16-B, 10.00%, 10/15/2019 $ 26,444 $ 27,006
.........................................................
1081 I, 7.00%, 12/15/2019 161,222 162,204
.........................................................
1722 PB, 6.50%, 2/15/2009 171,177 171,122
.........................................................
Federal Housing Authority
Project, 7.43%, 2/01/2023 139,560 140,785
.........................................................
Federal National Mortgage
Association:
G92-40 B, 7.00%, 12/25/2015 # 124,603 124,390
.........................................................
1992-43 B, 7.50%,
11/25/2018 669,283 673,961
.........................................................
1992-185 VA, 5.10%,
5/25/1997 225,632 224,221
.......................................... ===========
1,523,689
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.7%
.........................................................
Federal National Mortgage
Association, 1993-97 L
(IO),
7.50%, 5/25/2023 874,486 112,284
.........................................................
Government National Mortgage
Association, 103695,
11.50%, 9/15/1998 19,943 20,908
.......................................... ===========
133,192
- ---------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $1,624,225) 1,656,881
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
20
<PAGE> 106
Schedule of Investments -- June 30, 1996
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
NON-AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 17.9% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 17.0%
.........................................................
Citicorp Mortgage Securities,
Inc.:
1989-18 A1, 9.50%,
11/25/2004 $ 159,210 $ 158,766
.........................................................
1990-D A1, 9.50%,
10/25/2005 263,904 262,716
.........................................................
1991-5 A, 6.248%,
5/25/2021 # 189,054 156,915
.........................................................
1991-7 M, 8.75%, 5/25/2021 82,648 83,776
.........................................................
Donaldson, Lufkin & Jenrette:
1992-M10 A1, 7.3125%,
12/22/2002 # 663,586 678,384
.........................................................
1992-MF3 A3, 7.1375%,
6/18/2007 # 500,000 503,600
.........................................................
Prudential Home Mortgage
Securities, Inc.,
1993-1 A1, 7.50%, 2/25/2023 279,189 280,895
.........................................................
Ryland Mortgage Securities
Corp.,
1992-15 B1, 7.5159%,
11/25/2022 # 387,060 358,766
.........................................................
Saxon Mortgage Securities
Corp.,
1994-6 B2, 8.1844%,
6/25/2024 # 488,810 485,193
.........................................................
Structured Mortgage Asset
Residential Trust,
1992-11B BH, 7.80%,
8/25/2021 209,903 212,300
.......................................... ===========
3,181,311
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.9%
.........................................................
Donaldson, Lufkin & Jenrette:
1993-Q16 IS (IO), 3.7392%,
11/25/2023 # 533,723 39,955
.........................................................
1993-Q18 SC (IO), 3.0627%,
1/25/2024 # 2,637,956 127,835
.......................................... ===========
167,790
- ---------------------------------------------------------
Total non-agency mortgage-
backed securities
(cost $3,447,235) 3,349,101
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY Principal
OBLIGATIONS -- 20.6% Amount Value
<S> <C> <C>
- ---------------------------------------------------------
U.S. Treasury Notes:
5.625%, 1/31/1998 $2,100,000 $ 2,086,875
.........................................................
5.375%, 5/31/1998 1,800,000 1,776,375
.......................................... ===========
Total U.S. Treasury
obligations
(cost $3,859,227) 3,863,250
- ---------------------------------------------------------
DISCOUNT NOTES -- 19.2%
- ---------------------------------------------------------
Alloman Funding Corp.,
5.42%, 7/22/1996 800,000 797,471
.........................................................
C & H Sugar,
5.50%, 7/09/1996 700,000 699,144
.........................................................
Columbia/HCA Healthcare
Corp.,
5.52%, 7/26/1996 700,000 697,317
.........................................................
Kerr McGee Credit Corp.,
5.55%, 7/08/1996 700,000 699,245
.........................................................
Source One Mortgage Services
Corp.,
5.55%, 7/19/1996 700,000 698,058
.......................................... ===========
Total discount notes
(cost $3,591,233) 3,591,235
- ---------------------------------------------------------
VARIABLE RATE DEMAND NOTE* -- 2.2%
- ---------------------------------------------------------
Southwestern Bell, Inc.,
5.1239% 408,706 408,706
.......................................... ===========
Total variable rate demand
note
(cost $408,706) 408,706
- ---------------------------------------------------------
Total investments -- 99.2%
(cost $18,520,274) 18,585,163
.......................................... ===========
Other assets in excess of
liabilities -- 0.8% 140,619
.......................................... ===========
Total net assets -- 100% $18,725,782
- ---------------------------------------------------------
</TABLE>
# Variable rate security. Rate listed is as of June 30, 1996.
* 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 June 30, 1996.
IO -- Interest Only.
CLB -- Callable.
See Notes to Financial Statements
21
<PAGE> 107
Financial Statements -- June 30, 1996
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
EQUITY SMALL
INCOME CAP
FUND FUND
--------------------------------
<S> <C> <C>
ASSETS:
Investments, at value*...................................... $182,765,666 $16,048,850
Foreign currency**.......................................... 0 0
Cash........................................................ 76,709 1,360
Dividends and interest receivable........................... 465,207 23,474
Receivable from Advisor..................................... 0 6,149
Receivable for investments sold............................. 0 427,792
Receivable for Fund shares sold............................. 53,000 10,000
Other receivables........................................... 1,567 7,010
------------ -----------
Total assets........................................... $183,362,149 $16,524,635
------------ -----------
LIABILITIES:
Payable to Advisor.......................................... 120,437 0
Payable for investments purchased........................... 348,725 0
Payable for Fund shares repurchased......................... 203,041 3,639
Dividends payable........................................... 0 0
Accrued expenses and other liabilities...................... 151,841 40,310
------------ -----------
Total liabilities...................................... 824,044 43,949
------------ -----------
Net assets............................................. $182,538,105 $16,480,686
============ ===========
NET ASSETS CONSIST OF:
Paid in capital............................................. $142,852,990 $13,319,788
Undistributed net investment income......................... 0 56,471
Undistributed net realized gain (loss) on securities
and foreign currency transactions........................ 4,957,420 1,983,103
Net unrealized appreciation (depreciation) of
securities and foreign currency.......................... 34,727,695 1,121,324
------------ -----------
Net assets............................................. $182,538,105 $16,480,686
============ ===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of
no par value authorized)................................. 9,650,910 772,618
Net asset value per share (offering and redemption price)... $ 18.91 $ 21.33
============ ===========
*Cost of Investments......................................... $148,037,971 $14,927,526
============ ===========
**Cost of Foreign Currency.................................... $ 0 $ 0
============ ===========
</TABLE>
See Notes to Financial Statements
22
<PAGE> 108
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED TOTAL LOW SHORT-TERM
INTERNATIONAL INCOME RETURN BOND DURATION INVESTMENT
FUND FUND FUND FUND FUND
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$307,968,234 $69,986,886 $42,985,479 $187,545,541 $18,585,163
11,925,048 0 0 0 0
32,747,429 9,795 199 0 0
1,614,376 612,636 607,099 2,397,030 201,176
0 0 4,001 0 0
0 109,685 100,738 243,424 12,144
1,265,558 100,200 0 203,600 7,467
29,515 15,560 17,910 83,739 37,545
------------ ----------- ----------- ------------ -----------
355,550,160 70,834,762 43,715,426 190,473,334 18,843,495
------------ ----------- ----------- ------------ -----------
150,825 57,241 0 38,703 487
23,847,083 77,095 0 0 0
292,540 37,769 0 163,181 0
1,639 0 245,467 1,016,632 82,289
264,630 64,464 49,767 93,636 34,937
------------ ----------- ----------- ------------ -----------
24,556,717 236,569 295,234 1,312,152 117,713
------------ ----------- ----------- ------------ -----------
$330,993,443 $70,598,193 $43,420,192 $189,161,182 $18,725,782
============ =========== =========== ============ ===========
$312,994,774 $64,561,629 $43,688,951 $188,103,806 $18,745,835
503,115 80,910 79,541 290,152 0
664,767 2,385,523 234,483 (2,721) (84,942)
16,830,787 3,570,131 (582,783) 769,945 64,889
------------ ----------- ----------- ------------ -----------
$330,993,443 $70,598,193 $43,420,192 $189,161,182 $18,725,782
============ =========== =========== ============ ===========
16,192,046 3,865,012 3,396,308 18,700,254 1,841,171
$ 20.44 $ 18.27 $ 12.78 $ 10.12 $ 10.17
============ =========== =========== ============ ===========
$291,115,551 $66,416,755 $43,568,262 $186,775,596 $18,520,274
============ =========== =========== ============ ===========
$ 11,926,443 $ 0 $ 0 $ 0 $ 0
============ =========== =========== ============ ===========
</TABLE>
See Notes to Financial Statements
23
<PAGE> 109
Financial Statements -- Year Ended June 30, 1996
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
EQUITY SMALL
INCOME CAP
FUND FUND
-------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income*
Dividends................................................. $ 5,537,019 $ 172,082
Interest.................................................. 296,099 91,009
----------- -----------
Total income......................................... 5,833,118 263,091
----------- -----------
Expenses
Advisory fee.............................................. 1,238,052 159,346
Legal and auditing fees................................... 69,358 22,576
Custodian fees and expenses............................... 60,383 6,426
Accounting and transfer agent fees and expenses........... 94,976 25,211
Administration fee........................................ 33,744 2,784
Trustees' fees............................................ 6,275 6,275
Reports to shareholders................................... 28,000 20,000
Registration fees......................................... 55,374 12,726
Other expenses............................................ 29,925 1,268
----------- -----------
Total expenses....................................... 1,616,087 256,612
Less, expense reimbursement............................... 0 (44,825)
----------- -----------
Net expenses......................................... 1,616,087 211,787
----------- -----------
Net investment income........................................ 4,217,031 51,304
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on securities and foreign currency
transactions............................................ 6,697,177 3,242,921
Net change in unrealized appreciation (depreciation) of
securities and foreign currency......................... 17,517,007 (1,035,528)
----------- -----------
Net gain (loss) on investments............................... 24,214,184 2,207,393
----------- -----------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $28,431,215 $ 2,258,697
=========== ===========
*Net of Foreign Taxes Withheld................................. $ 15,236 $ 0
=========== ===========
</TABLE>
See Notes to Financial Statements
24
<PAGE> 110
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED TOTAL LOW SHORT-TERM
INTERNATIONAL INCOME RETURN BOND DURATION INVESTMENT
FUND FUND FUND FUND FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5,192,070 $ 858,947 $ 0 $ 0 $ 0
420,748 2,291,873 2,226,847 12,311,794 1,242,397
----------- ---------- ----------- ----------- ----------
5,612,818 3,150,820 2,226,847 12,311,794 1,242,397
----------- ---------- ----------- ----------- ----------
1,108,545 377,472 164,708 706,115 71,031
35,277 26,043 18,419 48,834 15,227
265,000 37,964 11,159 41,208 5,893
73,391 33,131 21,882 66,907 22,464
34,924 10,211 5,975 27,965 2,445
6,275 6,275 6,275 6,275 6,275
20,000 20,000 20,000 20,000 20,000
105,000 22,088 27,939 38,316 10,501
3,365 1,667 1,195 5,294 984
----------- ---------- ----------- ----------- ----------
1,651,777 534,851 277,552 960,914 154,820
(169,480) (31,555) (84,461) (29,763) (69,867)
----------- ---------- ----------- ----------- ----------
1,482,297 503,296 193,091 931,151 84,953
----------- ---------- ----------- ----------- ----------
4,130,521 2,647,524 2,033,756 11,380,643 1,157,444
----------- ---------- ----------- ----------- ----------
1,311,404 2,948,927 386,435 302,726 17,041
14,489,301 587,322 (1,233,325) (603,922) 72,725
----------- ---------- ----------- ----------- ----------
15,800,705 3,536,249 (846,890) (301,196) 89,766
----------- ---------- ----------- ----------- ----------
$19,931,226 $6,183,773 $1,186,866 $11,079,447 $1,247,210
=========== ========== =========== =========== ==========
$ 550,504 $ 14,043 $ 0 $ 0 $ 0
=========== ========== =========== =========== ==========
</TABLE>
See Notes to Financial Statements
25
<PAGE> 111
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
EQUITY INCOME FUND
---------------------------------
<S> <C> <C>
Year Ended Year Ended
June 30, 1996 June 30, 1995
---------------------------------
OPERATIONS:
Net investment income (loss)........................... $ 4,217,031 $ 3,330,418
Net realized gain on securities and foreign currency
transactions......................................... 6,697,177 8,380,400
Net change in unrealized appreciation (depreciation)
of securities and foreign currency................... 17,517,007 8,445,277
------------- -------------
Net increase in net assets resulting from
operations...................................... 28,431,215 20,156,095
------------- -------------
NET EQUALIZATION CREDITS.................................... 0 101,938
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. (5,190,178) (3,053,827)
Net realized gain on securities transactions........... (9,231,395) (2,560,940)
------------- -------------
Total dividends and distributions................. (14,421,573) (5,614,767)
------------- -------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.......................... 71,541,636 41,289,943
Shares issued in connection with payment of dividends
and distributions.................................... 13,515,453 5,234,238
Cost of shares redeemed................................ (43,625,015) (21,285,555)
------------- -------------
Net increase (decrease) in net assets from Fund
share transactions.............................. 41,432,074 25,238,626
------------- -------------
Total increase (decrease) in net assets..................... 55,441,716 39,881,892
NET ASSETS:
Beginning of period.................................... 127,096,389 87,214,497
------------- -------------
End of period*......................................... $ 182,538,105 $ 127,096,389
============= =============
*Including undistributed net investment income of: $ 0 $ 1,600,193
============= =============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................ 3,846,201 2,625,774
Shares issued in connection with payment of dividends
and distributions.................................... 743,944 345,347
Shares redeemed........................................ (2,311,587) (1,384,748)
------------- -------------
Net increase (decrease)........................... 2,278,558 1,586,373
============= =============
</TABLE>
See Notes to Financial Statements
26
<PAGE> 112
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP FUND INTERNATIONAL FUND
------------------------------- -------------------------------
Year Ended Year Ended Year Ended Year Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------------------------- -------------------------------
<S> <C> <C> <C>
$ 51,304 $ (53,458) $ 4,130,521 $ 918,248
3,242,921 2,051,312 1,311,404 235,087
(1,035,528) 315,290 14,489,301 2,640,106
----------- ----------- ------------ ------------
2,258,697 2,313,144 19,931,226 3,793,441
----------- ----------- ------------ ------------
0 0 0 105,891
----------- ----------- ------------ ------------
0 0 (3,924,997) (1,058,855)
(3,229,051) (567,724) (911,877) (727,274)
----------- ----------- ------------ ------------
(3,229,051) (567,724) (4,836,874) (1,786,129)
----------- ----------- ------------ ------------
9,973,586 6,033,472 324,232,058 25,589,662
2,737,936 548,049 4,533,313 1,758,581
(15,737,773) (931,042) (64,341,082) (3,959,148)
----------- ----------- ------------ ------------
(3,026,251) 5,650,479 264,424,289 23,389,095
----------- ----------- ------------ ------------
(3,996,605) 7,395,899 279,518,641 25,502,298
20,477,291 13,081,392 51,474,802 25,972,504
----------- ----------- ------------ ------------
$16,480,686 $20,477,291 $330,993,443 $ 51,474,802
=========== =========== ============ ============
$ 56,471 $ 464,275 $ 503,115 $ 325,550
=========== =========== ============ ============
444,190 298,181 16,283,849 1,484,025
137,516 28,967 227,114 103,654
(760,129) (45,954) (3,226,302) (227,394)
----------- ----------- ------------ ------------
(178,423) 281,194 13,284,661 1,360,285
=========== =========== ============ ============
</TABLE>
See Notes to Financial Statements
27
<PAGE> 113
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
BALANCED INCOME FUND
---------------------------------
Year Ended Year Ended
June 30, 1996 June 30, 1995
---------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 2,647,524 $ 1,917,881
Net realized gain (loss) on securities transactions..... 2,948,927 434,314
Net change in unrealized appreciation (depreciation) of
securities............................................ 587,322 2,852,215
------------- -------------
Net increase in net assets resulting from
operations....................................... 6,183,773 5,204,410
------------- -------------
NET EQUALIZATION (DEBITS).................................... 0 (65,989)
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (2,554,681) (1,672,655)
Net realized gain on securities transactions............ (55,137) (1,199,739)
Return of capital....................................... 0 (30,446)
------------- -------------
Total dividends and distributions.................. (2,609,818) (2,902,840)
------------- -------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 43,038,215 10,526,666
Shares issued in connection with payment of dividends
and distributions..................................... 2,406,463 2,688,210
Cost of shares redeemed................................. (10,483,447) (19,360,405)
------------- -------------
Net increase (decrease) in net assets from Fund
share transactions............................... 34,961,231 (6,145,529)
------------- -------------
Total increase (decrease) in net assets...................... 38,535,186 (3,909,948)
NET ASSETS:
Beginning of period..................................... 32,063,007 35,972,955
------------- -------------
End of period**......................................... $ 70,598,193 $ 32,063,007
============= =============
**Including undistributed net investment income of: $ 80,910 $ 0
============= =============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 2,395,366 668,502
Shares issued in connection with payment of dividends
and distributions..................................... 134,345 172,367
Shares redeemed......................................... (580,252) (1,215,259)
------------- -------------
Net increase (decrease)............................ 1,949,459 (374,390)
============= =============
</TABLE>
* Commencement of operations.
See Notes to Financial Statements
28
<PAGE> 114
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN BOND FUND LOW DURATION FUND SHORT-TERM INVESTMENT FUND
----------------------------------- ------------------------------- -------------------------------
December 6, 1994*
Year Ended through Year Ended Year Ended Year Ended Year Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
----------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$ 2,033,756 $ 352,723 $ 11,380,643 $ 5,880,534 $ 1,157,444 $ 838,304
386,435 167,201 302,726 622,634 17,041 (131,070)
(1,233,325) 650,542 (603,922) 1,891,223 72,725 38,083
----------- ----------- ------------- ------------ ------------ -----------
1,186,866 1,170,466 11,079,447 8,394,391 1,247,210 745,317
----------- ----------- ------------- ------------ ------------ -----------
0 0 0 0 0 0
----------- ----------- ------------- ------------ ------------ -----------
(2,033,756) (352,723) (11,385,745) (5,880,534) (1,150,687) (838,304)
(239,612) 0 (680,292) (75,968) 0 0
0 0 0 0 (6,473) 0
----------- ----------- ------------- ------------ ------------ -----------
(2,273,368) (352,723) (12,066,037) (5,956,502) (1,157,160) (838,304)
----------- ----------- ------------- ------------ ------------ -----------
31,603,393 14,983,481 187,622,316 160,502,377 14,567,153 17,020,236
1,813,318 358,388 10,272,786 5,661,434 634,339 365,441
(4,198,498) (880,731) (131,067,667) (81,760,823) (16,377,951) (7,986,845)
----------- ----------- ------------- ------------ ------------ -----------
29,218,213 14,461,138 66,827,435 84,402,988 (1,176,459) 9,398,832
----------- ----------- ------------- ------------ ------------ -----------
28,131,711 15,278,881 65,840,845 86,840,877 (1,086,409) 9,305,845
15,288,481 9,600 123,320,337 36,479,460 19,812,191 10,506,346
----------- ----------- ------------- ------------ ------------ -----------
$43,420,192 $15,288,481 $ 189,161,182 $123,320,337 $ 18,725,782 $19,812,191
=========== =========== ============= ============ ============ ===========
$ 79,541 $ 167,201 $ 290,152 $ 693,241 $ 0 $ 0
=========== =========== ============= ============ ============ ===========
2,396,355 1,223,013 18,411,897 16,119,314 1,435,371 1,683,176
138,416 28,352 1,008,556 567,024 62,521 36,134
(319,560) (70,268) (12,866,489) (8,215,536) (1,613,876) (791,051)
----------- ----------- ------------- ------------ ------------ -----------
2,215,211 1,181,097 6,553,964 8,470,802 (115,984) 928,259
=========== =========== ============= ============ ============ ===========
</TABLE>
See Notes to Financial Statements
29
<PAGE> 115
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
NOTE 1.
ACCOUNTING POLICIES. Hotchkis and Wiley Funds (the "Trust") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Trust was organized as a Massachusetts business trust on
August 22, 1984 and consists of eight series of shares comprising the Balanced
Income Fund, the Small Cap Fund, the Equity Income Fund, the International Fund,
the Total Return Bond Fund, the Low Duration Fund, the Short-Term Investment
Fund and the Equity Fund for Insurance Companies (collectively, the "Funds"),
the assets of which are invested in separate, independently managed portfolios.
The accompanying financial statements exclude financial information for the
Equity Fund for Insurance Companies; financial statements for that Fund are
reported on separately. Investment operations of the Funds began on August 13,
1985 (the Balanced Income Fund), September 20, 1985 (the Small Cap Fund), June
24, 1987 (the Equity Income Fund), October 1, 1990 (the International Fund),
January 29, 1993 (the Equity Fund for Insurance Companies), May 18, 1993 (the
Low Duration Fund and the Short-Term Investment Fund), and December 6, 1994 (the
Total Return Bond Fund).
The Balanced Income Fund seeks to preserve capital while producing a high total
return. The Small Cap Fund seeks capital appreciation. The Equity Income Fund
seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The International Fund seeks to provide current income and
long-term growth of income, accompanied by growth of capital. The Total Return
Bond Fund seeks to maximize long-term total return. The Low Duration Fund seeks
to maximize total return, consistent with preservation of capital. The
Short-Term Investment Fund seeks to maximize total return, consistent with
preservation of capital. The following is a summary of significant accounting
policies followed by the Funds in the preparation of the financial statements.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or the NASDAQ National Market System
("System") 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 such System. Unlisted securities that
are not included in such System 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.
30
<PAGE> 116
- --------------------------------------------------------------------------------
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.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with banks
or broker-dealers that meet credit guidelines established by the Board of
Trustees. In connection with transactions in repurchase agreements, it is the
Funds' policy that the custodian take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults, and the value
of the collateral declines, realization of the collateral by the Funds may be
delayed or limited.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are maintained
in U.S. dollars. For the International Fund, foreign currency transactions are
translated into U.S. dollars on the following basis: (i) market value of
investment securities, assets and liabilities at the daily rates of exchange,
and (ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions. The International 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 International 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 from the fluctuations arising from trade date and settlement date
differences.
FORWARD CURRENCY EXCHANGE CONTRACTS: The International Fund utilizes forward
currency exchange contracts for the purpose of hedging foreign currency risk on
unsettled trades. Under these contracts, it 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 each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and intends
to distribute investment company net taxable income and net capital gains to
shareholders. Therefore, no federal income tax provision is required.
EXPENSE ALLOCATION: Common expenses incurred by the Funds are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.
EQUALIZATION: Effective July 1, 1995, the Funds discontinued the practice of
equalization. The Balanced Income Fund, the Equity Income Fund, and the
International Fund each followed the accounting practice known as equalization,
by which
31
<PAGE> 117
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
a portion of the proceeds from sales and costs of redemptions of capital shares,
equivalent on a per share basis to the amount of undistributed net investment
income on the date of the transaction, is credited or charged to undistributed
net investment income. As a result, undistributed net investment income per
share was unaffected by sales or redemptions of the Fund's shares.
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.
OTHER: Security and shareholder transactions are recorded no later than the
first business day after the 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. Each Fund has an investment advisory agreement
with the Advisor. The Advisor receives a fee, computed daily and payable
monthly, at the annual rates presented below as applied to each Fund's daily net
assets. The Advisor has voluntarily agreed to pay all operating expenses in
excess of the annual rates presented below as applied to each Fund's daily net
assets. For the year ended June 30, 1996, the Advisor waived the following fees
by Fund:
<TABLE>
<CAPTION>
Equity Income Small Cap International Balanced
Fund Fund Fund Income Fund
----------------------------------------------------------------
<S> <C> <C> <C> <C>
ANNUAL ADVISORY RATE.................. 0.75% 0.75% 0.75% 0.75%
ANNUAL CAP ON EXPENSES................ 1.00% 1.00% 1.00% 1.00%
FEES WAIVED........................... $0 $44,825 $169,480 $31,555
</TABLE>
<TABLE>
<CAPTION>
Total Return Low Duration Short-Term
Bond Fund Fund Investment Fund
-------------------------------------------------------
<S> <C> <C> <C>
ANNUAL ADVISORY RATE............................ 0.55%(2) 0.46%(2) 0.40%
ANNUAL CAP ON EXPENSES.......................... 0.65%(1) 0.58% 0.48%
FEES WAIVED..................................... $84,461 $29,763 $69,867
</TABLE>
- ---------------
(1) Prior to October 31, 1995 the cap on expenses was 0.80%.
(2) Prior to October 31, 1995 the annual advisory rate was 0.70% and 0.40% for
the Total Return Bond Fund and the Low Duration Fund, respectively.
32
<PAGE> 118
- --------------------------------------------------------------------------------
NOTE 3.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended June 30, 1996 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
--------------------------------- --------------------------------
Fund U.S. Government Other U.S. Government Other
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY INCOME FUND.......... -- $ 75,874,959 -- $38,653,126
SMALL CAP FUND.............. -- 23,177,790 -- 28,434,706
INTERNATIONAL FUND.......... -- 259,607,748 -- 17,421,880
BALANCED INCOME FUND........ $43,329,290 34,484,505 $29,749,363 13,853,364
TOTAL RETURN BOND FUND...... 17,375,098 25,284,188 8,117,336 4,987,113
LOW DURATION FUND........... 77,928,167 76,885,465 44,188,340 29,656,743
SHORT-TERM INVESTMENT
FUND...................... 4,306,944 7,112,715 138,491 9,066,542
</TABLE>
As of June 30, 1996, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
Net Appreciation Appreciated Depreciated
Fund (Depreciation) Securities Securities
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY INCOME FUND.............................. $ 34,682,882 $37,918,503 $(3,235,621)
SMALL CAP FUND.................................. 1,121,324 2,064,976 (943,652)
INTERNATIONAL FUND.............................. 16,419,100 24,406,777 (7,987,677)
BALANCED INCOME FUND............................ 3,545,902 5,358,698 (1,812,796)
TOTAL RETURN BOND FUND.......................... (589,991) 970,827 (1,560,818)
LOW DURATION FUND............................... 769,945 2,897,019 (2,127,074)
SHORT-TERM INVESTMENT FUND...................... 64,889 190,720 (125,831)
</TABLE>
33
<PAGE> 119
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
At June 30, 1996, the cost of investments for federal income tax purposes was
$148,082,784, $14,927,526, $291,549,134, $66,440,984, $43,575,470, $186,775,596
and $18,520,274 for the Equity Income, Small Cap, International, Balanced
Income, Total Return Bond, Low Duration and Short-Term Investment Funds,
respectively.
The International, Low Duration and Short-Term Investment Funds realized, on a
tax basis, post-October losses of $58,680, $2,721 and $1,827, respectively. Such
amounts may be used to offset future capital gains.
At June 30, 1996, the Short-Term Investment Fund had accumulated net realized
capital loss carryovers of $19,570 expiring in 2003 and $63,545 expiring in
2004. To the extent the Short-Term Investment Fund realizes future net capital
gains, taxable distributions to its shareholders will be offset by any unused
capital loss carryover.
For the year ended June 30, 1996, the following percent of dividends and
distributions paid qualifies for the dividend received deduction available to
corporate stockholders: Equity Income Fund 97%, Small Cap Fund 13% and Balanced
Income Fund 29%.
NOTE 4.
SUBSEQUENT EVENT. In June 1996, the Advisor, a limited partnership, entered into
a Purchase Agreement with Merrill Lynch & Co., Inc., a Delaware corporation
("ML"), pursuant to which ML will acquire the partnership interests in the
Advisor. The purchase is subject to a number of contingencies, including
approval by the Funds' Board of Trustees (which has occurred) and shareholders
of new investment advisory agreements relating to each Fund. If the transaction
occurs, it is anticipated that the Funds will be operated in the same manner as
they are currently.
