<PAGE> 1
As filed with the Securities and Registration No. 2-96219
Exchange Commission on August 20, 1999. 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. 29 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 [ ]
Amendment No. 31 [x]
(Check appropriate box or boxes)
------------------------
HOTCHKIS AND WILEY FUNDS
(Exact name of registrant as specified in charter)
725 S. Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (213) 430-1000
Turner Swan
725 S. Figueroa Street, Suite 4000
Los Angeles, California 90017-5400
(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)
[X] on August 27, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) 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.
================================================================================
Title of Securities Being Registered..............Shares of Beneficial Interest,
no par value
<PAGE> 2
- --------------------------------------------------------------------------------
PROSPECTUS
AUGUST 27, 1999
LOGO HOTCHKIS AND WILEY FUNDS
INVESTOR CLASS SHARES
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests primarily in U.S. stocks.
MID-CAP FUND
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests primarily in stocks of U.S. companies with market
capitalizations of less than $10 billion.
SMALL CAP FUND
Seeks capital appreciation. The Fund invests primarily in stocks of U.S.
companies with market capitalizations of less than $2 billion.
INTERNATIONAL FUND
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in international stocks.
GLOBAL EQUITY FUND
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in U.S. and international stocks.
BALANCED FUND
Seeks to preserve capital while producing a high total return. The Fund's assets
are allocated between stocks and bonds.
TOTAL RETURN BOND FUND
Seeks to maximize long-term total return. The Fund invests in bonds 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 bonds 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 bonds of varying maturities with a portfolio duration which will
generally not exceed one year.
The Funds are separate portfolios of the Hotchkis and Wiley Funds.
The Securities and Exchange Commission has not approved or disapproved these
securities or the accuracy of this Prospectus. It is a criminal offense to state
otherwise.
<PAGE> 3
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
KEY FACTS.............................................. 3
FEES AND EXPENSES...................................... 15
INVESTMENT OBJECTIVES AND POLICIES..................... 16
INVESTMENT RISKS....................................... 22
THE ADVISOR AND PORTFOLIO MANAGERS..................... 27
HOW TO BUY SHARES...................................... 30
HOW TO REDEEM SHARES................................... 32
HOW TO EXCHANGE SHARES................................. 34
DIVIDENDS AND TAXES.................................... 35
FINANCIAL HIGHLIGHTS................................... 36
INFORMATION ABOUT THE FUNDS........................back cover
</TABLE>
[LOGO]
IMPORTANT TELEPHONE NUMBER
-------------------------------------------------------
CLIENT SERVICES AND SHAREHOLDER INQUIRIES 800-236-4479
<PAGE> 4
KEY FACTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND MAIN STRATEGIES
This section highlights important information about each Fund. Use this summary
to compare the Funds to other mutual funds. More detailed information follows
the summary.
STOCK FUNDS
VALUE INVESTING
In investing the Stock Funds, including the stock portion of the Balanced Fund,
Hotchkis and Wiley (the "Advisor") follows a value style. This means that the
Advisor buys stocks that it believes are currently undervalued by the market and
thus have a lower price than their true worth. Typical value characteristics
include:
- - low price-to-earnings ratio relative to the market
- - high yield relative to the market
- - low price-to-book value ratio relative to the market
- - financial strength
The different Stock Funds emphasize these characteristics in different degrees
depending on investment objective and market capitalization focus.
Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, 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.
This value discipline sometimes prevents investments in stocks that are in
well-known indexes, like the S&P 500 or similar large foreign indexes.
<TABLE>
<CAPTION>
EQUITY INCOME FUND MID-CAP FUND SMALL CAP FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OBJECTIVE - current income - current income - capital appreciation
- long-term growth of - long-term growth of
income income
- growth of capital - growth of capital
MAIN INVESTMENTS - stocks of large U.S. - stocks of U.S. - stocks of U.S.
companies companies with market companies with market
capitalizations of capitalizations of
less than $10 billion less than $2 billion
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
INTERNATIONAL FUND GLOBAL EQUITY FUND BALANCED FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OBJECTIVE - current income - current income - preserve capital
- long-term growth of - long-term growth of while producing a high
income income total return
- growth of capital - growth of capital
MAIN INVESTMENTS - international stocks - U.S. and - U.S. stocks and
international stocks investment grade
bonds
</TABLE>
BOND FUNDS
Each Bond Fund invests in a diversified portfolio of bonds of different
maturities, including U.S. Government securities, corporate bonds, asset-backed
securities and mortgage-backed securities. They differ in their objectives, the
credit quality of their portfolios and their volatility, as measured by their
"duration." Duration is a measure of how much the price of a bond would change
compared to a change in market interest rates. Duration is discussed further on
page 19.
<TABLE>
<CAPTION>
SHORT-TERM
TOTAL RETURN BOND FUND LOW DURATION FUND INVESTMENT FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OBJECTIVE - maximize long-term - maximize total return - maximize total return
total
return - preserve capital - preserve capital
MAIN STRATEGIES
CREDIT QUALITY - at least 85% - at least 70% in A - at least 70% in A
investment grade; up to rated or better; up to rated or better; up to
15% rated below 30% rated BBB/Baa; up 30% rated BBB/Baa; up
investment grade, to 10% rated below to 10% rated below
none below B investment grade, investment grade,
none below B none below B
DURATION 2-8 years 1-3 years 1 year or less
MOST VOLATILE -> -> -> LEAST VOLATILE
</TABLE>
MAIN RISKS
As with any mutual fund, the value of a Fund's investments, and therefore the
value of Fund shares, may go up or down. For the Stock Funds, these changes may
occur because the stock market is rising or falling. At other times, there are
specific factors that may affect the value of a particular investment. For the
Bond Funds, these changes may occur in response to interest rate changes or
other factors that may affect a particular issuer or obligation. Generally, when
interest rates go up, the value of bonds goes down. The value of the Bond Funds'
shares also may be affected by market conditions and economic or political
developments. The longer the duration of a Bond Fund, the more the Fund's price
will go down if interest rates go up. If the value of a Fund's investments goes
down, you may lose money.
- - The Mid-Cap Fund invests in medium-size companies and the Small Cap Fund
invests in small companies. Generally, the stock prices of medium and small
companies vary more than the stock prices of large companies and may present
above average risk.
- - The International and Global Equity Funds invest significantly in foreign
securities, which have additional risks. For example, the securities may go
up or down in value depending on foreign exchange rates, foreign political
4
<PAGE> 6
and economic developments and U.S. and foreign laws relating to foreign
investment. Foreign securities may also be less liquid, more volatile and
harder to value than U.S. securities. These risks are heightened when the
issuer of the securities is a country or is in a country with an emerging
capital market.
- - The Bond Funds and the Balanced Fund invest in mortgage-backed and
asset-backed securities. In addition to normal bond risks, these securities
are subject to prepayment risk.
- - The Bond Funds invest in "junk" bonds, which have more credit risk and tend
to be less liquid than higher-rated securities.
- - An investment in any of the Funds is not a bank deposit and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
See "Investment Risks" for more information about the risks associated with the
Funds.
THE FUNDS' PERFORMANCE
The bar charts and tables below provide some indication of the risks of
investing in the Funds by showing changes in each Fund's performance from year
to year and by showing how each Fund's average annual total returns for 1, 5 and
10 years (or for the life of the Fund if less than 5 or 10 years) compare with
those of a broad measure of market performance. They do not reflect the expense
of sub-transfer agency fees that began to be paid by the Funds on March 1, 1999.
How a Fund has performed in the past is not necessarily an indication of how the
Fund will perform in the future.
5
<PAGE> 7
EQUITY INCOME FUND
<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1989 23.67%
1990 -18.06%
1991 34.62%
1992 13.95%
1993 15.78%
1994 -3.49%
1995 34.43%
1996 17.39%
1997 31.16%
1998 4.34%
</TABLE>
Total return for the six months ended June 30, 1999: 10.21%.
Best quarter: 17.70% (1st Quarter of 1991).
Worst quarter: -19.94% (3rd Quarter of 1990).
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10 YEARS 6/24/87
- ------------------------------------------------------------------------------------------------------------------
Equity Income Fund 4.34% 15.82% 14.13% 12.26%
- ------------------------------------------------------------------------------------------------------------------
S&P 500 Index 28.76% 24.15% 19.22% 15.92%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
This chart compares the Equity Income Fund's performance with the returns of the
S&P 500 Index, a capital weighted, unmanaged index representing the aggregate
market value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange.
6
<PAGE> 8
MID-CAP FUND
<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1997 32.44%
1998 -10.26%
</TABLE>
Total return for the six months ended June 30, 1999: 22.01%.
Best quarter: 13.84% (2nd Quarter of 1997).
Worst quarter: -17.56% (3rd Quarter of 1998).
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 1/2/97
- ------------------------------------------------------------------------------------------
Mid-Cap Fund -10.26% 9.02%
- ------------------------------------------------------------------------------------------
Russell Midcap Index 10.10% 19.18%
- ------------------------------------------------------------------------------------------
</TABLE>
This chart compares the Mid-Cap Fund's performance with the returns of the
Russell Midcap Index, an unmanaged index that measures the performance of the
800 smallest companies in the Russell 1000 Index, which represents approximately
26% of the total market capitalization of the Russell 1000 Index.
7
<PAGE> 9
SMALL CAP FUND
<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1989 20.55%
1990 -9.01%
1991 48.24%
1992 13.73%
1993 12.59%
1994 1.12%
1995 18.43%
1996 14.26%
1997 39.52%
1998 -15.56%
</TABLE>
Total return for the six months ended June 30, 1999: 7.90%.
Best quarter: 22.92% (1st Quarter of 1991).
Worst quarter: -27.51% (3rd Quarter of 1990).
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10 YEARS 9/20/85
- ------------------------------------------------------------------------------------------------------------------
Small Cap Fund -15.56% 10.02% 12.87% 11.98%
- ------------------------------------------------------------------------------------------------------------------
Russell 2000 Index -2.55% 11.86% 12.92% 12.27%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
This chart compares the Small Cap Fund's performance with the returns of the
Russell 2000 Index, a stock market index comprised of the 2,000 smallest
companies in the Russell 3000 Index, which represents approximately 8% of the
total market capitalization of the Russell 3000 Index.
8
<PAGE> 10
INTERNATIONAL FUND
<TABLE>
<CAPTION>
TOTAL RETURN
- ------ ------------
<S> <C>
1991 20.35%
1992 -2.66%
1993 45.76%
1994 -2.93%
1995 19.89%
1996 18.29%
1997 5.33%
1998 6.41%
</TABLE>
Total return for the six months ended June 30, 1999: 10.52%.
Best quarter: 15.50% (4th Quarter of 1998).
Worst quarter: -18.36% (3rd Quarter of 1998).
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10/1/90
- ---------------------------------------------------------------------------------------------------------
International Fund 6.41% 9.05% 12.52%
- ---------------------------------------------------------------------------------------------------------
MSCI EAFE Index 20.33% 9.50% 10.60%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
This chart compares the International Fund's performance with the returns of the
Morgan Stanley Capital International Europe Australia, Far East Index (MSCI
EAFE), an arithmetic market value-weighted average of the performance of over
1,000 non-U.S. companies representing 20 stock markets in Europe, Australia, New
Zealand and the Far East.
