<PAGE> 1
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HOTCHKIS AND
WILEY FUNDS
------------------------------------------------------------
------------------------------------------------------------
Equity Fund For Insurance Companies
ANNUAL REPORT
------------------------------------------------------------------------
June 30, 1999
725 South Figueroa Street
Suite 4000
Los Angeles, CA 90017-5400
(213) 430-1000
Investment Advisor
Hotchkis and Wiley
Distributor
Princeton Funds Distributor, Inc.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS.
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<PAGE> 2
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
The last six months of calendar-year 1998 were a time of great volatility
and dramatic events in the marketplace. July began strongly with a narrow group
of the largest growth stocks accounting for most of the gain. Underneath this
narrow group, the erosion of stock prices, which had began in April, continued
with value stocks underperforming dramatically.
On July 17, 1998, the entire market fell sharply, culminating in a selling
crescendo in the last three trading days in August. During the sell-off, a shift
in investor preference began to emerge, as investors refocused on underlying
valuation support and were drawn to truly over-sold opportunities within the
market. From August 26 through October 8, the more value-oriented stocks
performed well relative to the S&P 500 Index. In particular, the Fund gained
significantly against the S&P 500. From August 26 through October 8, the Fund
generated a -3.4% return while the S&P 500 returned -11.2% and the Russell 1000
Value Index returned -8.1%.
The correction ended in early October when the market was reignited by
three rate cuts in quick succession as the Federal Reserve pumped liquidity into
the global marketplace. Investors once again crowded into a handful of the
largest, most liquid names and the market, as measured by the S&P 500, produced
sensational but narrow returns. There continued to be a wide disparity in
performance between growth and value styles, as well as between mega-cap stocks
and all the others - large, mid, and small-cap.
Moving into the first quarter of 1999, equity investors continued to ignore
value and, instead, focused their preference on the more growth-oriented areas
of the market. Technology issues led the charge (+14.1%), as this already highly
priced sector extended its earnings multiples to ever higher levels. Meanwhile,
the S&P 500 managed to post another impressive gain of 5.0% for the quarter.
As a disciplined value investor, the Fund did not participate in this
momentum-driven euphoria. Our lack of exposure to the volatile technology
sector, a sector that we saw as becoming greatly overvalued, hurt our relative
performance. Our fundamental research and value orientation dictated that we
remain invested in the cheapest areas of the market. History tells us that
fundamental underlying valuation is ultimately recognized by investors, and
consequently, we remained heavily committed to many of the overlooked
manufacturing cyclicals and utility stocks.
Finally, during the second quarter of 1999, value-oriented investors
enjoyed a bullish move in the equity market, particularly during the nine weeks
from the second week of April to mid June. Strong economic activity in the U.S.,
along with signs of earlier-than-expected recoveries in Asia and Latin America,
spurred investor interest in industrial stocks. The basic industry sector of the
S&P 500 rose a healthy 20.2% for the quarter. Although the initial catalyst
behind the abrupt shift in investor preference appeared to have been economic
strength, exceptional valuation opportunities attracted general investor
interest into other value areas of the market in April and May. At the same time
many growth stock issues began to falter; for example, the healthcare sector of
the S&P 500 fell 5.0% during these two months.
For the year, returns in the Fund came predominantly from basic material
stocks and telephones. Alcoa, Georgia-Pacific and Weyerhaeuser were up 84.7%,
57.9% and 48.0%, respectively. Alltel and
<PAGE> 3
AT&T also were strong performers, posting gains of 55.4% and 47.5%,
respectively. Returns were hampered by our holdings in the energy sector, which
suffered from historically low oil prices, and from the Fund's lack of exposure
to technology and drug companies, which were among the best performing sectors
and continue to trade at what we believe are excessive valuation levels.
Given the prolonged dynamics which favored momentum and growth stocks in
1998 and the first quarter of 1999, we believe the opportunity for value
investing is considerable. Although we began to see a significant broadening of
performance and rotation into value (value indices outpaced the growth indices
an average of over 9% in April 1999), we believe this recent trend has captured
only a small portion of the opportunity for value investors.