The net assets and net asset value per share of each Fund as of August 16, 1996
were as follows:
<TABLE>
<CAPTION>
Net Assets Net Asset Value
Fund (in millions) Per Share
- -------------------------------------------------------
<S> <C> <C>
Equity Income Fund...... $ 177.8 $ 18.68
Small Cap Fund.......... 16.1 20.88
International Fund...... 346.8 20.41
Balanced Fund........... 70.1 18.30
Total Return Fund....... 35.4 12.94
Low Duration Fund....... 171.2 10.12
Short-Term Investment
Fund.................. 14.0 10.17
- -------------------------------------------------------
</TABLE>
TAX STATUS OF DIVIDENDS (UNAUDITED)
During the year ended June 30, 1996, the following Funds paid capital gain
dividends (taxable as long-term capital gains) as follows:
<TABLE>
<CAPTION>
Per Share
---------
<S> <C>
EQUITY INCOME FUND.................. $0.86
SMALL CAP FUND...................... $2.03
</TABLE>
34
<PAGE> 120
Financial Highlights
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year........... $17.24 $15.07 $15.50 $14.51 $12.53
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income................... 0.45(1) 0.49 0.46 0.44 0.40
Net realized and unrealized gain on
investments........................... 2.89 2.48 0.10 1.21 1.99
------ ------ ------ ------ ------
Total from investment operations........ 3.34 2.97 0.56 1.65 2.39
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income)............................... (0.57) (0.44) (0.46) (0.43) (0.41)
Distributions (from realized gains)..... (1.10) (0.36) (0.53) (0.23) --
------ ------ ------ ------ ------
Total Distributions..................... (1.67) (0.80) (0.99) (0.66) (0.41)
------ ------ ------ ------ ------
Net Asset Value, End of Year................. $18.91 $17.24 $15.07 $15.50 $14.51
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Total Return................................. 20.04% 20.49% 3.40% 11.67% 19.28%
Net assets, end of year (millions)........... $182.5 $127.1 $87.2 $86.7 $71.6
Ratio of expenses to average net assets:
Before expense reimbursement............ 0.98% 1.02% 1.05% 1.02% 1.02%
After expense reimbursement............. 0.98% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement............ 2.56% 3.11% 2.85% 2.97% 2.93%
After expense reimbursement............. 2.56% 3.14% 2.90% 2.99% 2.95%
Portfolio turnover rate...................... 24% 50% 36% 25% 32%
</TABLE>
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
See Notes to Financial Statements
35
<PAGE> 121
Financial Highlights
- --------------------------------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year................ $21.53 $19.53 $19.88 $18.10 $17.30
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income (loss)................. 0.05(1) (0.06) (0.01) 0.27 0.09
Net realized and unrealized gain on
investments................................ 2.80 2.84 0.78 3.18 3.09
------- ------- ------- ------- -------
Total from investment operations............. 2.85 2.78 0.77 3.45 3.18
------- ------- ------- ------- -------
Less Distributions:
Dividends (from net investment income)....... -- -- (0.20) (0.04) (0.13)
Distributions (from realized gains).......... (3.05) (0.78) (0.92) (1.63) (2.25)
------- ------- ------- ------- -------
Total Distributions.......................... (3.05) (0.78) (1.12) (1.67) (2.38)
------- ------- ------- ------- -------
Net Asset Value, End of Year...................... $21.33 $21.53 $19.53 $19.88 $18.10
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Total Return...................................... 14.24% 14.79% 3.77% 19.80% 19.04%
Net assets, end of year (millions)................ $16.5 $20.5 $13.1 $10.8 $8.8
Ratio of expenses to average net assets:
Before expense reimbursement................. 1.21% 1.49% 1.65% 1.40% 1.45%
After expense reimbursement.................. 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average
net assets:
Before expense reimbursement................. 0.03% (0.82)% (0.71)% 1.03% (0.06)%
After expense reimbursement.................. 0.24% (0.34)% (0.06)% 1.42% 0.40%
Portfolio turnover rate........................... 119% 81% 44% 20% 26%
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
See Notes to Financial Statements
36
<PAGE> 122
Financial Highlights
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.............. $17.70 $16.79 $14.63 $13.97 $12.56
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income...................... 0.56(1) 0.28 0.26 0.23 0.22
Net realized and unrealized gain on
investments.............................. 2.51 1.52 2.19 0.74 3.09
------ ------ ------ ------ ------
Total from investment operations........... 3.07 1.80 2.45 0.97 3.31
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)..... (0.14) (0.44) (0.14) -- (0.61)
Distributions (from realized gains)........ (0.19) (0.45) (0.15) (0.31) (1.29)
------ ------ ------ ------ ------
Total Distributions........................ (0.33) (0.89) (0.29) (0.31) (1.90)
------ ------ ------ ------ ------
Net Asset Value, End of Year.................... $20.44 $17.70 $16.79 $14.63 $13.97
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Total Return.................................... 18.61% 11.08% 16.71% 7.36% 27.48%
Net assets, end of year (millions).............. $331.0 $51.5 $26.0 $6.6 $4.0
Ratio of expenses to average net assets:
Before expense reimbursement............... 1.11% 1.39% 1.61% 2.44% 4.19%
After expense reimbursement................ 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement............... 2.67% 2.45% 2.01% 1.14% 0.42%
After expense reimbursement................ 2.78% 2.83% 2.62% 2.58% 3.61%
Portfolio turnover rate......................... 12% 24% 23% 24% 88%
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
See Notes to Financial Statements
37
<PAGE> 123
Financial Highlights
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year........... $16.74 $15.71 $16.69 $16.35 $15.23
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income................... 0.94 0.89 0.89 0.77 0.79
Net realized and unrealized gain (loss)
on investments........................ 1.53 1.53 (0.27) 0.82 1.45
------ ------ ------ ------ ------
Total from investment operations........ 2.47 2.42 0.62 1.59 2.24
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income)............................... (0.92) (0.80) (0.94) (0.74) (0.76)
Distributions (from realized gains)..... (0.02) (0.57) (0.66) (0.51) (0.36)
Return of capital....................... -- (0.02) -- -- --
------ ------ ------ ------ ------
Total Distributions..................... (0.94) (1.39) (1.60) (1.25) (1.12)
------ ------ ------ ------ ------
Net Asset Value, End of Year................. $18.27 $16.74 $15.71 $16.69 $16.35
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Total Return................................. 15.04% 16.40% 3.60% 10.10% 15.10%
Net assets, end of year (millions)........... $70.6 $32.1 $36.0 $30.3 $16.7
Ratio of expenses to average net assets:
Before expense reimbursement............ 1.06% 1.19% 1.20% 1.15% 1.27%
After expense reimbursement............. 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement............ 5.20% 5.44% 5.04% 4.62% 4.64%
After expense reimbursement............. 5.26% 5.63% 5.24% 4.77% 4.90%
Portfolio turnover rate...................... 92% 51% 97% 155% 36%
</TABLE>
See Notes to Financial Statements
38
<PAGE> 124
Financial Highlights
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
December 6, 1994*
Year Ended through
June 30, 1996 June 30, 1995
--------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period............................. $12.94 $12.00
----------- --------
Income from Investment Operations:
Net investment income....................................... 0.84(1) 0.46
Net realized and unrealized gain on investments............. 0.06 0.94
----------- --------
Total from investment operations............................ 0.90 1.40
----------- --------
Less Distributions:
Dividends (from net investment income)...................... (0.93) (0.46)
Distributions (from realized gains)......................... (0.13) --
----------- --------
Total Distributions......................................... (1.06) (0.46)
----------- --------
Net Asset Value, End of Period................................... $12.78 $12.94
=========== ========
RATIOS/SUPPLEMENTAL DATA:
Total Return..................................................... 7.05% 11.88%
Net assets, end of period (millions)............................. $43.4 $15.3
Ratio of expenses to average net assets:
Before expense reimbursement................................ 0.98% 2.93%+
After expense reimbursement................................. 0.68% 0.80%+
Ratio of net investment income to average net assets:
Before expense reimbursement................................ 6.86% 4.92%+
After expense reimbursement................................. 7.16% 7.05%+
Portfolio turnover rate.......................................... 51% 68%
</TABLE>
* Commencement of operations.
+ Annualized.
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
See Notes to Financial Statements
39
<PAGE> 125
Financial Highlights
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
May 18, 1993*
Year Ended June 30, through
1996 1995 1994 June 30, 1993
-------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $10.15 $ 9.93 $10.00 $ 10.00
-------- -------- -------- --------
Income from Investment Operations:
Net investment income............................... 0.68 0.75 0.77 0.05
Net realized and unrealized gain on investments..... 0.06 0.23 0.11 0.00
-------- -------- -------- --------
Total from investment operations.................... 0.74 0.98 0.88 0.05
-------- -------- -------- --------
Less Distributions:
Dividends (from net investment income).............. (0.72) (0.75) (0.77) (0.05)
Distributions (from realized gains)................. (0.05) (0.01) (0.18) (0.00)
-------- -------- -------- --------
Total Distributions................................. (0.77) (0.76) (0.95) (0.05)
-------- -------- -------- --------
Net Asset Value, End of Period........................... $10.12 $10.15 $ 9.93 $ 10.00
======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Total Return............................................. 7.47% 10.23% 9.02% 4.36%+
Net assets, end of period (millions)..................... $189.2 $123.3 $36.5 $7.6
Ratio of expenses to average net assets:
Before expense reimbursement........................ 0.60% 0.75% 1.10% 4.94%+
After expense reimbursement......................... 0.58% 0.58% 0.58% 0.58%+
Ratio of net investment income to average net assets:
Before expense reimbursement........................ 7.07% 7.43% 6.82% 1.93%+
After expense reimbursement......................... 7.09% 7.61% 7.34% 6.28%+
Portfolio turnover rate.................................. 50% 71% 254% 34%
</TABLE>
* Commencement of operations.
+ Annualized.
See Notes to Financial Statements
40
<PAGE> 126
Financial Highlights
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
May 18, 1993*
Year Ended June 30, through
1996 1995 1994 June 30, 1993
-------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $10.12 $10.21 $10.00 $ 10.00
-------- -------- -------- --------
Income from Investment Operations:
Net investment income............................... 0.66 0.66 0.53 0.03
Net realized and unrealized
gain (loss) on investments........................ 0.05 (0.09) 0.21 --
-------- -------- -------- --------
Total from investment operations.................... 0.71 0.57 0.74 0.03
-------- -------- -------- --------
Less Distributions:
Dividends (from net investment income).............. (0.66) (0.66) (0.53) (0.03)
Return of capital................................... (0.00) -- -- --
-------- -------- -------- --------
Total Distributions................................. (0.66) (0.66) (0.53) (0.03)
-------- -------- -------- --------
Net Asset Value, End of Period........................... $10.17 $10.12 $10.21 $ 10.00
======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Total Return............................................. 7.23% 5.78% 7.47% 2.30%+
Net assets, end of period (millions)..................... $18.7 $19.8 $10.5 $.003
Ratio of expenses to average net assets:
Before expense reimbursement........................ 0.88% 1.26% 2.06% 57.02%+
After expense reimbursement......................... 0.48% 0.48% 0.48% 0.48%+
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement........................ 6.15% 5.74% 4.16% (56.99)%+
After expense reimbursement......................... 6.55% 6.52% 5.74% 2.32%+
Portfolio turnover rate.................................. 60% 81% 135% 0%
</TABLE>
* Commencement of operations.
+ Annualized.
See Notes to Financial Statements
41
<PAGE> 127
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Hotchkis and Wiley Funds:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Equity Income Fund, the Small
Cap Fund, the International Fund, the Balanced Income Fund, the Total Return
Bond Fund, the Low Duration Fund and the Short-Term Investment Fund (seven of
the eight separately managed portfolios of Hotchkis and Wiley Funds, the
"Funds") at June 30, 1996, the results of each of their operations for the year
then ended, and the changes in each of their net assets and their financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Milwaukee, WI
August 16, 1996
42
<PAGE> 128
- --------------------------------------------------------------------------------
LOGO
800 WEST SIXTH STREET
FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90017
800-236-4479
INVESTMENT ADVISOR
Hotchkis and Wiley
800 West Sixth Street
Fifth Floor
Los Angeles, California 90017
LEGAL COUNSEL
Gardner, Carton & Douglas
321 North Clark Street
Chicago, Illinois 60610
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
CUSTODIAN AND TRANSFER AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202
ANNUAL REPORT
FOR THE YEAR ENDED
JUNE 30, 1996
LOGO
LOGO
EQUITY INCOME FUND
-------------------------------------------------------------
SMALL CAP FUND
-------------------------------------------------------------
INTERNATIONAL FUND
-------------------------------------------------------------
BALANCED INCOME FUND
-------------------------------------------------------------
TOTAL RETURN BOND FUND
-------------------------------------------------------------
LOW DURATION FUND
-------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
- --------------------------------------------------------------------------------
THIS MATERIAL SHOULD BE PRECEDED HOTCHKIS AND WILEY:
OR ACCOMPANIED BY A PROSPECTUS. INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
<PAGE> 129
______________________
HOTCHKIS AND
WILEY FUNDS
______________________
Equity Fund For Insurance Companies
ANNUAL REPORT
___________________
June 30, 1996
800 West 6th Street, Fifth Floor
Los Angeles, CA 90017
(213) 362-8900
Investment Advisor: HOTCHKIS AND WILEY
<PAGE> 130
EQUITY FUND FOR INSURANCE COMPANIES
JANUARY 29, 1993 - JUNE 30, 1996
[CHART]
Ended
6/30/96
--------------------------------------------
One Year 22.9%
--------------------------------------------
Three Years 14.6%
--------------------------------------------
Since Inception 14.2%
(1/29/93)
--------------------------------------------
Past performance is not predictive of future performance. The representative
market indices are unmanaged. The annual returns reflect the voluntary
agreement of Hotchkis and Wiley, the Funds' advisor, to assume fees and
expenses in excess of certain limits.
<PAGE> 131
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
Dear Shareholders:
The Equity Income Fund's total return for the fiscal year ended June 30, 1996
was 22.9%. The second quarter of 1996 was a difficult environment for value
investors, dampening the strong returns achieved in the previous three quarters.
There has been an increasing amount of volatility and dispersion of returns
between various sectors of the equity market. The market's recent performance
has come primarily from technology and consumer products. We have continued to
retain a healthy investment position in basic industry, including chemicals,
paper and steel. These areas underperformed in the Spring, as climbing interest
rates threatened continued expansion in the economy. Now the economy is sending
mixed signals. It seems to be teetering in a delicate balance between growth
that is too strong or not strong enough. Perhaps this is what a continuing "soft
landing" feels like -- a lot of bumps along the way.
In this uncertain, volatile environment, we continue to believe high dividend
yielding, low P/E stocks of financially strong companies will provide superior
returns with less risk. The Fund remains attractive relative to the market as a
whole, with a projected price/earnings ratio of 12.1x compared to 16.5x for the
S&P 500 Stock Index, and a dividend yield of 3.4% compared to the S&P 500 Stock
Index of 2.2%. We will continue to manage the portfolio by adherence to our
investment disciplines which emphasize these lower risk characteristics.
<TABLE>
<S> <C>
George Wiley Gail Bardin
Managing Director, Hotchkis and Wiley Managing Director, Hotchkis and Wiley
Portfolio Manager Portfolio Manager
</TABLE>
<PAGE> 132
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--95.8% SHARES VALUE
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
AEROSPACE--4.3%
Lockheed Martin Corporation...................................... 1,800 $ 151,200
Northrop Grumman Corporation..................................... 3,000 204,375
Rockwell International Corporation............................... 5,100 291,975
United Technologies Corporation.................................. 3,600 414,000
-----------
1,061,550
-----------
AUTO-RELATED--1.4%
Dana Corporation................................................. 11,000 341,000
-----------
AUTOS & TRUCKS--5.2%
Ford Motor Company............................................... 23,300 754,338
General Motors Corporation....................................... 10,200 534,225
-----------
1,288,563
-----------
BANKS--8.3%
BankAmerica Corporation.......................................... 3,600 272,700
The Chase Manhattan Corporation.................................. 4,784 337,870
Comerica, Inc.................................................... 8,100 361,463
First Chicago NBD Corporation.................................... 9,700 379,513
First of America Bank Corporation................................ 4,700 210,325
KeyCorp.......................................................... 5,800 224,750
NationsBank Corporation.......................................... 3,200 264,400
-----------
2,051,021
-----------
BEVERAGES--1.6%
Anheuser-Busch Companies, Inc.................................... 5,200 390,000
-----------
BUILDING & FOREST PRODUCTS--1.8%
Weyerhaeuser Company............................................. 10,600 450,500
-----------
CHEMICALS--2.0%
Dow Chemical Company............................................. 3,400 258,400
Dupont (E.I.) De Nemours & Company............................... 3,000 237,375
-----------
495,775
-----------
COAL & GAS--1.8%
Eastern Enterprises.............................................. 13,000 432,250
-----------
</TABLE>
1
<PAGE> 133
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
DIVERSIFIED--4.9%
Hanson PLC, ADR.................................................. 22,000 $ 313,500
Ogden Corporation................................................ 11,500 208,438
Olin Corporation................................................. 2,700 240,975
Tenneco, Inc..................................................... 8,500 434,563
-----------
1,197,476
-----------
DRUGS--3.1%
American Home Products Corporation............................... 4,800 288,600
Baxter International, Inc........................................ 7,200 340,200
Merck & Company, Inc............................................. 2,000 129,250
-----------
758,050
-----------
ENGINEERING & CONSTRUCTION--1.0%
Harsco Corporation............................................... 3,700 248,825
-----------
FINANCIAL SERVICES--7.5%
Beneficial Corporation........................................... 4,800 269,400
Great Western Financial Corporation.............................. 15,300 365,287
H.F. Ahmanson & Company.......................................... 18,000 486,000
Household International, Inc..................................... 6,100 463,600
Transamerica Corporation......................................... 3,300 267,300
-----------
1,851,587
-----------
HOUSEHOLD FURNISHINGS & APPLIANCES--0.2%
Whirlpool Corporation............................................ 1,000 49,625
-----------
INSURANCE--5.3%
Aetna Life & Casualty Company.................................... 4,400 314,600
Aon Corporation.................................................. 7,000 355,250
Lincoln National Corporation..................................... 5,200 240,500
SAFECO Corporation............................................... 6,000 212,250
USLIFE Corporation............................................... 5,500 180,812
-----------
1,303,412
-----------
MACHINERY--1.6%
Deere & Company.................................................. 9,900 396,000
-----------
</TABLE>
2
<PAGE> 134
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
METALS & MINING--3.3%
Aluminum Company of America...................................... 8,600 $ 493,425
Reynolds Metals Company.......................................... 6,200 323,175
-----------
816,600
-----------
OIL--DOMESTIC--4.2%
Ashland, Inc..................................................... 7,200 285,300
Atlantic Richfield Company....................................... 2,200 260,700
Sun Company, Inc................................................. 6,710 203,816
USX-Marathon Group, Inc.......................................... 13,900 279,737
-----------
1,029,553
-----------
OIL--INTERNATIONAL--1.0%
Chevron Corporation.............................................. 4,000 236,000
-----------
PAPER--4.5%
Georgia Pacific Corporation...................................... 3,500 248,500
International Paper Company...................................... 11,000 405,625
Union Camp Corporation........................................... 4,000 195,000
Westvaco Corporation............................................. 9,000 268,875
-----------
1,118,000
-----------
PHOTOGRAPHY & OPTICAL--1.9%
Eastman Kodak Company............................................ 6,000 466,500
-----------
POLLUTION CONTROL--1.2%
Browning-Ferris Industries, Inc.................................. 10,500 304,500
-----------
PROFESSIONAL SERVICES--0.7%
PHH Corporation.................................................. 3,200 182,400
-----------
RAILROADS--2.3%
Conrail, Inc..................................................... 4,000 265,500
Norfolk Southern Corporation..................................... 3,600 305,100
-----------
570,600
-----------
</TABLE>
3
<PAGE> 135
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
RETAIL--GENERAL--7.2%
J.C. Penney Company, Inc......................................... 9,800 $ 514,500
Kmart Corporation................................................ 16,200 200,475
May Department Stores Company.................................... 11,800 516,250
Sears, Roebuck & Company......................................... 7,400 359,825
Woolworth Corporation(+)......................................... 8,300 186,750
-----------
1,777,800
-----------
SAVINGS & LOANS--1.1%
Federal National Mortgage Association............................ 8,000 268,000
-----------
STEEL--1.4%
USX-U.S. Steel Group, Inc........................................ 12,000 340,500
-----------
TELECOMMUNICATIONS--0.9%
Harris Corporation............................................... 3,500 213,500
-----------
TOBACCO--4.3%
American Brands, Inc............................................. 9,200 417,450
Philip Morris Companies, Inc..................................... 6,300 655,200
-----------
1,072,650
-----------
TRUCKING--0.9%
Ryder System, Inc................................................ 8,000 225,000
-----------
UTILITY--ELECTRIC--6.6%
CMS Energy Corporation........................................... 12,000 370,500
DTE Energy Company............................................... 4,000 123,500
Edison International............................................. 6,000 105,750
Entergy Corporation.............................................. 4,000 113,500
Illinova Corporation............................................. 6,500 186,875
New York State Electric & Gas Corporation........................ 5,300 129,187
Peco Energy Company.............................................. 11,300 293,800
Public Service Enterprises Group, Inc............................ 11,000 301,125
-----------
1,624,237
-----------
UTILITY--GAS PIPELINE--0.9%
British Gas PLC, ADR............................................. 2,089 223,262
-----------
</TABLE>
4
<PAGE> 136
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1996
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
UTILITY--TELEPHONE--3.4%
NYNEX Corporation................................................ 4,900 $ 232,750
Pacific Telesis Group............................................ 11,000 371,250
US West, Inc..................................................... 7,000 223,125
-----------
827,125
-----------
Total common stocks (cost $18,829,185)........................... 23,611,861
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
SHORT-TERM INVESTMENTS--4.2% AMOUNT
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES#--4.2%
Pitney Bowes, Inc., 5.1441%.................................... $484,847 484,847
Southwestern Bell, Inc., 5.1239%............................... 500,000 500,000
Warner Lambert, Inc., 5.115%................................... 50,000 50,000
-----------
Total variable rate demand notes (cost $1,034,847)............. 1,034,847
-----------
Total investments--100.0% (cost $19,864,032)........................ 24,646,708
Liabilities in excess of other assets--0.0%......................... 2,321
-----------
TOTAL NET ASSETS--100.0%....................................... $24,649,029
==========
</TABLE>
- ---------------
<TABLE>
<C> <S>
# Variable rate demand notes are considered short-term obligations and are payable on
demand. Interest rate changes periodically on specified dates. The rate listed is as of
June 30, 1996.
(+) Non-income producing security.
ADR --American Depository Receipts
</TABLE>
5
<PAGE> 137
HOTCHKIS
AND WILEY FUNDS Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $19,864,032)................................... $24,646,708
Cash....................................................................... 13,678
Dividends and interest receivable.......................................... 56,495
Receivable for investments sold............................................ 64,494
Receivable from Advisor.................................................... 11,458
Other receivables.......................................................... 185
-----------
Total assets.......................................................... 24,793,018
-----------
LIABILITIES:
Payable for investments purchased.......................................... 121,219
Accrued expenses and other liabilities..................................... 22,770
-----------
Total liabilities.......................................................... 143,989
-----------
Net assets............................................................ $24,649,029
===========
NET ASSETS CONSIST OF:
Paid in capital............................................................ $19,415,596
Undistributed net investment income........................................ 11,105
Undistributed net realized gains on investments............................ 439,652
Net unrealized appreciation on investments................................. 4,782,676
-----------
Net assets............................................................ $24,649,029
===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value authorized)........... 1,823,836
Net asset value per share (offering and redemption price).................. $ 13.51
===========
</TABLE>
See Notes to the Financial Statements.
6
<PAGE> 138
HOTCHKIS
AND WILEY FUNDS Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year ended June 30, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends *................................................................. $ 723,958
Interest.................................................................... 36,865
---------
Total income........................................................... 760,823
---------
EXPENSES:
Advisory fee................................................................ 115,773
Legal and auditing fees..................................................... 14,865
Custodian fees and expenses................................................. 7,291
Transfer agent fees and expenses............................................ 12,332
Administration fee.......................................................... 2,424
Trustees' fees and expenses................................................. 6,275
Reports to shareholders..................................................... 100
Registration fees........................................................... 3,867
Other expenses.............................................................. 1,103
---------
Total expenses......................................................... 164,030
Less: expense reimbursement................................................. (48,257)
---------
Net expenses........................................................... 115,773
---------
NET INVESTMENT INCOME............................................................ 645,050
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................................ 809,778
Net change in unrealized appreciation on investments........................ 2,827,246
---------
Net gain on investments................................................ 3,637,024
---------
NET INCREASE IN NET ASSETS FROM OPERATIONS....................................... $4,282,074
=========
- ---------------
* Net of Foreign Taxes withheld.................................................. $ 3,449
=========
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 139
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................... $ 645,050 $ 515,636
Net realized gain on securities transactions............. 809,778 53,938
Net change in unrealized appreciation of securities...... 2,827,246 2,320,505
----------- -----------
Net increase in net assets resulting from
operations........................................ 4,282,074 2,890,079
----------- -----------
NET EQUALIZATION CREDITS...................................... 0 48,905
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................... (688,368) (458,833)
Net realized gain on securities transactions............. (378,446) (37,220)
----------- -----------
Total dividends and distributions................... (1,066,814) (496,053)
----------- -----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold............................ 3,000,002 3,960,772
Shares issued in connection with payment of dividends.... 1,066,814 496,053
Cost of shares redeemed.................................. (22,500) (59,677)
----------- -----------
Net increase in net assets from Fund share
transactions...................................... 4,044,316 4,397,148
----------- -----------
Total Increase in Net Assets.................................. 7,259,576 6,840,079
NET ASSETS:
Beginning of year........................................ 17,389,453 10,549,374
----------- -----------
End of year*............................................. $ 24,649,029 $ 17,389,453
=========== ===========
*Including undistributed net investment income of:............ $ 11,105 $ 54,604
=========== ===========
CHANGES IN SHARES OUTSTANDING:
Shares sold.............................................. 234,558 400,117
Shares issued in connection with payment of dividends.... 83,286 46,972
Shares redeemed.......................................... (2,403) (5,704)
----------- -----------
Net increase........................................ 315,441 441,385
=========== ===========
</TABLE>
See Notes to the Financial Statements.
8
<PAGE> 140
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
NOTE 1. ACCOUNTING POLICIES. The Equity Fund for Insurance Companies (the
"Fund") is a series of Hotchkis and Wiley Funds (the "Trust"), an
open-end, management investment company organized as a Massachusetts
business trust on August 22, 1984 and registered under the Investment
Company Act of 1940. The Fund commenced operations on January 29,
1993. In addition to the Fund, the Trust also offers the Balanced
Income Fund, the Small Cap Fund, the Equity Income Fund, the
International Fund, the Low Duration Fund, the Short-Term Investment
Fund, and the Total Return Bond Fund. 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.
SECURITY VALUATION: Portfolio securities that are listed on a
securities exchange (whether domestic or foreign) or the NASDAQ
National Market System ("System") 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 such System. Unlisted securities that are not
included in such System 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 readily available are valued at fair value
as determined in good faith by Hotchkis and Wiley (the "Advisor")
under procedures established by and under the general supervision and
responsibility of 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.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase
agreements with banks or broker-dealers that meet credit guidelines
established by the Board of Trustees. In connection with transactions
in repurchase agreements, it is the Fund's policy that the custodian
take possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction,
including accrued interest. If the seller defaults, and the value of
the collateral declines, realization of the collateral by the Fund
may be delayed or limited.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the
requirements of the Internal Revenue Code applicable to regulated
investment companies and intends to distribute net investment company
taxable income and net capital gains to its shareholders. Therefore,
no federal income tax provision is required.
9
<PAGE> 141
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
EQUALIZATION: Effective July 1, 1995, the Fund discontinued the
practice of equalization. The Fund followed the accounting practice
known as equalization, by which a portion of the proceeds from sales
and costs of redemptions of capital shares, equivalent on a per share
basis to the amount of undistributed net investment income on the
date of the transaction, is credited or charged to undistributed net
investment income. As a result, undistributed net investment income
per share was unaffected by sales or redemptions of the Fund's
shares.
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.
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.
OTHER: Security and shareholder transactions are recorded no
later than the first business day after the 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. The Advisor receives a fee, computed
daily and payable monthly, at an annual rate of 0.60% of the first
$10 million of the Fund's average net assets, and 0.50% of average
net assets in excess of $10 million.
The Advisor provides continuous supervision of the investment
portfolio and pays all of the operating expenses relating to the Fund
other than the Advisory fee. For the year ended June 30, 1996, the
Advisor paid $48,257 of operating expenses on behalf of the Fund.
NOTE 3. PURCHASES AND SALES OF SECURITIES. Purchases and sales of investment
securities, other than short-term investments, for the year ended
June 30, 1996 were $7,265,980 and $4,250,059, respectively.
10
<PAGE> 142
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 30, 1996
At June 30, 1996 (for financial reporting and federal income tax
purposes), net unrealized appreciation aggregated $4,782,676, of
which $5,168,773 related to appreciated securities and $(386,097)
related to depreciated securities.
NOTE 4. SUBSEQUENT EVENT. In June 1996, the Advisor, a limited partnership,
entered into a Purchase Agreement with Merrill Lynch & Co., Inc., a
Delaware corporation ("ML"), pursuant to which ML will acquire the
partnership interests in the Advisor. The purchase is subject to a
number of contingencies, including approval by the Funds' Board of
Trustees (which has occurred) and shareholders of a new investment
advisory agreement relating to the Fund. If the transaction occurs,
it is anticipated that the Fund will be operated in the same manner
as it is currently.
11
<PAGE> 143
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JANUARY 29, 1993+
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period... $ 11.53 $ 9.89 $ 10.31 $10.00
------------- ------------- ------------- -------
Income from Investment Operations:
Net investment income............. 0.34 0.41 0.40 0.16
Net realized and unrealized gain
(loss) on investments........... 2.26 1.59 (0.24) 0.30
------------- ------------- ------------- -------
Total from investment
operations...................... 2.60 2.00 0.16 0.46
------------- ------------- ------------- -------
Less Distributions:
Dividends (from net investment
income)......................... (0.40) (0.34) (0.38) (0.15)
Distributions (from capital
gains).......................... (0.22) (0.02) (0.20) (0.00)
------------- ------------- ------------- -------
Total Distributions............... (0.62) (0.36) (0.58) (0.15)
------------- ------------- ------------- -------
Net Asset Value, End of Period......... $ 13.51 $ 11.53 $ 9.89 $10.31
========== ========== ========== ==============
RATIOS/SUPPLEMENTAL DATA:
Total Return........................... 22.93% 20.62% 1.38% 11.45%#
Net assets, end of period (millions)... $24.6 $17.4 $10.5 $7.1
Ratio of expenses to average net
assets:
Before expense reimbursement...... 0.76% 1.05% 1.20% 1.45%#
After expense reimbursement....... 0.54% 0.58% 0.60% 0.60%#
Ratio of net investment income to
average net assets:
Before expense reimbursement...... 2.78% 3.58% 3.32% 2.81%#
After expense reimbursement....... 3.00% 4.03% 3.91% 3.66%#
Portfolio turnover..................... 21% 29% 26% 2%
</TABLE>
- ---------------
+ Commencement of operations.