9
<PAGE> 11
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1997 7.80%
1998 6.71%
</TABLE>
Total return for the six months ended June 30, 1999: 10.77%.
Best quarter: 15.83% (4th Quarter of 1998).
Worst quarter: -17.84% (3rd Quarter of 1998).
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 1/2/97
- ------------------------------------------------------------------------------------------
Global Equity Fund 6.71% 7.25%
- ------------------------------------------------------------------------------------------
MSCI World Index 24.80% 20.43%
- ------------------------------------------------------------------------------------------
</TABLE>
This chart compares the Global Equity Fund's performance with the returns of the
MSCI World Index, an arithmetic, market value-weighted average of the
performance of over 1,400 companies listed on stock exchanges in the 22
countries that make up the MSCI Network Indices.
10
<PAGE> 12
BALANCED FUND
<TABLE>
<CAPTION>
TOTAL RETURN
------------
<S> <C>
1989 17.88%
1990 -0.45%
1991 20.53%
1992 9.41%
1993 12.59%
1994 0.82%
1995 24.80%
1996 11.71%
1997 16.75%
1998 5.20%
</TABLE>
Total return for the six months ended June 30, 1999: 3.98%.
Best quarter: 10.28% (1st Quarter of 1991).
Worst quarter: -8.32% (3rd Quarter of 1990).
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 10 YEARS 8/13/85
- ------------------------------------------------------------------------------------------------------------------
Balanced Fund 5.20% 11.54% 11.64% 11.89%
- ------------------------------------------------------------------------------------------------------------------
S&P 500 Index 28.76% 24.15% 19.22% 18.36%
- ------------------------------------------------------------------------------------------------------------------
Lehman Brothers Government/Corporate Intermediate
Index 8.44% 6.60% 8.52% 8.63%*
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
This chart compares the Balanced Fund's performance with the returns of two
indexes. The S&P 500 Index is a capital weighted, unmanaged index representing
the aggregate market value of the common equity of 500 stocks primarily traded
on the New York Stock Exchange. The Lehman Brothers Government/Corporate
Intermediate Index is a weighted index comprised of publicly-traded
intermediate-term government and corporate debt with maturities between one and
9.99 years.
* Period from 9/1/85 to 12/31/98
11
<PAGE> 13
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
TOTAL RETURN
-------------
<S> <C>
1995 21.32%
1996 4.34%
1997 10.76%
1998 8.79%
</TABLE>
Total return for the six months ended June 30, 1999: -1.81%.
Best quarter: 6.57% (2nd Quarter of 1995).
Worst quarter: -2.38% (1st Quarter of 1996).
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 12/6/94
- ------------------------------------------------------------------------------------------
Total Return Bond Fund 8.79% 11.03%
- ------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Index 8.69% 9.82%
- ------------------------------------------------------------------------------------------
</TABLE>
This chart compares the Total Return Bond Fund's performance with the returns of
the Lehman Brothers Aggregate Index, a weighted, unmanaged index of U.S.
Government and corporate bonds, mortgage-backed securities and asset-backed
securities rated at least investment grade with at least one year to maturity.
12
<PAGE> 14
LOW DURATION FUND
<TABLE>
<CAPTION>
TOTAL RETURN
<S> <C>
1994 5.23%
1995 12.75%
1996 6.23%
1997 7.59%
1998 5.65%
</TABLE>
Total return for the six months ended June 30, 1999: 0.85%
Best quarter: 4.02% (2nd Quarter of 1995).
Worst quarter: -0.09% (4th Quarter of 1998).
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 5/18/93
- ---------------------------------------------------------------------------------------------------------
Low Duration Fund 5.65% 7.45% 7.92%
- ---------------------------------------------------------------------------------------------------------
Merrill Lynch 1-3 Year U.S. Treasury Index 7.00% 5.99% 5.79%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
This chart compares the Low Duration Fund's performance with the returns of the
Merrill Lynch 1-3 Year U.S. Treasury Index, an unmanaged index of U.S. Treasury
securities with maturities ranging from one to three years, which are guaranteed
as to the timely payment of principal and interest by the U.S. Government. The
Fund invests in securities that are not reflected in the Index or guaranteed.
13
<PAGE> 15
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
Total Return
<S> <C>
1994 4.42%
1995 7.83%
1996 6.17%
1997 6.18%
1998 5.77%
</TABLE>
Total return for the six months ended June 30, 1999: 2.11%.
Best quarter: 2.44% (3rd Quarter of 1998).
Worst quarter: 0.71% (4th Quarter of 1998).
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) 1 YEAR 5 YEARS 5/18/93
- ---------------------------------------------------------------------------------------------------------
Short-Term Investment Fund 5.77% 6.07% 6.31%
- ---------------------------------------------------------------------------------------------------------
Merrill Lynch 6 Month U.S. Treasury Bill Index 5.58% 5.37% 5.14%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
This chart compares the Short-Term Investment Fund's performance with the
returns of the Merrill Lynch 6 Month U.S. Treasury Bill Index, an unmanaged
index of U.S. Treasury bills with maturities of six months which are guaranteed
as to the timely payment of principal and interest by the U.S. Government. The
Fund invests in securities that are not reflected in the Index or guaranteed.
14
<PAGE> 16
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table shows the expenses paid by the Investor Class shares of the Funds. No
sales load, exchange fee or redemption fee is charged on the purchase or sale of
Fund shares.
Investment dealers and other firms may charge you additional fees for buying and
selling Fund shares or for advisory services. See their materials for details.
<TABLE>
<CAPTION>
ANNUAL FUND Equity Mid- Small Inter- Global Total Low
OPERATING EXPENSES Income Cap Cap national Equity Balanced Return Duration
(expenses that are deducted from Fund assets) Fund Fund Fund Fund Fund Fund Bond Fund Fund
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees... .75% .75% .75% .75% .75% .75% .55% .46%
Distribution fees... 0 0 0 0 0 0 0 0
Other expenses... .20 1.37 .53 .27 1.37 .33 .36 .22
--- ---- ---- ---- ---- ---- ---- ---
Total annual Fund operating expenses... .95% 2.12% 1.28% 1.02% 2.12% 1.08% .91% .68%
=== ==== ==== ==== ==== ==== ==== ===
Expense reimbursement... 0 .97 0 0 .87 .13 .26 .10
--- ---- ---- ---- ---- ---- ---- ---
NET ANNUAL FUND OPERATING EXPENSES(1)... .95% 1.15% 1.28% 1.02% 1.25% .95% .65% .58%
=== ==== ==== ==== ==== ==== ==== ===
<CAPTION>
ANNUAL FUND Short-Term
OPERATING EXPENSES Investment
(expenses that are deducted from Fund assets) Fund
<S> <C>
Management fees... .40%
Distribution fees... 0
Other expenses... .32
---
Total annual Fund operating expenses... .72%
===
Expense reimbursement... .24
---
NET ANNUAL FUND OPERATING EXPENSES(1)... .48%
===
</TABLE>
- ---------------------------
(1)The Advisor has agreed to limit the annual operating expenses of each Fund,
except the Small Cap and the International Funds. The expense limits changed on
March 1, 1999. In addition, on March 1, 1999, the Funds began paying
sub-transfer agency fees. The table has been restated to reflect the expense
limits and the sub-transfer agency fees as if they had been in effect for the
Funds' full fiscal year ended June 30, 1999. The Advisor has contractually
agreed to keep the expense limits in place until February 29, 2000.
EXAMPLE
This example compares the cost of investing in the Funds with the cost of
investing in other mutual funds. The example assumes that you invest $10,000 in
the Funds and that each Fund returns 5% each year. After one year, the example
does not take into consideration the Advisor's agreement to subsidize expenses.
Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
Equity Mid- Small Inter- Global Total Low Short-Term
Income Cap Cap national Equity Balanced Return Duration Investment
Fund Fund Fund Fund Fund Fund Bond Fund Fund Fund
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Year............... $ 97 $ 117 $ 130 $ 104 $ 127 $ 97 $ 66 $ 59 $ 49
Three Years............ $ 303 $ 570 $ 406 $ 325 $ 580 $ 331 $ 264 $207 $206
Five Years............. $ 525 $1,050 $ 702 $ 563 $1,059 $ 583 $ 478 $369 $377
Ten Years.............. $1,166 $2,375 $1,545 $1,248 $2,383 $1,305 $1,096 $837 $872
</TABLE>
15
<PAGE> 17
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
STOCK FUNDS
EQUITY INCOME FUND
The Equity Income Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
The Equity Income Fund invests mostly in common stocks of large U.S. companies.
Normally, the Fund invests at least 80% of its total assets in stocks that pay
dividends. It also may invest in stocks that don't pay dividends or interest,
but have growth potential unrecognized by the market or changes in business or
management that indicate growth potential.
The Equity Income Fund can invest up to 10% of its total assets in foreign
securities.
MID-CAP FUND
The Mid-Cap Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
The Mid-Cap Fund invests at least 65% of its total assets in stocks of mid-size
U.S. companies. A "mid-size company" is one with a market capitalization of less
than $10 billion at the time of investment.
The Mid-Cap Fund can invest up to 20% of its total assets in foreign securities.
SMALL CAP FUND
The Small Cap Fund's investment objective is CAPITAL APPRECIATION.
The Small Cap Fund invests at least 65% of its total assets in stocks of small
U.S. companies. A "small company" is one with a market capitalization of less
than $2 billion at the time of investment.
The Small Cap Fund can invest up to 20% of its total assets in foreign
securities.
INTERNATIONAL FUND
The International Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
The International Fund invests at least 65% of its total assets in stocks in at
least ten foreign markets. Ordinarily, the Fund invests in stocks of companies
located in the developed foreign markets and invests at least 80% of its total
assets in stocks that pay dividends. It also may invest in stocks that don't pay
dividends or interest, but have growth potential unrecognized by the market or
changes in business or management that indicate growth potential.
GLOBAL EQUITY FUND
The Global Equity Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
16
<PAGE> 18
The Global Equity Fund invests in stocks in at least ten different countries
with developed stock markets, including the U.S. No country other than the U.S.
will represent more than 30% of assets. Normally, the Global Equity Fund invests
at least 80% of its total assets in stocks that pay dividends. It also may
invest in stocks that don't pay dividends or interest, but have growth potential
unrecognized by the market or changes in business or management that indicate
growth potential.
BALANCED FUND
The Balanced Fund's investment objective is to PRESERVE CAPITAL while producing
a HIGH TOTAL RETURN. The Advisor's current goal is a return at least 4% greater
than the rate of inflation as measured by the Consumer Price Index.
The Balanced Fund's assets are allocated among stocks and bonds. The Advisor
uses a proprietary model to set the amount invested in each category. Generally
stocks will be at least 20% of the Fund's total assets and bonds at least 25%.
Historically, the Fund's allocation to stocks has ranged from 27% to 59%, and to
bonds from 41% to 73%.