The roaring bull market has produced phenomenal performance during the past
5 years, with an average annualized return of 27.4% for the large cap-weighted
S&P 500 Index. The cost of this phenomena, however, is historic high-price
valuations and an increased risk profile for the capitalization-weighted indices
and similarly structured equity portfolios. By comparison, we believe the
valuation profile of our portfolio is reasonable and in line with earnings and
growth prospects. Furthermore, we believe that we are particularly well
positioned to take advantage of any continued rebound of value securities in the
equity market.
As always, we appreciate the trust you place in us. We thank you for your
continued support and look forward to reporting to you again in six months.
Sincerely,
/s/ Nancy D. Celick
President
Hotchkis and Wiley Funds
The above reflects opinions of portfolio managers as of June 30, 1999. They
are subject to change and any forecasts made cannot be guaranteed. The Fund
might not continue to hold any securities mentioned and has no obligation to
disclose purchases or sales in these securities. Past performance is no
guarantee of future performance. Performance and index description follow.
<PAGE> 4
EQUITY FUND FOR INSURANCE COMPANIES
JANUARY 29, 1993 - JUNE 30, 1999
[EQUITY FUND GRAPH]
<TABLE>
<CAPTION>
EQUITY FUND FOR INSURANCE CO. S&P 500 INDEX
----------------------------- -------------
<S> <C> <C>
'12/92' 10000.00 10000.00
10180.00 10443.00
'6/93' 10472.00 10485.00
10785.00 10757.00
'12/93' 11072.00 11005.00
10346.00 10587.00
'6/94' 10622.00 10629.00
11267.00 11152.00
'12/94' 10844.00 11152.00
11875.00 12234.00
'6/95' 12813.00 13396.00
13968.00 14466.00
'12/95' 14570.00 15325.00
15526.00 16168.00
'6/96' 15754.00 16896.00
16137.00 17420.00
'12/96' 17349.00 18893.00
17750.00 19388.00
'6/97' 20199.00 22781.00
22260.00 24515.00
'12/97' 22950.00 25201.00
25497.00 28730.00
'6/98' 24975.00 29684.00
22360.00 26757.00
'12/98' 24430.00 32459.00
23929.00 34069.00
'6/99' 26794.00 36426.00
</TABLE>
<TABLE>
<CAPTION>
Ended 6/30/99
-------------
Fund S&P 500
-----------------------------------------
<S> <C> <C>
One Year 7.29% 22.71%
-----------------------------------------
Five Years 20.33% 27.93%
-----------------------------------------
Since Inception 16.57% 22.14%
(1/29/93)
-----------------------------------------
</TABLE>
HOW A $10,000 INVESTMENT HAS GROWN:
The chart above shows the growth of a $10,000 investment in the Fund as
compared to the performance of a representative market index. The table below
the chart shows the average annual total returns on an investment over the
periods shown (a total return for the one year period).
Total returns and average annual total returns are net of all charges and
fees and assume reinvestment of capital gains distributions and shareholder
dividends in net asset value. The investment advisor pays all operating expenses
other than the management fee. Were it not to pay such expenses, net returns
would be lower. Investment return and principal will vary so that shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future performance.
The S&P 500 Index is an unmanaged index, representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The Index does not reflect the payment of transaction costs, fees and
expenses associated with an investment in the Fund. The Fund is not identical in
composition to the Index; the securities and weightings among securities in the
Fund differ from those in the Index. It is not possible to invest directly in an
index.