# Annualized.
See Notes to Financial Statements.
12
<PAGE> 144
HOTCHKIS
AND WILEY FUNDS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of the Equity Fund for Insurance
Companies:
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 Equity Fund for Insurance
Companies (one of the eight separately managed portfolios of Hotchkis and Wiley
Funds, the "Fund") at June 30, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the three years in
the period then ended and for the period from January 29, 1993 (commencement of
operations) through June 30, 1993, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1996 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Milwaukee, WI
August 16, 1996
<PAGE> 145
<TABLE>
<CAPTION>
==================================================================================================================
<S> <C> <C> <C>
INVESTMENT ADVISOR LEGAL COUNSEL INDEPENDENT ACCOUNTANTS CUSTODIAN AND TRANSFER AGENT
Hotchkis and Wiley Gardner, Carton & Douglas Price Waterhouse LLP Firstar Trust Company
800 West 6th Street 321 North Clark Street 100 East Wisconsin Avenue 615 East Michigan Street
Fifth Floor Chicago, IL 60610 Milwaukee, WI 53202 Milwaukee, WI 53202
Los Angeles, CA 90017
</TABLE>
This report is intended for the information of shareholders of Hotchkis and
Wiley Funds and should not be used as sales literature unless preceded or
accompanied by a current prospectus.
<PAGE> 146
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 97.1% Shares Value
<S> <C> <C>
- -----------------------------------------------------------
AEROSPACE -- 2.6%
...........................................................
Northrop Grumman Corporation 32,000 $ 2,810,000
...........................................................
Rockwell International
Corporation 33,000 1,947,000
................................................-----------
4,757,000
- -----------------------------------------------------------
APPAREL & TEXTILES -- 0.4%
...........................................................
Russell Corporation 22,000 651,750
- -----------------------------------------------------------
AUTO-RELATED -- 1.4%
...........................................................
Dana Corporation 67,000 2,546,000
- -----------------------------------------------------------
AUTOS & TRUCKS -- 7.4%
...........................................................
Chrysler Corporation 57,000 1,870,312
...........................................................
Ford Motor Company 162,000 6,115,500
...........................................................
General Motors Corporation 105,000 5,847,187
................................................-----------
13,832,999
- -----------------------------------------------------------
BANKS -- 6.6%
...........................................................
CoreStates Financial Corporation 33,000 1,773,750
...........................................................
First Chicago NBD Corporation 60,000 3,630,000
...........................................................
Fleet Financial Group, Inc. 21,000 1,328,250
...........................................................
KeyCorp 32,000 1,788,000
...........................................................
NationsBank Corporation 17,000 1,096,500
...........................................................
Signet Banking Corporation 74,000 2,664,000
................................................-----------
12,280,500
- -----------------------------------------------------------
BEVERAGES -- 0.6%
...........................................................
Anheuser-Busch Companies, Inc. 28,500 1,195,219
- -----------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 3.1%
...........................................................
Georgia-Pacific Corporation 24,000 2,049,000
...........................................................
Weyerhaeuser Company 73,000 3,796,000
................................................-----------
5,845,000
- -----------------------------------------------------------
BUILDING MATERIALS -- 0.4%
...........................................................
Hanson PLC ADR 26,625 665,625
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS -- 97.1% Shares Value
<S> <C> <C>
- -----------------------------------------------------------
CHEMICALS -- 2.5%
...........................................................
The Dow Chemical Company 30,000 $ 2,613,750
...........................................................
Eastman Chemical Company 33,000 2,095,500
................................................-----------
4,709,250
- -----------------------------------------------------------
CONGLOMERATES -- 1.8%
...........................................................
Tenneco, Inc. 76,000 3,434,250
- -----------------------------------------------------------
CONSUMER PRODUCTS -- 0.5%
...........................................................
Tupperware Corporation 22,800 832,200
- -----------------------------------------------------------
ENGINEERING AND CONSTRUCTION -- 1.0%
...........................................................
Harsco Corporation 44,000 1,782,000
- -----------------------------------------------------------
FINANCIAL SERVICES -- 4.5%
...........................................................
Beneficial Corporation 41,000 2,913,562
...........................................................
Household International, Inc. 31,000 3,640,563
...........................................................
Transamerica Corporation 20,000 1,871,250
................................................-----------
8,425,375
- -----------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 2.0%
...........................................................
Whirlpool Corporation 68,500 3,737,531
- -----------------------------------------------------------
INSURANCE -- 5.7%
...........................................................
American General Corporation 58,000 2,769,500
...........................................................
Aon Corporation 35,000 1,811,250
...........................................................
Lincoln National Corporation 33,000 2,124,375
...........................................................
Safeco Corporation 36,400 1,699,425
...........................................................
St. Paul Companies, Inc. 25,000 1,906,250
...........................................................
TIG Holdings, Inc. 9,500 296,875
................................................-----------
10,607,675
- -----------------------------------------------------------
LEISURE/TOYS -- 2.1%
...........................................................
Fortune Brands, Inc. 103,500 3,861,844
- -----------------------------------------------------------
MACHINERY -- 3.1%
...........................................................
Deere & Company 34,000 1,865,750
...........................................................
New Holland N.V. 145,000 3,969,375
................................................-----------
5,835,125
- -----------------------------------------------------------
</TABLE>
See Notes to Financial Statements
1
<PAGE> 147
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- -----------------------------------------------------------
METALS & MINING -- 3.9%
...........................................................
Aluminum Company of America 46,000 $ 3,467,250
...........................................................
Reynolds Metals Company 52,000 3,705,000
................................................-----------
7,172,250
- -----------------------------------------------------------
NATURAL GAS -- 0.9%
...........................................................
Eastern Enterprises 50,000 1,734,375
- -----------------------------------------------------------
OIL -- DOMESTIC -- 4.7%
...........................................................
Atlantic Richfield Company 25,000 1,762,500
...........................................................
Occidental Petroleum Corporation 160,000 4,010,000
...........................................................
Phillips Petroleum Company 22,000 962,500
...........................................................
Ultramar Diamond Shamrock
Corporation 59,000 1,924,875
................................................-----------
8,659,875
- -----------------------------------------------------------
OIL -- INTERNATIONAL -- 2.4%
...........................................................
Amoco Corporation 22,000 1,912,625
...........................................................
Royal Dutch Petroleum Company
NYS 46,800 2,544,750
................................................-----------
4,457,375
- -----------------------------------------------------------
PAPER -- 2.3%
...........................................................
International Paper Company 53,000 2,573,813
...........................................................
Union Camp Corporation 35,000 1,750,000
................................................-----------
4,323,813
- -----------------------------------------------------------
POLLUTION CONTROL -- 2.1%
...........................................................
Browning-Ferris Industries, Inc. 120,000 3,990,000
- -----------------------------------------------------------
RAILROADS -- 1.8%
...........................................................
Norfolk Southern Corporation 33,000 3,324,750
- -----------------------------------------------------------
RETAIL -- 4.4%
...........................................................
Intimate Brands, Inc. 54,000 1,134,000
...........................................................
J.C. Penney Company, Inc. 56,000 2,922,500
...........................................................
May Department Stores Company 41,000 1,937,250
...........................................................
Sears, Roebuck & Company 40,000 2,150,000
................................................-----------
8,143,750
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- -----------------------------------------------------------
SAVINGS & LOANS -- 5.7%
...........................................................
Fannie Mae 41,000 $ 1,788,625
...........................................................
Great Western Financial
Corporation 71,000 3,816,250
...........................................................
H.F. Ahmanson & Company 115,000 4,945,000
................................................-----------
10,549,875
- -----------------------------------------------------------
STEEL -- 5.0%
...........................................................
Allegheny Teledyne, Inc. 157,000 4,239,000
...........................................................
Lukens, Inc. 87,900 1,653,619
...........................................................
USX-U.S. Steel Group, Inc. 95,000 3,330,938
................................................-----------
9,223,557
- -----------------------------------------------------------
TOBACCO -- 4.5%
...........................................................
Gallaher Group PLC ADR # 80,000 1,475,000
...........................................................
Philip Morris Companies, Inc. 123,000 5,458,125
...........................................................
UST, Inc. 52,500 1,456,875
................................................-----------
8,390,000
- -----------------------------------------------------------
TRUCKING -- 1.0%
...........................................................
Ryder System, Inc. 57,000 1,881,000
- -----------------------------------------------------------
UTILITY -- ELECTRIC -- 7.2%
...........................................................
CMS Energy Corporation 86,000 3,031,500
...........................................................
Central & South West Corporation 33,000 701,250
...........................................................
DTE Energy Company 57,000 1,574,625
...........................................................
Energy Group PLC ADR 26,625 1,128,234
...........................................................
Illinova Corporation 130,000 2,860,000
...........................................................
PECO Energy Company 105,000 2,205,000
...........................................................
PacifiCorp 44,000 968,000
...........................................................
Public Service Enterprises
Group, Inc. 37,000 925,000
.................................................----------
13,393,609
- -----------------------------------------------------------
</TABLE>
See Notes to Financial Statements
2
<PAGE> 148
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- -----------------------------------------------------------
UTILITY -- TELEPHONE -- 5.5%
...........................................................
AT&T Corporation 141,800 $ 4,971,862
...........................................................
Alltel Corporation 80,000 2,675,000
...........................................................
NYNEX Corporation 46,000 2,650,750
................................................-----------
10,297,612
- -----------------------------------------------------------
Total Common Stock
(cost $141,602,381) 180,541,184
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE RATE Principal
DEMAND NOTES* -- 6.4% Amount Value
<S> <C> <C>
- ------------------------------------------------------------
Lilly (Eli) & Co., 5.0949% $ 733 $ 733
............................................................
General Mills, Inc., 5.245% 3,196,466 3,196,466
............................................................
Pitney Bowes, Inc., 5.2551% 1,240,495 1,240,495
............................................................
Warner-Lambert Co., 5.226% 7,405,906 7,405,906
.................................................-----------
Total variable rate demand
notes
(cost $11,843,600) 11,843,600
- ------------------------------------------------------------
Total investments -- 103.5%
(cost $153,445,981) 192,384,784
............................................................
Liabilities in excess of other
assets -- (3.5)% (6,510,972)
.................................................-----------
Total net assets -- 100.0% $185,873,812
- ------------------------------------------------------------
</TABLE>
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of June 30, 1997.
ADR -- American Depository Receipts.
NYS -- New York Shares.
# Non-income producing security.
See Notes to Financial Statements
3
<PAGE> 149
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
MID CAP FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 94.4% Shares Value
<S> <C> <C>
- ---------------------------------------------------------
APPAREL & TEXTILES -- 5.2%
...........................................................
Coats Viyella PLC ADR 5,000 $ 31,830
...........................................................
Polo Ralph Lauren Corporation # 200 5,475
...........................................................
Russell Corporation 2,200 65,175
............................................ -----------
102,480
- ---------------------------------------------------------
AUTO PARTS -- 1.4%
...........................................................
ITT Industries, Inc. 1,100 28,325
- ---------------------------------------------------------
AUTO-RELATED -- 4.7%
...........................................................
Dana Corporation 600 22,800
...........................................................
Echlin, Inc. 600 21,600
...........................................................
Lear Corporation # 1,100 48,812
............................................ -----------
93,212
- ---------------------------------------------------------
BANKS -- 7.0%
...........................................................
Compass Bancshares, Inc. 450 15,131
...........................................................
First Commerce Bancshares, Inc. 400 17,600
...........................................................
First Tennessee National
Corporation 200 9,600
...........................................................
Signet Banking Corporation 700 25,200
...........................................................
Union Planters Corporation 700 36,313
...........................................................
UnionBanCal Corporation 500 35,938
............................................ -----------
139,782
- ---------------------------------------------------------
BEVERAGES -- 0.8%
...........................................................
Pernod Ricard ADR 1,200 15,483
- ---------------------------------------------------------
CHEMICALS -- 4.4%
...........................................................
DSM N.V. ADR 1,000 24,919
...........................................................
Eastman Chemical Company 700 44,450
...........................................................
Wellman, Inc. 1,100 19,113
............................................ -----------
88,482
- ---------------------------------------------------------
COMMUNICATIONS & MEDIA -- 3.2%
...........................................................
Octel Communications Corporation
# 2,700 63,281
- ---------------------------------------------------------
COMPUTERS -- 1.3%
...........................................................
Exabyte Corporation # 2,000 25,625
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS -- 94.4% Shares Value
<S> <C> <C>
- ---------------------------------------------------------
COMPUTER-RELATED -- 2.7%
...........................................................
Great Plains Software, Inc. # 2,000 $ 54,000
- ---------------------------------------------------------
CONSUMER PRODUCTS -- 3.1%
...........................................................
The Dial Corporation 1,200 18,750
...........................................................
Tupperware Corporation 1,200 43,800
............................................ -----------
62,550
- ---------------------------------------------------------
CONTAINERS -- 2.0%
...........................................................
Ball Corporation 1,300 39,081
- ---------------------------------------------------------
ELECTRIC PRODUCTS -- 1.8%
...........................................................
UCAR International, Inc. # 800 36,600
- ---------------------------------------------------------
ELECTRICAL EQUIPMENT -- 0.9%
...........................................................
Pameco Corporation # 1,000 17,750
- ---------------------------------------------------------
ELECTRONICS -- 2.3%
...........................................................
Avnet, Inc. 400 23,000
...........................................................
EG&G, Inc. 1,000 22,500
............................................ -----------
45,500
- ---------------------------------------------------------
FOODS -- 1.0%
...........................................................
Dean Foods Company 500 20,188
- ---------------------------------------------------------
HEALTH CARE -- DRUGS -- 2.1%
...........................................................
Bergen Brunswig
Corporation -- Class A 1,250 34,844
...........................................................
McKesson Corporation 100 7,750
............................................ -----------
42,594
- ---------------------------------------------------------
HEALTHCARE SERVICES & SUPPLIES -- 2.2%
...........................................................
Apria Healthcare Group, Inc. # 900 15,975
- ---------------------------------------------------------
HOSPITAL/HEALTHCARE MANAGEMENT -- 0.4%
...........................................................
Foundation Health Systems,
Inc. -- Class A # 900 27,281
...........................................................
Medaphis Corporation # 800 8,050
............................................ -----------
35,331
- ---------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 2.5%
...........................................................
Whirlpool Corporation 900 49,106
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
4
<PAGE> 150
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
MID CAP FUND
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- ---------------------------------------------------------
INSURANCE -- 6.1%
...........................................................
Harleysville Group, Inc. 900 $ 34,087
...........................................................
IPC Holdings Limited 1,300 35,100
...........................................................
Ohio Casualty Corporation 500 22,000
...........................................................
St. Paul Companies, Inc. 400 30,500
............................................ -----------
121,687
- ---------------------------------------------------------
MACHINERY -- 2.2%
...........................................................
New Holland N.V. 1,600 43,800
- ---------------------------------------------------------
METALS & MINING -- 2.1%
...........................................................
Reynolds Metals Company 600 42,750
- ---------------------------------------------------------
NATURAL GAS -- 0.8%
...........................................................
MCN Energy Group, Inc. 500 15,312
- ---------------------------------------------------------
OIL & GAS -- INTERNATIONAL -- 0.9%
...........................................................
Equitable Resources, Inc. 600 17,025
- ---------------------------------------------------------
OIL & GAS SERVICES -- 2.9%
...........................................................
Tidewater, Inc. 1,300 57,200
- ---------------------------------------------------------
PAPER -- 3.2%
...........................................................
Chesapeake Corporation 900 30,375
...........................................................
Consolidated Papers, Inc. 600 32,400
............................................ -----------
62,775
- ---------------------------------------------------------
PRINTING & PUBLISHING -- 1.7%
...........................................................
Readers Digest Association, Inc. 1,200 34,425
- ---------------------------------------------------------
PROFESSIONAL SERVICES -- 1.8%
...........................................................
Olsten Corporation 1,800 34,988
- ---------------------------------------------------------
RETAIL -- 3.6%
...........................................................
Family Dollar Stores, Inc. 1,300 35,425
...........................................................
Intimate Brands, Inc. 1,750 36,750
............................................ -----------
72,175
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- ---------------------------------------------------------
RETAIL: SPECIALTY -- 1.5%
...........................................................
AutoZone, Inc. # 1,250 $ 29,453
- ---------------------------------------------------------
SAVINGS & LOANS -- 3.0%
...........................................................
Charter One Financial, Inc. 400 21,550
...........................................................
Washington Federal, Inc. 1,030 26,458
...........................................................
Washington Mutual, Inc. 200 11,950
............................................ -----------
59,958
- ---------------------------------------------------------
STEEL -- 3.2%
...........................................................
AK Steel Holding Corporation 800 35,300
...........................................................
USX-U.S. Steel Group, Inc. 800 28,050
............................................ -----------
63,350
- ---------------------------------------------------------
TOBACCO -- 1.6%
...........................................................
Universal Corporation 1,000 31,750
- ---------------------------------------------------------
TRANSPORTATION -- AIR -- 2.0%
...........................................................
ASA Holdings, Inc. 1,400 40,075
- ---------------------------------------------------------
TRANSPORTATION -- MARINE -- 2.1%
...........................................................
Teekay Shipping Corporation 1,200 41,475
- ---------------------------------------------------------
TRAVEL & RECREATION -- 2.5%
...........................................................
Royal Caribbean Cruises, Ltd. 1,400 48,913
- ---------------------------------------------------------
TRUCKING -- 1.7%
...........................................................
Ryder System, Inc. 1,000 33,000
- ---------------------------------------------------------
UTILITY-ELECTRIC -- 2.5%
...........................................................
DTE Energy Company 600 16,575
...........................................................
Illinova Corporation 1,500 33,000
............................................ -----------
49,575
- ---------------------------------------------------------
Total common stocks
(cost $1,680,835) 1,875,031
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
5
<PAGE> 151
Schedule of Investments -- June 30, 1997 (Unaudited)
- -----------------------------------------------------------
MID CAP FUND
<TABLE>
<CAPTION>
VARIABLE RATE
DEMAND NOTES* Principal
-- 5.1% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
Pitney Bowes, Inc., 5.2551% $102,418 $ 102,418
............................................ ----------
Total variable rate demand notes
(cost $102,418) 102,418
- -----------------------------------------------------------
Total investments -- 99.5% (cost
$1,783,253) 1,977,449
...........................................................
Other assets in excess of
liabilities -- 0.5% 9,748
............................................ ----------
Total net assets -- 100% $ 1,987,197
- -----------------------------------------------------------
</TABLE>
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of June 30, 1997.
ADR -- American Depository Receipt.
# Non-income producing security.
See Notes to Financial Statements
6
<PAGE> 152
Schedule of Investments -- June 30, 1997 (Unaudited)
- -----------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 93.5% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
AUTO PARTS -- 1.4%
...........................................................
APS Holding Corporation -- Class
A # 43,000 $ 376,250
- -----------------------------------------------------------
BUILDING MATERIALS -- 4.3%
...........................................................
Giant Cement Holding, Inc. # 25,100 470,625
...........................................................
NCI Building Systems, Inc. # 21,700 702,538
............................................ ----------
1,173,163
- -----------------------------------------------------------
CHEMICALS -- 1.7%
...........................................................
The Carbide/Graphite Group,
Inc. # 20,000 465,000
- -----------------------------------------------------------
COMMUNICATIONS & MEDIA -- 9.9%
...........................................................
Century Communications
Corporation, Class A # 70,000 376,250
...........................................................
Groupe AB SA ADR # 142,500 1,211,250
...........................................................
Octel Communications
Corporation # 29,200 684,375
...........................................................
Teltrend, Inc. # 8,700 127,238
...........................................................
VTEL Corporation # 56,000 336,000
............................................ ----------
2,735,113
- -----------------------------------------------------------
COMMUNICATIONS EQUIPMENT/MANUFACTURERS -- 2.2%
...........................................................
Channell Commercial Corporation # 45,200 610,200
- -----------------------------------------------------------
COMPUTERS -- 6.9%
...........................................................
Applied Magnetics Corporation # 21,500 486,437
...........................................................
Exabyte Corporation # 41,700 534,281
...........................................................
Key Tronic Corporation # 23,000 112,125
...........................................................
MICROS Systems, Inc. # 18,100 760,200
............................................ ----------
1,893,043
- ---------------------------------------------------------
COMPUTER SERVICES -- 0.8%
...........................................................
AMX Corporation # 40,000 230,000
- -----------------------------------------------------------
COMPUTER SYSTEMS -- 2.2%
...........................................................
VLSI Technology, Inc. # 26,000 614,250
- -----------------------------------------------------------
HEALTHCARE: MISCELLANEOUS -- 3.1%
...........................................................
Healthcare Services Group, Inc. # 70,000 840,000
- -----------------------------------------------------------
HEALTHCARE SERVICES & SUPPLIES -- 1.7%
...........................................................
Apria Healthcare Group, Inc. # 27,100 481,025
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
HOMEBUILDERS -- 1.8%
...........................................................
Del Webb Corporation 30,000 $ 487,500
- -----------------------------------------------------------
HOSPITAL/HEALTHCARE MANAGEMENT -- 1.7%
...........................................................
Integrated Health Services, Inc. 12,000 462,000
- -----------------------------------------------------------
INSURANCE -- 7.0%
...........................................................
FPIC Insurance Group, Inc. # 36,100 812,250
...........................................................
Omni Insurance Group, Inc. # 35,000 437,500
...........................................................
Philadelphia Consolidated Holding
Corporation # 20,000 680,000
............................................ ----------
1,929,750
- -----------------------------------------------------------
MACHINERY -- 6.5%
...........................................................
Gleason Corporation 14,400 669,600
...........................................................
Special Devices, Inc. # 36,100 568,575
...........................................................
OmniQuip International, Inc. # 23,700 548,063
............................................ ----------
1,786,238
- -----------------------------------------------------------
METALS & MINING -- 1.9%
...........................................................
Northwest Pipe Company # 28,900 531,038
- -----------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 4.8%
...........................................................
Abraxas Petroleum Corporation # 57,800 742,369
...........................................................
Trico Marine Services, Inc. # 26,200 571,488
............................................ ----------
1,313,857
- -----------------------------------------------------------
OIL & GAS DRILLING -- 1.6%
...........................................................
Coho Energy, Inc. # 41,300 438,812
- -----------------------------------------------------------
OIL -- SERVICES -- 2.3%
...........................................................
Stolt Comex Seaway, S.A. # FS 24,600 624,225
- -----------------------------------------------------------
REAL ESTATE -- 10.0%
...........................................................
Brandywine Realty Trust 35,500 718,875
...........................................................
MGI Properties, Inc. 36,100 796,456
...........................................................
Redwood Trust, Inc. 21,500 1,005,125
...........................................................
Vistana, Inc. # 15,000 232,500
............................................ ----------
2,752,956
- -----------------------------------------------------------
</TABLE>
See Notes to Financial Statements
7
<PAGE> 153
Schedule of Investments -- June 30, 1997 (Unaudited)
- -----------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
RETAIL: FOOD CHAINS -- 3.1%
...........................................................
Dominick's Supermarkets, Inc. # 31,900 $ 849,337
...........................................................
RETAIL: JEWELRY -- 3.3%
...........................................................
Friedman's, Inc. # 40,100 917,287
- -----------------------------------------------------------
SAVINGS & LOANS -- 6.8%
...........................................................
Coastal Bancorp, Inc. 25,000 743,750
...........................................................
Poughkeepsie Financial
Corporation 60,000 438,750
...........................................................
Washington Federal, Inc. 26,395 678,022
............................................ ----------
1,860,522
- -----------------------------------------------------------
STEEL FABRICATOR -- 3.0%
...........................................................
Citation Corporation # 48,410 829,021
- -----------------------------------------------------------
TELECOMMUNICATIONS -- 2.4%
...........................................................
Applied Voice Technology, Inc. # 12,000 222,000
...........................................................
Celeritek, Inc. # 36,100 451,250
............................................ ----------
673,250
- -----------------------------------------------------------
TRANSPORTATION -- AIR FREIGHT -- 1.3%
...........................................................
AirNet Systems, Inc. # 21,700 355,338
- -----------------------------------------------------------
TRANSPORTATION -- MARINE -- 1.8%
...........................................................
Knightsbridge Tankers Ltd. 20,000 505,000
- -----------------------------------------------------------
Total Common Stock (cost
$20,886,740) 25,734,175
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VARIABLE RATE
DEMAND NOTES *
- -- 5.2%
Shares Value
<S> <C> <C>
- ------------------------------------------------------------
General Mills, Inc., 5.245% $440,000 $ 440,000
............................................................
Pitney Bowes, Inc., 5.2551% 512,787 512,787
............................................................
Warner-Lambert Co., 5.226% 482,329 482,329
............................................. ----------
Total variable rate demand notes
(cost $1,435,116) 1,435,116
- ------------------------------------------------------------
Total investments -- 98.7%
(cost $22,321,856) 27,169,291
............................................................
Other assets in excess of
liabilities -- 1.3% 360,910
............................................. ----------
Total net assets -- 100.0% $27,530,201
- ------------------------------------------------------------
</TABLE>
# Non-income producing security.
* 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 June 30, 1997.
FS Foreign Security.
ADR American Depository Receipts.
See Notes to Financial Statements
8
<PAGE> 154
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 92.5%
- --------------------------------------------------------------
AUSTRALIA -- 4.0% Shares Value
- --------------------------------------------------------------
<S> <C> <C>
BANKS -- 1.6%
............................................................
Australia and New Zealand
Banking Group, Ltd. 1,945,800 $ 14,431,095
- --------------------------------------------------------------
BUILDING MATERIALS -- 0.7%
............................................................
Pioneer International, Ltd. 1,690,000 6,482,202
- --------------------------------------------------------------
INSURANCE -- 0.9%
............................................................
GIO Australia Holdings, Ltd. 1,791,583 5,502,838
............................................................
QBE Insurance Group, Ltd. 400,807 2,402,101
............................................ -----------
7,904,939
- --------------------------------------------------------------
RETAIL -- 0.8%
............................................................
Davids, Ltd. 7,567,476 6,576,199
............................................................
Total Australia 35,394,435
- --------------------------------------------------------------
AUSTRIA -- 1.0%
- --------------------------------------------------------------
STEEL -- 1.0%
............................................................
Boehler-Uddeholm AG 117,000 9,074,863
............................................................
Total Austria 9,074,863
- --------------------------------------------------------------
CANADA -- 5.5%
- --------------------------------------------------------------
BANKS -- 2.2%
............................................................
Bank of Nova Scotia 190,038 8,334,039
............................................................
Canadian Imperial Bank of
Commerce 458,180 11,557,798
............................................ -----------
19,891,837
- --------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 1.3%
............................................................
Imasco, Ltd. 402,400 11,667,497
- --------------------------------------------------------------
METALS & MINERALS -- 1.0%
............................................................
Noranda, Inc. 395,790 8,535,157
- --------------------------------------------------------------
RAILROADS -- 1.0%
............................................................
Canadian National Railway
Company 201,000 8,771,064
............................................................
Total Canada 48,865,555
- --------------------------------------------------------------
FINLAND -- 1.7% Shares Value
- --------------------------------------------------------------
<S> <C> <C>
FOREST PRODUCTS & PAPER -- 1.3%
............................................................
UPM-Kymmene Corporation OY 492,200 $ 11,371,022
- --------------------------------------------------------------
MACHINERY -- 0.4%
............................................................
The Rauma Group OY 168,950 3,870,631
............................................................
Total Finland 15,241,653
- --------------------------------------------------------------
FRANCE -- 5.6%
- --------------------------------------------------------------
BEVERAGES -- 1.7%
............................................................
Pernod-Ricard SA 292,198 15,080,386
- --------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS -- 1.3%
............................................................
LaFarge SA 178,280 11,098,968
- --------------------------------------------------------------
OIL & GAS -- 1.1%
............................................................
Elf Aquitaine SA 88,000 9,503,083
- --------------------------------------------------------------
STEEL -- 1.1%
............................................................
Usinor Sacilor SA 561,930 10,145,668
- --------------------------------------------------------------
TOBACCO -- 0.4%
............................................................
SEITA SA 122,335 3,875,754
............................................................
Total France 49,703,859
- --------------------------------------------------------------
GERMANY -- 3.2%
- --------------------------------------------------------------
BANKS -- 1.6%
............................................................
Commerzbank AG 485,960 13,888,284
- --------------------------------------------------------------
CHEMICALS -- 0.8%
............................................................
Bayer AG 185,000 7,134,438
- --------------------------------------------------------------
MANUFACTURING -- 0.8%
............................................................
Buderus AG 13,500 7,499,423
............................................................
Total Germany 28,522,145
- --------------------------------------------------------------
HONG KONG -- 7.5%
- --------------------------------------------------------------
BANKS -- 1.2%
............................................................
HSBC Holdings PLC 372,800 11,211,985
- --------------------------------------------------------------
PRINTING & PUBLISHING -- 0.7%
............................................................
South China Morning Post
(Holdings), Ltd. 6,010,000 5,895,746
- --------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
9
<PAGE> 155
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
RETAIL -- SPECIALTY -- 1.0%
............................................................
Dickson Concepts International,
Ltd. 2,375,000 $ 8,644,969
- ---------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 1.9%
............................................................
Hang Lung Development Company 4,888,000 8,959,221
............................................................
New World Development Co., Ltd. 1,305,000 7,782,214
............................................ ----------
16,741,435
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 1.7%
............................................................
China Light & Power Company,
Ltd. 2,718,000 15,401,558
- ---------------------------------------------------------
UTILITY -- TELECOMMUNICATIONS -- 1.0%
............................................................