The Balanced Fund seeks to achieve growth of capital through its investment in
stocks. It may purchase common stocks or securities with common stock
characteristics (like convertible preferred stocks, convertible bonds or
warrants).
The Balanced Fund seeks to earn income and reduce fluctuation in the value of
the Fund's shares through its investments in bonds and preferred stocks. The
Fund invests in bonds with a portfolio duration of two to five years. The
Balanced Fund only purchases investment grade bonds and preferred stocks as
follows:
- - U.S. Government securities
- - preferred stocks
- - mortgage-backed and other asset-backed securities
- - corporate bonds
- - bonds that are convertible into stocks
- - bank certificates of deposit, fixed time deposits and bankers' acceptances
- - repurchase agreements, reverse repurchase agreements and dollar rolls
- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities
- - obligations of international agencies or supra-national entities
- - municipal bonds
After the Fund buys a security, it may be given a lower rating or stop being
rated. This will not require the Fund to sell it, but the Advisor will consider
the change in rating in deciding whether to keep the security. It is expected
that the average credit quality of the Fund's bonds will be AA/Aa or higher.
Because the Balanced Fund allocates its assets among stocks and bonds, it may
not be able to achieve a total return as high as a fund with complete freedom to
invest its assets in any one type of security. Likewise, because at least 25% of
the Balanced Fund's portfolio will normally consist of bonds, the Fund may not
achieve as much capital appreciation as a portfolio investing only in stocks.
Although the Balanced Fund intends to invest in bonds to keep the price of the
Fund's shares more stable, it can invest in intermediate- and long-term bonds,
which fluctuate in price more than money market obligations.
The Balanced Fund can invest up to 20% of its total assets in foreign
securities.
17
<PAGE> 19
BOND FUNDS
TOTAL RETURN BOND FUND
The Total Return Bond Fund's investment objective is to MAXIMIZE LONG-TERM TOTAL
RETURN. The Fund invests in bonds with a portfolio duration of two to eight
years. Investments are concentrated in areas of the bond market (based on
quality, sector, coupon or maturity) that the Advisor believes are relatively
undervalued.
LOW DURATION FUND
The Low Duration Fund's investment objective is to MAXIMIZE TOTAL RETURN,
consistent with CAPITAL PRESERVATION. The Fund invests in bonds with a portfolio
duration of one to three years. The total rate of return for this Fund is
expected to rise and fall less than a longer duration bond fund like the Total
Return Bond Fund.
SHORT-TERM INVESTMENT FUND
The Short-Term Investment Fund's investment objective is to MAXIMIZE TOTAL
RETURN, consistent with CAPITAL PRESERVATION. The Fund invests in bonds and
seeks to maintain a portfolio duration that will generally not exceed one year.
The Fund also seeks to maintain a dollar-weighted average portfolio maturity
that will generally not exceed three years, based on the effective maturity of
the Fund's securities.
TYPES OF BOND FUND INVESTMENTS
The Bond Funds seek to achieve their objectives by investing mainly in
investment grade, interest-bearing securities of varying maturities. These
include:
- - U.S. Government securities
- - preferred stocks
- - mortgage-backed and other asset-backed securities
- - corporate bonds
- - bonds that are convertible into stocks
- - bank certificates of deposit, fixed time deposits and bankers' acceptances
- - repurchase agreements, reverse repurchase agreements and dollar rolls
- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities
- - obligations of international agencies or supra-national entities
- - municipal bonds
RATINGS LIMITATIONS
Total Return Bond Fund
- - at least 85% of total assets rated at least investment grade or, if
short-term, the second highest quality grade, by a major rating agency such as
Moody's Investors Service ("Moody's") or Standard & Poor's Ratings Group
("S&P")
- - up to 15% of total assets rated below investment grade (below Baa by Moody's
or below BBB by S&P), but none below B
- - can invest in unrated securities if the Advisor believes them to be of
comparable quality
18
<PAGE> 20
Low Duration Fund and Short-Term Investment Fund
- - at least 70% of total assets rated at least A or, if short-term, the second
highest quality grade, by a major rating agency
- - up to 30% of total assets rated Baa by Moody's or BBB by S&P
- - up to 10% of total assets rated below investment grade, but none below B
- - can invest in unrated securities if the Advisor believes them to be of
comparable quality
After a Fund buys a security, it may be given a lower rating or stop being
rated. This will not require the Fund to sell it, but the Advisor will consider
the change in rating in deciding whether to keep the security.
MATURITY AND DURATION REQUIREMENTS
Maturity. The EFFECTIVE MATURITY of a bond is the weighted average period over
which principal is expected to be repaid. STATED MATURITY is the date when the
issuer is scheduled to make the final payment of principal. Effective maturity
is different than stated maturity because it estimates the effect of expected
principal prepayments and call provisions.
Duration. The Bond Funds have different portfolio "durations." Duration
measures the potential volatility of the price of a bond or a portfolio of bonds
prior to maturity. Duration is the magnitude of the change in price of a bond
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 bond with interest payments occurring before principal is repaid,
duration is ordinarily less than maturity. Generally, the lower the stated or
coupon rate of interest of a bond, the longer the duration. The higher the
stated or coupon rate of interest of a bond, the shorter the duration. The
calculation of duration is based on estimates.
Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the durations shown below, each Bond Fund's price would
change as follows:
<TABLE>
<CAPTION>
FUND DURATION CHANGE IN INTEREST RATES
---- -------- ------------------------
<S> <C> <C>
Total Return Bond 4.5 yrs. 1% decline -> 4.5% gain in Fund price
1% rise -> 4.5% decline in Fund price
Low Duration 2 yrs. 1% decline -> 2% gain in Fund price
1% rise -> 2% decline in Fund price
Short-Term Investment .75 yrs. 1% decline -> .75% gain in Fund price
1% rise -> .75% decline in Fund price
</TABLE>
Other factors such as changes in credit quality, prepayments, the shape of the
yield curve and liquidity affect the price of the Bond Funds and may correlate
with changes in interest rates. These factors can increase swings in the Funds'
share prices during periods of volatile interest rate changes.
FOREIGN BONDS
Each Bond Fund may invest in foreign bonds as follows:
- - up to 25% of total assets in foreign bonds that are denominated in U.S.
dollars
- - up to 15% of total assets in foreign bonds that are not denominated in U.S.
dollars
- - up to 15% of total assets in emerging market foreign bonds
19
<PAGE> 21
MONEY MARKET INVESTMENTS
To meet redemptions and when waiting to invest cash receipts, the Funds may
invest in short-term, investment grade bonds and other money market instruments.
Also, the Funds temporarily can invest up to 100% of their assets in short-term,
investment grade bonds and other money market instruments in response to adverse
market, economic or political conditions. The Funds may not achieve their
objectives using this type of investing.
PORTFOLIO TURNOVER
As a result of the strategies described above, the Balanced Fund and the Bond
Funds may have an annual portfolio turnover rate above 100%. Portfolio turnover
is generally the percentage found by dividing the lesser of portfolio purchases
or sales by the monthly average value of the portfolio. High portfolio turnover
(100% or more) results in higher mark ups and other transaction costs and can
affect these Funds' performance. It also can result in a greater amount of
distributions as ordinary income rather than long-term capital gains.
TYPES OF SECURITIES USED IN PRINCIPAL STRATEGIES
U.S. GOVERNMENT SECURITIES
The Bond Funds and the Balanced Fund can invest in U.S. Government securities.
U.S. Government securities include direct obligations issued by the United
States Treasury, like Treasury bills, certificates of indebtedness, notes, bonds
and parts of notes or bonds. U.S. Government agencies and instrumentalities that
issue or guarantee securities include the Federal National Mortgage Association
("Fannie Mae"), Government National Mortgage Association ("Ginnie Mae"), Federal
Home Loan Mortgage Association ("Freddie Mac"), Federal Financing Bank, and
Student Loan Marketing Association ("Sallie Mae").
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 are
backed by the right of the agency to borrow from the Treasury. Others are
supported only by the credit of the agency and not by the Treasury. If the
securities are not backed by the full faith and credit of the United States, the
owner must look mainly to the agency issuing the obligation for repayment.
CORPORATE BONDS
The Bond Funds and the Balanced Fund can invest in corporate bonds. These
include variable and floating rate bonds and corporate commercial paper.
The Bond Funds and the Balanced Fund can invest in structured debentures and
structured notes, which are hybrid instruments with characteristics of both
bonds and swap agreements. The prices of structured debentures and structured
notes can be more volatile than and are often not correlated to other bonds.
The Bond Funds and the Balanced Fund can invest in inverse floaters and tiered
index bonds. In general, the interest rates on tiered index bonds and inverse
floaters move in the opposite direction of prevailing interest rates.
ASSET-BACKED SECURITIES
The Bond Funds and the Balanced Fund can invest in securities whose principal
and interest payments are backed by various types of assets, including
automobile loans, credit card loans, and home equity loans.
20
<PAGE> 22
MORTGAGE-BACKED SECURITIES
The Bond Funds and the Balanced Fund can invest in mortgage-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations ("CMOs").
OTHER STRATEGIES
The Funds use certain other investment strategies:
- - BOND INVESTMENTS IN STOCK FUNDS: the Stock Funds buy common stocks and
securities with common stock characteristics, like convertible preferred
stocks, convertible bonds or warrants. They also may buy bonds. Convertible
securities and bonds will be rated investment grade (the four highest grades)
by a major rating agency like Moody's or S&P or, if unrated, be of comparable
quality in the Advisor's opinion. In addition, the Mid-Cap and Small Cap Funds
may invest up to 5% of their total assets in convertible securities and bonds
rated below investment grade, but not below B, or, if unrated, of comparable
quality in the Advisor's opinion. After a Stock Fund buys a bond or
convertible security, it may be given a lower rating or stop being rated. This
would not require the Fund to sell the security, but the Advisor will consider
the change in rating in deciding whether the Fund should keep the security.
- - REPURCHASE AGREEMENTS: the Funds can enter into repurchase agreements
involving U.S. Government securities with commercial banks or broker-dealers.
This is a method of short-term investment of cash where the Fund would buy
securities from a bank or broker-dealer and sell them back a short time later
(usually overnight) for a slightly higher price. Each Fund intends to be fully
"collateralized" as to such agreements, and the collateral will be
marked-to-market daily. But if the person obligated to repurchase from the
Fund defaults, there may be possible delays and expenses in liquidating the
securities, a decline in their value and loss of interest income.
- - MUNICIPAL BONDS: the Bond Funds and the Balanced Fund can invest in municipal
bonds issued by or on behalf of the governments of states, territories or
possessions of the United States, the District of Columbia and their agencies
and instrumentalities. These include general obligation bonds, revenue bonds
and private activity bonds.
- - REAL ESTATE INVESTMENT TRUSTS: the Funds can invest in securities of real
estate investment trusts or REITs.
- - DERIVATIVES: the Funds may use "derivatives," whose performance is derived
from the performance of an underlying asset. The Funds may use derivatives to
hedge against changes in interest rates, foreign currency exchange rates or
securities prices; for liquidity; or as part of their overall investment
strategies. Types of derivatives that the Funds may use include futures
contracts (Bond Funds only), forward contracts and options. Derivatives allow
a Fund to increase or decrease the level of risk to which the Fund is exposed
more quickly and efficiently than transactions in other types of instruments.