<PAGE> 5
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1999
<TABLE>
<CAPTION>
COMMON STOCKS--99.6% SHARES VALUE
- ------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE--4.8%
Lockheed Martin Corporation............................ 21,700 $ 808,325
Northrop Grumman Corporation........................... 13,800 915,112
Rockwell International Corporation..................... 6,000 364,500
-----------
2,087,937
-----------
APPAREL & TEXTILES--0.7%
Russell Corporation.................................... 15,300 298,350
-----------
AUTO PARTS--3.8%
Dana Corporation....................................... 16,600 764,637
Delphi Automotive Systems Corporation.................. 12,525 232,495
Meritor Automotive, Inc. .............................. 1,900 48,450
TRW Inc. .............................................. 11,400 625,575
-----------
1,671,157
-----------
AUTOS & TRUCKS--4.7%
Ford Motor Company..................................... 20,600 1,162,612
General Motors Corporation............................. 13,200 871,200
-----------
2,033,812
-----------
BANKS--7.1%
Bank One Corporation................................... 18,200 1,084,037
First Security Corporation............................. 8,200 223,450
First Union Corporation................................ 13,370 628,390
Fleet Financial Group, Inc. ........................... 12,000 532,500
KeyCorp................................................ 14,200 456,175
UnionBanCal Corporation................................ 5,000 180,625
-----------
3,105,177
-----------
BEVERAGES--1.0%
Anheuser-Busch Companies, Inc. ........................ 6,000 425,625
-----------
BUILDING & FOREST PRODUCTS--2.5%
Georgia-Pacific Corporation (Timber Group)............. 10,900 275,225
Weyerhaeuser Company................................... 11,800 811,250
-----------
1,086,475
-----------
</TABLE>
See Notes to the Financial Statements.
1
<PAGE> 6
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
CHEMICALS--3.0%
The Dow Chemical Company............................... 5,300 $ 672,437
duPont (E.I.) de Nemours & Company..................... 3,000 204,937
Eastman Chemical Company............................... 8,100 419,175
-----------
1,296,549
-----------
CONGLOMERATES--1.7%
Tenneco, Inc. ......................................... 32,000 764,000
-----------
DRUGS--0.9%
American Home Products Corporation..................... 6,500 373,750
-----------
ENGINEERING & CONSTRUCTION--0.7%
Harsco Corporation..................................... 9,300 297,600
-----------
FINANCIAL SERVICES--4.8%
Associates First Capital Corporation--Class A.......... 1,342 59,467
Fannie Mae............................................. 12,300 841,013
Household International, Inc........................... 16,119 763,637
Transamerica Corporation............................... 6,100 457,500
-----------
2,121,617
-----------
HOUSEHOLD FURNISHINGS & APPLIANCES--2.2%
Whirlpool Corporation.................................. 12,900 954,600
-----------
INSURANCE--5.0%
American General Corporation........................... 7,687 579,407
Lincoln National Corporation........................... 10,000 523,125
Safeco Corporation..................................... 15,600 688,350
St. Paul Companies, Inc. .............................. 12,000 381,750
-----------
2,172,632
-----------
LEISURE/TOYS--0.9%
Fortune Brands, Inc. .................................. 10,000 413,750
-----------
MACHINERY--1.9%
New Holland N.V. ...................................... 47,200 808,300
-----------
MEDICAL PRODUCTS & SUPPLIES--0.9%
Baxter International, Inc. ............................ 6,700 406,188
-----------
</TABLE>
See Notes to the Financial Statements.