Hong Kong Telecommunications,
Ltd. 3,807,200 9,091,344
............................................................
Total Hong Kong 66,987,037
- ---------------------------------------------------------
IRELAND -- 1.4%
- ---------------------------------------------------------
PAPER -- 1.4%
............................................................
Jefferson Smurfit Group PLC 4,409,000 12,770,814
............................................................
Total Ireland 12,770,814
- ---------------------------------------------------------
ITALY -- 1.9%
- ---------------------------------------------------------
ENGINEERING &
CONSTRUCTION -- 0.5%
............................................................
Danieli & Company 1,236,000 4,322,186
- ---------------------------------------------------------
OIL & GAS -- 1.4%
............................................................
ENI 2,311,750 13,077,045
............................................................
Total Italy 17,399,231
- ---------------------------------------------------------
JAPAN -- 11.5%
- ---------------------------------------------------------
AUTOS & TRUCKS -- 1.3%
............................................................
Bridgestone Corporation 165,000 3,835,532
............................................................
Suzuki Motor Corporation 647,000 8,198,460
............................................ -----------
12,033,992
- ---------------------------------------------------------
BUILDING MATERIAL & COMPONENTS -- 1.4%
............................................................
Sekisui Chemical Co., Ltd. 1,198,000 12,144,364
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
ELECTRICAL MACHINERY -- 2.7%
............................................................
Nichicon Corporation 1,110,000 $ 15,035,389
............................................................
Sony Corporation 99,400 8,677,844
............................................ -----------
23,713,233
- ---------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.7%
............................................................
Nintendo Co., Ltd. 184,400 15,470,065
- ---------------------------------------------------------
FINANCIAL SERVICES -- 1.8%
............................................................
Promise Company, Ltd. 279,700 16,034,532
- ---------------------------------------------------------
IRON/STEEL -- 1.0%
............................................................
Yodogawa Steel Works 1,398,000 8,551,951
- ---------------------------------------------------------
PHARMACEUTICALS -- 0.5%
............................................................
Terumo Corporation 259,000 4,956,828
- ---------------------------------------------------------
RESTAURANTS -- 0.6%
............................................................
MOS Food Services 269,000 4,983,657
- ---------------------------------------------------------
TRANSPORTATION EQUIPMENT -- 0.5%
............................................................
Koito Manufacturing Co., Ltd. 576,000 4,409,472
............................................................
Total Japan 102,298,094
- ---------------------------------------------------------
MALAYSIA -- 2.7%
- ---------------------------------------------------------
BUILDING MATERIALS -- 0.3%
............................................................
Kedah Cement Holdings Berhad 1,495,000 2,333,713
- ---------------------------------------------------------
FINANCIAL SERVICES -- 0.7%
............................................................
Arab Malaysia Finance Berhad 2,751,000 5,831,152
- ---------------------------------------------------------
TRAVEL & RECREATION -- 1.2%
............................................................
Genting Berhad 2,258,900 10,829,099
- ---------------------------------------------------------
TRUCKING & SHIPPING -- 0.5%
............................................................
Malaysia International Shipping
Berhad 1,838,000 4,769,763
............................................................
Total Malaysia 23,763,727
- ---------------------------------------------------------
NETHERLANDS -- 7.0%
- ---------------------------------------------------------
BANKS -- 2.6%
............................................................
ABN Amro Holding N.V. 550,000 10,273,962
............................................................
ING Groep N.V. 281,250 12,990,782
............................................ -----------
23,264,744
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
10
<PAGE> 156
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
CHEMICALS -- 1.5%
............................................................
Akzo Nobel N.V. 96,275 $ 13,217,825
- ---------------------------------------------------------
CONSTRUCTION & HOUSING -- 1.0%
............................................................
Hollandsche Beton Groep N.V. 38,150 8,717,176
- ---------------------------------------------------------
INSURANCE -- 0.9%
............................................................
Fortis Amev N.V. 173,191 7,725,577
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 1.0%
............................................................
Koninklije PTT Nederland N.V. 238,700 9,380,745
............................................................
Total Netherlands 62,306,067
- ---------------------------------------------------------
NEW ZEALAND -- 0.9%
- ---------------------------------------------------------
BUILDING MATERIALS -- 0.9%
............................................................
Fletcher Challenge Building 2,542,500 7,633,453
- ---------------------------------------------------------
FOREST PRODUCTS & PAPER -- 0.0%
............................................................
Fletcher Challenge Forest 101,700 147,500
............................................................
Total New Zealand 7,780,953
- ---------------------------------------------------------
NORWAY -- 2.4%
- ---------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.3%
............................................................
Kvaerner ASA - Class A 192,500 11,661,813
- ---------------------------------------------------------
PHARMACEUTICALS & HEALTH CARE -- 1.1%
............................................................
Nycomed ASA - Class B 667,789 9,532,290
............................................................
Total Norway 21,194,103
- ---------------------------------------------------------
SINGAPORE -- 2.0%
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIES -- 2.0%
............................................................
Jardine Matheson Holdings, Ltd. 2,436,600 17,299,860
............................................................
Total Singapore 17,299,860
- ---------------------------------------------------------
SOUTH KOREA -- 0.6%
- ---------------------------------------------------------
BANKS -- 0.6%
............................................................
Cho Hung Bank Co., Ltd. GDR 742,500 5,383,125
............................................................
Total South Korea 5,383,125
- ---------------------------------------------------------
SPAIN -- 3.8%
- ---------------------------------------------------------
BANKS -- 1.5%
............................................................
Banco Santander SA 423,000 13,057,858
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
OIL -- INTERNATIONAL -- 1.4%
............................................................
Repsol SA 282,700 $ 11,975,388
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 0.9%
............................................................
Telefonica de Espana SA 290,000 8,400,078
............................................................
Total Spain 33,433,324
- ---------------------------------------------------------
SWEDEN -- 1.1%
- ---------------------------------------------------------
APPLIANCES -- 0.4%
............................................................
Electrolux AB - Class B 42,480 3,065,530
- ---------------------------------------------------------
DIVERSIFIED -- 0.7%
............................................................
Marieberg Tidnings AB -- Class
A 263,000 6,530,460
............................................................
Total Sweden 9,595,990
- ---------------------------------------------------------
SWITZERLAND -- 7.2%
- ---------------------------------------------------------
BUILDING MATERIALS -- 0.6%
............................................................
Sarna Kunststoff Holding AG
"registered" 5,080 5,052,646
- ---------------------------------------------------------
FOOD PRODUCERS -- 1.6%
............................................................
Nestle SA "registered" 11,037 14,581,241
- ---------------------------------------------------------
INSURANCE -- 1.9%
............................................................
Swiss Reinsurance Co.
"registered" 11,900 16,855,987
- ---------------------------------------------------------
MACHINERY & EQUIPMENT -- 2.5%
............................................................
SIG Schweizerische Industrie --
Gesellschaft Holding AG 3,010 9,136,228
............................................................
Sulzer AG "registered" (P.C.) 14,750 12,647,049
............................................ -----------
21,783,277
- ---------------------------------------------------------
MEDICAL PRODUCTS -- 0.0%
............................................................
Sulzer Medica AG "registered"
rights # 14,750 0
- ---------------------------------------------------------
PHARMACEUTICALS & HEALTH CARE -- 0.6%
............................................................
Novartis AG "registered" 3,520 5,635,477
............................................................
Total Switzerland 63,908,628
- ---------------------------------------------------------
UNITED KINGDOM -- 21.5%
- ---------------------------------------------------------
APPAREL & TEXTILES -- 1.6%
............................................................
Coats Viyella PLC 6,715,850 14,250,916
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 157
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
BANKS -- 2.2%
............................................................
Abbey National PLC 395,309 $ 5,394,885
............................................................
National Westminster Bank PLC 1,081,300 14,531,831
............................................ -----------
19,926,716
- ---------------------------------------------------------
BUILDING MATERIALS -- 2.3%
............................................................
Hanson PLC 2,006,597 9,968,645
............................................................
Redland PLC 1,908,200 10,813,658
............................................ -----------
20,782,303
- ---------------------------------------------------------
BUSINESS SERVICES -- 1.0%
............................................................
Lex Service PLC 1,367,300 8,567,624
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 2.8%
............................................................
BTR PLC 4,424,000 15,130,684
............................................................
Harrisons & Crosfield PLC 5,114,900 9,449,128
............................................ -----------
24,579,812
- ---------------------------------------------------------
FOOD & BEVERAGES -- 1.7%
............................................................
Allied Domecq PLC 2,154,530 15,472,659
- ---------------------------------------------------------
FOOD PRODUCERS -- 1.3%
............................................................
Hillsdown Holdings PLC 3,015,500 8,481,597
............................................................
Tate & Lyle PLC 395,700 2,940,486
............................................ -----------
11,422,083
- ---------------------------------------------------------
INSURANCE -- 1.2%
............................................................
Commercial Union PLC 1,008,700 10,601,492
- ---------------------------------------------------------
RETAIL -- 1.4%
............................................................
Safeway PLC 2,148,250 12,424,280
- ---------------------------------------------------------
TOBACCO -- 1.6%
............................................................
B.A.T Industries PLC 1,560,000 13,955,156
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 2.1%
............................................................
Energy Group PLC 513,610 5,479,275
............................................................
Powergen PLC 1,080,000 12,851,725
............................................ -----------
18,331,000
- ---------------------------------------------------------
UTILITY -- GAS -- 0.6%
............................................................
BG PLC 1,400,000 5,149,344
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
UTILITY -- WATER -- 1.7%
............................................................
Hyder PLC 1,129,000 $ 15,266,832
............................................................
Total United Kingdom 190,730,217
............................................................
Total common stocks -- 92.5%
(cost $699,164,546) 821,653,680
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS Principal
- -- 7.6% Amount
- ---------------------------------------------------------
CERTIFICATES OF
DEPOSIT -- 3.1%
- ---------------------------------------------------------
<S> <C> <C>
Structured Product Asset
Return Certificate Trust,
5.8375%, 7/28/97 $27,500,000 $ 27,500,000
- ---------------------------------------------------------
COMMERCIAL PAPER -- 4.4%
- ---------------------------------------------------------
Levi Strauss, 5.80%, 7/09/1997 11,000,000 10,985,822
...........................................................
Lockheed Martin Corporation,
5.82%, 7/01/1997 18,491,000 18,491,000
...........................................................
Praxair, Inc., 5.68%,
7/01/1997 10,000,000 10,000,000
............................................
-----------
39,476,822
- ---------------------------------------------------------
MUTUAL FUNDS -- 0.1%
- ---------------------------------------------------------
Vista Institutional Prime
Money Market Fund 1,156,477 1,156,477
...........................................................
Total short-term investments
(cost $68,133,299) 68,133,299
...........................................................
Total investments -- 100.1%
(cost $767,297,845) 889,786,979
...........................................................
Liabilities in excess of other
assets -- (0.1)% (1,258,534)
...........................................................
Total net assets -- 100.0% $888,528,445
- ---------------------------------------------------------
</TABLE>
# Non-income producing security.
P.C. -- Participation Certificates.
GDR -- Global Depository Receipts.
See Notes to Financial Statements
12
<PAGE> 158
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
<S> <C> <C>
COMMON STOCKS -- 93.2%
- ---------------------------------------------------------
AUSTRALIA -- 0.9% Shares Value
- ---------------------------------------------------------
BANKS -- 0.9%
............................................................
Australia & New Zealand Banking
Group, Ltd. 4,690 $ 34,784
............................................ -----------
34,784
Total Australia
- ---------------------------------------------------------
CANADA -- 0.7%
- ---------------------------------------------------------
METALS & MINERALS -- 0.7%
............................................................
Noranda, Inc. 1,165 25,123
............................................ -----------
25,123
Total Canada
- ---------------------------------------------------------
FINLAND -- 2.5%
- ---------------------------------------------------------
FOREST PRODUCTS & PAPER -- 1.7%
............................................................
UPM-Kymmene Corporation OY 2,640 60,990
- ---------------------------------------------------------
MACHINERY -- 0.8%
............................................................
The Rauma Group OY 1,356 31,066
............................................ -----------
92,056
Total Finland
- ---------------------------------------------------------
FRANCE -- 3.9%
- ---------------------------------------------------------
BEVERAGES -- 2.0%
............................................................
Pernod-Ricard SA 1,440 74,319
- ---------------------------------------------------------
STEEL -- 0.9%
............................................................
Usinor Sacilor SA 1,830 33,041
- ---------------------------------------------------------
TOBACCO -- 1.0%
............................................................
SEITA SA 1,192 37,764
............................................ -----------
145,124
Total France
- ---------------------------------------------------------
GERMANY -- 1.2%
- ---------------------------------------------------------
BANKS -- 1.2%
............................................................
Commerzbank AG 1,500 42,869
............................................ -----------
42,869
Total Germany
- ---------------------------------------------------------
HONG KONG -- 4.7%
- ---------------------------------------------------------
FINANCIAL SERVICES -- 2.3%
............................................................
Manhattan Card Company, Ltd. 186,000 84,630
- ---------------------------------------------------------
UTILITY-ELECTRIC -- 1.5%
............................................................
China Light & Power Company,
Ltd. 10,000 56,665
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------
UTILITY -- TELECOMMUNICATIONS -- 0.9%
............................................................
Hong Kong Telecommunications,
Ltd. 14,800 $ 35,341
............................................ -----------
176,636
Total Hong Kong
- ---------------------------------------------------------
IRELAND -- 1.4%
- ---------------------------------------------------------
PAPER -- 1.4%
............................................................
Jefferson Smurfit Group PLC 18,000 52,138
............................................ -----------
52,138
Total Ireland
- ---------------------------------------------------------
ITALY -- 1.4%
- ---------------------------------------------------------
OIL & GAS -- 1.4%
............................................................
ENI 9,000 50,911
............................................ -----------
50,911
Total Italy
- ---------------------------------------------------------
JAPAN -- 12.7%
- ---------------------------------------------------------
BUILDING MATERIAL & COMPONENTS -- 2.7%
............................................................
Sekisui Chemical Co., Ltd. 10,000 101,372
- ---------------------------------------------------------
ELECTRICAL MACHINERY -- 2.2%
............................................................
Nichicon Corporation 6,000 81,272
- ---------------------------------------------------------
ELECTRONIC COMPONENTS -- 2.7%
............................................................
Nintendo Co., Ltd. 1,200 100,673
- ---------------------------------------------------------
FINANCIAL SERVICES -- 3.1%
............................................................
Promise Company, Ltd. 2,000 114,655
- ---------------------------------------------------------
RESTAURANTS -- 2.0%
............................................................
MOS Food Services 4,000 74,106
............................................ -----------
472,078
Total Japan
- ---------------------------------------------------------
MALAYSIA -- 2.6%
- ---------------------------------------------------------
FINANCIAL SERVICES -- 1.8%
............................................................
Public Finance Berhad 44,000 67,639
- ---------------------------------------------------------
TRAVEL & RECREATION -- 0.8%
............................................................
Genting Berhad 6,100 29,243
............................................ -----------
96,882
Total Malaysia
- ---------------------------------------------------------
NETHERLANDS -- 2.9%
- ---------------------------------------------------------
BANKS -- 1.3%
............................................................
ABN Amro Holding N.V. 2,565 47,914
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 159
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- ---------------------------------------------------------
CHEMICALS -- 1.6%
............................................................
Akzo Nobel N.V. 450 $ 61,782
............................................ -----------
109,696
Total Netherlands
- ---------------------------------------------------------
NORWAY -- 1.9%
- ---------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 1.0%
............................................................
Kvaerner ASA -- Class A 598 36,227
- ---------------------------------------------------------
PHARMACEUTICALS & HEALTH CARE -- 0.9%
............................................................
Nycomed ASA -- Class B 2,400 34,259
............................................ -----------
70,486
Total Norway
- ---------------------------------------------------------
SINGAPORE -- 2.7%
- ---------------------------------------------------------
DIVERSIFIED -- 2.7%
............................................................
Jardine Matheson Holdings, Ltd. 14,000 99,400
............................................ -----------
99,400
Total Singapore
- ---------------------------------------------------------
SPAIN -- 1.9%
- ---------------------------------------------------------
OIL -- INTERNATIONAL -- 1.9%
............................................................
Repsol SA 1,700 72,013
............................................ -----------
72,013
Total Spain
- ---------------------------------------------------------
SWEDEN -- 1.7%
- ---------------------------------------------------------
APPLIANCES -- 0.5%
............................................................
Electrolux AB -- Class B 240 17,319
- ---------------------------------------------------------
DIVERSIFIED -- 1.2%
............................................................
Marieberg Tidnings AB -- Class
A 1,860 46,185
............................................ -----------
63,504
Total Sweden
- ---------------------------------------------------------
SWITZERLAND -- 6.9%
- ---------------------------------------------------------
BUILDING MATERIALS -- 1.6%
............................................................
Forbo Holding AG "registered" 135 58,339
- ---------------------------------------------------------
FOOD PRODUCERS -- 1.3%
............................................................
Nestle SA "registered" 38 50,203
- ---------------------------------------------------------
INSURANCE -- 2.6%
............................................................
Swiss Reinsurance Co.
"registered" 69 97,736
- ---------------------------------------------------------
MACHINERY & EQUIPMENT -- 1.4%
............................................................
Sulzer AG "registered" (P.C.) 60 51,446
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
- ---------------------------------------------------------
MEDICAL PRODUCTS -- 0.0%
............................................................
Sulzer Medica AG "registered"
rights # 60 $ 0
............................................ -----------
257,724
Total Switzerland
- ---------------------------------------------------------
UNITED KINGDOM -- 18.7%
- ---------------------------------------------------------
APPAREL & TEXTILES -- 1.6%
............................................................
Coats Viyella PLC 28,850 61,219
- ---------------------------------------------------------
BANKS -- 1.3%
............................................................
National Westminster Bank PLC 3,600 48,381
- ---------------------------------------------------------
BUILDING MATERIALS -- 2.2%
............................................................
Redland PLC 14,400 81,604
- ---------------------------------------------------------
BUSINESS SERVICES -- 1.8%
............................................................
Lex Service PLC 10,900 68,300
- ---------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 3.8%
............................................................
BTR PLC 23,675 80,972
............................................................
Harrisons & Crosfield PLC 32,000 59,116
............................................ -----------
140,088
- ---------------------------------------------------------
FOOD & BEVERAGES -- 1.7%
............................................................
Allied Domecq PLC 8,760 62,910
- ---------------------------------------------------------
FOOD PRODUCERS -- 0.8%
............................................................
Tate & Lyle PLC 4,190 31,136
- ---------------------------------------------------------
INSURANCE -- 1.1%
............................................................
Commercial Union PLC 4,000 42,040
- ---------------------------------------------------------
RETAIL -- 1.8%
............................................................
Safeway PLC 11,300 65,353
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 1.4%
............................................................
Powergen PLC 4,400 52,359
- ---------------------------------------------------------
UTILITY -- WATER -- 1.2%
............................................................
Hyder PLC 3,350 45,300
............................................ -----------
698,690
Total United Kingdom
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 160
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
UNITED STATES -- 24.5% Shares Value
<S> <C> <C>
- ---------------------------------------------------------
AUTOS & TRUCKS -- 1.0%
............................................................
General Motors Corporation 670 $ 37,311
- ---------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 1.0%
............................................................
Weyerhaeuser Company 700 36,400
- ---------------------------------------------------------
CHEMICALS -- 2.0%
............................................................
Eastman Chemical Company 1,200 76,200
- ---------------------------------------------------------
CONSUMER PRODUCTS -- 1.3%
............................................................
Tupperware Corporation 1,370 50,005
- ---------------------------------------------------------
ELECTRONICS -- 0.7%
............................................................
EG&G, Inc. 1,100 24,750
- ---------------------------------------------------------
FINANCIAL SERVICES -- 1.2%
............................................................
Beneficial Corporation 600 42,637
- ---------------------------------------------------------
INSURANCE -- 2.7%
............................................................
Safeco Corporation 700 32,681
............................................................
St. Paul Companies, Inc. 450 34,313
............................................................
TIG Holdings, Inc. 1,100 34,375
............................................ -----------
101,369
- ---------------------------------------------------------
MACHINERY -- 2.9%
............................................................
New Holland N.V. 3,900 106,763
- ---------------------------------------------------------
METALS & MINING -- 2.2%
............................................................
Aluminum Company of America 1,100 82,912
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
UNITED STATES -- 24.5% Shares Value
<S> <C> <C>
- ---------------------------------------------------------
OIL -- DOMESTIC -- 2.0%
............................................................
Occidental Petroleum
Corporation 2,950 $ 73,934
- ---------------------------------------------------------
RETAIL -- 2.4%
............................................................
Intimate Brands, Inc. 4,300 90,300
- ---------------------------------------------------------
SAVINGS & LOANS -- 1.4%
............................................................
Great Western Financial
Corporation 1,000 53,750
- ---------------------------------------------------------
TOBACCO -- 2.5%
............................................................
Philip Morris Companies, Inc. 2,100 93,188
- ---------------------------------------------------------
UTILITY -- ELECTRIC -- 1.2%
............................................................
Illinova Corporation 2,100 46,200
............................................ -----------
915,719
Total United States
- ---------------------------------------------------------
Total common stock -- 93.2%
(cost $3,176,072) 3,475,833
............................................................
Other assets in excess of liabilities --6.8% 253,763
............................................................
Total net assets -- 100% $ 3,729,596
- ---------------------------------------------------------
</TABLE>
# Non income producing security.
P.C. -- Participation Certificates.
See Notes to Financial Statements
15
<PAGE> 161
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 36.5% Shares Value
<S> <C> <C>
- ---------------------------------------------------------
AEROSPACE -- 1.0%
............................................................
Northrop Grumman Corporation 6,200 $ 544,437
............................................................
Rockwell International Corporation 6,000 354,000
............................................. ----------
898,437
- ---------------------------------------------------------
APPAREL & TEXTILES -- 0.2%
............................................................
Russell Corporation 5,400 159,975
- ---------------------------------------------------------
AUTO-RELATED -- 0.5%
............................................................
Dana Corporation 12,400 471,200
- ---------------------------------------------------------
AUTOS & TRUCKS -- 1.9%
............................................................
Ford Motor Company 25,500 962,625
............................................................
General Motors Corporation 14,000 779,625
............................................. ----------
1,742,250
- ---------------------------------------------------------
BANKS -- 1.3%
............................................................
Comerica, Inc. 3,500 238,000
............................................................
CoreStates Financial Corporation 3,000 164,153
............................................................
National City Corporation 6,000 315,000
............................................................
Signet Banking Corporation 13,500 486,000
............................................. ----------
1,203,153
- ---------------------------------------------------------
BEVERAGES -- 0.2%
............................................................
Anheuser-Busch Companies, Inc. 5,000 209,687
- ---------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 0.9%
............................................................
Georgia Pacific Corporation 3,700 315,887
............................................................
Weyerhaeuser Company 10,000 520,000
............................................. ----------
835,887
- ---------------------------------------------------------
BUILDING MATERIALS -- 0.1%
............................................................
Hanson PLC ADR 5,000 125,000
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS -- 36.5% Shares Value
<S> <C> <C>
- ---------------------------------------------------------
CHEMICALS -- 1.5%
............................................................
The Dow Chemical Company 6,300 $ 548,887
............................................................
duPont (E.I.) de Nemours & Company 4,600 289,225
............................................................
Eastman Chemical Company 7,200 457,200
............................................................
Millennium Chemicals, Inc. 2,142 48,731
............................................. ----------
1,344,043
- ---------------------------------------------------------
CONSUMER PRODUCTS -- 0.2%
............................................................
Tupperware Corporation 5,700 208,050
- ---------------------------------------------------------
CONGLOMERATES -- 0.5%
............................................................
Tenneco, Inc. 10,000 451,875
- ---------------------------------------------------------
FINANCIAL SERVICES -- 1.4%
............................................................
Beneficial Corporation 9,200 653,775
............................................................
Household International, Inc. 2,000 234,875
............................................................
Transamerica Corporation 4,000 374,250
............................................. ----------
1,262,900
- ---------------------------------------------------------
HEALTHCARE -- DRUGS -- 1.0%
............................................................
American Home Products Corporation 4,000 306,000
............................................................
Bristol-Meyers Squibb Company 3,600 291,600
............................................................
Merck & Company, Inc. 2,600 269,100
............................................. ----------
866,700
- ---------------------------------------------------------
HEALTHCARE -- MEDICAL PRODUCTS -- 0.3%
............................................................
Baxter International, Inc. 5,200 271,700
- ---------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 0.9%
............................................................
Whirlpool Corporation 15,000 818,438
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
16
<PAGE> 162
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
INSURANCE -- 1.9%
............................................................
American General Corporation 6,523 $ 310,911
............................................................
Aon Corporation 3,100 160,425
............................................................
Harleysville Group, Inc. 9,000 340,875
............................................................
Safeco Corporation 9,000 420,188
............................................................
St. Paul Companies, Inc. 5,000 381,250
............................................................
TIG Holdings, Inc. 2,300 71,875
............................................. ----------
1,685,524
- ---------------------------------------------------------
LEISURE/TOYS -- 0.7%
............................................................
Fortune Brands, Inc. 16,500 615,656
- ---------------------------------------------------------
MACHINERY -- 1.1%
............................................................
Deere & Company 3,600 197,550
............................................................
New Holland N.V. 27,400 749,359
............................................. ----------
946,909
- ---------------------------------------------------------
METALS & MINING -- 1.6%
............................................................
Aluminum Company of America 11,400 859,275
............................................................
Phelps Dodge Corporation 4,200 357,788
............................................................
Reynolds Metals Company 3,200 228,000
............................................. ----------
1,445,063
- ---------------------------------------------------------
OIL-DOMESTIC -- 2.1%
............................................................
Atlantic Richfield Company 11,000 775,500
............................................................
Occidental Petroleum Corporation 28,200 706,763
............................................................
USX-Marathon Group, Inc. 15,500 447,563
............................................. ----------
1,929,826
- ---------------------------------------------------------
OIL-INTERNATIONAL -- 1.9%
............................................................
Chevron Corporation 6,000 443,625
............................................................
Exxon Corporation 8,600 528,900
............................................................
Mobil Corporation 4,000 279,500
............................................................
Royal Dutch Petroleum Company NYS 8,000 435,000
............................................. ----------
1,687,025
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
PAPER -- 1.2%
............................................................
International Paper Company 15,125 $ 734,508
............................................................
Union Camp Corporation 7,500 375,000
............................................. ----------
1,109,508
- ---------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 0.2%
............................................................
Eastman Kodak Company 2,200 168,850
- ---------------------------------------------------------
POLLUTION CONTROL -- 0.4%
............................................................
Browning-Ferris Industries, Inc. 10,000 332,500
- ---------------------------------------------------------
RAILROADS -- 0.8%
............................................................
Norfolk Southern Corporation 7,200 724,552
- ---------------------------------------------------------
RETAIL -- 2.2%
............................................................
Intimate Brands, Inc. 18,000 378,000
............................................................
J.C. Penney Company, Inc. 10,000 521,875
............................................................
May Department Stores Company 14,000 661,500
............................................................
Sears, Roebuck & Company 8,000 430,000
............................................. ----------
1,991,375
- ---------------------------------------------------------
SAVINGS & LOANS -- 1.7%
............................................................
Fannie Mae 6,000 261,750
............................................................
Great Western Financial Corporation 12,700 682,625
............................................................
H.F. Ahmanson & Company 14,000 602,000
............................................. ----------
1,546,375
- ---------------------------------------------------------
STEEL -- 0.7%
............................................................
USX-U.S. Steel Group, Inc. 19,000 666,188
- ---------------------------------------------------------
TOBACCO -- 1.1%
............................................................
Gallaher Group PLC ADR # 12,500 230,469
............................................................
Philip Morris Companies, Inc. 17,000 754,375
............................................. ----------
984,844
- ---------------------------------------------------------
TRUCKING -- 0.4%
............................................................
Ryder System, Inc. 10,600 349,800
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
17
<PAGE> 163
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
UTILITY-ELECTRIC -- 3.3%
............................................................
CMS Energy Corporation 6,600 $ 232,650
............................................................
Central & South West Corporation 14,700 312,375
............................................................
DTE Energy Company 10,400 287,300
............................................................
Edison International 19,300 480,087
............................................................
Energy Group PLC ADR 3,900 165,262
............................................................
Illinova Corporation 30,000 660,000
............................................................
PECO Energy Company 13,000 273,000
............................................................
PacifiCorp 18,300 402,600
............................................................
Public Service Enterprises Group,
Inc. 7,000 175,000
............................................. ----------
2,988,274
- ---------------------------------------------------------
UTILITY-GAS PIPELINE -- 0.6%
............................................................
Nicor, Inc. 6,000 215,250
............................................................
Peoples Energy Corporation 7,500 280,781
............................................. ----------
496,031
- ---------------------------------------------------------
UTILITY-TELEPHONE -- 2.7%
............................................................
AT&T Corporation 26,700 936,169
............................................................
Alltel Corporation 15,500 518,281
............................................................
NYNEX Corporation 8,000 461,000
............................................................
SBC Communications, Inc. 3,657 226,277
............................................................
US West Communications Group 7,000 263,813
............................................. ----------
2,405,540
- ---------------------------------------------------------
Total common stocks (cost
$26,541,243) 32,943,135
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
CORPORATE BONDS Principal
- -- 21.4% Amount
- ---------------------------------------------------------
<S> <C> <C>
AUTOS & TRUCKS -- 1.1%
............................................................
Ford Motor Company (Global),
7.00%, 9/25/2001 $ 1,000,000 1,010,450
- ---------------------------------------------------------
BANKS -- 5.7%
............................................................
Associates First Capital
Corporation, Putable
5/15/1999, 5.96%, 5/15/2037 $ 1,000,000 $ 1,002,185
............................................................