Derivatives, however, are volatile and involve significant risks, including
credit risk, currency risk, leverage risk, liquidity risk and index risk. Each
Fund will mark liquid assets as segregated or enter offsetting positions to
cover its obligations, if any, under options, futures contracts and swap
agreements to avoid leveraging the Fund.
- - BORROW MONEY: each Fund can borrow up to 10% of the value of its total assets.
The Bond Funds and the Balanced Fund can enter into reverse repurchase
agreements in which they sell securities and agree to buy them back for a
fixed price at a later date. They also can use dollar rolls in which they sell
securities for delivery in the current month while agreeing to buy very
similar securities at a later date from the same party. Reverse repurchase
agreements and dollar rolls involve leverage and are treated as borrowings by
the Funds.
- - LEND SECURITIES: each Bond Fund can lend up to 33 1/3% of the value of its
total assets.
21
<PAGE> 23
- - SHORT SALES AGAINST-THE-BOX: each Fund can borrow and sell "short" securities
when it also owns an equal amount of those securities (or their equivalent).
No more than 25% of a Fund's total assets can be held as collateral for short
sales at any one time.
- - WHEN-ISSUED OR DELAYED DELIVERY: the Funds can buy securities on a when-issued
or delayed delivery basis. The Funds will mark liquid assets as segregated in
an amount equal to the when-issued securities.
- - CORPORATE LOANS: the Funds can invest in corporate loans. Commercial banks and
other financial institutions make corporate loans to companies that need
capital to grow or restructure. Borrowers generally pay interest on corporate
loans at rates that change in response to changes in market interest rates
such as the London Interbank Offered Rate ("LIBOR") or the prime rates of U.S.
banks. As a result, the value of corporate loan investments is generally less
responsive to shifts in market interest rates. Because the trading market for
corporate loans is less developed than the secondary market for bonds and
notes, the Fund may experience difficulties from time to time in selling its
corporate loans. Borrowers frequently provide collateral to secure repayment
of these obligations. Leading financial institutions often act as agent for a
broader group of lenders, generally referred to as a "syndicate". The
syndicate's agent arranges the corporate loans, holds collateral and accepts
payments of principal and interest. If the agent developed financial problems,
a Fund may not recover its investment, or there might be a delay in the Fund's
recovery. By investing in a corporate loan, a Fund becomes a member of the
syndicate.
- - ILLIQUID INVESTMENTS: each Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities, it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
- restricted securities: Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities
that a Fund buys directly from the issuer. Private placement and other
restricted securities may not be listed on an exchange and may have no
active trading market.
Restricted securities may be illiquid. A Fund may be unable to sell them
on short notice or may be able to sell them only at a price below current
value. A Fund may get only limited information about the issuer, so may
be less able to predict a loss. In addition, if Fund management receives
material adverse non-public information about the issuer, the Fund will
not be able to sell the security.
- 144A: Rule 144A securities are restricted securities that can be resold
to qualified institutional buyers but not the general public. Rule 144A
securities may have an active trading market but carry the risk that the
active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are considered
liquid.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will meet
its goals or that the Fund's performance will be positive for any period of
time.
22
<PAGE> 24
MARKET AND SELECTION RISK
Market risk is the risk that the stock or bond market will go down in value,
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the market or other funds with similar
investment objectives and investment strategies. These risks apply to all of the
Funds.
RISKS OF INVESTING IN SMALL AND MID-SIZE COMPANIES
The Mid-Cap Fund and Small Cap Fund invest in the securities of small and
medium-size companies. Investment in small and medium-size companies involves
more risk than investing in larger, more established companies. Small and
medium-size companies may have limited product lines or markets. They may be
less financially secure than larger, more established companies. They may depend
on a small number of key personnel. If a product fails, or if management
changes, or there are other adverse developments, the Fund's investment in a
small cap or mid-cap company may lose substantial value.
Securities of small and medium-size companies generally trade in lower volumes
and are subject to greater and more unpredictable price changes than larger cap
securities or the stock market as a whole. Investing in securities of small and
medium-size companies requires a long-term view.
FOREIGN MARKET RISK
Since the Funds, particularly the International Fund and the Global Equity Fund,
may invest in foreign securities, they offer the potential for more
diversification than an investment only in the United States. This is because
stocks traded on foreign markets have often (though not always) performed
differently than stocks in the United States. However, such investments involve
special risks not present in U.S. investments that can increase the chances that
a Fund will lose money. In particular, investments in foreign securities involve
the following risks, which are generally greater for investments in emerging
markets:
- - The economies of some foreign markets often do not compare favorably with that
of the United States in areas such as growth of gross national product,
reinvestment of capital, resources, and balance of payments. Some of these
economies may rely heavily on particular industries or foreign capital. They
may be more vulnerable to adverse diplomatic developments, the imposition of
economic sanctions against a particular country or countries, changes in
international trading patterns, trade barriers and other protectionist or
retaliatory measures.
- - Investments in foreign markets may be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets or the imposition of punitive
taxes.
- - The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices. They
could also impair a Fund's ability to purchase or sell foreign securities or
transfer its assets or income back into the United States, or otherwise
adversely affect a Fund's operations.
- - Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts and political and social
instability. Legal remedies available to investors in some foreign countries
may be less extensive than those available to investors in the United States.
23
<PAGE> 25
- - Because there are generally fewer investors on foreign exchanges and a smaller
number of shares traded each day, it may be difficult for a Fund to buy and
sell securities on those exchanges. In addition, prices of foreign securities
may go up and down more than prices of securities traded in the United States.
- - Foreign markets may have different clearance and settlement procedures. In
certain markets, settlements may be unable to keep pace with the volume of
securities transactions. If this occurs, settlement may be delayed and a
Fund's assets may be uninvested and not earning returns. A Fund also may miss
investment opportunities or be unable to sell an investment because of these
delays.
- - The value of a Fund's foreign holdings (and hedging transactions in foreign
currencies) will be affected by changes in currency exchange rates.
- - The costs of non-U.S. securities transactions tend to be higher than those of
U.S. transactions.
- - International trade barriers or economic sanctions against certain non-U.S.
countries may adversely affect a Fund's non-U.S. holdings.
- - If a Fund purchases a bond issued by a foreign government, the government may
be unwilling or unable to make payments when due. There may be no formal
bankruptcy proceeding by which the Fund would be able to collect amounts owed
by a foreign government.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU)
Certain European countries entered into EMU in an effort to, among other things,
reduce barriers between countries, increase competition among companies, reduce
government subsidies in certain industries, and reduce or eliminate currency
fluctuations among these countries. EMU has established a single common European
currency (the "euro") that was introduced on January 1, 1999 and is expected to
replace the existing national currencies of all EMU participants by July 1,
2002. Certain securities (beginning with government and corporate bonds) were
redenominated in the euro, and are listed, traded, declaring dividends and
making other payments only in euros. Although EMU is generally expected to have
a beneficial effect, it could negatively affect the Funds in a number of
situations, including as follows:
- - If the transition to the euro, or EMU as a whole, does not proceed as planned,
the Funds' investments could be adversely affected. For example, sharp
currency fluctuations, exchange rate volatility, and other disruptions of the
markets could occur.
- - Withdrawal from EMU by a participating country could also have a negative
effect on the Funds' investments, for example if securities redenominated in
euros are transferred back into that country's national currency.
RISKS OF CONVERTIBLE SECURITIES
Convertibles are generally bonds or preferred stocks that may be converted into
common stock. Convertibles typically pay current income, as either interest
(bond convertibles) or dividends (preferred stocks). A convertible's value
usually reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like regular
bonds; that is, if market interest rates rise, the value of a convertible
usually falls. Since it is convertible into common stock, the convertible also
has the same types of market and issuer risk as the underlying common stock.
These risks apply to all of the Funds.
24
<PAGE> 26
ADDITIONAL BOND RISKS
- - MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage-backed securities will
be paid off more quickly than originally anticipated. Prepayment reduces the
yield to maturity and average life of the mortgage-backed securities. In
addition, when a Fund reinvests the proceeds of a prepayment, it may receive a
lower interest rate than the rate on the security that was prepaid. This risk
is known as "prepayment risk." When interest rates rise, certain types of
mortgage-backed securities will be paid off more slowly than originally
anticipated and the value of these securities will fall. This risk is known as
extension risk.
Because of prepayment risk and extension risk, mortgage-backed securities
react differently to changes in interest rates than other bonds. Small
movements in interest rates (both up and down) may quickly and significantly
reduce the value of certain mortgage-backed securities.
Mortgage-backed securities are issued by Federal government agencies like
Ginnie Mae, Freddie Mac or Fannie Mae. Principal and interest payments on
mortgage-backed securities issued by Federal government agencies are
guaranteed by either the Federal government or the government agency. This
means that such securities have very little credit risk. Other mortgage-backed
securities are issued by private corporations rather than Federal agencies.
Private mortgage-backed securities have credit risk as well as prepayment risk
and extension risk.
Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations (CMOs). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing
costs). CMOs are created by dividing the principal and interest payments
collected on a pool of mortgages into several revenue streams (tranches) with
different priority rights to portions of the underlying mortgage payments.
Certain CMO tranches may represent a right to receive interest only (IOs),
principal only (POs) or an amount that remains after other floating-rate
tranches are paid (an inverse floater). These securities are frequently
referred to as "mortgage derivatives" and may be extremely sensitive to
changes in interest rates. If a Fund invests in CMO tranches (including CMO
tranches issued by government agencies) and interest rates move in a manner
not anticipated by Fund management, it is possible that the Fund could lose
all or substantially all of its investment.
- - ASSET-BACKED SECURITIES -- Like traditional bonds, the value of asset-backed
securities typically increases when interest rates fall and decreases when
interest rates rise. Certain asset-backed securities may also be subject to
the risk of prepayment. In a period of declining interest rates, borrowers may
pay what they owe on the underlying assets more quickly than anticipated.
Prepayment reduces the yield to maturity and the average life of the asset-
backed securities. In addition, when a Fund reinvests the proceeds of a
prepayment, it may receive a lower interest rate than the rate on the security
that was prepaid. In a period of rising interest rates, prepayments may occur
at a slower rate than expected. As a result, the average maturity of the
Fund's portfolio will increase. The value of long-term securities changes more
widely in response to changes in interest rates than shorter-term securities.
- - CREDIT RISK -- Credit risk is the risk that the issuer of bonds will be unable
to pay the interest or principal when due. The degree of credit risk depends
on both the financial condition of the issuer and on the terms of the specific
bonds.
25
<PAGE> 27
- - INTEREST RATE RISK -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than do prices of shorter term securities.
- - CALL AND REDEMPTION RISK -- Investments in bonds carry the risk that a bond's
issuer will call the bond for redemption prior to the bond's maturity. If
there is an early call of a bond, a Fund may lose income and may have to
invest the proceeds of the redemption in bonds with lower yields than the
called bond.