2
<PAGE> 7
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
METALS & MINING--4.3%
Alcoa, Inc. ........................................... 14,100 $ 872,438
Phelps Dodge Corporation............................... 3,200 198,200
Reynolds Metals Company................................ 13,900 820,100
-----------
1,890,738
-----------
NATURAL GAS--1.2%
Eastern Enterprises.................................... 13,600 540,600
-----------
OIL--DOMESTIC--8.1%
Atlantic Richfield Company............................. 5,900 493,019
Occidental Petroleum Corporation....................... 35,200 743,600
Phillips Petroleum Company............................. 20,300 1,021,344
Texaco Inc. ........................................... 4,500 281,250
USX-Marathon Group, Inc................................ 21,100 687,069
Ultramar Diamond Shamrock Corporation.................. 13,300 290,106
-----------
3,516,388
-----------
PAPER--3.4%
Georgia-Pacific Group.................................. 9,400 445,325
International Paper Company............................ 20,465 1,033,483
-----------
1,478,808
-----------
PHOTOGRAPHY & OPTICAL--1.7%
Eastman Kodak Company.................................. 11,200 758,800
-----------
POLLUTION CONTROL--2.8%
Browning-Ferris Industries, Inc. ...................... 15,772 678,196
Waste Management, Inc. ................................ 9,930 533,738
-----------
1,211,934
-----------
RAILROADS--1.6%
CSX Corporation........................................ 3,100 140,469
Norfolk Southern Corporation........................... 19,100 575,388
-----------
715,857
-----------
RETAIL--3.8%
Intimate Brands, Inc................................... 2,940 139,283
J.C. Penney Company, Inc............................... 13,600 660,450
May Department Stores Company.......................... 12,400 506,850
Sears, Roebuck & Company............................... 8,000 356,500
-----------
1,663,083
-----------
</TABLE>
See Notes to the Financial Statements.
3
<PAGE> 8
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
SAVINGS & LOANS--1.8%
Washington Mutual, Inc. ............................... 22,124 $ 782,636
-----------
STEEL--1.7%
USX-U.S. Steel Group, Inc.............................. 27,800 750,600
-----------
TOBACCO--3.5%
Philip Morris Companies, Inc. ......................... 37,700 1,515,069
-----------
TRUCKING--0.4%
Ryder System, Inc. .................................... 8,000 208,000
-----------
UTILITY--ELECTRIC--9.9%
CMS Energy Corporation................................. 12,600 527,625
Central & South West Corporation....................... 7,000 163,625
DTE Energy Company..................................... 4,000 160,000
Edison International................................... 7,100 189,925
Entergy Corporation.................................... 7,400 231,250
GPU, Inc. ............................................. 5,400 227,813
Illinova Corporation................................... 28,700 782,075
PECO Energy Company.................................... 12,900 540,188
P P & L Resources, Inc................................. 12,937 397,812
PacifiCorp............................................. 6,600 121,275
Public Service Enterprises Group, Inc. ................ 10,600 433,275
SCANA Corporation...................................... 13,200 308,550
Texas Utilities Company................................ 5,502 226,958
-----------
4,310,371
-----------
UTILITY--TELEPHONE--8.8%
AT&T Corporation....................................... 20,250 1,130,203
ALLTEL Corporation..................................... 12,600 900,900
Bell Atlantic Corporation.............................. 11,980 783,193
GTE Corporation........................................ 1,400 106,050
SBC Communications, Inc. .............................. 16,090 933,220
-----------
3,853,566
-----------
Total common stocks (cost $31,438,354)................. 43,513,969
-----------
</TABLE>
See Notes to the Financial Statements.
4
<PAGE> 9
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
VARIABLE RATE DEMAND NOTES*--0.2% AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
General Mills, Inc., 4.8250%........................... $40,040 $ 40,040
Pitney Bowes, Inc., 4.8250%............................ 55,674 55,674
-----------
Total variable rate demand notes (cost $95,714)........ 95,714
-----------
Total investments--99.8% (cost $31,534,068)................. 43,609,683
Other assets in excess of liabilities--0.2%................. 69,673
-----------
TOTAL NET ASSETS--100.0%............................... $43,679,356
===========
</TABLE>
- ---------------
<TABLE>
<C> <S>
* 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, 1999.
</TABLE>
See Notes to the Financial Statements.