KeyCorp Instit Capital-A
(Acquired 12/19/1996, Cost
$799,722) r, CLB 12/01/2006,
7.826%, 12/01/2026 825,000 802,397
............................................................
MBNA Corporation, 6.13125%,
6/17/2002 # 1,500,000 1,501,009
............................................................
MBNA Corporation (Global),
6.65938%, 2/01/2027 # 1,000,000 991,604
............................................................
Mellon Bank Corporation, Class
A, CLB 12/01/2006, 7.72%,
12/01/2026 825,000 801,629
............................................. ----------
5,098,824
- ---------------------------------------------------------
BUSINESS MACHINES & SOFTWARE -- 1.1%
............................................................
Oracle Corporation, 6.91%,
2/15/2007 1,000,000 987,191
- ---------------------------------------------------------
CONSUMER PRODUCTS -- 0.9%
............................................................
The Stop & Shop Companies,
Inc., 9.75%, 2/01/2002 700,000 773,811
- ---------------------------------------------------------
EUROBANKS -- 6.6%
............................................................
Foreningsbanken Kredit AB, CLB
12/18/2001, 6.53125%,
12/29/2049 # 2,000,000 2,012,800
............................................................
Midland Bank PLC, 6.0375%,
6/29/2049 # 500,000 445,425
............................................................
Nordbanken, CLB 10/25/2001,
6.43984%, 10/29/2049 # 2,000,000 2,002,590
............................................................
Okobank, 7.375%, 9/27/2049 # 1,500,000 1,527,300
............................................. ----------
5,988,115
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
18
<PAGE> 164
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
FINANCIAL SERVICES -- 1.1%
............................................................
Salomon, Inc.:
5.65%, 2/10/1998 $ 500,000 $ 499,238
............................................................
6.70%, 12/01/1998 # 500,000 501,595
............................................. ----------
1,000,833
- ---------------------------------------------------------
PAPER -- 0.8%
............................................................
Fort Howard Corporation,
11.00%, 1/02/2002 700,442 742,329
- ---------------------------------------------------------
REAL ESTATE -- 1.7%
............................................................
Taubman Realty Group, Ltd.,
6.33984%, 11/03/1997 # 1,500,000 1,500,433
- ---------------------------------------------------------
SAVINGS & LOANS -- 0.5%
............................................................
Federal Home Loan Mortgage
Corporation, CLB 7/01/1997,
7.15%, 6/27/2000 500,000 500,000
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 1.7%
............................................................
Tele Communications, Inc., CLB
9/15/1997, 6.4625%, 9/15/2003
# 1,500,000 1,504,017
- ---------------------------------------------------------
TRANSPORTATION -- 0.2%
............................................................
Delta Air Lines ETC, 9.90%,
1/02/2002 150,000 165,108
- ---------------------------------------------------------
Total corporate bonds (cost
$20,169,785) 19,271,111
- ---------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 7.2%
- ---------------------------------------------------------
ASSET-BACKED SECURITIES -- 1.0%
............................................................
Student Loan Marketing
Association, 1996-4 A1,
5.55%, 7/25/2004 # 887,143 885,896
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS -- 3.0%
............................................................
Federal National Mortgage
Association: 1995-3 Z, 8.25%,
7/25/2024 $ 691,844 $ 696,962
............................................................
TBA, 8.00%, 7/25/2027 2,000,000 2,045,000
............................................. ----------
2,741,962
- ---------------------------------------------------------
PASS-THROUGH SECURITIES -- 1.7%
............................................................
Government National Mortgage
Association, TBA, 8.00%,
7/15/2027 1,500,000 1,535,157
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED
SECURITIES -- 1.5%
............................................................
Federal Home Loan Mortgage
Corporation:
1860 SA (IO), 8.79317%,
2/15/2024 # 2,500,000 837,653
............................................................
1965 SA (IO), 2.05%,
3/15/2024 # 3,050,000 475,611
............................................. ----------
1,313,264
- ---------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $6,438,120) 6,476,279
- ---------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES -- 7.6%
- ---------------------------------------------------------
ASSET-BACKED SECURITIES -- 1.6%
............................................................
Bridgestone/Firestone Master
Trust, 1996-1 A, 6.17%,
7/01/2003 1,400,000 1,390,606
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
19
<PAGE> 165
Schedule of Investments -- June 30, 1997 (Unaudited)
- -------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Value
- ---------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE
OBLIGATIONS -- 2.8%
............................................................
Citicorp Mortgage Securities,
Inc., 1991-7 M, 8.75%,
5/25/2021 $ 245,166 $ 247,361
............................................................
Independent National Mortgage
Corporation, 1996-D A2,
7.00%, 5/25/2026 696,985 697,911
............................................................
PNC Mortgage Securities
Corporation, 1996-1 A11,
Class Z, 7.50%, 6/25/2026 1,710,972 1,610,435
............................................. ----------
2,555,707
- ---------------------------------------------------------
PASS-THROUGH SECURITIES -- 0.0%
............................................................
Citicorp Mortgage Securities,
Inc., 1987-14 A1, 9.50%,
9/25/2002 21,496 21,567
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED
SECURITIES -- 3.2%
............................................................
Chase Commercial Mortgage
Securities Corporation,
1997-1 X (IO), 1.39762%,
4/19/2015 # 23,495,137 2,009,657
............................................................
Donaldson, Lufkin & Jenrette,
1997-CF1 S (IO), 1.0969%,
3/15/2017 # 9,250,000 620,037
............................................................
GE Capital Mortgage Services,
Inc., 1993-1 G (IO),
657.2504%, 2/25/2022 22,089 289,011
............................................. ----------
2,918,705
- ---------------------------------------------------------
Total non-agency
mortgage-backed securities
(cost $6,545,920) 6,886,585
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCKS
- -- 1.1% Shares
- ---------------------------------------------------------
<S> <C> <C>
Home Ownership Funding 2,
(Acquired 2/20/1997, Cost
$1,000,000) r 1,000 $ 971,622
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY OBLIGATIONS Principal
- -- 19.4% Amount Value
- ---------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bonds:
8.75%, 5/15/2017 $ 750,000 $ 902,578
6.50%, 11/15/2026 1,550,000 1,486,064
............................................. ----------
2,388,642
- ---------------------------------------------------------
U.S. Treasury Notes:
............................................................
5.375%, 5/31/1998 375,000 373,711
............................................................
5.875%, 8/15/1998 4,350,000 4,350,004
............................................................
6.375%, 5/15/1999 6,000,000 6,031,877
............................................................
6.50%, 5/31/2001 3,000,000 3,017,814
............................................................
6.50%, 5/15/2005 1,300,000 1,298,376
............................................. ----------
15,071,782
- ---------------------------------------------------------
Total U.S. Treasury obligations
(cost $17,437,255) 17,460,424
- ---------------------------------------------------------
SHORT-TERM INVESTMENTS -- 6.6%
- ---------------------------------------------------------
CERTIFICATES OF DEPOSIT -- 1.1%
............................................................
Structured Product Asset Return
Certificate Trust, 5.8375%,
7/28/1997 1,000,000 1,000,000
- ---------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 5.5%
............................................................
Lilly (Eli) & Co., 5.0949% 933,217 933,217
............................................................
General Mills, Inc., 5.245% 1,512,928 1,512,928
............................................................
Pitney Bowes, Inc. 5.2551% 967,965 967,965
............................................................
Warner-Lambert Co., 5.226% 1,560,910 1,560,910
............................................. ----------
4,975,020
- ---------------------------------------------------------
Total short-term investments
(cost $5,975,020) 5,975,020
.............................................
Total investments -- 99.8%
(cost $83,107,343) 89,984,176
............................................................
Other assets in excess of
liabilities -- 0.2% 174,338
............................................................
Total net assets -- 100.0% $90,158,514
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
20
<PAGE> 166
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
Principal
Amount Value
- ---------------------------------------------------------
# Variable rate security. The rate listed is as of June 30, 1997.
* 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 June 30, 1997.
IO -- Interest Only.
ETC -- Equipment Trust Certificate.
ADR -- American Depository Receipts.
CLB -- Callable.
NYS -- New York Shares.
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 Financial Statements
21
<PAGE> 167
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 26.1% Amount Value
- ---------------------------------------------------------
<S> <C> <C>
BANKS -- 6.9%
...........................................................
First Chicago NBD Corporation,
CLB 2/01/2007,
6.40938%, 2/01/2027# $ 500,000 $ 489,859
...........................................................
MBNA Corporation, 6.13125%,
6/17/2002 # 500,000 500,336
.............................................
----------
990,195
- ---------------------------------------------------------
FINANCIAL SERVICES -- 4.2%
...........................................................
Associates First Capital
Corporation, Putable
5/15/1999, 5.96%, 5/15/2037 250,000 250,546
...........................................................
Salomon, Inc.:
6.70%, 12/01/1998 # 150,000 150,479
...........................................................
6.40%, 5/20/1999 # 200,000 198,712
.............................................
----------
599,737
- ---------------------------------------------------------
INDUSTRIAL -- 1.8%
...........................................................
Westinghouse Electric
Corporation, 8.93%, 6/22/1999 250,000 258,247
- ---------------------------------------------------------
SAVINGS & LOAN -- 3.6%
...........................................................
Western Financial Savings,
8.50%, 7/01/2003 500,000 509,197
- ---------------------------------------------------------
SOVEREIGN -- 3.2%
...........................................................
Government of Mexico, 11.00781%,
7/21/1997 # 450,000 450,196
- ---------------------------------------------------------
TELECOMMUNICATIONS -- 4.5%
...........................................................
Summit Communications Group,
Inc., CLB 4/15/1999,
10.50%, 4/15/2005 600,000 646,500
- ---------------------------------------------------------
TRANSPORTATION -- 1.9%
...........................................................
Delta Air Lines ETC, 9.90%,
1/02/2002 250,000 275,180
- ---------------------------------------------------------
Total corporate bonds and notes
(cost $3,694,837) 3,729,252
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT AGNECY MORTGAGE- Principal
BACKED SECURITIES 22.9% Amount Value
COLLATERALIZED MORTGAGE OBLIGATIONS -- 16.0%
...........................................................
<S> <C> <C>
Federal Home Loan Mortgage
Corporation: 1261 J, 8.00%,
7/15/2021 $ 599,911 $ 618,045
...........................................................
1468 S, 11.934%, 2/15/2023 # 449,224 447,024
...........................................................
1564 SE, 8.40233%, 8/15/2008 # 353,637 322,878
...........................................................
Federal National Mortgage Association:
G93-27 SB, 6.71922%, 8/25/2023 #
115,176 73,635
...........................................................
1993-37 SB, 6.95624%,
3/25/2023 # 224,549 164,680
...........................................................
1995-3 Z, 8.25%, 7/25/2024 661,763 666,659
.............................................
----------
2,292,921
- ---------------------------------------------------------
PASS-THROUGH SECURITIES -- 3.9%
...........................................................
Government National Mortgage
Association, 8974, 7.125%,
5/20/2022 # 543,828 561,176
- ---------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 3.0%
...........................................................
Federal Home Loan Mortgage
Corporation:
1860 SA (IO), 8.79317%,
2/15/2024 # 800,000 268,049
...........................................................
1965 SA (IO),
2.05%, 3/15/2024 # 1,000,000 155,938
.............................................
----------
423,987
- ---------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $3,024,074) 3,278,084
- ---------------------------------------------------------
</TABLE>
See Notes to Financial Statements
22
<PAGE> 168
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
NON-AGENCY MORTGAGE-
BACKED SECURITIES -- Principal
32.8% Amount Value
- -----------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 28.8%
...........................................................
Blackrock Capital Finance L.P
(Acquired 6/23/97, Cost
$496,953), 1997-R2 AP,
4.427%, 12/25/2035 # r $ 500,000 $ 495,903
...........................................................
CMC Securities Corporation,
1994-G, 7.00%, 9/25/2024 200,000 187,102
...........................................................
Citicorp Mortgage Securities,
Inc., 1990-D A1, 9.50%,
10/25/2005 175,914 183,012
...........................................................
Collateralized Mortgage
Obligations Trust, 57-D,
9.90%, 2/01/2019 521,617 563,604
...........................................................
Countrywide Funding Corporation,
1994-2 A12T, 9.00%, 2/25/2009
# 465,685 469,783
...........................................................
GE Capital Mortgage Services,
Inc.: 1994-24 A4, 7.00%,
7/25/2024 169,843 159,478
...........................................................
1997-5 A7, 7.50%, 6/25/2027 417,236 415,802
...........................................................
Housing Securities, Inc.: 1994-1
AB2, 6.50%, 3/25/2009 512,748 383,997
...........................................................
1994-2 B1, 6.50%, 7/25/2009 259,560 218,312
...........................................................
Independent National Mortgage
Corporation, 1995-F A5, 8.25%,
5/25/2010 1,000,000 1,035,405
.................................................
----------
4,112,398
- -----------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 4.0%
...........................................................
Chase Commercial Mortgage
Securities Corporation, 1997-1
X (IO), 1.39762%, 4/19/2015 # 6,737,000 576,249
- -----------------------------------------------------------
- -----------------------------------------------------------
Total non-agency mortgage-backed
securities (cost $4,558,172) 4,688,647
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK -- 6.8% Shares Value
- -----------------------------------------------------------
<S> <C> <C>
Home Ownership Funding 2,
(Acquired 2/20/97, Cost
$500,000) r 500 $ 485,811
...........................................................
Kenwood Properties, Inc.,
(Acquired 2/26/97,
Cost $500,000) r 500 491,317
...........................................................
Total preferred stock (cost
$1,000,000) 977,128
- -----------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- Principal
10.1% Amount
- -----------------------------------------------------------
Lilly (Eli) & Co., 5.0949% $ 3,849 3,849
...........................................................
Pitney Bowes, Inc., 5.2551% 1,359,671 1,359,671
...........................................................
Warner-Lambert Co., 5.226% 81,380 81,380
.............................................
----------
Total variable rate demand notes
(cost $1,444,900) 1,444,900
- -----------------------------------------------------------
Total investments -- 98.7% (cost
$13,721,983) 14,118,011
...........................................................
Other assets in excess of
liabilities -- 1.3% 189,102
.............................................
----------
Total net assets -- 100% $14,307,113
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
# Variable rate security. Rate listed is as of June 30, 1997.
* 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 June 30, 1997.
IO -- Interest Only.
CLB -- Callable.
r -- Restricted Security. Purchased in a private placement transaction; resale
to the public registration or may extend only to qualified institutional buyers.
ETC -- Equipment Trust Certificate.
See Notes to Financial Statements
23
<PAGE> 169
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 44.4% Amount Value
<S> <C> <C>
- ------------------------------------------------------------
BANKS -- 9.9%
............................................................
Barnett Capital Trust III, CLB
2/01/2007, (Acquired 2/06/97,
cost $2,437,250), 6.48438%,
2/01/2027 # r $2,500,000 $ 2,444,035
............................................................
Chase Capital II,
6.35938%, 2/01/2027 # 2,100,000 2,042,901
............................................................
First Chicago NBD Corporation,
CLB 2/01/2007, 6.40938%,
2/01/2027# 3,000,000 2,939,153
............................................................
First Maryland Capital II,
CLB 2/01/2007, 6.70938%,
2/01/2027 # 4,000,000 3,996,955
............................................................
MBNA Corporation,
6.13125%, 6/17/2002 # 1,125,000 1,125,757
............................................................
MBNA Global Capital Securities,
CLB 2/01/2007, 6.65938%,
2/01/2027 # 2,000,000 1,983,208
............................................................
Old Kentucky Capital Trust I
(Acquired 2/6/97,
cost $2,485,000),
6.65938%, 2/01/2027 # r 2,500,000 2,487,857
.................................................-----------
17,019,866
- ------------------------------------------------------------
EUROBANKS -- 8.4%
............................................................
Foreningsbanken Kredit AB,
CLB 12/18/2001, 6.53125%,
12/29/2049# 5,000,000 5,032,000
............................................................
Nordbanken, CLB 10/25/2001,
6.43984%, 10/29/2049 # 5,830,000 5,837,549
............................................................
Skandinavinska Enskilda Banken,
CLB 6/28/2003, 6.78125%,
6/29/2049 # 3,500,000 3,553,200
.................................................-----------
14,422,749
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ------------------------------------------------------------
FINANCIAL SERVICES -- 7.0%
............................................................
Ford Motor Credit,
6.10%, 2/15/1999 # $4,400,000 $ 4,391,454
............................................................
General Motors Acceptance
Corporation,
5.8125%, 12/09/1999 # 1,000,000 998,915
............................................................
Heller Financial,
5.8875%, 9/03/1999 # 1,000,000 1,001,677
............................................................
Salomon, Inc.:
5.65%, 2/10/1998 200,000 199,695
............................................................
5.70%, 2/11/1998 2,000,000 1,997,504
............................................................
9.43%, 3/15/1998 1,000,000 1,023,304
............................................................
6.125%, 5/15/1998 315,000 315,182
............................................................
6.70%, 12/01/1998 # 1,500,000 1,504,786
............................................................
6.40%, 5/20/1999 # 500,000 496,779
.................................................-----------
11,929,296
- ------------------------------------------------------------
HEALTH -- 0.1%
............................................................
Health & Retirement Property
Trust, CLB 7/13/1997,
6.53641%, 7/13/1999 # 200,000 200,053
- ------------------------------------------------------------
PAPER -- 1.7%
............................................................
Fort Howard Corporation,
11.00%, 1/02/2002 2,801,770 2,969,316
- ------------------------------------------------------------
REAL ESTATE -- 2.7%
............................................................
Taubman Realty Group, Ltd.,
6.68125%, 7/26/1999 # 4,550,000 4,559,063
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 7.6%
............................................................
Continental Cablevision, Inc.,
CLB 6/01/1999, 11.00%,
6/01/2007 4,000,000 4,502,856
............................................................
Illinois Bell Telephone Co.,
CLB 8/13/1997, 7.625%,
4/01/2006 300,000 303,478
............................................................
Summit Communications Group, Inc.,
CLB 4/15/1999, 10.50%,
4/15/2005 2,700,000 2,909,250
............................................................
</TABLE>
See Notes to Financial Statements
24
<PAGE> 170
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ------------------------------------------------------------
Tele Communications, Inc.,
CLB 9/15/1997, 6.4625%,
9/15/2003 # $5,315,000 $ 5,329,233
.................................................-----------
13,044,817
- ------------------------------------------------------------
TRANSPORTATION -- 1.3%
............................................................
Delta Air Lines, 10.50%,
4/30/2016 1,750,000 2,161,223
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 5.7%
............................................................
Cleveland Electric Illum, CLB
8/14/1997, 9.375%, 3/01/2017 3,500,000 3,643,069
............................................................
CTC Mansfield Funding Corp.,
CLB 8/14/1997, 11.125%,
9/30/2016 350,000 372,225
............................................................
Gulf States Utilities, CLB
8/19/1997, 6.75%, 10/01/1998 700,000 700,479
............................................................
Texas Utilities, CLB
11/01/1997, 6.25781%,
5/01/1999 # 5,000,000 5,007,195
.................................................-----------
9,722,968
- ------------------------------------------------------------
Total corporate bonds and notes
(cost $75,614,363) 76,029,351
- ------------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 19.0%
- ------------------------------------------------------------
ASSET-BACKED SECURITIES -- 1.3%
............................................................
Student Loan Marketing
Association,
1996-4 A1, 5.55%, 7/25/2004 # 2,217,857 2,214,739
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 10.7%
............................................................
Federal Home Loan Mortgage
Corporation:
1081 I, 7.00%, 12/15/2019 226,095 227,529
............................................................
1096 D, 7.00%, 6/15/2020 34,486 34,604
............................................................
1194 G, 6.50%, 10/15/2006 500,000 495,675
............................................................
1201 D, 7.00%, 10/15/2020 290,278 291,013
............................................................
1206 GA, 7.00%, 3/15/2018 3,910,000 3,938,973
............................................................
1262 F, 7.50%, 3/15/2015 436,505 440,311
............................................................
1267 O, 7.25%, 12/15/2005 73,555 74,342
............................................................
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ------------------------------------------------------------
1336 H, 7.75%, 1/15/2021 $ 400,000 $ 409,222
............................................................
1358 F, 6.75%, 1/15/2019 484,319 486,576
............................................................
1521 B, 5.80%, 7/15/2000 1,063,780 1,063,993
............................................................
1543 KE, 9.52875%,
9/15/2022 # 1,046,602 850,036
............................................................
1617 D, 6.50%, 11/15/2023 71,000 64,960
............................................................
Federal National Mortgage
Association:
1988-26 C, 7.50%, 7/25/2018 111,253 112,370
............................................................
1990-112 E, 8.50%, 7/25/2019 85,113 86,490
............................................................
1991-6 K, 7.50%, 4/25/2014 2,823,919 2,832,815
............................................................
1991-147 K, 7.00%, 1/25/2021 5,000 5,007
............................................................
1991-153 N, 7.50%, 2/25/2007 300,000 303,963
............................................................
G92-9 K, 7.00%, 1/25/2020 55,326 55,271
............................................................
1992-138 O, 7.50%, 7/25/2022 66,658 65,583
............................................................
1992-163 E, 6.75%, 9/25/2022 500,000 499,900
............................................................
1993-45 SB, 9.156%,
4/25/2023 # 1,500,000 1,264,767
............................................................
1994-60 D, 7.00%, 4/25/2024 30,000 28,070
............................................................
1995-3 Z, 8.25%, 7/25/2024 3,308,817 3,333,295
............................................................
Government National Mortgage
Association,
1995-2 G, 8.50%, 3/20/2020 1,300,000 1,331,253
.................................................-----------
18,296,018
- ------------------------------------------------------------
PASS-THROUGH SECURITIES -- 4.9%
............................................................
Federal Home Loan Mortgage
Corporation, 255452, 8.50%,
2/01/2008 610,030 636,243
............................................................
Federal National Mortgage
Association:
21130, 8.00%, 9/01/2000 7,648 7,823
............................................................
308798, 7.359%, 4/01/2025 # 1,408,070 1,456,437
............................................................
312155, 7.318%, 3/01/2025 # 621,308 632,398
............................................................
</TABLE>
See Notes to Financial Statements
25
<PAGE> 171
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
Government National Mortgage
Association:
8956, 7.125%, 4/20/2022 # $4,426,940 $ 4,568,158
............................................................
8974, 7.125%, 5/20/2022 # 1,030,010 1,062,867
.................................................-----------
8,363,926
- ------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.1%
............................................................
Federal Home Loan Mortgage Corporation:
1860 SA (IO), 8.79317%,
2/15/2024 # 5,261,274 1,762,849
............................................................
1965 SA (IO), 2.05%,
3/15/2024 # 10,500,000 1,637,349
............................................................
Federal National Mortgage Association,
1993-97 L (IO), 7.50%,
5/25/2023 1,713,940 162,110
.................................................-----------
3,562,308
- ------------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $31,729,189) 32,436,991
- ------------------------------------------------------------
NON-AGENCY MORTGAGE BACKED SECURITIES -- 20.5%
- ------------------------------------------------------------
ASSET-BACKED SECURITIES -- 7.1%
............................................................
BHN II Mortgage Trust (Acquired
4/30/97, cost $2,500,000),
1997-1 A1, 7.1375%,
3/25/2011 # r 2,457,568 2,459,519
............................................................
Bridgestone/Firestone Master
Trust, 1996-1 A, 6.17%,
7/01/2003 3,000,000 2,979,870
............................................................
First Chicago Master Trust II,
1996-R A, 5.7575%, 7/15/2001# 1,400,000 1,401,344
............................................................
Western Financial Grantor
Trust, 1992-3, 4.70%,
1/01/1998 38,460 38,480
............................................................
World Omni Wholesale Master Trust,
1996-2 B, 5.9575%, 10/25/2001 # 5,250,000 5,250,000
.................................................-----------
12,129,213
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ---------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.8%
............................................................
Blackrock Capital Finance L.P.
(Acquired 6/23/97, Cost
$2,733,242), 1997-R2 AP,
4.427%, 12/25/2035 # r $2,750,000 $ 2,727,467
............................................................
Capstead Securities Corp.,
1992-2 C, 7.80%, 2/25/2022 215,243 216,007
............................................................
Chemical Mortgage Securities,
Inc., 1993-3 A1, 7.125%,
7/25/2023 339,116 340,208
............................................................
Citicorp Mortgage Securities,
Inc., 1990-D A1, 9.50%,
10/25/2005 351,828 366,024
............................................................
Countrywide Funding
Corporation, 1994-17 A9,
8.00%, 7/25/2024 4,000 4,112
............................................................
First Bank Systems, 1993 AT T2,
8.25%, 3/25/2023 254,255 256,589
............................................................
Housing Securities, Inc.:
1992-B3, 8.00%, 7/25/2021 1,893,625 1,913,742
............................................................
1994-2 B1, 6.50%, 7/25/2009 232,362 195,437
............................................................
Independent National Mortgage
Corporation:
1995-A4, 8.75%, 3/25/2025 18,000 18,708
............................................................
1996-D A2, 7.00%, 5/25/2026 2,987,077 2,991,049
............................................................
Prudential Home Mortgage
Securities, Co., 1993-36 A10,
7.25%, 10/25/2023 500,000 496,605
............................................................
Residential Asset
Securitization Trust,
1996-A10 A1, 7.50%,
11/25/2011 2,238,893 2,250,132
............................................................
Residential Funding Corp.,
1993-S9 A8, 8.16667%,
2/25/2008# 125,305 104,473
............................................................
Residential Funding Mortgage
Securities, Inc., 1992-S5 A5,
7.50%, 2/25/2007 1,132,645 1,129,723
............................................................
</TABLE>
See Notes to Financial Statements
26
<PAGE> 172
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ------------------------------------------------------------
Structured Mortgage Asset
Residential Trust:
1991-1H, 8.25%, 6/25/2022 $ 286,292 $ 284,804
............................................................
1992-3 A, 8.00%, 10/25/2007 228,144 232,732
............................................................
1993-5A AA, 6.93501%,
6/25/2024 # 381,499 377,836
............................................................
Walsh Acceptance (Acquired
3/06/97, cost $3,023,438),
1997-2 A, 6.75%, 3/01/2027# r 2,831,962 2,852,352
.................................................-----------
16,758,000
- ------------------------------------------------------------
PASS-THROUGH SECURITIES -- 0.7%
............................................................
Citicorp Mortgage Securities,
Inc.:
1987-5, 8.50%, 4/25/2017 27,014 26,945
............................................................
1987-9 A1, 9.00%, 7/25/2002 535,986 539,738
............................................................
1987-14, 9.50%, 9/25/2002 42,991 43,133
............................................................
1988-16 A1, 10.00%,
11/25/2018 48,156 51,242
............................................................
1989-8 A1, 10.50%, 6/25/2019 555,073 597,309
.................................................-----------
1,258,367
- ------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 2.9%
............................................................
Chase Commercial Mortgage
Securities Corporation,
1997-1 X (IO), 1.39762%,
4/19/2015 # 26,000,000 2,223,910
............................................................
Donaldson, Lufkin & Jenrette,
1997-CF1 S (IO), 1.0969%,
3/15/2017 # 35,600,000 2,386,304
............................................................
Residential Funding Corp.,
1992-S2 A16 (IO), 0.50%,
1/25/2022 31,563,874 335,366
.................................................-----------
4,945,580
- ------------------------------------------------------------
Total non-agency
mortgage-backed securities
(cost $34,647,130) 35,091,160
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK -- 2.0% Shares Value
<S> <C> <C>
- -------------------------------------------------------------
Home Ownership Funding 2 (Acquired
2/20/97, Cost $1,500,000) r 1,500 $1,457,433
.............................................................
Kenwood Properties, Inc. (Acquired
2/26/97 and 4/18/97, cost
$1,000,000 and $992,070,
respectively) r 2,000 1,965,268
- -------------------------------------------------------------
Total preferred stock (cost
$3,492,070) 3,422,701
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY OBLIGATIONS Principal
- -- 5.0% Amount
<S> <C> <C>
- ------------------------------------------------------------
U.S. Treasury Notes:
7.875%, 4/15/1998 $2,500,000 2,541,407
............................................................
5.375%, 5/31/1998 6,000,000 5,979,377
............................................ -----------
Total U.S. Treasury obligations 8,520,784
(cost $8,484,097)
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 4.1%
- ------------------------------------------------------------
CERTIFICATES OF DEPOSIT -- 2.9%
............................................................
Structured Product Asset Return
Certificate Trust, 5.8375%,
7/28/1997 5,000,000 5,000,000
- ------------------------------------------------------------
DISCOUNT NOTES -- 1.2%
............................................................
McDonnell Douglas Corp. 4(2),
5.73%, 7/03/1997 2,000,000 1,999,363
- ------------------------------------------------------------
Total short-term investments
(cost $6,999,363) 6,999,363
- ------------------------------------------------------------
Total investments -- 95.0%
(cost $160,966,212) 162,500,350
............................................................
Other assets in excess of
liabilities -- 5.0% 8,713,681
............................................................
Total net assets -- 100.0% $171,214,031
- ------------------------------------------------------------
</TABLE>
# Variable rate security. Rate listed is as of June 30, 1997.
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.
4(2) -- Restricted securities requiring resale to institutional investors.
See Notes to Financial Statements
27
<PAGE> 173
Schedule of Investments -- June 30, 1997 (Unaudited)
- ------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
CORPORATE BONDS AND Principal
NOTES -- 39.9% Amount Value
<S> <C> <C>
- ------------------------------------------------------------
BANKS -- 2.3%
............................................................
MBNA Corporation,
6.13125%, 6/17/2002 # $ 500,000 $ 500,337
- ------------------------------------------------------------
EUROBANKS -- 8.6%
............................................................