- - JUNK BONDS -- Junk bonds are bonds that are rated below investment grade by
the major rating agencies or are unrated securities that the Funds' Advisor
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for a Fund. Junk bonds generally
are less liquid and experience more price volatility than higher rated debt
securities. The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer's bankruptcy, claims of other creditors may have priority
over the claims of junk bond holders, leaving few or no assets available to
repay junk bond holders. Junk bonds may be subject to greater call and
redemption risk than higher rated debt securities.
- - WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued, delayed-delivery securities and forward
commitments involve the risk that the security a Fund buys will lose value
prior to its delivery to the Fund. There also is the risk that the security
will not be issued or that the other party will not meet its obligation, in
which case the Fund loses the investment opportunity of the assets it has set
aside to pay for the security and any gain in the security's price.
- - VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations are
floating rate securities that consist of an interest in a long-term bond and
the conditional right to demand payment prior to the bond's maturity from a
bank or other financial institution. If the bank or other financial
institution is unable to pay on demand, a Fund may be adversely affected. In
addition, these securities are subject to credit risk.
- - INDEXED AND INVERSE FLOATING RATE SECURITIES -- A Bond Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. A Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, inverse floaters change in value in a manner
that is opposite to most bonds -- that is, interest rates on inverse floaters
will decrease when short-term rates increase and increase when short-term
rates decrease. Investments in indexed securities and inverse floaters may
subject a Fund to the risks of reduced or eliminated interest payments.
Investments in indexed securities also may subject a Fund to loss of
principal. In addition, certain indexed securities and inverse floaters may
increase or decrease in value at a greater rate than the underlying interest
rate, which effectively leverages a Fund's investment. As a result, the market
value of such securities will generally be more volatile than that of fixed
rate securities. Both indexed securities and inverse floaters can be
derivative securities and can be considered speculative.
- - SOVEREIGN DEBT -- The Bond Funds may invest in sovereign debt securities.
These securities are issued or guaranteed by foreign government entities.
Investments in sovereign debt subject the Funds to the risk that a government
entity may delay or refuse to pay interest or repayment of principal on its
sovereign debt. Some of these reasons may include cash flow problems,
insufficient foreign currency reserves, political considerations, the relative
size of its debt position to its economy or its failure to put in place
economic reforms required by the International Monetary Fund or other
multilateral agencies. If a government entity defaults, it may ask for more
26
<PAGE> 28
time in which to pay or for further loans. There is no legal process for
collecting sovereign debts that a government does not pay.
- - CORPORATE LOANS -- Corporate loans are subject to the risk of loss of
principal and income. Borrowers do not always provide collateral for corporate
loans and the value of the collateral may not completely cover the borrower's
obligations at the time of a default. If a borrower files for protection from
its creditors under the U.S. bankruptcy laws, these laws may limit a Fund's
rights to its collateral. In addition, the value of collateral may erode
during a bankruptcy case. In the event of a bankruptcy, the holder of a
corporate loan may not recover its principal, may experience a long delay in
recovering its investment and may not receive interest during the delay.
RISKS OF DERIVATIVES
Derivatives involve the following risks:
- - CREDIT RISK -- Credit risk is the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to a Fund.
- - CURRENCY RISK -- Currency risk is the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S. dollar terms)
of an investment.
- - LEVERAGE RISK -- Leverage risk is the risk associated with certain types of
investments or trading strategies that relatively small market movements may
result in large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that greatly
exceed the amount originally invested.
- - LIQUIDITY RISK -- Liquidity risk is the risk that certain securities may be
difficult or impossible to sell at the time that the seller would like or at
the price that the seller believes the security is currently worth.
- - INDEX RISK -- If the derivative is linked to the performance of an index, it
will be subject to the risks associated with changes in that index. If the
index changes, a Fund could receive lower interest payments or experience a
reduction in the value of the derivative to below what the Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite
direction to the index), may create leverage, to the extent that they increase
or decrease in value at a rate that is a multiple of the changes in the
applicable index.
Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Funds and
the risks associated with these instruments.
THE ADVISOR AND PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
THE ADVISOR
Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017-5400, has been the Funds' investment advisor since 1984. The
Advisor is a division of Merrill Lynch Asset Management, L.P., a Delaware
limited partnership. The Advisor supervises and arranges the purchase and sale
of securities held in the Funds' portfolios and administers the Funds. The
Advisor also manages other mutual funds and separate investment advisory
accounts.
27
<PAGE> 29
The table below shows the fees paid to the Advisor for the Funds' fiscal year
ended June 30, 1999 as a percentage of average net assets.
<TABLE>
<CAPTION>
FUND %
---- ---
<S> <C>
Equity Income............................................... .75
Mid-Cap..................................................... .75
Small Cap................................................... .75
International............................................... .75
Global Equity............................................... .75
Balanced.................................................... .75
Total Return Bond........................................... .55
Low Duration................................................ .46
Short-Term Investment....................................... .40
</TABLE>
Although not required to do so, the Advisor has agreed to make reimbursements so
that the regular annual operating expenses of each Fund except the Small Cap and
International Funds will be limited as follows:
<TABLE>
<CAPTION>
EXPENSE LIMITS
(AS A PERCENTAGE OF
FUND AVERAGE NET ASSETS)
---- -------------------
<S> <C>
Equity Income........................................... .95
Mid-Cap................................................. 1.15
Global Equity........................................... 1.25
Balanced................................................ .95
Total Return Bond....................................... .65
Low Duration............................................ .58
Short-Term Investment................................... .48
</TABLE>
The Advisor has agreed to these expense limits through February 2000, and will
thereafter give shareholders at least 30 days' notice if this reimbursement
policy will change.
The Advisor is allowed to allocate brokerage based on sales of shares of funds
managed by the Advisor but has not done so.
SUBADVISORS
The Advisor has entered into subadvisory agreements with Mercury Asset
Management International Limited, 33 King William Street, London, England EC4R
9AS, and Merrill Lynch Asset Management U.K. Limited, Ropemaker Place, 25
Ropemaker Street, London, England E2Y 9LY, affiliated investment advisors that
are indirect subsidiaries of Merrill Lynch & Co., Inc. The subadvisory
arrangements are for investment research, recommendations and other
investment-related services to be provided to the International and Global
Equity Funds. There is no increase in the aggregate fees paid by the Funds for
these services.
PORTFOLIO MANAGERS
The portfolio managers who have responsibility for the day-to-day management of
the Funds' portfolios are listed below.
28
<PAGE> 30
EQUITY INCOME FUND
The portfolio managers of the Equity Income Fund are Gail Bardin and Sheldon
Lieberman. Ms. Bardin is a managing director of the Advisor and began
co-managing the Fund in April 1994. She 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. Before joining the Advisor, Mr. Lieberman
was the Chief Investment Officer for the Los Angeles County Employees Retirement
Association.
MID-CAP FUND
The portfolio managers of the Mid-Cap Fund are Jim Miles and Stan Majcher. Mr.
Miles joined the Advisor in 1995, and has served as a portfolio manager of the
Fund since it began in January 1997. Before 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. Mr. Majcher has been a portfolio manager of the Mid-Cap Fund since January
1999. Mr. Majcher joined the Advisor in August 1996 as a domestic equity
analyst. From 1994 to 1996, he was an investment banking analyst at Merrill
Lynch & Co. Inc.
SMALL CAP FUND
The 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. Before that, Mr. Green was associated with Goldman Sachs Asset
Management, where he worked as an investment analyst from November 1995. Before
that, he was an investment manager and analyst with Prudential Investment
Advisors.
INTERNATIONAL FUND
The portfolio managers of the International Fund are Sarah Ketterer, Harry
Hartford and David Chambers. Ms. Ketterer is a managing director of the Advisor
and has served as portfolio manager of the Fund since it began in October 1990.
Before 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 is a managing director of the Advisor and has
served as a portfolio manager of the Fund since May 1994. Before joining the
Advisor, Mr. Hartford was with the Investment Bank of Ireland (now Bank of
Ireland Asset Management) as a senior manager of International and Global
Equities from 1985 to 1994. Mr. Chambers is a managing director of the Advisor
and has served as a portfolio manager of the Fund since October 1996. He has
been associated with Mercury Asset Management International in London since July
1998. Before joining the Advisor, Mr. Chambers was with Baring Asset Management,
Inc. as senior vice president of Global Equities from 1992 to 1995 and Baring
Brothers, London, England as assistant director of Corporate Finance from 1990
to 1991.
GLOBAL EQUITY FUND
The 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 under "International Fund" above.
Before 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.
29
<PAGE> 31
BALANCED FUND
The portfolio managers of the Balanced 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 and the asset allocation strategy. Mr.
DeBard is a managing director of the Advisor and has served as portfolio manager
of the Fund since it began in August 1985. Mr. DeBard and Mr. Sanchez have
responsibility for the day-to-day management of the bond portion of the Fund's
portfolio. Mr. Sanchez has served as portfolio manager of the Fund since joining
the Advisor in August 1996. Before 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.
BOND FUNDS
The portfolio managers of the Bond 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 under "Balanced Fund." Mr.
Queen joined the Advisor in 1997. Before 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.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). A Fund could be adversely affected
if the computer systems used by the Fund's management or other Fund service
providers do not properly address this problem before January 1, 2000. The
Funds' management expects to have addressed this problem before then, and does
not anticipate that the services it provides will be adversely affected. The
Funds' other service providers have told the Funds' management that they also
expect to resolve the Year 2000 Problem, and the Funds' management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Funds could be negatively affected. The Year
2000 Problem could also have a negative impact on the companies in which the
Funds invest. The negative impact may be greater for companies in foreign
markets, especially emerging markets, since they may be less prepared for the
Year 2000 Problem than domestic companies and markets. If the companies in which
the Funds invest have Year 2000 Problems, the Funds' returns could be adversely
affected.
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
Five of the Funds (the Small Cap, International, Balanced, Total Return Bond and
Low Duration Funds) offer two classes of shares, Investor Class and Distributor
Class. The other Funds offer only Investor Class shares. Investor Class shares,
to which this Prospectus relates, are purchased directly from the Funds.
Purchasers of Investor Class shares do not pay a sales charge or a 12b-1 fee.
(They do pay advisory fees and other expenses, like custody and brokerage fees.)
MINIMUM INVESTMENT
The minimum initial investment in each Fund is $10,000. There is no minimum
subsequent investment. The Funds reserve the right to waive the minimum
investment.
30
<PAGE> 32
WIRE
Before you wire money, call 800-236-4479 to notify the Trust of the wire to
ensure proper credit when the wire is received. Instruct your bank to send the
wire to the Transfer Agent to:
Firstar Bank Milwaukee
ABA #0750-00022
For credit to Firstar Mutual Fund Services
Account #112-952-137
For further credit to HOTCHKIS AND WILEY FUNDS
[Name of Fund]
Account # [Your account number]
Wires received by the Transfer Agent before the New York Stock Exchange closes
(currently 4:00 p.m., Eastern Time) receive that day's net asset value price.