5
<PAGE> 10
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1999
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $31,534,068)............... $43,609,683
Dividends and interest receivable...................... 98,888
Prepaid expenses....................................... 10,171
-----------
Total assets...................................... 43,718,742
-----------
LIABILITIES:
Payable to Advisor..................................... 11,817
Payable for investments purchased...................... 14,846
Accrued expenses and other liabilities................. 12,723
-----------
Total liabilities................................. 39,386
-----------
Net assets........................................ $43,679,356
===========
NET ASSETS CONSIST OF:
Paid in capital........................................ $30,194,127
Undistributed net investment income.................... 0
Undistributed net realized gains on investments........ 1,409,614
Net unrealized appreciation on investments............. 12,075,615
-----------
Net assets........................................ $43,679,356
===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)........................................... 2,501,148
Net asset value per share (offering and redemption
price)................................................ $ 17.46
===========
</TABLE>
See Notes to the Financial Statements.
6
<PAGE> 11
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended June 30, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME
Income *
Dividends.............................................. $1,152,537
Interest............................................... 9,264
----------
Total income...................................... 1,161,801
----------
Expenses
Advisory fee........................................... 206,371
Legal and auditing fees................................ 2,655
Custodian fees and expenses............................ 10,771
Accounting fee......................................... 20,785
Administration fee..................................... 3,187
Trustees' fees and expenses............................ 2,986
Reports to shareholders................................ 8,865
Other expenses......................................... 1,848
----------
Total expenses.................................... 257,468
Less, expense reimbursement............................ (51,097)
----------
Net expenses...................................... 206,371
----------
Net investment income..................................... 955,430
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on securities transactions........... 1,951,485
Net change in unrealized appreciation of securities.... 76,985
----------
Net gain on investments........................... 2,028,470
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $2,983,900
==========
- ---------------
* Net of Foreign Taxes withheld............................. $ 3,944
==========
</TABLE>
See Notes to the Financial Statements.
7
<PAGE> 12
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 955,430 $ 857,023
Net realized gain on securities transactions........... 1,951,485 3,890,091
Net change in unrealized appreciation of securities.... 76,985 3,049,489
----------- -----------
Net increase in net assets resulting from
operations...................................... 2,983,900 7,796,603
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. (957,593) (862,305)
Net realized gain on securities transactions........... (3,955,702) (2,201,788)
----------- -----------
Total dividends and distributions................. (4,913,295) (3,064,093)
----------- -----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.......................... 0 0
Shares issued in connection with payment of dividends
and distributions.................................... 4,913,295 3,064,093
Cost of shares redeemed................................ (29,999) (30,000)
----------- -----------
Net increase in net assets from Fund share
transactions.................................... 4,883,296 3,034,093
----------- -----------
Total increase in net assets................................ 2,953,901 7,766,603
NET ASSETS:
Beginning of year...................................... 40,725,455 32,958,852
----------- -----------
End of year*........................................... $43,679,356 $40,725,455
=========== ===========
*Including undistributed net investment income of:.......... $ 0 $ 310
=========== ===========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................ 0 0
Shares issued in connection with payment of dividends
and distributions.................................... 307,125 178,122
Shares redeemed........................................ (1,827) (1,656)
----------- -----------
Net increase...................................... 305,298 176,466
=========== ===========
</TABLE>
See Notes to the Financial Statements.
8
<PAGE> 13
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
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. The sole shareholder of the Fund is The Prudential Insurance
Company of America. The Fund seeks to provide current income and long-
term growth of income, accompanied by growth of capital. In addition
to the Fund, the Trust also offers the Balanced Fund, the Small Cap
Fund, the Equity Income Fund, the International Fund, the Low Duration
Fund, the Short-Term Investment Fund, the Total Return Bond Fund, the
Mid-Cap Fund, and the Global Equity Fund (collectively, the "Funds").
The assets of each series are invested in separate, independently
managed portfolios. The following is a summary of significant
accounting policies followed by the Fund in the preparation of the
financial statements.
SECURITY VALUATION: Portfolio securities that are listed on a
securities exchange (whether domestic or foreign) or The Nasdaq Stock
Market ("NSM") are valued at the last sale price as of 4:00 p.m.,
Eastern time, or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on such exchange or
NSM. Unlisted securities that are not included in NSM are valued at
the average of the quoted bid and asked price in the over-the-counter
market. Securities for which market quotations are not otherwise
available are valued at fair value as determined in good faith by
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.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the
requirements of the Internal Revenue Code applicable to regulated
investment companies and the Fund intends to distribute substantially
all of its investment company net taxable income and net capital gains
to its shareholders. Therefore, no federal income tax provision is
required.