Foreningsbanken Kredit AB,
CLB 12/18/2001,
6.53125%, 12/29/2049# 500,000 503,200
............................................................
Nordbanken, CLB 10/25/2001,
6.43984%, 10/29/2049 # 550,000 550,712
............................................................
Skandinavinska Enskilda Banken,
CLB 6/28/2003,
6.78125%, 6/29/2049# 800,000 812,160
............................................. ----------
1,866,072
- ------------------------------------------------------------
FINANCIAL SERVICES -- 7.8%
............................................................
Caterpillar Finance,
6.20%, 4/05/1999 # 550,000 547,996
............................................................
General Motors Acceptance
Corporation,
5.8125%, 12/09/1999 # 750,000 749,186
............................................................
Salomon, Inc.,
6.70%, 12/01/1998 # 400,000 401,276
............................................. ----------
1,698,458
- ------------------------------------------------------------
REAL ESTATE -- 2.6%
............................................................
Taubman Realty Group, Ltd.,
6.68125%, 7/26/1999 # 550,000 551,095
- ------------------------------------------------------------
SOVEREIGN -- 2.5%
............................................................
Government of Mexico,
11.00781%, 7/21/1997 # 550,000 550,239
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 14.7%
............................................................
Continental Cablevision, Inc.,
CLB 6/01/1999,
11.00%, 6/01/2007 $ 700,000 $ 788,000
............................................................
GTE Corporation, CLB 9/15/1997,
10.75%, 9/15/2017 750,000 795,517
............................................................
Illinois Bell Telephone Co.,
CLB 8/13/1997,
7.625%, 4/01/2006 150,000 151,739
............................................................
Summit Communications Group,
Inc., CLB 4/15/1999,
10.50%, 4/15/2005 800,000 862,000
............................................................
Tele Communications, Inc.,
CLB 9/15/1997,
6.4625%, 9/15/2003 # 600,000 601,607
............................................. ----------
3,198,863
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 1.4%
............................................................
Gulf States Utilities, CLB
8/13/1997,
6.75%, 10/01/1998 300,000 300,205
- ------------------------------------------------------------
Total corporate bonds and notes
(cost $8,656,547) 8,665,269
- ------------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 17.6%
- ------------------------------------------------------------
ASSET-BACKED SECURITIES -- 2.0%
............................................................
Student Loan Marketing
Association, 1996-4 A1, 5.55%,
7/25/2004 # 443,571 442,948
- ------------------------------------------------------------
</TABLE>
28
<PAGE> 174
Schedule of Investments -- June 30, 1997 (Unaudited)
- -------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
- -------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 13.4%
.............................................................
Federal Home Loan Mortgage
Corporation:
16 B, 10.00%, 10/15/2019 $ 1,535 $ 1,537
1081 I, 7.00%, 12/15/2019 92,982 93,571
1206 GA, 7.00%, 3/15/2018 750,000 755,557
1521 B, 5.80%, 7/15/2000 244,547 244,596
.............................................................
Federal Housing Authority
Project,
7.43%, 2/01/2023 137,143 137,198
.............................................................
Federal National Mortgage
Association:
1991-6 K, 7.50%, 4/25/2014 992,784 995,911
1992-43 B, 7.50%, 11/25/2018 264,934 265,459
1995-3 Z, 8.25%, 7/25/2024 421,122 424,238
.............................................. ----------
2,918,067
- -------------------------------------------------------------
GOVERNMENT AGENCY NOTES -- 1.8%
.............................................................
Federal Home Loan Bank, CLB
9/16/1997,
5.33%, 3/16/1999 # 400,000 397,076
- -------------------------------------------------------------
PASS-THROUGH SECURITIES -- 0.1%
.............................................................
Government National Mortgage
Association,
103695, 11.50%, 9/15/1998 9,321 9,498
- -------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.3%
.............................................................
Federal National Mortgage
Association,
1993-97 L (IO), 7.50%,
5/25/2023 632,105 59,786
- -------------------------------------------------------------
Total government agency mortgage-
backed securities
(cost $3,785,291) 3,827,375
- -------------------------------------------------------------
<CAPTION>
NON-AGENCY MORTGAGE- Principal
BACKED SECURITIES -- 16.2% Amount Value
<S> <C> <C>
- -------------------------------------------------------------
ASSET-BACKED SECURITIES -- 8.0%
.............................................................
BHN II Mortgage Trust (Acquired
4/30/97, cost $491,514), 1997-1
A1, 7.1375%, 3/25/2011 # r $ 491,514 $ 491,904
.............................................................
World Omni Wholesale Master
Trust, 1996-2 B,
5.9575%, 10/25/2001 # 1,250,000 1,250,000
.............................................. ----------
1,741,904
- -------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.2%
.............................................................
Citicorp Mortgage Securities,
Inc.:
1990-D A1, 9.50%, 10/25/2005 175,914 183,012
1991-7 M, 8.75%, 5/25/2021 27,241 27,485
.............................................................
GE Capital Mortgage Services,
Inc., 1997-5 A7, 7.50%,
6/25/2027 417,236 415,802
.............................................................
Prudential Home Mortgage
Securities, Inc., 1993-1 A1,
7.50%, 2/25/2023 193,344 194,448
.............................................................
Residential Asset Securitization
Trust,
1996-A10 A1,
7.50%, 11/25/2011 319,842 321,447
.............................................................
Structured Mortgage Asset
Residential Trust, 1992-11B BH,
7.80%, 8/25/2021 145,915 147,375
.............................................................
Walsh Acceptance (Acquired
3/06/97, cost $475,681)
1997-2 A, 6.75%, 3/01/2027# r 471,994 475,392
.............................................. ----------
1,764,961
- -------------------------------------------------------------
Total non-agency mortgage-backed
securities
(cost $3,498,370) 3,506,865
- -------------------------------------------------------------
<CAPTION>
PREFERRED STOCKS -- 1.1% Shares
<S> <C> <C>
- -------------------------------------------------------------
Kenwood Properties, Inc.,
(Acquired 4/18/97, Cost
$248,017) r 250 245,658
- -------------------------------------------------------------
Total preferred stock
(cost $248,017) 245,658
- -------------------------------------------------------------
</TABLE>
29
<PAGE> 175
Schedule of Investments -- June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
U.S. TREASURY Principal
OBLIGATIONS -- 3.2% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Notes:
5.625%, 1/31/1998 $ 600,000 $ 600,001
5.875%, 8/15/1998 100,000 100,000
............................................. ----------
Total U.S. Treasury obligations 700,001
(cost $697,556)
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 15.5%
- ------------------------------------------------------------
CERTIFICATES OF DEPOSIT -- 4.6%
............................................................
Structured Product Asset Return
Certificate Trust,
5.8375%, 7/28/1997 1,000,000 1,000,000
- ------------------------------------------------------------
DISCOUNT NOTES -- 10.3%
............................................................
Conagra Inc.,
5.75%, 7/16/1997 250,000 249,401
............................................................
HD Real Estate 4(2),
5.55%, 7/07/1997 1,000,000 999,075
............................................................
Lockheed Martin Corporation,
5.82%, 7/01/1997 1,000,000 1,000,000
............................................. ----------
2,248,476
- ------------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 0.6%
............................................................
Pitney Bowes, Inc., 5.2551% 121,149 121,149
- ------------------------------------------------------------
Total short-term investments
(cost $3,369,625) 3,369,625
- ------------------------------------------------------------
Total investments -- 93.5%
(cost $20,255,406) 20,314,793
............................................................
Other assets in excess of
liabilities -- 6.5% 1,401,975
............................................. ----------
$21,716,768
Total net assets -- 100.0%
- ------------------------------------------------------------
</TABLE>
# Variable rate security. Rate listed is as of June 30, 1997.
* 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 June 30, 1997.
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.
4(2) -- Restricted securities requiring resale to institutional investors.
30
<PAGE> 176
Financial Statements -- June 30, 1997
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
<TABLE>
<CAPTION>
EQUITY
INCOME MID-CAP SMALL
FUND FUND CAP FUND
---------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value*................................ $192,384,784 $1,977,449 $27,169,291
Foreign currency**.................................... -- -- --
Cash.................................................. 2,907,362 -- --
Dividends and interest receivable..................... 459,357 2,609 40,251
Receivable from Advisor............................... -- -- --
Receivable for investments sold....................... 108,657 -- 217,180
Receivable for Fund shares sold....................... 135,260 -- 132,241
Prepaid expenses...................................... 14,538 26,351 7,765
------------ ---------- -----------
Total assets..................................... 196,009,958 2,006,409 27,566,728
------------ ---------- -----------
LIABILITIES:
Payable to Advisor.................................... 120,244 4,168 5,727
Payable for investments purchased..................... 206,390 -- --
Payable for Fund shares repurchased................... 9,687,256 -- 3,098
Dividends payable..................................... 31 -- --
Accrued expenses and other liabilities................ 122,225 15,044 27,702
------------ ---------- -----------
Total liabilities................................ 10,136,146 19,212 36,527
------------ ---------- -----------
Net assets....................................... $185,873,812 $1,987,197 $27,530,201
============ ========== ===========
NET ASSETS CONSIST OF:
Paid in capital....................................... $125,042,434 $1,785,070 $21,211,571
Undistributed net investment income (loss)............ 88,433 1,700 18,227
Undistributed net realized gain (loss) on securities
and foreign currency transactions.................. 21,804,142 6,231 1,452,968
Net unrealized appreciation of securities and
foreign currency................................... 38,938,803 194,196 4,847,435
------------ ---------- -----------
Net assets....................................... $185,873,812 $1,987,197 $27,530,201
============ ========== ===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of
no par value authorized)........................... 8,749,053 170,600 1,155,117
Net asset value per share (offering and redemption
price)............................................. $ 21.25 $ 11.65 $ 23.83
============ ========== ===========
*Cost of Investments................................... $153,445,981 $1,783,253 $22,321,856
============ ========== ===========
**Cost of Foreign Currency.............................. -- -- --
============ ========== ===========
</TABLE>
See Notes to Financial Statements
31
<PAGE> 177
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED TOTAL LOW SHORT-TERM
INTERNATIONAL GLOBAL INCOME RETURN BOND DURATION INVESTMENT
FUND EQUITY FUND FUND FUND FUND FUND
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$889,786,979 $3,475,833 $89,984,176 $14,118,011 $162,500,350 $20,314,793
15,024,496 55,045 -- -- -- --
6,947,320 119,647 -- 105,799 76,411 77,266
6,160,160 30,948 679,609 155,145 1,555,860 185,929
-- -- -- 38,540 -- 15,943
-- 6,180 3,746,241 123 8,081,585 1,221,587
2,292,118 150,000 650 -- 114,400 24,750
25,144 26,351 10,313 7,942 10,825 9,381
------------ ---------- ----------- ----------- ------------ -----------
920,236,217 3,864,004 94,420,989 14,425,560 172,339,431 21,849,649
------------ ---------- ----------- ----------- ------------ -----------
346,479 9,571 55,678 -- 51,391 --
30,072,856 110,115 4,031,897 -- -- --
330,918 -- -- -- 42,745 5
472 -- -- 92,956 932,482 106,235
957,047 14,722 174,900 25,491 98,782 26,641
------------ ---------- ----------- ----------- ------------ -----------
31,707,772 134,408 4,262,475 118,447 1,125,400 132,881
------------ ---------- ----------- ----------- ------------ -----------
$888,528,445 $3,729,596 $90,158,514 $14,307,113 $171,214,031 $21,716,768
============ ========== =========== =========== ============ ===========
$768,116,972 $3,407,376 $79,125,333 $13,881,097 $168,510,945 $21,789,027
(14,889) (452) 50,696 105,919 446,351 (6,818)
(2,141,548) 22,433 4,105,652 (75,931) 722,597 (124,828)
122,567,910 300,239 6,876,833 396,028 1,534,138 59,387
------------ ---------- ----------- ----------- ------------ -----------
$888,528,445 $3,729,596 $90,158,514 $14,307,113 $171,214,031 $21,716,768
============ ========== =========== =========== ============ ===========
36,754,324 336,191 4,651,745 1,097,438 16,738,345 2,140,042
$ 24.17 $ 11.09 $ 19.38 $ 13.04 $ 10.23 $ 10.15
============ ========== =========== =========== ============ ===========
$767,297,845 $3,176,072 $83,107,343 $13,721,983 $160,966,212 $20,255,406
============ ========== =========== =========== ============ ===========
$ 15,053,316 $ 55,071 -- -- -- --
============ ========== =========== =========== ============ ===========
</TABLE>
See Notes to Financial Statements
32
<PAGE> 178
Financial Statements -- Year Ended June 30, 1997 (except as noted)
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
EQUITY SMALL
INCOME MID-CAP CAP
FUND FUND** FUND
-------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income*
Dividends.......................................... $ 6,150,497 $ 17,578 $ 157,723
Interest........................................... 202,417 1,778 43,373
----------- -------- ----------
Total income.................................. 6,352,914 19,356 201,096
----------- -------- ----------
Expenses
Advisory fee....................................... 1,411,861 5,049 137,271
Legal and auditing fees............................ 40,149 550 8,987
Custodian fees and expenses........................ 40,563 6,107 7,829
Accounting and transfer agent fees and expenses.... 51,151 18,441 33,700
Administration fee................................. 59,557 265 6,485
Trustees' fees and expenses........................ 13,108 6,000 13,437
Reports to shareholders............................ 15,456 -- 4,106
Registration fees.................................. 20,509 17,202 22,977
Other expenses..................................... 2,977 1,999 2,594
----------- -------- ----------
Total expenses................................ 1,655,331 55,613 237,386
Less, expense reimbursement........................ -- (48,881) (54,357)
----------- -------- ----------
Net expenses.................................. 1,655,331 6,732 183,029
----------- -------- ----------
Net investment income................................. 4,697,583 12,624 18,067
----------- -------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on securities and foreign
currency transactions............................ 34,935,223 6,232 1,503,738
Net change in unrealized appreciation
(depreciation) of securities and foreign
currency......................................... 4,211,108 194,196 3,726,110
----------- -------- ----------
Net gain (loss) on investments........................ 39,146,331 200,428 5,229,848
----------- -------- ----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.............. $43,843,914 $213,052 $5,247,915
=========== ======== ==========
*Net of Foreign Taxes Withheld.......................... $ 37,188 $ 403 $ --
=========== ======== ==========
**Six months ended June 30, 1997.
</TABLE>
See Notes to Financial Statements
33
<PAGE> 179
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL BALANCED TOTAL LOW SHORT-TERM
INTERNATIONAL EQUITY INCOME RETURN BOND DURATION INVESTMENT
FUND FUND** FUND FUND FUND FUND
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 17,714,989 $ 54,441 $ 1,117,942 $ 39,597 $ 118,793 $ 3,052
2,300,188 5,130 3,197,223 2,106,796 11,423,589 1,142,906
------------ -------- ----------- ---------- ----------- ----------
20,015,177 59,571 4,315,165 2,146,393 11,542,382 1,145,958
------------ -------- ----------- ---------- ----------- ----------
4,086,051 9,920 562,261 153,519 767,825 72,568
130,073 750 18,432 10,926 43,631 7,369
917,624 950 26,451 9,350 45,235 9,094
230,515 21,163 47,236 37,805 104,491 39,988
194,177 517 25,312 18,447 58,935 6,363
13,884 6,000 13,884 13,870 13,892 13,870
206,902 -- 12,084 985 26,728 1,240
69,977 17,268 26,942 18,771 37,911 23,077
5,554 2,008 1,726 882 4,364 2,024
------------ -------- ----------- ---------- ----------- ----------
5,854,757 58,576 734,328 264,555 1,103,012 175,593
(391,595) (45,349) -- (83,124) (134,885) (88,511)
------------ -------- ----------- ---------- ----------- ----------
5,463,162 13,227 734,328 181,431 968,127 87,082
------------ -------- ----------- ---------- ----------- ----------
14,552,015 46,344 3,580,837 1,964,962 10,574,255 1,058,876
------------ -------- ----------- ---------- ----------- ----------
953,040 21,267 4,518,798 (42,063) 1,057,714 (46,704)
105,727,351 300,239 3,306,702 978,811 764,193 (5,502)
------------ -------- ----------- ---------- ----------- ----------
106,680,391 321,506 7,825,500 936,748 1,821,907 (52,206)
------------ -------- ----------- ---------- ----------- ----------
$121,232,406 $367,850 $11,406,337 $2,901,710 $12,396,162 $1,006,670
============ ======== =========== ========== =========== ==========
$ 2,209,857 $ 6,306 $ 11,972 $ -- $ -- $ --
============ ======== =========== ========== =========== ==========
</TABLE>
See Notes to Financial Statements
34
<PAGE> 180
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
EQUITY INCOME FUND
-----------------------------------
Year Ended Year Ended
June 30, 1997 June 30, 1996
-----------------------------------
(unaudited)
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 4,697,583 $ 4,217,031
Net realized gain on securities and foreign currency
transactions......................................... 34,935,223 6,697,177
Net change in unrealized appreciation (depreciation)
of securities and foreign currency................... 4,211,108 17,517,007
------------ ------------
Net increase in net assets resulting from
operations...................................... 43,843,914 28,431,215
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. (4,609,150) (5,190,178)
Net realized gain on securities transactions........... (18,088,501) (9,231,395)
------------ ------------
Total dividends and distributions................. (22,697,651) (14,421,573)
------------ ------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.......................... 42,695,225 71,541,636
Shares issued in connection with payment of dividends
and distributions.................................... 21,727,110 13,515,453
Cost of shares redeemed................................ (82,232,891) (43,625,015)
------------ ------------
Net increase (decrease) in net assets from Fund
share transactions.............................. (17,810,556) 41,432,074
------------ ------------
Total increase (decrease) in net assets..................... 3,335,707 55,441,716
NET ASSETS:
Beginning of period.................................... 182,538,105 127,096,389
------------ ------------
End of period*......................................... $185,873,812 $182,538,105
============ ============
*Including undistributed net investment income (loss) of: $ 88,433 $ --
============ ============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................ 2,183,683 3,846,201
Shares issued in connection with payment of dividends
and distributions.................................... 1,142,942 743,944
Shares redeemed........................................ (4,228,482) (2,311,587)
------------ ------------
Net increase (decrease)........................... (901,857) 2,278,558
============ ============
</TABLE>
See Notes to Financial Statements
35
<PAGE> 181
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MID-CAP FUND SMALL CAP FUND INTERNATIONAL FUND GLOBAL EQUITY FUND
---------------- ----------------------------- ----------------------------- -------------------
Six Months Ended Year Ended Year Ended Year Ended Year Ended Six Months Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996 June 30, 1997
---------------- ----------------------------- ----------------------------- -------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
$ 12,624 $ 18,067 $ 51,304 $ 14,552,015 $ 4,130,521 $ 46,344
6,232 1,503,738 3,242,921 953,040 1,311,404 21,267
194,196 3,726,110 (1,035,528) 105,727,351 14,489,301 300,239
---------- ------------ ------------ ------------- ------------ ----------
213,052 5,247,915 2,258,697 121,232,406 19,931,226 367,850
---------- ------------ ------------ ------------- ------------ ----------
(10,925) (56,310) -- (15,060,247) (3,924,997) (45,630)
-- (2,033,874) (3,229,051) (3,759,354) (911,877) --
---------- ------------ ------------ ------------- ------------ ----------
(10,925) (2,090,184) (3,229,051) (18,819,601) (4,836,874) (45,630)
---------- ------------ ------------ ------------- ------------ ----------
2,380,798 21,595,726 9,973,586 655,854,799 324,232,058 3,368,545
10,844 1,901,255 2,737,936 17,244,335 4,533,313 44,743
(606,572) (15,605,197) (15,737,773) (217,976,937) (64,341,082) (5,912)
---------- ------------ ------------ ------------- ------------ ----------
1,785,070 7,891,784 (3,026,251) 455,122,197 264,424,289 3,407,376
---------- ------------ ------------ ------------- ------------ ----------
1,987,197 11,049,515 (3,996,605) 557,535,002 279,518,641 3,579,596
-- 16,480,686 20,477,291 330,993,443 51,474,802 --
---------- ------------ ------------ ------------- ------------ ----------
$1,987,197 $ 27,530,201 $ 16,480,686 $ 888,528,445 $330,993,443 $3,729,596
========== ============ ============ ============= ============ ==========
$ 1,700 $ 18,227 $ 56,471 $ (14,889) $ 503,115 $ (452)
========== ============ ============ ============= ============ ==========
226,865 998,558 444,190 29,673,741 16,283,849 332,759
942 97,400 137,516 739,904 227,114 4,002
(57,207) (713,459) (760,129) (9,851,367) (3,226,302) (571)
---------- ------------ ------------ ------------- ------------ ----------
170,600 382,499 (178,423) 20,562,278 13,284,661 336,190
========== ============ ============ ============= ============ ==========
</TABLE>
See Notes to Financial Statements
36
<PAGE> 182
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
BALANCED INCOME FUND
-----------------------------------
Year Ended Year Ended
June 30, 1997 June 30, 1996
-----------------------------------
(unaudited)
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 3,580,837 $ 2,647,524
Net realized gain (loss) on securities transactions.... 4,518,798 2,948,927
Net change in unrealized appreciation (depreciation) of
securities........................................... 3,306,702 587,322
------------ ------------
Net increase in net assets resulting from
operations...................................... 11,406,337 6,183,773
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. (3,999,551) (2,554,681)
Net realized gain on securities transactions........... (2,410,169) (55,137)
Return of capital...................................... -- --
------------ ------------
Total dividends and distributions................. (6,409,720) (2,609,818)
------------ ------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.......................... 39,290,919 43,038,215
Shares issued in connection with payment of dividends
and distributions.................................... 6,071,836 2,406,463
Cost of shares redeemed................................ (30,799,051) (10,483,447)
------------ ------------
Net increase (decrease) in net assets from Fund
share transactions.............................. 14,563,704 34,961,231
------------ ------------
Total increase (decrease) in net assets..................... 19,560,321 38,535,186
NET ASSETS:
Beginning of period.................................... 70,598,193 32,063,007
------------ ------------
End of period*......................................... $ 90,158,514 $ 70,598,193
============ ============
*Including undistributed net investment income of: $ 50,696 $ 80,910
============ ============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................ 2,119,226 2,395,366
Shares issued in connection with payment of dividends
and distributions.................................... 325,867 134,345
Shares redeemed........................................ (1,658,360) (580,252)
------------ ------------
Net increase (decrease)........................... 786,733 1,949,459
============ ============
</TABLE>
See Notes to Financial Statements
37
<PAGE> 183
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN BOND FUND LOW DURATION FUND SHORT-TERM INVESTMENT FUND
----------------------------- ----------------------------- -----------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
----------------------------- ----------------------------- -----------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
$ 1,964,962 $ 2,033,756 $ 10,574,255 $ 11,380,643 $ 1,058,876 $ 1,157,444
(42,063) 386,435 1,057,714 302,726 (46,704) 17,041
978,811 (1,233,325) 764,193 (603,922) (5,502) 72,725
------------ ----------- ------------ ------------- ------------ ------------
2,901,710 1,186,866 12,396,162 11,079,447 1,006,670 1,247,210
------------ ----------- ------------ ------------- ------------ ------------
(1,964,962) (2,033,756) (10,574,255) (11,385,745) (1,058,876) (1,150,687)
(241,973) (239,612) (176,195) (680,292) -- --
-- -- -- -- -- (6,473)
------------ ----------- ------------ ------------- ------------ ------------
(2,206,935) (2,273,368) (10,750,450) (12,066,037) (1,058,876) (1,157,160)
------------ ----------- ------------ ------------- ------------ ------------
14,661,662 31,603,393 191,220,600 187,622,316 39,041,151 14,567,153
1,802,150 1,813,318 10,052,581 10,272,786 570,013 634,339
(46,271,666) (4,198,498) (220,866,044) (131,067,667) (36,567,972) (16,377,951)
------------ ----------- ------------ ------------- ------------ ------------
(29,807,854) 29,218,213 (19,592,863) 66,827,435 3,043,192 (1,176,459)
------------ ----------- ------------ ------------- ------------ ------------
(29,113,079) 28,131,711 (17,947,151) 65,840,845 2,990,986 (1,086,409)
43,420,192 15,288,481 189,161,182 123,320,337 18,725,782 19,812,191
------------ ----------- ------------ ------------- ------------ ------------
$ 14,307,113 $43,420,192 $171,214,031 $ 189,161,182 $ 21,716,768 $ 18,725,782
============ =========== ============ ============= ============ ============
$ 105,919 $ 79,541 $ 446,351 $ 290,152 $ (6,818) $ --
============ =========== ============ ============= ============ ============
1,130,467 2,396,355 18,787,386 18,411,897 3,847,758 1,435,371
139,510 138,416 990,060 1,008,556 56,209 62,521
(3,568,847) (319,560) (21,739,355) (12,866,489) (3,605,096) (1,613,876)
------------ ----------- ------------ ------------- ------------ ------------
(2,298,870) 2,215,211 (1,961,909) 6,553,964 298,871 (115,984)
============ =========== ============ ============= ============ ============
</TABLE>
See Notes to Financial Statements
38
<PAGE> 184
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1997
NOTE 1.
ACCOUNTING POLICIES. Hotchkis and Wiley Funds (the "Trust") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Trust was organized as a Massachusetts business trust on
August 22, 1984 and consists of ten series of shares comprising the Balanced
Income Fund, the Small Cap Fund, the Equity Income Fund, the International Fund,
the Total Return Bond Fund, the Low Duration Fund, the Short-Term Investment
Fund, the Mid-Cap Fund, the Global Equity Fund and the Equity Fund for Insurance
Companies (collectively, the "Funds"), the assets of which are invested in
separate, independently managed portfolios. The accompanying financial
statements exclude financial information for the Equity Fund for Insurance
Companies; financial statements for that Fund are reported on separately.
Investment operations of the Funds began on August 13, 1985 (the Balanced Income
Fund), September 20, 1985 (the Small Cap Fund), June 24, 1987 (the Equity Income
Fund), October 1, 1990 (the International Fund), January 29, 1993 (the Equity
Fund for Insurance Companies), May 18, 1993 (the Low Duration Fund and the
Short-Term Investment Fund), December 6, 1994 (the Total Return Bond Fund), and
January 1, 1997 (the Mid-Cap Fund and the Global Equity Fund).
The Balanced Income Fund seeks to preserve capital while producing a high total
return. The Small Cap Fund seeks capital appreciation. The Equity Income Fund
seeks to provide current income and long-term growth of income, accompanied by
growth of capital. The International Fund seeks to provide current income and
long-term growth of income, accompanied by growth of capital. The Total Return
Bond Fund seeks to maximize long-term total return. The Low Duration Fund seeks
to maximize total return, consistent with preservation of capital. The
Short-Term Investment Fund seeks to maximize total return, consistent with
preservation of capital. The Mid-Cap Fund seeks to provide current income and
long-term growth of income, accompanied by growth of capital. The Global Equity
Fund seeks to provide current income and long-term growth of income, accompanied
by growth of capital. The following is a summary of significant accounting
policies followed by the Funds in the preparation of the financial statements.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or the NASDAQ National Market System
("System") 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 such System. Unlisted securities that
are not included in such System 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
39
<PAGE> 185
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1997
utilizing similar factors. As a broader market does not exist, the proceeds
received upon the disposal of such securities may differ from quoted values
previously furnished by such market makers. Securities for which market
quotations are not otherwise available are valued at fair value as determined in
good faith by Hotchkis and Wiley (the "Advisor") under procedures established by
the Board of Trustees. Short-term investments which mature in less than 60 days
are valued at amortized cost (unless the Board of Trustees determines that this
method does not represent fair value), if their original maturity was 60 days or
less, or by amortizing the values as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days. Investments quoted in foreign
currency are valued daily in U.S. dollars on the basis of the foreign currency
exchange rate prevailing at the time of valuation.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with banks
or broker-dealers that meet credit guidelines established by the Board of
Trustees. In connection with transactions in repurchase agreements, it is the
Funds' policy that the custodian take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults, and the value
of the collateral declines, realization of the collateral by the Funds may be
delayed or limited.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are maintained
in U.S. dollars. For the International Fund and the Global Equity Fund, foreign
currency transactions are translated into U.S. dollars on the following basis:
(i) market value of investment securities, assets and liabilities at the daily
rates of exchange, and (ii) purchases and sales of investment securities,
dividend and interest income and certain expenses at the rates of exchange
prevailing on the respective dates of such transactions. The International Fund
and the Global Equity Fund do not isolate and treat as ordinary income that
portion of the results of operations arising as a result of changes in the
exchange rate from the fluctuations arising from changes in the market prices of
securities held during the period. However, for federal income tax purposes, the
International Fund and the Global Equity Fund do 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 from the fluctuations arising from trade date and settlement date
differences.
FORWARD CURRENCY EXCHANGE CONTRACTS: The International Fund and the Global
Equity Fund utilize forward currency exchange contracts for the purpose of
hedging foreign currency risk on unsettled trades. Under these contracts, they
are obligated to exchange currencies at specific future dates. Risks arise from
the possible inability of counter-parties to meet the terms of their contracts
and from movements in currency values.
FEDERAL INCOME TAXES: It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and each Fund
intends to distribute investment company net taxable income and net capital
gains to
40
<PAGE> 186
- --------------------------------------------------------------------------------
shareholders. Therefore, no federal income tax provision is required.
EXPENSE ALLOCATION: Common expenses incurred by the Funds are allocated among
the Funds based upon (i) relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) evenly among the Funds, depending on the
nature of the expenditure.