For initial investments, you should also mail an application form to:
Firstar Mutual Fund Services, LLC
615 E. Michigan Avenue, 3rd Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
MAIL
You also can invest by sending a check or money order payable to HOTCHKIS AND
WILEY FUNDS with the application form to Firstar's address above.
Checks must be drawn on a U.S. bank in U.S. dollars. You will receive the net
asset value price next determined after Firstar receives your check or money
order and completed account application. Firstar does not accept cash, drafts or
third party checks. If your check doesn't clear, you will be charged for any
loss sustained by the relevant Fund and a $25 service charge. Forms for
additional contributions by check or change of address are included with account
statements, or you can request them by calling 800-236-4479.
AUTOMATIC INVESTMENT PLAN (AIP)
The Automatic Investment Plan lets you automatically purchase shares by debiting
your bank account for a pre-authorized amount. There is a $50 minimum per
transaction and a maximum of 4 transactions a month. Your bank must be a member
of the ACH network. We don't charge a fee for this service, but you will be
charged $25 if there are insufficient funds in the account at the time of the
scheduled transaction.
RIGHT TO SUSPEND SALES AND REJECT PURCHASE ORDERS
The Funds reserve the right to suspend the offering of shares at any time, and
to reject a purchase order.
GENERAL
The Funds may also accept orders from certain qualified institutions, with
payment made to the Fund at a later time. The Advisor is responsible for
ensuring that such payment is made on a timely basis. An institution which makes
such a purchase for an investor may charge the investor a reasonable service
fee.
The Advisor may pay out of its own resources brokers and other persons who sell
shares of the Funds.
31
<PAGE> 33
PRICING OF FUND SHARES
The net asset value per share of each class of each Fund is calculated every day
that the New York Stock Exchange is open for trading, at the close of regular
trading (currently 4:00 p.m., Eastern Time). The net asset value per share is
the value of a Fund's assets, minus its liabilities, divided by the number of
Fund shares outstanding. The value of portfolio securities is determined on the
basis of the market value of such securities or, when market prices are not
available, at fair value. The Funds will price purchase orders at the net asset
value next determined after the request is received in good order by the
Transfer Agent or an authorized financial institution or its sub-delegate.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
MAIL
You can redeem shares (sell them back to the Funds) by sending us a letter that
includes:
- - the Fund's name
- - your account name
- - your account number
- - the number of shares or dollar amount you want to redeem
- - signatures of all registered owners exactly as the account is registered.
Send your request to:
Firstar Mutual Fund Services, LLC
615 East Michigan Avenue, 3rd Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
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 sold at the net asset value next determined after the
Transfer Agent or an authorized financial institution or its sub-delegate
receives the request.
TELEPHONE
Call 800-236-4479 and tell us:
- - your account name
- - your account number
- - dollar amount or number of shares you want to redeem ($1,000 minimum).
We will then either send you a check to the address in our records or wire the
amount to your U.S. commercial bank. To redeem shares by telephone, you must
have notified us ahead of time that you want this privilege.
If you can't get through to us by phone, which might be when the market is
volatile, you should use the procedures above for "Mail."
32
<PAGE> 34
PROPER FORM
Share Certificates
If you have share certificates, you can't redeem shares until you return them.
The certificates must either be endorsed or accompanied by a stock power signed
by the registered owners, with signatures guaranteed, exactly as the
certificates are registered.
Signature Guarantee
You may need a signature guarantee for your request if your redemption proceeds
- - are more than $50,000
- - are paid to a person other than the owner shown on our records
- - are sent to an address or bank account that is different from our records or
has changed within 15 days
- - are paid to a corporation, partnership, trust or fiduciary.
You can get a signature guarantee from:
- - a bank which is a member of the FDIC
- - a trust company
- - a member firm of a national securities exchange
- - another eligible guarantor institution.
Guarantees must be signed by an authorized signatory of the guarantor
institution and include the words "Signature Guaranteed." We will not accept
signature guarantees from notaries public. Additional documents may be needed
from corporations or other organizations, fiduciaries or anyone other than the
shareholder of record.
DELAYS IN REDEEMING SHARES
At certain times when allowed by the SEC, we may delay sending your check or
wiring your redemption proceeds.
PAYMENTS
Payment also may be delayed up to 12 days if you bought shares with a check.
CHANGES TO REDEMPTION PROCEDURES
The redemption procedures may be modified at any time on 30 days' notice to
shareholders.
REDEMPTION IN KIND
The Funds reserve the right to pay shareholders with large accounts securities
instead of cash in certain circumstances.
LIQUIDATING SMALL ACCOUNTS
We may liquidate your account if its value falls below $1,000 because of
redeeming shares, but we will give you 60 days' written notice so that you can
buy more shares to increase the account size.
REPURCHASES
The Funds may accept orders for the repurchase of shares from certain qualified
institutions. These institutions may charge shareholders a fee for their
services. The Funds may also waive or modify the requirements as to proper form
for such institutions.
33
<PAGE> 35
HOW TO EXCHANGE SHARES
- --------------------------------------------------------------------------------
You can exchange Investor Class shares in a Fund for Investor Class shares of
another Fund subject to a $1,000 minimum. For tax purposes, exchanges are a sale
and purchase.
MAIL
You can exchange shares by sending us a letter that includes:
- - your account name
- - your account number
- - the dollar amount or number of shares you want to exchange
- - the Fund you want to sell and the Fund you want to buy
- - signatures of all account owners.
Send your request to:
Firstar Mutual Fund Services, LLC
615 East Michigan Avenue
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
TELEPHONE
You can exchange shares by calling us at 800-236-4479 as long as you have
notified us ahead of time that you want this privilege. If you have share
certificates, you must return them first.
CHANGES TO THE EXCHANGE PRIVILEGE
The Funds reserve the right to reject any exchange request. The exchange
privilege can be modified or terminated at any time on 30 days' notice to
shareholders.
34
<PAGE> 36
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Funds pay income dividends, if any, as follows:
<TABLE>
<S> <C>
Monthly Total Return Bond Fund
Low Duration Fund
Short-Term Investment Fund
Quarterly Equity Income Fund
Balanced Fund
Yearly Mid-Cap Fund
Small Cap Fund
International Fund
Global Equity Fund
</TABLE>
The Funds pay distributions of any net realized short-term gains and any net
capital gains every year.
TAXES
Dividends
If you do not hold your shares in an IRA, 401(k) plan or another qualified
tax-deferred retirement plan, dividends are taxable to you whether you receive
them in cash or reinvest in additional shares. Income dividends and
distributions of short-term capital gains are subject to federal income tax as
ordinary income at rates up to 39.6% for individuals. Long-term capital gains
distributed by a Fund are taxable at capital gains tax rates no matter how long
you have held your shares. For federal income tax purposes, the long-term
capital gains rate for individuals currently is 20%.
Selling/Exchanging Shares
You may need to pay income tax when you sell or exchange shares in the Funds.
Unless you are a dealer in securities, any gain or loss realized upon the sale
or redemption of shares in any of the Funds will be treated as long-term capital
gain or loss if you held the shares for more than one year, and as short-term
capital gain or loss if you held the shares for one year or less.
Corporations
Corporations investing in the Funds may be eligible for a dividends-received
deduction. See "Dividends and Tax Status" in the SAI for additional information
about the deduction.
This discussion refers only to certain potential federal income tax
consequences. An investment in a Fund also may have state or local income tax
consequences. Please consult your own tax advisor for advice about your tax
situation regarding federal, state and local taxes.
35
<PAGE> 37
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in a Fund (assuming reinvestment of
all dividends and distributions). These financial highlights were audited by
PricewaterhouseCoopers LLP. The accountants' report and the Funds' financial
statements are included in the SAI and the Funds' annual report, which are
available upon request. Further performance information is contained in the
annual report.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
EQUITY INCOME FUND 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $22.02 $21.25 $18.91 $17.24 $15.07
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.41 0.46 0.49 0.45(1) 0.49
Net realized and unrealized gain on investments......... 0.82 4.02 4.15 2.89 2.48
------ ------ ------ ------ ------
Total from investment operations........................ 1.23 4.48 4.64 3.34 2.97
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.41) (0.46) (0.48) (0.57) (0.44)
Distributions (from realized gains)..................... (2.88) (3.25) (1.82) (1.10) (0.36)
------ ------ ------ ------ ------
Total distributions..................................... (3.29) (3.71) (2.30) (1.67) (0.80)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $19.96 $22.02 $21.25 $18.91 $17.24
====== ====== ====== ====== ======
TOTAL RETURN................................................ 7.32% 22.60% 26.15% 20.04% 20.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $148.7 $175.3 $185.9 $182.5 $127.1
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.91% 0.87% 0.88% 0.98% 1.02%
After expense reimbursement............................... 0.91% 0.87% 0.88% 0.98% 1.00%
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 2.09% 1.99% 2.49% 2.56% 3.11%
After expense reimbursement............................. 2.09% 1.99% 2.49% 2.56% 3.14%
Portfolio turnover rate..................................... 18% 23% 44% 24% 50%
</TABLE>
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
36
<PAGE> 38
<TABLE>
<CAPTION>
January 2,
1997*
Year Ended June 30, through
--------------------- June 30,
MID-CAP FUND 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $12.92 $11.65 $10.00
------- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.16 0.13 0.07
Net realized and unrealized gain on investments......... 0.46 1.60 1.64
------- ------ ------
Total from investment operations........................ 0.62 1.73 1.71
------- ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. -- (0.14) (0.06)
Distributions (from realized gains)..................... (1.51) (0.32) --
------- ------ ------
Total distributions..................................... (1.51) (0.46) (0.06)
------- ------ ------
Net Asset Value, End of Period.............................. $12.03 $12.92 $11.65
======= ====== ======
TOTAL RETURN................................................ 7.66% 15.00% 17.15%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $6.9 $7.5 $2.0
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 2.02% 2.72% 8.26%+
After expense reimbursement............................... 1.05% 1.00% 1.00%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement.............................. 0.46% (0.52)% (5.39)%+
After expense reimbursement............................... 1.43% 1.20% 1.87%+
Portfolio turnover rate..................................... 113% 71% 23%++
</TABLE>
* Commencement of operations.
+ Annualized.
++ Not annualized.
37
<PAGE> 39
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
SMALL CAP FUND 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $26.48 $23.83 $21.33 $21.53 $19.53
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............................ (0.05)(2) (0.06)(1) 0.03 0.05(1) (0.06)
Net realized and unrealized gain (loss) on
investments........................................... (3.88) 5.13 5.62 2.80 2.84
------ ------ ------ ------ ------
Total from investment operations........................ (3.93) 5.07 5.65 2.85 2.78
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. -- (0.05) (0.09) -- --
Distributions (from realized gains)..................... (1.53) (2.37) (3.06) (3.05) (0.78)
------ ------ ------ ------ ------
Total distributions..................................... (1.53) (2.42) (3.15) (3.05) (0.78)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $21.02 $26.48 $23.83 $21.33 $21.53
====== ====== ====== ====== ======
TOTAL RETURN................................................ (14.26)% 22.24% 29.74% 14.24% 14.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $53.4 $94.9 $27.5 $16.5 $20.5
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 1.19% 0.94% 1.30% 1.21% 1.49%
After expense reimbursement............................... 1.05% 0.94% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement.............................. (0.40)% (0.23)% (0.20)% 0.03% (0.82)%
After expense reimbursement............................... (0.26)% (0.23)% 0.10% 0.24% (0.34)%
Portfolio turnover rate..................................... 105% 85% 88% 119% 81%
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
(2) Net investment income per share is calculated using ending balances prior
to consideration of adjustments for permanent book and tax differences.