EXPENSE ALLOCATION: Common expenses incurred by the Trust are
allocated among the Funds based upon (i) relative average net assets,
(ii) as incurred on a specific identification basis, or (iii) evenly
among the Funds, depending on the nature of the expenditure.
9
<PAGE> 14
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 30, 1999
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income are declared and paid quarterly. Distributions of net realized
capital gains, if any, will be declared at least annually.
OTHER: Security and shareholder transactions are recorded on
trade date. Realized gains and losses on sales of investments are
calculated on the identified cost basis. Dividend income and dividends
and distributions to shareholders are recorded on the ex-dividend
date. Interest income is recognized on the accrual basis. Generally
accepted accounting principles require that permanent financial
reporting and tax differences relating to shareholder distributions be
reclassified within the capital accounts.
NOTE 2. INVESTMENT ADVISORY AGREEMENT. The Fund has an investment advisory
agreement with the Advisor. 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 daily net assets, and 0.50% of the
average daily 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, 1999, the
Advisor paid $51,097 of operating expenses on behalf of the Fund.
As permitted under Rule 10f-3 of the Investment Company Act of
1940, the Board of Trustees of the Trust has adopted procedures which
allow the Fund, under certain conditions described in the Rule, to
acquire newly-issued securities from a member of an underwriting group
in which an affiliated underwriter participates.
NOTE 3. PURCHASES AND SALES OF SECURITIES. Purchases and sales of investment
securities, other than short-term investments, for the year ended June
30, 1999 were $6,568,338 and $5,538,728, respectively. There were no
purchases or sales of long-term U.S. government securities.
At June 30, 1999 (for financial reporting and federal income tax
purposes), net unrealized appreciation aggregated $12,075,615, of
which $13,747,816 related to appreciated securities and $1,672,201
related to depreciated securities. At June 30, 1999, the cost of
investments for book and federal income tax purposes was $31,534,068.
10
<PAGE> 15
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $18.55 $16.32 $13.51 $11.53 $ 9.89
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income................................... 0.41 0.41 0.39 0.34 0.41
Net realized and unrealized gain on investments......... 0.70 3.31 3.30 2.26 1.59
------ ------ ------ ------ ------
Total from investment operations........................ 1.11 3.72 3.69 2.60 2.00
------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income).................. (0.41) (0.41) (0.40) (0.40) (0.34)
Distributions (from realized gains)..................... (1.79) (1.08) (0.48) (0.22) (0.02)
------ ------ ------ ------ ------
Total distributions..................................... (2.20) (1.49) (0.88) (0.62) (0.36)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $17.46 $18.55 $16.32 $13.51 $11.53
====== ====== ====== ====== ======
Total Return................................................ 7.29% 23.69% 28.20% 22.93% 20.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $43.7 $40.7 $33.0 $24.6 $17.4
Ratio of expenses to average net assets:
Before expense reimbursement............................ 0.65% 0.73% 0.75% 0.76% 1.05%
After expense reimbursement............................. 0.52% 0.52% 0.53% 0.54% 0.58%
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 2.28% 2.06% 2.50% 2.78% 3.58%
After expense reimbursement............................. 2.41% 2.27% 2.72% 3.00% 4.03%
Portfolio turnover.......................................... 14% 21% 22% 21% 29%
</TABLE>
See Notes to the Financial Statements.
11
<PAGE> 16
HOTCHKIS
AND WILEY FUNDS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of the Hotchkis and Wiley 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 Hotchkis and Wiley Equity Fund
for Insurance Companies (one of the ten portfolios of Hotchkis and Wiley Funds,
the "Fund") at June 30, 1999, 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 five years in the period
then ended, 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, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS
Milwaukee, WI
August 11, 1999
12