RESTRICTED SECURITIES: The Balanced Income, Total Return, Low Duration and
Short-Term Investment Funds own investment securities which are unregistered and
thus restricted as to resale. These securities are valued by the Funds after
giving due consideration to pertinent factors including recent private sales,
market conditions and the issuer's financial performance. Where future
disposition of these securities require registration under the Securities Act of
1933 the Funds have the right to include its securities in such registration,
generally without cost to the Funds. The Funds have no right to require
registration of unregistered 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.
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. Each Fund has an investment advisory agreement
with the Advisor. The Advisor receives a fee, computed daily and payable
monthly, at the annual rates presented below as applied to each Fund's daily net
assets. The Advisor has voluntarily agreed to pay all operating expenses in
excess of the annual rates presented below as applied to each Fund's daily net
assets. For the period ended June 30, 1997, the Advisor waived the following
fees:
<TABLE>
<CAPTION>
Equity Income Mid-Cap Small Cap International Global Equity Balanced
Fund Fund Fund Fund Fund Income Fund
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL ADVISORY RATE.... 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
ANNUAL CAP ON
EXPENSES.............. 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
FEES WAIVED............. $0 $48,881 $54,357 $391,595 $45,349 $0
</TABLE>
41
<PAGE> 187
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1997
<TABLE>
<CAPTION>
Total Return Low Duration Short-Term
Bond Fund Fund Investment Fund
-----------------------------------------------------
<S> <C> <C> <C>
ANNUAL ADVISORY RATE............................ 0.55% 0.46% 0.40%
ANNUAL CAP ON EXPENSES.......................... 0.65% 0.58% 0.48%
FEES WAIVED..................................... $83,124 $134,885 $88,511
</TABLE>
NOTE 3.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the period ended June 30, 1997 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
---------------------------------- ----------------------------------
Fund U.S. Government Other U.S. Government Other
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY INCOME FUND......... -- $ 80,039,960 -- $120,769,051
MID-CAP FUND............... -- 1,946,560 -- 271,957
SMALL CAP FUND............. -- 20,260,380 -- 15,651,230
INTERNATIONAL FUND......... -- 497,829,831 -- 91,711,214
GLOBAL EQUITY FUND......... -- 3,573,904 -- 420,265
BALANCED INCOME FUND....... $ 39,786,952 53,582,315 $ 33,436,179 50,004,667
TOTAL RETURN BOND FUND..... 19,224,314 24,457,221 28,453,768 43,565,459
LOW DURATION FUND.......... 112,501,163 181,582,055 112,816,251 206,492,057
SHORT-TERM INVESTMENT
FUND..................... 4,678,298 16,653,190 6,088,137 12,729,307
</TABLE>
As of June 30, 1997, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
Appreciated Depreciated
Fund Net Appreciation Securities Securities
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY INCOME FUND............................ $ 38,887,880 $ 41,872,813 $ (2,984,933)
MID-CAP FUND.................................. 194,196 221,325 (27,129)
SMALL CAP FUND................................ 4,818,533 5,496,083 (677,550)
INTERNATIONAL FUND............................ 122,489,134 141,658,804 (19,169,670)
GLOBAL EQUITY FUND............................ 286,718 370,948 (84,230)
BALANCED INCOME FUND.......................... 6,876,833 7,480,292 (603,459)
TOTAL RETURN BOND FUND........................ 396,028 445,027 (48,999)
LOW DURATION FUND............................. 1,531,976 1,752,750 (220,774)
SHORT-TERM INVESTMENT FUND.................... 59,387 72,553 (13,166)
</TABLE>
42
<PAGE> 188
- --------------------------------------------------------------------------------
At June 30, 1997, the cost of investments for federal income tax purposes was
$153,496,904, $1,783,253, $22,350,757, $767,297,845, $3,244,159, $83,107,343,
$13,721,983, $160,968,374 and $20,255,406 for the Equity Income, Mid-Cap, Small
Cap, International, Global Equity, Balanced Income, Total Return Bond, Low
Duration and Short-Term Investment Funds, respectively.
At June 30, 1997, the International and Short-Term Investment Funds realized, on
a tax basis, post-October losses of $1,438,172 and $1,379, respectively. Such
amounts may be used to offset future capital gains.
At June 30, 1997, the Short-Term Investment Fund had accumulated net realized
capital loss carryovers of $19,570 expiring in 2003, $63,545 expiring in 2004
and $40,334 expiring in 2005. To the extent the Short-Term Investment Fund
realizes future net capital gains, taxable distributions to its shareholders
will be offset by any unused capital loss carryover.
43
<PAGE> 189
Financial Highlights
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............. $18.91 $17.24 $15.07 $15.50 $14.51
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income..................... 0.49 0.45(1) 0.49 0.46 0.44
Net realized and unrealized gain on
investments............................. 4.15 2.89 2.48 0.10 1.21
------ ------ ------ ------ ------
Total from investment operations.......... 4.64 3.34 2.97 0.56 1.65
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income).... (0.48) (0.57) (0.44) (0.46) (0.43)
Distributions (from realized gains)....... (1.82) (1.10) (0.36) (0.53) (0.23)
------ ------ ------ ------ ------
Total distributions....................... (2.30) (1.67) (0.80) (0.99) (0.66)
------ ------ ------ ------ ------
Net Asset Value, End of Year................... $21.25 $18.91 $17.24 $15.07 $15.50
====== ====== ====== ====== ======
Total return................................... 26.15% 20.04% 20.49% 3.40% 11.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........... $185.9 $182.5 $127.1 $87.2 $86.7
Ratio of expenses to average net assets:
Before expense reimbursement.............. 0.88% 0.98% 1.02% 1.05% 1.02%
After expense reimbursement............... 0.88% 0.98% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement.............. 2.49% 2.56% 3.11% 2.85% 2.97%
After expense reimbursement............... 2.49% 2.56% 3.14% 2.90% 2.99%
Portfolio turnover rate........................ 44% 24% 50% 36% 25%
Average commission rate per share.............. $0.0472 N/A N/A N/A N/A
</TABLE>
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
See Notes to Financial Statements
44
<PAGE> 190
Financial Highlights
- --------------------------------------------------------------------------------
MID-CAP FUND
<TABLE>
<CAPTION>
January 1, 1997*
through
June 30, 1997
----------------
(unaudited)
<S> <C>
Net Asset Value, Beginning of Period........................ $10.00
--------
Income from Investment Operations:
Net investment income.................................. 0.07
Net realized and unrealized gain on investments........ 1.64
--------
Total from investment operations....................... 1.71
--------
Less Distributions:
Dividends (from net investment income)................. (0.06)
Distributions (from realized gains).................... --
--------
Total distributions.................................... (0.06)
--------
Net Asset Value, End of Period.............................. $11.65
========
RATIOS/SUPPLEMENTAL DATA:
Total return................................................ 17.15 %
Net assets, end of period (millions)........................ $2.0
Ratio of expenses to average net assets:
Before expense reimbursement........................... 8.26 %+
After expense reimbursement............................ 1.00 %+
Ratio of net investment income to average net assets:
Before expense reimbursement........................... (5.39)%+
After expense reimbursement............................ 1.87 %+
Portfolio turnover rate..................................... 23 %
Average commission rate per share........................... $0.0330
</TABLE>
* Commencement of operations.
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
+ Annualized.
See Notes to Financial Statements
45
<PAGE> 191
Financial Highlights
- --------------------------------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.............. $ 21.33 $21.53 $19.53 $19.88 $18.10
------- ------ ------ ------ ------
Income from Investment Operations:
Net investment income (loss)............... 0.03 0.05(1) (0.06) (0.01) 0.27
Net realized and unrealized gain on
investments.............................. 5.62 2.80 2.84 0.78 3.18
------- ------ ------ ------ ------
Total from investment operations........... 5.65 2.85 2.78 0.77 3.45
------- ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)..... (0.09) -- -- (0.20) (0.04)
Distributions (from realized gains)........ (3.06) (3.05) (0.78) (0.92) (1.63)
------- ------ ------ ------ ------
Total distributions........................ (3.15) (3.05) (0.78) (1.12) (1.67)
------- ------ ------ ------ ------
Net Asset Value, End of Year.................... $ 23.83 $21.33 $21.53 $19.53 $19.88
======= ====== ====== ====== ======
Total return.................................... 29.74% 14.24% 14.79% 3.77% 19.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)............ $27.5 $16.5 $20.5 $13.1 $10.8
Ratio of expenses to average net assets:
Before expense reimbursement............... 1.30% 1.21% 1.49% 1.65% 1.40%
After expense reimbursement................ 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average
net assets:
Before expense reimbursement............... (0.20)% 0.03% (0.82)% (0.71)% 1.03%
After expense reimbursement................ 0.10% 0.24% (0.34)% (0.06)% 1.42%
Portfolio turnover rate......................... 88% 119% 81% 44% 20%
Average commission rate per share............... $0.0460 N/A N/A N/A N/A
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
See Notes to Financial Statements
46
<PAGE> 192
Financial Highlights
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............. $ 20.44 $17.70 $16.79 $14.63 $13.97
------- ------ ------ ------ ------
Income from Investment Operations:
Net investment income..................... 0.59(1) 0.56(1) 0.28 0.26 0.23
Net realized and unrealized gain on
investments............................. 3.78 2.51 1.52 2.19 0.74
------- ------ ------ ------ ------
Total from investment operations.......... 4.37 3.07 1.80 2.45 0.97
------- ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income).... (0.48) (0.14) (0.44) (0.14) --
Distributions (from realized gains)....... (0.16) (0.19) (0.45) (0.15) (0.31)
------- ------ ------ ------ ------
Total distributions....................... (0.64) (0.33) (0.89) (0.29) (0.31)
------- ------ ------ ------ ------
Net Asset Value, End of Year................... $ 24.17 $20.44 $17.70 $16.79 $14.63
======= ====== ====== ====== ======
Total return................................... 21.59% 18.61% 11.08% 16.71% 7.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........... $888.5 $331.0 $51.5 $26.0 $6.6
Ratio of expenses to average net assets:
Before expense reimbursement.............. 1.07% 1.11% 1.39% 1.61% 2.44%
After expense reimbursement............... 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement.............. 2.59% 2.67% 2.45% 2.01% 1.14%
After expense reimbursement............... 2.66% 2.78% 2.83% 2.62% 2.58%
Portfolio turnover rate........................ 18% 12% 24% 23% 24%
Average commission rate per share.............. $0.0147 N/A N/A N/A N/A
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
See Notes to Financial Statements
47
<PAGE> 193
Financial Highlights
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
January 1, 1997*
through
June 30, 1997
----------------
(unaudited)
<S> <C>
Net Asset Value, Beginning of Period........................ $10.00
-------
Income from Investment Operations:
Net investment income.................................. 0.14
Net realized and unrealized gain on investments........ 1.09
-------
Total from investment operations....................... 1.23
-------
Less Distributions:
Dividends (from net investment income)................. (0.14)
Distributions (from realized gains).................... --
-------
Total distributions.................................... (0.14)
-------
Net Asset Value, End of Period.............................. $11.09
=======
Total return................................................ 12.32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $3.7
Ratio of expenses to average net assets:
Before expense reimbursement........................... 4.43%+
After expense reimbursement............................ 1.00%+
Ratio of net investment income to average net assets:
Before expense reimbursement........................... 0.07%+
After expense reimbursement............................ 3.50%+
Portfolio turnover rate..................................... 18%
Average commission rate per share........................... $0.0144
</TABLE>
* Commencement of operations.
+ Annualized.
See Notes to Financial Statements
48
<PAGE> 194
Financial Highlights
- --------------------------------------------------------------------------------
BALANCED INCOME FUND
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 18.27 $16.74 $15.71 $16.69 $16.35
------- ------ ------ ------ ------
Income from Investment Operations:
Net investment income.................... 0.98 0.94 0.89 0.89 0.77
Net realized and unrealized gain (loss)
on investments......................... 1.78 1.53 1.53 (0.27) 0.82
------- ------ ------ ------ ------
Total from investment operations......... 2.76 2.47 2.42 0.62 1.59
------- ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)... (0.99) (0.92) (0.80) (0.94) (0.74)
Distributions (from realized gains)...... (0.66) (0.02) (0.57) (0.66) (0.51)
Return of capital........................ -- -- (0.02) -- --
------- ------ ------ ------ ------
Total distributions...................... (1.65) (0.94) (1.39) (1.60) (1.25)
------- ------ ------ ------ ------
Net Asset Value, End of Period................ $ 19.38 $18.27 $16.74 $15.71 $16.69
======= ====== ====== ====== ======
Total return.................................. 15.75% 15.04% 16.40% 3.60% 10.10%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions).......... $90.2 $70.6 $32.1 $36.0 $30.3
Ratio of expenses to average net assets:
Before expense reimbursement............. 0.98% 1.06% 1.19% 1.20% 1.15%
After expense reimbursement.............. 0.98% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement............. 4.77% 5.20% 5.44% 5.04% 4.62%
After expense reimbursement.............. 4.77% 5.26% 5.63% 5.24% 4.77%
Portfolio turnover rate....................... 117% 92% 51% 97% 155%
Average commission rate per share............. $0.0392 N/A N/A N/A N/A
</TABLE>
See Notes to Financial Statements
49
<PAGE> 195
Financial Highlights
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
Year Ended June 30, December 6, 1994*
----------------------- through
1997 1996 June 30, 1995
-----------------------------------------------
(unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period....................... $12.78 $12.94 $12.00
------ ------ --------
Income from Investment Operations:
Net investment income................................. 0.97(1) 0.84(1) 0.46
Net realized and unrealized gain on investments....... 0.32 0.06 0.94
------ ------ --------
Total from investment operations...................... 1.29 0.90 1.40
------ ------ --------
Less Distributions:
Dividends (from net investment income)................ (0.92) (0.93) (0.46)
Distributions (from realized gains)................... (0.11) (0.13) --
------ ------ --------
Total distributions................................... (1.03) (1.06) (0.46)
------ ------ --------
Net Asset Value, End of Period............................. $13.04 $12.78 $12.94
====== ====== ========
Total return............................................... 10.48% 7.05% 11.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)....................... $14.3 $ 43.4 $15.3
Ratio of expenses to average net assets:
Before expense reimbursement.......................... 0.95% 0.98% 2.93%+
After expense reimbursement........................... 0.65% 0.68% 0.80%+
Ratio of net investment income to average net assets:
Before expense reimbursement.......................... 6.78% 6.86% 4.92%+
After expense reimbursement........................... 7.08% 7.16% 7.05%+
Portfolio turnover rate.................................... 173% 51% 68%
</TABLE>
* Commencement of operations.
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
+ Annualized.
See Notes to Financial Statements
50
<PAGE> 196
Financial Highlights
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Year Ended June 30, May 18, 1993*
-------------------------------------- through
1997 1996 1995 1994 June 30, 1993
------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $10.12 $10.15 $ 9.93 $10.00 $10.00
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income..................... 0.65 0.68 0.75 0.77 0.05
Net realized and unrealized gain on
investments............................. 0.11 0.06 0.23 0.11 0.00
------ ------ ------ ------ ------
Total from investment operations.......... 0.76 0.74 0.98 0.88 0.05
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income).... (0.64) (0.72) (0.75) (0.77) (0.05)
Distributions (from realized gains)....... (0.01) (0.05) (0.01) (0.18) (0.00)
------ ------ ------ ------ ------
Total distributions....................... (0.65) (0.77) (0.76) (0.95) (0.05)
------ ------ ------ ------ ------
Net Asset Value, End of Period................. $10.23 $10.12 $10.15 $ 9.93 $10.00
====== ====== ====== ====== ======
Total return................................... 7.79% 7.47% 10.23% 9.02% 4.36%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........... $171.2 $189.2 $123.3 $36.5 $7.6
Ratio of expenses to average net assets:
Before expense reimbursement.............. 0.66% 0.60% 0.75% 1.10% 4.94%+
After expense reimbursement............... 0.58% 0.58% 0.58% 0.58% 0.58%+
Ratio of net investment income to average net
assets:
Before expense reimbursement.............. 6.26% 7.07% 7.43% 6.82% 1.93%+
After expense reimbursement............... 6.34% 7.09% 7.61% 7.34% 6.28%+
Portfolio turnover rate........................ 202% 50% 71% 254% 34%
</TABLE>
* Commencement of operations.
+ Annualized.
See Notes to Financial Statements
51
<PAGE> 197
Financial Highlights
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
Year Ended June 30, May 18, 1993*
-------------------------------------- through
1997 1996 1995 1994 June 30, 1993
------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $10.17 $10.12 $10.21 $10.00 $10.00
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income..................... 0.59 0.66 0.66 0.53 0.03
Net realized and unrealized
gain (loss) on investments.............. (0.02) 0.05 (0.09) 0.21 --
------ ------ ------ ------ ------
Total from investment operations.......... 0.57 0.71 0.57 0.74 0.03
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income).... (0.59) (0.66) (0.66) (0.53) (0.03)
Return of capital......................... -- (0.00) -- -- --
------ ------ ------ ------ ------
Total distributions....................... (0.59) (0.66) (0.66) (0.53) (0.03)
------ ------ ------ ------ ------
Net Asset Value, End of Period................. $10.15 $10.17 $10.12 $10.21 $10.00
====== ====== ====== ====== ======
Total return................................... 5.77% 7.23% 5.78% 7.47% 2.30%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........... $21.7 $18.7 $19.8 $10.5 $.003
Ratio of expenses to average net assets:
Before expense reimbursement.............. 0.96% 0.88% 1.26% 2.06% 57.02%+
After expense reimbursement............... 0.48% 0.48% 0.48% 0.48% 0.48%+
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement.............. 5.34% 6.15% 5.74% 4.16% (56.99)%+
After expense reimbursement............... 5.82% 6.55% 6.52% 5.74% 2.32%+
Portfolio turnover rate........................ 154% 60% 81% 135% 0%
</TABLE>
* Commencement of operations.
+ Annualized.
See Notes to Financial Statements
52
<PAGE> 198
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The following financial statements (only the financial statements for
the period ended June 30, 1997 are unaudited) are included in the
Statement of Additional Information constituting Part B of this Registration
Statement:
Equity Fund for Insurance Companies Series
Schedule of Investments, June 30, 1997 and June 30, 1996
Statement of Assets and Liabilities, June 30, 1997
and June 30, 1996
Statement of Operations, June 30, 1997 and June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1997
and 1996 and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
Equity Income Series
Schedule of Investments, June 30, 1997 and June 30, 1996
Statement of Assets and Liabilities, June 30, 1997 and
June 30, 1996
Statement of Operations, June 30, 1997 and June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1997
and 1996 and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
Balanced Income Series
Schedule of Investments, June 30, 1997 and June 30, 1996
Statement of Assets and Liabilities, June 30, 1997 and
June 30, 1996
Statement of Operations, June 30, 1997 and June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1997
and 1996 and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
Small Cap Series
Schedule of Investments, June 30, 1997 and June 30, 1996
Statement of Assets and Liabilities, June 30, 1997 and
June 30, 1996
Statement of Operations, June 30, 1997 and June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1997
and 1996 and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
International Series
Schedule of Investments, June 30, 1997 and June 30, 1996
Statement of Assets and Liabilities, June 30, 1997 and
June 30, 1996
Statement of Operations, June 30, 1997 and June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1997
and 1996 and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
C-1
<PAGE> 199
Low Duration Series
Schedule of Investments, June 30, 1997 and June 30, 1996
Statement of Assets and Liabilities, June 30, 1997 and
June 30, 1996
Statement of Operations, June 30, 1997 and June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1997
and 1996 and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
Short-Term Investment Series
Schedule of Investments, June 30, 1997 and June 30, 1996
Statement of Assets and Liabilities, June 30, 1997 and
June 30, 1996
Statement of Operations, June 30, 1997 and June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1997
and 1996 and 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
Total Return Bond Series
Schedule of Investments, June 30, 1997 and June 30, 1996
Statement of Assets and Liabilities, June 30, 1997 and
June 30, 1996
Statement of Operations, June 30, 1997 and June 30, 1996
Statement of Changes in Net Assets, years ended June 30, 1997
and 1996 and December 6, 1994 through June 30, 1995
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
Mid-Cap Fund
Schedule of Investments, June 30, 1997
Statement of Assets and Liabilities, June 30, 1997
Statement of Operations, June 30, 1997
Statement of Changes in Net Assets, period from January 2,
1997 to June 30, 1997
Financial Highlights
Notes to Financial Statements
Global Equity Fund
Schedule of Investments, June 30, 1997
Statement of Assets and Liabilities, June 30, 1997
Statement of Operations, June 30, 1997
Statement of Changes in Net Assets, period from January 2,
1997 to June 30, 1997
Financial Highlights
Notes to Financial Statements
The following financial statements are included in the Prospectuses
constituting Part A of this Registration Statement:
Financial Highlights
(b) Exhibits:
(1)(a) Restated Declaration of Trust8
(b) Certificate of Designation8
(2) By-Laws1
(3) Not applicable
(4) Specimen stock certificate2
(5) (a) Investment Advisory Agreement relating to the
Balanced Income Fund8
(b) Investment Advisory Agreement relating to the
Equity Income Fund8
(c) Investment Advisory Agreement relating to the
International Fund8
(d) Investment Advisory Agreement relating to the
Equity Fund for Insurance Companies8
(e) Investment Advisory Agreement relating to the
Low Duration Fund8
(f) Investment Advisory Agreement relating to the
Total Return Bond Fund8
(g) Investment Advisory Agreement relating to the
Small Cap Fund8
(h) Investment Advisory Agreement relating to the
Short-Term Investment Fund8
(i) Investment Advisory Agreement
relating to the Mid-Cap Fund*
(j) Investment Advisory Agreement
relating to the Global Equity Fund*
(6) Agreement with First Fund Distributors, Inc.5
(7) Not applicable
(8) (a) Custodian Agreement with First Wisconsin Trust
Company4
C-2
<PAGE> 200
(b) Sub-Custodian Agreement between First Wisconsin
Trust Company and Chase Manhattan Bank, N.A.6
(9) (a) Fund Administration Servicing Agreement7
(b) License Agreement with Merrill Lynch & Co., Inc.8
(10) Not applicable
(11) Consents of Price Waterhouse LLP*
(12) Not applicable
(13) Not Applicable
(14) Individual Retirement Account application3
(15) Not applicable
(16) Performance calculation6
(18) Not applicable
(27) Financial Data Schedules for the unaudited periods
ended June 30, 1997 are included herein. Financial
Data Schedules for the periods ended June 30, 1996 are
incorporated herein by reference to Post-Effective
Amendment No. 21 to the Registration Statement on Form
N-1A filed on October 3, 1996*
(27.1) Financial Data Schedule Balanced Income Fund
(27.2) Financial Data Schedule Small Cap Fund
(27.3) Financial Data Schedule Equity Income Fund
(27.4) Financial Data Schedule International Fund
(27.5) Financial Data Schedule Equity Fund For
Insurance Companies
(27.6) Financial Data Schedule Low Duration Fund
(27.7) Financial Data Schedule Short-Term Investment Fund
(27.8) Financial Data Schedule Total Return Bond Fund
(27.9) Financial Data Schedule Mid-Cap Fund
(27.10) Financial Data Schedule Global Equity Fund
1Incorporated herein by reference and previously filed as an exhibit
to the Registration Statement on Form N-1A (File No. 2-96219), filed on
March 5, 1985.
2Incorporated herein by reference and previously filed as an exhibit
to Pre-effective Amendment No. 2 to the Registration Statement on Form N-1A.
3Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 7 to the Registration Statement on Form N-1A,
filed on July 20, 1990.
4Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 8 to the Registration Statement on Form N-1A,
filed on September 18, 1990.
5Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 9 to the Registration Statement on Form N-1A,
filed on May 22, 1991.
6Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 11 to the Registration Statement on Form N-1A,
filed on September 23, 1992.
7Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 21 to the Registration Statement on Form N-1A
filed via EDGAR on October 3, 1996.
8Incorporated herein by reference and previously filed as an exhibit to
Post-effective Amendment No. 23 to the Registration Statement on Form N-1A filed
via EDGAR on December 17, 1996.
- --------------------------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See "General Information About the Trust" in the Statement of
Additional Information.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES. At June 30, 1997, there were
346 record holders of shares of beneficial interest of the Small Cap Series of
the Registrant, 399 record holders of shares of beneficial interest of the
Balanced Income Series, 494 record holders of shares of beneficial interest of
the Equity Income Series, 11,212 record holders of shares of beneficial interest
of the International Series, 1 record holder of shares of beneficial interest of
the Equity Fund for Insurance Companies Series, 1,646 record holders of shares
of beneficial interest of the Low Duration Series, 168 record holders of shares
of beneficial interest of the Short-Term Investment Series, 69 record holders of
shares of beneficial interest of the Total Return Bond Series, 40 record holders
of shares of beneficial interest of the Mid-Cap Fund and 61 record holders of
shares of beneficial interest of the Global Equity Fund.
C-3
<PAGE> 201
ITEM 27. INDEMNIFICATION.
Section 12 of Article SEVENTH of Registrant's Declaration of Trust,
states as follows:
(c)(1) As used in this paragraph the following terms shall
have the meanings set forth below:
(i) the term "indemnitee" shall mean any present
or former Trustee, officer or employee of the Trust, any
present or former Trustee or officer of another trust or
corporation whose securities are or were owned by the Trust or
of which the Trust is or was a creditor and who served or
serves in such capacity at the request of the Trust, any
present or former investment advisor, sub-advisor or principal
underwriter of the Trust and the heirs, executors,
administrators, successors and assigns of any of the
foregoing; however, whenever conduct by an indemnitee is
referred to, the conduct shall be that of the original
indemnitee rather than that of the heir, executor,
administrator, successor or assignee;
(ii) the term "covered proceeding" shall mean any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, to
which an indemnitee is or was a party or is threatened to be
made a party by reason of the fact or facts under which he or
it is an indemnitee as defined above;
(iii) the term "disabling conduct" shall mean
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office
in question;
(iv) the term "covered expenses" shall mean
expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by
an indemnitee in connection with a covered proceeding; and
(v) the term "adjudication of liability" shall
mean, as to any covered proceeding and as to any indemnitee,
an adverse determination as to the indemnitee whether by
judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent.
(d) The Trust shall not indemnify any indemnitee for any
covered expenses in any covered proceeding if there has been an
adjudication of liability against such indemnitee expressly based on a
finding of disabling conduct.
(e) Except as set forth in (d) above, the Trust shall
indemnify an indemnitee for covered expenses in any covered
proceeding, whether or not there is an adjudication of liability as to
such indemnitee, if a determination has been made that the indemnitee
was not liable by reason of disabling conduct by (i) a final decision
of the court or other body before which the covered proceeding was
brought; or (ii) in the absence of such decision, a reasonable
determination, based on a review of the facts, by either (a) the vote
of a majority of a quorum of Trustees who are neither "interested
persons," as defined in the 1940 Act, nor parties to the covered
proceeding or (b) an independent legal counsel in a written opinion;
provided that such Trustees or counsel, in reaching such
determination, may but need not presume the absence of disabling
conduct on the part of the indemnitee by reason of the manner in which
the covered proceeding was terminated.
(f) Covered expenses incurred by an indemnitee in
connection with a covered proceeding shall be advanced by the Trust to
an indemnitee prior to the final disposition of a covered proceeding
upon the request of the indemnitee for such advance and the
undertaking by or on behalf of the indemnitee to repay the advance
unless it is ultimately determined that the indemnitee is entitled to
indemnification thereunder, but only if one or more of the following
is the case: (i) the indemnitee shall provide a security for such
undertaking; (ii) the Trust shall be insured against losses arising
out of any lawful advances; or (iii) there shall have been a
determination, based on a review of the readily available facts (as
opposed to a full trial-type inquiry) that there is a reason to
believe that the indemnitee ultimately will be found entitled to
indemnification by either independent legal counsel in a written
opinion or by the vote of a majority of a
C-4
<PAGE> 202
quorum of trustees who are neither "interested persons" as defined in
the 1940 Act nor parties to the covered proceeding.
(g) Nothing herein shall be deemed to affect the right of
the Trust and/or any indemnitee to acquire and pay for any insurance
covering any or all indemnitees to the extent permitted by the 1940
Act or to affect any other indemnification rights to which any
indemnitee may be entitled to the extent permitted by the 1940 Act.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in that
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a trustee, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Organization and Management" in the Prospectuses constituting
Part A of this Registration Statement and "Management" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Information as to Hotchkis and Wiley, a division of Merrill Lynch Asset
Management, L.P., is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-11583), as most recently amended, the text of
which is incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) The Registrant's principal underwriter, First Fund
Distributors, Inc., also acts as principal underwriter for the following
investment companies:
Berger/BIAM International Funds
Guinness Flight Investment Funds
Jurika & Voyles Fund Group
Masters Select Investment Trust
O'Shaunessy Funds, Inc.
PIC Investment Trust
Professionally Managed Portfolios:
Academy Value Fund
Avondale Total Return Fund
Boston Managed Growth Fund
Harris, Bretall, Sullivan & Smith
Growth Equity Fund
Kayne Anderson Mutual Fund
Leonetti Balanced Fund
Lighthouse Growth Fund
Osterweis Fund
Perkins Micro-Cap Fund
Perkins Opportunity Fund
Pro-Conscience Women's Equity Mutual Fund
Pzena Focused Value Fund
Titan Financial Services Fund
Trent Equity Fund
US Global Growth Fund
Rainier Investment Management Mutual Funds
RNC Mutual Fund Group, Inc.