38
<PAGE> 40
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
INTERNATIONAL FUND 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $25.33 $24.17 $20.44 $17.70 $16.79
--------- --------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.59 0.59 0.59(1) 0.56(1) 0.28
Net realized and unrealized gain on investments......... 0.40 1.23 3.78 2.51 1.52
--------- --------- ------ ------- ------
Total from investment operations.................... 0.99 1.82 4.37 3.07 1.80
--------- --------- ------ ------- ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.25) (0.66) (0.48) (0.14) (0.44)
Distributions (from realized gains)..................... (0.34) -- (0.16) (0.19) (0.45)
--------- --------- ------ ------- ------
Total distributions..................................... (0.59) (0.66) (0.64) (0.33) (0.89)
--------- --------- ------ ------- ------
Net Asset Value, End of Year................................ $25.73 $25.33 $24.17 $20.44 $17.70
========= ========= ====== ======= ======
TOTAL RETURN................................................ 4.22% 7.77% 21.59% 18.61% 11.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $1,378.9 $1,476.8 $888.5 $331.0 $51.5
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.95% 0.89% 1.07% 1.11% 1.39%
After expense reimbursement............................... 0.95% 0.89% 1.00% 1.00% 1.00%
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 1.98% 2.32% 2.59% 2.67% 2.45%
After expense reimbursement............................... 1.98% 2.32% 2.66% 2.78% 2.83%
Portfolio turnover rate..................................... 41% 20% 18% 12% 24%
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
39
<PAGE> 41
<TABLE>
<CAPTION>
January 2,
1997*
Year Ended June 30, through
------------------------ June 30,
GLOBAL EQUITY FUND 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $11.38 $11.09 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.35 0.28 0.14
Net realized and unrealized gain on investments......... 0.24 0.51 1.09
------ ------ ------
Total from investment operations........................ 0.59 0.79 1.23
------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.11) (0.32) (0.14)
Distributions (from realized gains)..................... (0.02) (0.18) --
------ ------ ------
Total distributions..................................... (0.13) (0.50) (0.14)
------ ------ ------
Net Asset Value, End of Period.............................. $11.84 $11.38 $11.09
====== ====== ======
TOTAL RETURN................................................ 5.40% 7.61% 12.32%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $7.6 $7.3 $3.7
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 2.07% 2.88% 4.43%+
After expense reimbursement............................... 1.09% 1.00% 1.00%+
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 1.78% 0.00% 0.07%+
After expense reimbursement............................... 2.76% 1.88% 3.50%+
Portfolio turnover rate..................................... 40% 54% 18%++
</TABLE>
* Commencement of operations.
+ Annualized.
++ Not annualized.
40
<PAGE> 42
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
BALANCED FUND 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $19.84 $19.38 $18.27 $16.74 $15.71
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.77 0.89 0.90(1) 0.94 0.89
Net realized and unrealized gain (loss) on
investments........................................... (0.04) 1.58 1.86 1.53 1.53
------ ------ ------ ------ ------
Total from investment operations........................ 0.73 2.47 2.76 2.47 2.42
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.75) (0.90) (0.99) (0.92) (0.80)
Distributions (from realized gains)..................... (0.82) (1.11) (0.66) (0.02) (0.57)
Return of capital....................................... -- -- -- -- (0.02)
------ ------ ------ ------ ------
Total distributions..................................... (1.57) (2.01) (1.65) (0.94) (1.39)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $19.00 $19.84 $19.38 $18.27 $16.74
====== ====== ====== ====== ======
TOTAL RETURN................................................ 4.04% 13.29% 15.75% 15.04% 16.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $97.9 $104.6 $90.2 $70.6 $32.1
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.98% 0.93% 0.98% 1.06% 1.19%
After expense reimbursement............................... 0.95% 0.93% 0.98% 1.00% 1.00%
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 3.99% 4.49% 4.77% 5.20% 5.44%
After expense reimbursement............................... 4.02% 4.49% 4.77% 5.26% 5.63%
Portfolio turnover rate..................................... 135% 121% 117% 92% 51%
</TABLE>
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
41
<PAGE> 43
<TABLE>
<CAPTION>
December 6,
1994*
Year Ended June 30, through
------------------------------------------ June 30,
TOTAL RETURN BOND FUND 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $13.46 $13.04 $12.78 $12.94 $12.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.81 0.89 0.99 0.84(1) 0.46
Net realized and unrealized gain (loss) on
investments........................................... (0.49) 0.50 0.30 0.06 0.94
------ ------ ------ ------ ------
Total from investment operations........................ 0.32 1.39 1.29 0.90 1.40
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.83) (0.97) (0.92) (0.93) (0.46)
Distributions (from realized gains)..................... (0.10) -- (0.11) (0.13) --
------ ------ ------ ------ ------
Total distributions..................................... (0.93) (0.97) (1.03) (1.06) (0.46)
------ ------ ------ ------ ------
Net Asset Value, End of Period.............................. $12.85 $13.46 $13.04 $12.78 $12.94
====== ====== ====== ====== ======
TOTAL RETURN................................................ 2.30% 11.04% 10.48% 7.05% 11.88%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $124.3 $45.2 $14.3 $43.4 $15.3
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.79% 1.02% 0.95% 0.98% 2.93%+
After expense reimbursement............................... 0.65% 0.65% 0.65% 0.68% 0.80%+
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 5.64% 6.28% 6.78% 6.86% 4.92%+
After expense reimbursement............................... 5.78% 6.65% 7.08% 7.16% 7.05%+
Portfolio turnover rate..................................... 233% 195% 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.
++ Not annualized.
42
<PAGE> 44
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------
LOW DURATION FUND 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.................... $10.20 $10.23 $10.12 $10.15 $ 9.93
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................. 0.60 0.66 0.66 0.68 0.75
Net realized and unrealized gain (loss) on
investments..................................... (0.28) 0.05 0.10 0.06 0.23
------ ------ ------ ------ ------
Total from investment operations.................. 0.32 0.71 0.76 0.74 0.98
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)............ (0.59) (0.68) (0.64) (0.72) (0.75)
Dividends (from realized gains)................... (0.02) (0.06) (0.01) (0.05) (0.01)
------ ------ ------ ------ ------
Total distributions............................... (0.61) (0.74) (0.65) (0.77) (0.76)
------ ------ ------ ------ ------
Net Asset Value, End of Year.......................... $ 9.91 $10.20 $10.23 $10.12 $10.15
====== ====== ====== ====== ======
TOTAL RETURN.......................................... 3.15% 7.19% 7.79% 7.47% 10.23%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).................... $410.0 $253.2 $171.2 $189.2 $123.3
Ratio of expenses to average net assets:
Before expense reimbursement........................ 0.64% 0.65% 0.66% 0.60% 0.75%
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........................ 5.65% 6.39% 6.26% 7.07% 7.43%
After expense reimbursement......................... 5.71% 6.46% 6.34% 7.09% 7.61%
Portfolio turnover rate............................... 201% 119% 202% 50% 71%
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
SHORT-TERM INVESTMENT FUND 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $10.13 $10.15 $10.17 $10.12 $10.21
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.57 0.63 0.58 0.66 0.66
Net realized and unrealized gain (loss) on
investments........................................... (0.11) 0.00 (0.01) 0.05 (0.09)
------ ------ ------ ------ ------
Total from investment operations........................ 0.46 0.63 0.57 0.71 0.57
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.54) (0.65) (0.59) (0.66) (0.66)
Return of capital....................................... -- -- -- (0.00) --
------ ------ ------ ------ ------
Total distributions..................................... (0.54) (0.65) (0.59) (0.66) (0.66)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $10.05 $10.13 $10.15 $10.17 $10.12
====== ====== ====== ====== ======
TOTAL RETURN................................................ 4.70% 6.37% 5.77% 7.23% 5.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $50.9 $28.0 $21.7 $18.7 $19.8
Ratio of expenses to average net assets:
Before expense reimbursement.............................. 0.68% 0.92% 0.96% 0.88% 1.26%
After expense reimbursement............................... 0.48% 0.48% 0.48% 0.48% 0.48%
Ratio of net investment income to average net assets:
Before expense reimbursement.............................. 5.32% 5.92% 5.34% 6.15% 5.74%
After expense reimbursement............................... 5.52% 6.36% 5.82% 6.55% 6.52%
Portfolio turnover rate..................................... 144% 121% 154% 60% 81%
</TABLE>
44
<PAGE> 46
HOTCHKIS AND WILEY FUNDS
725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017
800-236-4479
INFORMATION ABOUT THE FUNDS
Please read this Prospectus before you invest in the Funds. Keep the Prospectus
for future reference. You can get additional information about the Funds in:
- - Statement of Additional Information (SAI) (incorporated by reference
into -- legally a part of -- this Prospectus)
- - Annual Report (contains a discussion of market conditions and investment
strategies that affected Fund performance)
- - Semi-annual Report
To get this information and other information regarding the Funds free of charge
or for shareholder questions, contact:
Firstar Mutual Fund Services, LLC
615 East Michigan Avenue, 3rd Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(800) 236-4479
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
- - call 1-800-SEC-0330 for information on the Commission's Public Reference Room,
where documents can be reviewed and copied
- - the information is available at the SEC's Internet site at http://www.sec.gov
- - copies of the information retrievable from the SEC's Internet site are
available for a fee by writing to the SEC's Public Reference Section
You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with information
that is different.
Investment Company Act File No. 811-4182
PROSPECTUS
AUGUST 27, 1999
[LOGO]
HOTCHKIS AND WILEY FUNDS
INVESTOR CLASS SHARES
-------------------------------------------------------
EQUITY INCOME FUND
-------------------------------------------------------
MID-CAP FUND
-------------------------------------------------------
SMALL CAP FUND
-------------------------------------------------------
INTERNATIONAL FUND
-------------------------------------------------------
GLOBAL EQUITY FUND
-------------------------------------------------------
BALANCED FUND
-------------------------------------------------------
TOTAL RETURN BOND FUND
-------------------------------------------------------
LOW DURATION FUND
-------------------------------------------------------
SHORT-TERM INVESTMENT FUND
-------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 47
- --------------------------------------------------------------------------------
PROSPECTUS
AUGUST 27, 1999
HOTCHKIS AND WILEY FUNDS LOGO
DISTRIBUTOR CLASS SHARES
- --------------------------------------------------------------------------------
SMALL CAP FUND
Seeks capital appreciation. The Fund invests primarily in stocks of U.S.
companies with market capitalizations of less than $2 billion.
INTERNATIONAL FUND
Seeks current income and long-term growth of income, accompanied by growth of
capital. The Fund invests in international stocks.