C-5
<PAGE> 203
(b) The following information is furnished with respect to the
officers and directors of First Fund Distributors, Inc.:
Position and Offices Position and
Name and Principal with Principal Offices with
Business Address Underwriter Registrant
---------------- ----------- ----------
Robert H. Wadsworth President & None
4455 E. Camelback Road Treasurer
Suite 261E
Phoenix, Arizona 85018
Steven J. Paggioli Vice President & None
479 West 22nd Street Secretary
New York, New York 10011
Eric Banhazl Vice President None
20025 East Financial Way
Glendora, California 91741
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession of Registrant or
Registrant's investment adviser, 800 West 6th Street, Fifth Floor, Los Angeles,
California 90017, Registrant's custodian and administrator, Firstar Trust
Company, 615 East Michigan Street, Milwaukee, Wisconsin 53202, or Registrant's
sub-custodian, The Chase Manhattan Bank, N.A., Four Chase Metro Tech Center,
Brooklyn, New York 11245.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
The Registrant hereby undertakes to furnish to each person to whom a
Prospectus is delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.
C-6
<PAGE> 204
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles and State of California on
the 29th day of July, 1997.
HOTCHKIS AND WILEY FUNDS
By: /s/ NANCY D. CELICK
-------------------------------
Nancy D. Celick
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ NANCY D. CELICK Principal Executive Officer July 29, 1997
- ----------------------------------------
Nancy D. Celick
/s/ GRACIE FERMELIA Principal Financial and Accounting July 29, 1997
- ---------------------------------------- Officer
Gracie Fermelia
/s/ Trustee July 29, 1997
- ----------------------------------------
Robert L. Burch III
/s/ Trustee July 29, 1997
- ----------------------------------------
John A.G. Gavin
/s/ MICHAEL L. QUINN Trustee July 29, 1997
- ----------------------------------------
Michael L. Quinn
/s/ JOHN F. HOTCHKIS Trustee July 29, 1997
- ----------------------------------------
John F. Hotchkis
/s/ ROBERT B. HUTCHINSON Trustee July 29, 1997
- ----------------------------------------
Robert B. Hutchinson
/s/ JOE GRILLS Trustee July 29, 1997
- ----------------------------------------
Joe Grills
/s/ MERLE T. WELSHANS Trustee July 29, 1997
- ----------------------------------------
Merle T. Welshans
/s/ RICHARD R. WEST Trustee July 29, 1997
- ----------------------------------------
Richard R. West
</TABLE>
<PAGE> 205
HOTCHKIS AND WILEY FUNDS
EXHIBIT INDEX
Exhibit
Number Description Page
- ------- ---------- ----
(1) (a) Restated Declaration of Trust8
(b) Certificate of Designation8
(2) By-Laws1
(3) Not applicable
(4) Specimen stock certificate2
(5) (a) Investment Advisory Agreement relating to the
Balanced Income Fund8
(b) Investment Advisory Agreement relating to the Equity
Income Fund8
(c) Investment Advisory Agreement relating to the
International Fund8
(d) Investment Advisory Agreement relating to the Equity
Fund for Insurance Companies8
(e) Investment Advisory Agreement relating to the Low
Duration Fund8
(f) Investment Advisory Agreement to the Total Return
Bond Fund8
(g) Investment Advisory Agreement relating to the Small
Cap Fund8
(h) Investment Advisory Agreement relating to the
Short-Term Investment Fund8
(i) Form of Investment Advisory Agreement relating to the
Mid-Cap Fund*
(j) Form of Investment Advisory Agreement relating to the
Global Equity Fund*
(6) Agreement with First Fund Distributors, Inc.5
(7) Not applicable
(8) (a) Custodian Agreement with First Wisconsin Trust
Company4
(b) Sub-Custodian Agreement between First Wisconsin Trust
Company and Chase Manhattan Bank, N.A.6
(9) (a) Fund Administration Servicing Agreement7
(b) License Agreement with Merrill Lynch & Co., Inc.8
(10) Not applicable
(11) Consents of Price Waterhouse LLP*
<PAGE> 206
Exhibit
Number Description Page
- ------- ----------- ----
(12) Not applicable
(13) Not Applicable
(14) Individual Retirement Account application3
(15) Not applicable
(16) Performance calculation6
(18) Not applicable
(27) Financial Data Schedules*
(27.1) Financial Data Schedule Balanced Income Fund
(27.2) Financial Data Schedule Small Cap Fund
(27.3) Financial Data Schedule Equity Income Fund
(27.4) Financial Data Schedule International Fund
(27.5) Financial Data Schedule Equity Fund For Insurance Companies
(27.6) Financial Data Schedule Low Duration Fund
(27.7) Financial Data Schedule Short-Term Investment Fund
(27.8) Financial Data Schedule Total Return Bond Fund
(27.9) Financial Data Schedule Mid-Cap Fund
(30.0) Financial Data Schedule Global Equity Fund
1Incorporated herein by reference and previously filed as an exhibit
to the Registration Statement on Form N-1A (File No. 2-96219), filed on
March 5, 1985.
2Incorporated herein by reference and previously filed as an exhibit
to Pre-effective Amendment No. 2 to the Registration Statement on Form N-1A.
3Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 7 to the Registration Statement on Form N-1A,
filed on July 20, 1990.
4Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 8 to the Registration Statement on Form N-1A,
filed on September 18, 1990.
5Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 9 to the Registration Statement on Form N-1A,
filed on May 22, 1991.
6Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 11 to the Registration Statement on Form N-1A,
filed on September 23, 1992.
7Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 21 to the Registration Statement on Form N-1A
filed via EDGAR on October 3, 1996.
8Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 23 to the Registration Statement on Form N-1A
filed via EDGAR on December 17, 1996.
- --------------------------
* Filed herewith
2
<PAGE> 1
HOTCHKIS AND WILEY FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1st day of January, 1997, by and between HOTCHKIS AND
WILEY FUNDS, a Massachusetts business trust (the "Trust"), on behalf of the
Mid-Cap Series (the "Fund"), and HOTCHKIS AND WILEY, a division of the Capital
Management Group of Merrill Lynch Asset Management, L.P. (the "Advisor").
WITNESSETH:
WHEREAS, the Trust has been organized and operates as an investment
company registered under the Investment Company Act of 1940 ("1940 Act") and is
currently comprised of eight series, one of which is the Fund; and each series
engages in the business of investing and reinvesting its assets; and
WHEREAS, the Advisor is a registered investment advisor under the
Investment Advisors Act of 1940 and engages in the business of providing
investment advisory services; and
WHEREAS, the Trust's Board of Trustees, including a majority of the
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, and the Fund's shareholders have
approved this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, it is hereby agreed by and between the parties hereto as
follows:
1. IN GENERAL
The Advisor agrees, all as more fully set forth herein, to act as
managerial investment advisor to the Trust with respect to the investment of the
assets of the Fund and to supervise and arrange the purchase and sale of
securities held in the portfolio of the Fund.
2. DUTIES AND OBLIGATIONS OF THE ADVISOR WITH RESPECT TO INVESTMENT OF
ASSETS OF THE FUND
(a) Subject to the succeeding provisions of this section and subject to
the direction and control of the Board of Trustees of the Trust, the
Advisor shall:
(i) Decide what securities or other assets shall be purchased or sold
by the Trust with respect to the Fund and when; and
(ii) Arrange for the purchase and the sale of securities or other
assets held in the portfolio of the Fund by placing purchase and sale
orders for the Trust with respect to the Fund.
<PAGE> 2
(b) Any investment purchases or sales made by the Advisor shall at
all times conform to, and be in accordance with, any requirements
imposed by: (1) the provisions of the 1940 Act and of any rules or
regulations in force thereunder; (2) any other applicable provisions
of law; (3) the provisions of the Declaration of Trust and By-Laws of
the Trust as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Trust; and (5) the
fundamental policies of the Trust relating to the Fund, as reflected
in the Trust's Registration Statement under the 1940 Act, or as
amended by the shareholders of the Fund.
(c) The Advisor shall give the Trust the benefit of its best judgment
and effort in rendering services hereunder, but the Advisor shall not
be liable for any loss sustained by reason of the purchase, sale or
retention of any security whether or not such purchase, sale or
retention shall have been based on its own investigation and research
or upon investigation and research made by any other individual, firm
or corporation, if such purchase, sale or retention shall have been
made and such other individual, firm or corporation shall have been
selected in good faith. Nothing herein contained shall, however, be
construed to protect the Advisor against any liability to the Trust
or its security holders by reason of willful misfeasance, bad faith,
or gross negligence in the performance of its duties, or by reason of
its reckless disregard of obligations and duties under this
Agreement.
(d) Nothing in this Agreement shall prevent the Advisor or any
affiliated person (as defined in the 1940 Act) of the Advisor from
acting as investment advisor or manager and/or principal underwriter
for any other person, firm or corporation and shall not in any way
limit or restrict the Advisor or any such affiliated person from
buying, selling or trading any securities for its or their own
accounts or the accounts of others for whom it or they may be acting,
provided, however, that the Advisor expressly represents that it will
undertake no activities which, in its judgment, will adversely affect
the performance of its obligations to the Trust under this Agreement.
(e) It is agreed that the Advisor shall have no responsibility or
liability for the accuracy or completeness of the Trust's
Registration Statement under the 1940 Act or the Securities Act of
1933 except for information supplied by the Advisor for inclusion
therein. The Trust may indemnify the Advisor to the full extent
permitted by the Trust's Declaration of Trust.
3. BROKER-DEALER RELATIONSHIPS
The Advisor is responsible for decisions to buy and sell securities for
the Fund, broker-dealer selection, and negotiation of brokerage commission
rates. The Advisor's primary consideration in effecting a securities transaction
will be execution at the most favorable price. In selecting a broker-dealer to
execute each particular transaction, the Advisor will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of
2
<PAGE> 3
the expected contribution of the broker-dealer to the investment performance of
the Fund on a continuing basis. Accordingly, the price to the Fund in any
transaction may be less favorable than that available from another broker-dealer
if the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of Trustees of
the Trust may determine, the Advisor shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides brokerage or research services to the Advisor an amount of commission
for effecting a portfolio transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction, if
the Advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or the Advisor's overall responsibilities with respect to the Trust.
The Advisor is further authorized to allocate the orders placed by it on behalf
of the Fund to such brokers or dealers who also provide research or statistical
material, or other services, to the Trust, the Advisor, or any affiliate of
either. Such allocation shall be in such amounts and proportions as the Advisor
shall determine, and the Advisor shall report on such allocations regularly to
the Trust, indicating the broker-dealers to whom such allocations have been made
and the basis therefor. The Advisor is also authorized to consider sales of
shares as a factor in the selection of brokers or dealers to execute portfolio
transactions, subject to the requirements of best execution, i.e., that such
brokers or dealers are able to execute the order promptly and at the best
obtainable securities price.
4. ALLOCATION OF EXPENSES
The Advisor agrees that it will furnish the Trust, at the Advisor's
expense, with all office space and facilities, and equipment and clerical
personnel necessary for carrying out its duties under this Agreement. The
Advisor (or an affiliate thereof) will also pay all compensation of all
Trustees, officers and employees of the Trust who are affiliated persons of the
Advisor. All operating costs and expenses relating to the Fund not expressly
assumed by the Advisor under this Agreement shall be paid by the Trust from the
assets of the Fund, as applicable, including, but not limited to (i) interest
and taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv)
compensation and expenses of the Trust's Trustees other than those affiliated
with the Advisor; (v) legal and audit expenses; (vi) fees and expenses of the
Trust's custodian, shareholder servicing or transfer agent and accounting
services agent; (vii) expenses incident to the issuance of the Fund's shares,
including issuance on the payment of, or reinvestment of, dividends; (viii) fees
and expenses incident to the registration under Federal or state securities laws
of the Trust or the shares of the Fund; (ix) expenses of preparing, printing and
mailing reports and notices and proxy materials to shareholders of the Fund; (x)
all other expenses incident to holding meetings of the Fund's shareholders; (xi)
dues or assessments of or contributions to the Investment Company Institute or
any successor; (xii) such non-recurring expenses as may arise, including
litigation affecting the Trust and the legal obligations which the Trust may
have to indemnify its officers and Trustees with respect thereto; and (xiii) all
expenses which the Trust or the Fund agree to bear in any distribution agreement
or in any plan adopted by the Trust and/or the Fund pursuant to Rule 12b-1 under
the 1940 Act.
3
<PAGE> 4
5. COMPENSATION OF THE ADVISOR
(a) The Trust agrees to pay the Advisor and the Advisor agrees to
accept as full compensation for all services rendered by the Advisor
hereunder, an annual management fee, payable monthly and computed on
the value of the average net assets of the Fund as of the close of
business each business day, at the annual rate of .75%.
(b) In the event the expenses of the Fund (including the fees of the
Advisor and amortization of organization expenses but excluding
interest, taxes, brokerage commissions, extraordinary expenses and
sales charges and any distribution fees) for any fiscal year exceed
the limits set by applicable regulations of state securities
commissions, the Advisor will reduce its fee by the amount of such
excess. Any such reductions are subject to readjustment during the
year. The payment of the management fee at the end of any month will
be reduced or postponed or, if necessary, a refund will be made to
the Trust as to the Fund so that at no time will there be any accrued
but unpaid liability under this expense limitation.
6. DURATION AND TERMINATION
(a) This Agreement shall go into effect on the date hereof and shall,
unless terminated as hereinafter provided, continue in effect until
January 1, 1999, and thereafter from year to year, but only so long
as such continuance is specifically approved at least annually by the
Trust's Board of Trustees, including the vote of a majority of the
Trustees who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any such party cast in
person at a meeting called for the purpose of voting on such
approval, or by the vote of the holders of a "majority" (as so
defined) of the outstanding voting securities of the Fund and by such
a vote of the Trustees.
(b) This Agreement may be terminated by the Advisor at any time
without penalty upon giving the Trust sixty (60) days' notice written
notice (which notice may be waived by the Trust) and may be
terminated by the Trust at any time without penalty upon giving the
Advisor sixty (60) days' written notice (which notice may be waived
by the Advisor), provided that such termination by the Trust shall be
directed or approved by the vote of a majority of all of its Trustees
in office at the time or by the vote of the holders of a majority (as
defined in the 1940 Act) of the voting securities of the Trust at the
time outstanding and entitled to vote. This Agreement shall
automatically terminate in the event of its assignment (as so
defined).
7. AGREEMENT BINDING ONLY ON FUND PROPERTY
The Advisor understands that the obligations of this Agreement are not
binding upon any shareholder of the Trust personally, but bind only the Trust's
property; the Advisor represents
4
<PAGE> 5
that it has notice of the provisions of the Trust's Declaration of Trust
disclaiming shareholder liability for acts or obligations of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by duly authorized persons and their seals to be
hereunto affixed, all as of the day and year first above written.
HOTCHKIS AND WILEY FUNDS
By /s/ Nancy D. Celick
-----------------------------------------
ATTEST:
/s/ Gracie Fermelia
- ----------------------------------
HOTCHKIS AND WILEY, a division of the
Capital Management Group of Merrill
Lynch Asset Management, L.P.
By /s/ Nancy D. Celick
-----------------------------------------
ATTEST:
/s/ Vonny Reagan
- -------------------------------------
<PAGE> 1
HOTCHKIS AND WILEY FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1st day of January, 1997, by and between HOTCHKIS
AND WILEY FUNDS, a Massachusetts business trust (the "Trust"), on behalf of the
Global Equity Series (the "Fund"), and HOTCHKIS AND WILEY, a division of the
Capital Management Group of Merrill Lynch Asset Management, L.P. (the
"Advisor").
WITNESSETH:
WHEREAS, the Trust has been organized and operates as an investment
company registered under the Investment Company Act of 1940 ("1940 Act") and is
currently comprised of eight series, one of which is the Fund; and each series
engages in the business of investing and reinvesting its assets; and
WHEREAS, the Advisor is a registered investment advisor under the
Investment Advisors Act of 1940 and engages in the business of providing
investment advisory services; and
WHEREAS, the Trust's Board of Trustees, including a majority of the
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, and the Fund's shareholders have
approved this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, it is hereby agreed by and between the parties hereto as
follows:
1. IN GENERAL
The Advisor agrees, all as more fully set forth herein, to act as
managerial investment advisor to the Trust with respect to the investment of the
assets of the Fund and to supervise and arrange the purchase and sale of
securities held in the portfolio of the Fund.
2. DUTIES AND OBLIGATIONS OF THE ADVISOR WITH RESPECT TO INVESTMENT
OF ASSETS OF THE FUND
(a) Subject to the succeeding provisions of this section and
subject to the direction and control of the Board of Trustees of
the Trust, the Advisor shall:
(i) Decide what securities or other assets shall be
purchased or sold by the Trust with respect to the Fund
and when; and
(ii) Arrange for the purchase and the sale of
securities or other assets held in the portfolio of the
Fund by placing purchase and sale orders for the Trust
with respect to the Fund.
<PAGE> 2
(b) Any investment purchases or sales made by the Advisor
shall at all times conform to, and be in accordance with, any
requirements imposed by: (1) the provisions of the 1940 Act and
of any rules or regulations in force thereunder; (2) any other
applicable provisions of law; (3) the provisions of the
Declaration of Trust and By-Laws of the Trust as amended from
time to time; (4) any policies and determinations of the Board
of Trustees of the Trust; and (5) the fundamental policies of
the Trust relating to the Fund, as reflected in the Trust's
Registration Statement under the 1940 Act, or as amended by the
shareholders of the Fund.
(c) The Advisor shall give the Trust the benefit of its best
judgment and effort in rendering services hereunder, but the
Advisor shall not be liable for any loss sustained by reason of
the purchase, sale or retention of any security whether or not
such purchase, sale or retention shall have been based on its
own investigation and research or upon investigation and
research made by any other individual, firm or corporation, if
such purchase, sale or retention shall have been made and such
other individual, firm or corporation shall have been selected
in good faith. Nothing herein contained shall, however, be
construed to protect the Advisor against any liability to the
Trust or its security holders by reason of willful misfeasance,
bad faith, or gross negligence in the performance of its duties,
or by reason of its reckless disregard of obligations and duties
under this Agreement.
(d) Nothing in this Agreement shall prevent the Advisor or
any affiliated person (as defined in the 1940 Act) of the
Advisor from acting as investment advisor or manager and/or
principal underwriter for any other person, firm or corporation
and shall not in any way limit or restrict the Advisor or any
such affiliated person from buying, selling or trading any
securities for its or their own accounts or the accounts of
others for whom it or they may be acting, provided, however,
that the Advisor expressly represents that it will undertake no
activities which, in its judgment, will adversely affect the
performance of its obligations to the Trust under this
Agreement.
(e) It is agreed that the Advisor shall have no
responsibility or liability for the accuracy or completeness of
the Trust's Registration Statement under the 1940 Act or the
Securities Act of 1933 except for information supplied by the
Advisor for inclusion therein. The Trust may indemnify the
Advisor to the full extent permitted by the Trust's Declaration
of Trust.
3. BROKER-DEALER RELATIONSHIPS
The Advisor is responsible for decisions to buy and sell securities for
the Fund, broker-dealer selection, and negotiation of brokerage commission
rates. The Advisor's primary consideration in effecting a securities transaction
will be execution at the most favorable price. In selecting a broker-dealer to
execute each particular transaction, the Advisor will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of
2
<PAGE> 3
the expected contribution of the broker-dealer to the investment performance of
the Fund on a continuing basis. Accordingly, the price to the Fund in any
transaction may be less favorable than that available from another broker-dealer
if the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of Trustees of
the Trust may determine, the Advisor shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides brokerage or research services to the Advisor an amount of commission
for effecting a portfolio transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction, if
the Advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or the Advisor's overall responsibilities with respect to the Trust.
The Advisor is further authorized to allocate the orders placed by it on behalf
of the Fund to such brokers or dealers who also provide research or statistical
material, or other services, to the Trust, the Advisor, or any affiliate of
either. Such allocation shall be in such amounts and proportions as the Advisor
shall determine, and the Advisor shall report on such allocations regularly to
the Trust, indicating the broker-dealers to whom such allocations have been made
and the basis therefor. The Advisor is also authorized to consider sales of
shares as a factor in the selection of brokers or dealers to execute portfolio
transactions, subject to the requirements of best execution, i.e., that such
brokers or dealers are able to execute the order promptly and at the best
obtainable securities price.
4. ALLOCATION OF EXPENSES
The Advisor agrees that it will furnish the Trust, at the Advisor's
expense, with all office space and facilities, and equipment and clerical
personnel necessary for carrying out its duties under this Agreement. The
Advisor (or an affiliate thereof) will also pay all compensation of all
Trustees, officers and employees of the Trust who are affiliated persons of the
Advisor. All operating costs and expenses relating to the Fund not expressly
assumed by the Advisor under this Agreement shall be paid by the Trust from the
assets of the Fund, as applicable, including, but not limited to (i) interest
and taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv)
compensation and expenses of the Trust's Trustees other than those affiliated
with the Advisor; (v) legal and audit expenses; (vi) fees and expenses of the
Trust's custodian, shareholder servicing or transfer agent and accounting
services agent; (vii) expenses incident to the issuance of the Fund's shares,
including issuance on the payment of, or reinvestment of, dividends; (viii) fees
and expenses incident to the registration under Federal or state securities laws
of the Trust or the shares of the Fund; (ix) expenses of preparing, printing and
mailing reports and notices and proxy materials to shareholders of the Fund; (x)
all other expenses incident to holding meetings of the Fund's shareholders; (xi)
dues or assessments of or contributions to the Investment Company Institute or
any successor; (xii) such non-recurring expenses as may arise, including
litigation affecting the Trust and the legal obligations which the Trust may
have to indemnify its officers and Trustees with respect thereto; and (xiii) all
expenses which the Trust or the Fund agree to bear in any distribution agreement
or in any plan adopted by the Trust and/or the Fund pursuant to Rule 12b-1 under
the 1940 Act.
3
<PAGE> 4
5. COMPENSATION OF THE ADVISOR
(a) The Trust agrees to pay the Advisor and the Advisor
agrees to accept as full compensation for all services rendered
by the Advisor hereunder, an annual management fee, payable
monthly and computed on the value of the average net assets of
the Fund as of the close of business each business day, at the
annual rate of .75%.
(b) In the event the expenses of the Fund (including the
fees of the Advisor and amortization of organization expenses
but excluding interest, taxes, brokerage commissions,
extraordinary expenses and sales charges and any distribution
fees) for any fiscal year exceed the limits set by applicable
regulations of state securities commissions, the Advisor will
reduce its fee by the amount of such excess. Any such reductions
are subject to readjustment during the year. The payment of the
management fee at the end of any month will be reduced or
postponed or, if necessary, a refund will be made to the Trust
as to the Fund so that at no time will there be any accrued but
unpaid liability under this expense limitation.
6. DURATION AND TERMINATION
(a) This Agreement shall go into effect on the date hereof
and shall, unless terminated as hereinafter provided, continue
in effect until January 1, 1999, and thereafter from year to
year, but only so long as such continuance is specifically
approved at least annually by the Trust's Board of Trustees,
including the vote of a majority of the Trustees who are not
parties to this Agreement or "interested persons" (as defined in
the 1940 Act) of any such party cast in person at a meeting
called for the purpose of voting on such approval, or by the
vote of the holders of a "majority" (as so defined) of the
outstanding voting securities of the Fund and by such a vote of
the Trustees.
(b) This Agreement may be terminated by the Advisor at any
time without penalty upon giving the Trust sixty (60) days'
notice written notice (which notice may be waived by the Trust)
and may be terminated by the Trust at any time without penalty
upon giving the Advisor sixty (60) days' written notice (which
notice may be waived by the Advisor), provided that such
termination by the Trust shall be directed or approved by the
vote of a majority of all of its Trustees in office at the time
or by the vote of the holders of a majority (as defined in the
1940 Act) of the voting securities of the Trust at the time
outstanding and entitled to vote. This Agreement shall
automatically terminate in the event of its assignment (as so
defined).
7. AGREEMENT BINDING ONLY ON FUND PROPERTY
The Advisor understands that the obligations of this Agreement are not
binding upon any shareholder of the Trust personally, but bind only the Trust's
property; the Advisor represents
4
<PAGE> 5
that it has notice of the provisions of the Trust's Declaration of Trust
disclaiming shareholder liability for acts or obligations of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by duly authorized persons and their seals to be
hereunto affixed, all as of the day and year first above written.
HOTCHKIS AND WILEY FUNDS
By /s/ Nancy D. Celick
------------------------------
ATTEST:
/s/ Gracie Fermelia
- ----------------------------------
HOTCHKIS AND WILEY, a
division of the Capital
Management Group of Merrill
Lynch Asset Management, L.P.
By /s/ Nancy D Celick
------------------------------
ATTEST:
/s/ Vonny Reagan
- ----------------------------------
5
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to use in the Statement of Additional Information constituting
part of this Post-Effective Amendment No. 24 to the registration statement on
Form N-1A (the "Registration Statement") of our report dated August 16, 1996,
relating to the financial statements and financial highlights of the Equity
Income Fund, the Small Cap Fund, the International Fund, the Balanced Income
Fund, the Total Return Bond Fund, the Low Duration Fund and the Short-Term
Investment Fund (seven of the ten separately managed portfolios of Hotchkis and
Wiley Funds), which appears in such Statement of Additional Information, and to
the incorporation by reference of our report into the Prospectus which
constitutes part of this Registration Statement. We also consent to the
reference to us under the heading "General Information About the Trust" in such
Statement of Additional Information and to the reference to us under the heading
"Financial Highlights" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
July 29, 1997
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to use in the Statement of Additional Information constituting
part of this Post-Effective Amendment No. 24 to the registration statement on
Form N-1A (the "Registration Statement") of our report dated August 16, 1996,
relating to the financial statements and financial highlights of the Equity Fund
for Insurance Companies (one of the eight separately managed portfolios of
Hotchkis and Wiley Funds), which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "General Information About the
Trust" in such Statement of Additional Information and to the reference to us
under the heading "Financial Highlights" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
July 29, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 1
<NAME> BALANCED INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 83,107
<INVESTMENTS-AT-VALUE> 89,984
<RECEIVABLES> 4,427
<ASSETS-OTHER> 10
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 94,421
<PAYABLE-FOR-SECURITIES> 4,032
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 230
<TOTAL-LIABILITIES> 4,262
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79,125
<SHARES-COMMON-STOCK> 4,652
<SHARES-COMMON-PRIOR> 3,865
<ACCUMULATED-NII-CURRENT> 51
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,106
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,877
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<EXPENSES-NET> (734)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 2
<NAME> SMALL CAP FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
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<SENIOR-EQUITY> 0
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<ACCUMULATED-NII-CURRENT> 18
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,847
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<ACCUMULATED-NII-PRIOR> 57
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<PER-SHARE-NAV-BEGIN> 21.33
<PER-SHARE-NII> 0.03
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 3
<NAME> EQUITY INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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<RECEIVABLES> 3,611
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<TOTAL-ASSETS> 196,010
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<SENIOR-LONG-TERM-DEBT> 0
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 125,043
<SHARES-COMMON-STOCK> 8,749
<SHARES-COMMON-PRIOR> 9,651
<ACCUMULATED-NII-CURRENT> 88
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 21,804
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 38,939
<NET-ASSETS> 185,874
<DIVIDEND-INCOME> 6,151
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<OTHER-INCOME> 0
<EXPENSES-NET> (1,655)
<NET-INVESTMENT-INCOME> 4,698
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<NUMBER-OF-SHARES-SOLD> 2,184
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<PER-SHARE-NAV-BEGIN> 18.91
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 4.15
<PER-SHARE-DIVIDEND> 0.48
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 4
<NAME> INTERNATIONAL FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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<SHARES-COMMON-PRIOR> 16,192
<ACCUMULATED-NII-CURRENT> (15)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,142)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 122,568
<NET-ASSETS> 888,528
<DIVIDEND-INCOME> 17,715
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<ACCUMULATED-GAINS-PRIOR> 664
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<PER-SHARE-NAV-BEGIN> 20.44
<PER-SHARE-NII> 0.59
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<PER-SHARE-DIVIDEND> 0.48
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 5
<NAME> EQUITY FUND FOR INSURANCE COMPANIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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<TOTAL-LIABILITIES> 191
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,277
<SHARES-COMMON-STOCK> 2,019
<SHARES-COMMON-PRIOR> 1,824
<ACCUMULATED-NII-CURRENT> 6
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,727
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,949
<NET-ASSETS> 32,959
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<EXPENSES-NET> (148)
<NET-INVESTMENT-INCOME> 761
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<NET-CHANGE-FROM-OPS> 7,138
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<DISTRIBUTIONS-OF-GAINS> (923)
<DISTRIBUTIONS-OTHER> 0
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<SHARES-REINVESTED> 116
<NET-CHANGE-IN-ASSETS> 8,310
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 209
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<PER-SHARE-NAV-BEGIN> 13.51
<PER-SHARE-NII> 0.39
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<EXPENSE-RATIO> 0.53
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 6
<NAME> LOW DURATION FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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<ACCUMULATED-NII-CURRENT> 446
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 723
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,534
<NET-ASSETS> 171,214
<DIVIDEND-INCOME> 119
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<EXPENSES-NET> (968)
<NET-INVESTMENT-INCOME> 10,574
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<ACCUMULATED-GAINS-PRIOR> (3)
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<PER-SHARE-NAV-BEGIN> 10.12
<PER-SHARE-NII> 0.65
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 7
<NAME> SHORT-TERM INVESTMENT FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-30-1996
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<PER-SHARE-NAV-BEGIN> 10.17
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 8
<NAME> TOTAL RETURN BOND FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 9
<NAME> MID-CAP FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-02-1997
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000759829
<NAME> HOTCHKIS & WILEY FUNDS
<SERIES>
<NUMBER> 10
<NAME> GLOBAL EQUITY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> JUN-30-1997
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<EXPENSES-NET> (13)
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<DISTRIBUTIONS-OF-INCOME> (46)
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</TABLE>