BALANCED FUND
Seeks to preserve capital while producing a high total return. The Fund's assets
are allocated between stocks and bonds.
TOTAL RETURN BOND FUND
Seeks to maximize long-term total return. The Fund invests in bonds 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 bonds of varying maturities with a portfolio duration of one to
three years.
The Funds are separate portfolios of the Hotchkis and Wiley Funds.
The Securities and Exchange Commission has not approved or disapproved these
securities or the accuracy of this Prospectus. It is a criminal offense to state
otherwise.
<PAGE> 48
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
KEY FACTS.............................................. 3
FEES AND EXPENSES...................................... 10
INVESTMENT OBJECTIVES AND POLICIES..................... 11
INVESTMENT RISKS....................................... 17
THE ADVISOR AND PORTFOLIO MANAGERS..................... 21
HOW TO BUY SHARES...................................... 24
HOW TO REDEEM SHARES................................... 24
HOW TO EXCHANGE SHARES................................. 25
DIVIDENDS AND TAXES.................................... 25
FINANCIAL HIGHLIGHTS................................... 27
INFORMATION ABOUT THE FUNDS........................back cover
</TABLE>
[LOGO]
IMPORTANT TELEPHONE NUMBER
-------------------------------------------------------
CLIENT SERVICES AND SHAREHOLDER INQUIRIES 800-236-4479
<PAGE> 49
KEY FACTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND MAIN STRATEGIES
This section highlights important information about each Fund. Use this summary
to compare the Funds to other mutual funds. More detailed information follows
the summary.
STOCK FUNDS
VALUE INVESTING
In investing the Stock Funds, including the stock portion of the Balanced Fund,
Hotchkis and Wiley (the "Advisor") follows a value style. This means that the
Advisor buys stocks that it believes are currently undervalued by the market and
thus have a lower price than their true worth. Typical value characteristics
include:
- - low price-to-earnings ratio relative to the market
- - high yield relative to the market
- - low price-to-book value ratio relative to the market
- - financial strength
The different Stock Funds emphasize these characteristics in different degrees
depending on investment objective and market capitalization focus.
Stocks may be "undervalued" because they are part of an industry that is out of
favor with investors generally. Even in those industries, though, 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.
This value discipline sometimes prevents investments in stocks that are in
well-known indexes, like the S&P 500 or similar large foreign indexes.
<TABLE>
<CAPTION>
SMALL CAP FUND INTERNATIONAL FUND BALANCED FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OBJECTIVE - capital appreciation - current income - preserve capital
- long-term growth of while producing a high
income total return
- growth of capital
MAIN INVESTMENTS - stocks of U.S. - international stocks - U.S. stocks and
companies with market investment grade
capitalizations of bonds
less than $2 billion
</TABLE>
BOND FUNDS
Each Bond Fund invests in a diversified portfolio of bonds of different
maturities, including U.S. Government securities, corporate bonds, asset-backed
securities and mortgage-backed securities. They differ in their objectives, the
credit quality of their portfolios and their volatility, as measured by their
"duration." Duration is a measure of how much the price of a bond would change
compared to a change in market interest rates. Duration is discussed further on
page 13.
3
<PAGE> 50
<TABLE>
<CAPTION>
TOTAL RETURN
BOND FUND LOW DURATION FUND
- ------------------------------------------------------------------------------------
<S> <C> <C>
OBJECTIVE - maximize long-term - maximize total return
total return - preserve capital
MAIN STRATEGIES
CREDIT QUALITY - at least 85% - at least 70% in A
investment grade; up to rated or better; up to
15% rated below 30% rated BBB/Baa; up
investment grade, none to 10% rated below
below B investment grade, none
below B
DURATION 2-8 years 1-3 years
MORE VOLATILE LESS VOLATILE
</TABLE>
MAIN RISKS
As with any mutual fund, the value of a Fund's investments, and therefore the
value of Fund shares, may go up or down. For the Stock Funds, these changes may
occur because the stock market is rising or falling. At other times, there are
specific factors that may affect the value of a particular investment. For the
Bond Funds, these changes may occur in response to interest rate changes or
other factors that may affect a particular issuer or obligation. Generally, when
interest rates go up, the value of bonds goes down. The value of the Bond Funds'
shares also may be affected by market conditions and economic or political
developments. The longer the duration of a Bond Fund, the more the Fund's price
will go down if interest rates go up. If the value of a Fund's investments goes
down, you may lose money.
- - The Small Cap Fund invests in small companies. Generally, the stock prices of
small companies vary more than the stock prices of large companies and may
present above average risk.
- - The International Fund invests primarily in foreign securities, which have
additional risks. For example, the securities may go up or down in value
depending on foreign exchange rates, foreign political and economic
developments and U.S. and foreign laws relating to foreign investment.
Foreign securities may also be less liquid, more volatile and harder to value
than U.S. securities. These risks are heightened when the issuer of the
securities is a country or is in a country with an emerging capital market.
- - The Bond Funds and the Balanced Fund invest in mortgage-backed and
asset-backed securities. In addition to normal bond risks, these securities
are subject to prepayment risk.
- - The Bond Funds invest in "junk" bonds, which have more credit risk and tend
to be less liquid than higher-rated securities.
- - An investment in any of the Funds is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
See "Investment Risks" for more information about the risks associated with the
Funds.
4
<PAGE> 51
THE FUNDS' PERFORMANCE
The bar charts below provide some indication of the risks of investing in the
Funds by showing changes in each Fund's Investor Class performance from year to
year. They do not reflect the expense of sub-transfer agency fees that began to
be paid on March 1, 1999 or 12b-1 fees paid by the Distributor Class shares. How
a Fund has performed in the past is not necessarily an indication of how the
Fund will perform in the future.
SMALL CAP FUND
<TABLE>
<CAPTION>
Total Return*
<S> <C>
1989 20.55%
1990 -9.01%
1991 48.24%
1992 13.73%
1993 12.59%
1994 1.12%
1995 18.43%
1996 14.26%
1997 39.52%
1998 -15.56%
</TABLE>
Total return for the six months ended June 30, 1999: 7.90%.*
Best quarter: 22.92% (1st Quarter of 1991).
Worst quarter: -27.51% (3rd Quarter of 1990).
* These returns are for Investor Class shares, since Distributor Class shares
had not commenced operations as of June 30, 1999. Distributor Class shares are
invested in the same portfolio of securities and the annual expenses would
differ only to the extent of the 12b-1 fee paid by Distributor Class shares.
5
<PAGE> 52
INTERNATIONAL FUND
<TABLE>
<CAPTION>
TOTAL RETURN*
<S> <C>
1991 20.35%
1992 -2.66%
1993 45.76%
1994 -2.93%
1995 19.89%
1996 18.29%
1997 5.33%
1998 6.41%
</TABLE>
Total return for the six months ended June 30, 1999: 10.52%.*
Best quarter: 15.50% (4th Quarter of 1998).
Worst quarter: - 18.36% (3rd Quarter of 1998).
* These returns are for Investor Class shares, since Distributor Class shares
did not commence operations until June 2, 1999. Distributor Class shares are
invested in the same portfolio of securities and the annual expenses would
differ only to the extent of the 12b-1 fee paid by Distributor Class shares.
6
<PAGE> 53
BALANCED FUND
<TABLE>
<CAPTION>
Total Return*
<S> <C>
1989 17.88%
1990 -0.45%
1991 20.53%
1992 9.41%
1993 12.59%
1994 0.82%
1995 24.80%
1996 11.71%
1997 16.75%
1998 5.20%
</TABLE>
Total return for the six months ended June 30, 1999: 3.98%.*
Best quarter: 10.28% (1st Quarter of 1991).
Worst quarter: - 8.32% (3rd Quarter of 1990).
* These returns are for Investor Class shares, since Distributor Class shares
had not commenced operations as of June 30, 1999. Distributor Class shares are
invested in the same portfolio of securities and the annual expenses would
differ only to the extent of the 12b-1 fee paid by Distributor Class shares.
7
<PAGE> 54
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
Total Return*
<S> <C>
1995 21.32%
1996 4.34%
1997 10.76%
1998 8.79%
</TABLE>
Total return for the six months ended June 30, 1999: -1.81%.*
Best quarter: 6.57% (2nd Quarter of 1995).
Worst quarter: -2.38% (1st Quarter of 1996).
* These returns are for Investor Class shares, since Distributor Class shares
did not commence operations until June 2, 1999. Distributor Class shares are
invested in the same portfolio of securities and the annual expenses would
differ only to the extent of the 12b-1 fee paid by Distributor Class shares.
8
<PAGE> 55
LOW DURATION FUND
<TABLE>
<CAPTION>
Total Return*
<S> <C>
1994 5.23%
1995 12.75%
1996 6.23%
1997 7.59%
1998 5.65%
</TABLE>
Total return for the six months ended June 30, 1999: 0.85%.*
Best quarter: 4.02% (2nd Quarter of 1995).
Worst quarter: - 0.09% (4th Quarter of 1998).
* These returns are for Investor Class shares, since Distributor Class shares
had not commenced operations as of June 30, 1999. Distributor Class shares are
invested in the same portfolio of securities and the annual expenses would
differ only to the extent of the 12b-1 fee paid by the Distributor Class
shares.
9
<PAGE> 56
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table shows the expenses to be paid by the Distributor Class shares of the
Funds, based on results for the Investor Class shares of the Funds. No sales
load, exchange fee or redemption fee is charged on the purchase or sale of Fund
shares.
Investment dealers and other firms may charge you additional fees for buying and
selling Fund shares or for advisory services. See their materials for details.
<TABLE>
<CAPTION>
ANNUAL FUND Small Inter- Total Low
OPERATING EXPENSES Cap national Balanced Return Duration
(expenses that are deducted from Fund assets) Fund Fund Fund Bond Fund Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management fees...................................... .75% .75% .75% .55% .46%
Distribution (12b-1) fees............................ .25 .25 .25 .25 .25
Other expenses....................................... .53 .27 .33 .36 .22
---- ---- ---- ---- ---
Total annual Fund operating expenses................. 1.53% 1.27% 1.33% 1.16% .93%
==== ==== ==== ==== ===
Expense reimbursement................................ 0 0 .13 .26 .10
---- ---- ---- ---- ---
NET ANNUAL FUND OPERATING EXPENSES(1)................ 1.53% 1.27% 1.20% .90% .83%
==== ==== ==== ==== ===
</TABLE>
- ---------------
(1) The Advisor has agreed to limit the annual operating expenses of each Fund,
except the Small Cap and the International Funds, to the amounts shown in the
table. Distributor Class shares had not commenced operations as of June 30,
1999, except for the International and Total Return Bond Funds, which commenced
operations in June 1999. On March 1, 1999, the Funds began paying sub-transfer
agency fees. The table is based on results for the Investor Class shares as of
June 30, 1999 and has been restated to reflect the 12b-1 fees payable by the
Distributor Class and the expense limits and the sub-transfer agency fees as if
they had been in effect for the Funds' full fiscal year ended June 30, 1999. The
Advisor has contractually agreed to keep the expense limits in place until
February 29, 2000.
EXAMPLE
This example compares the cost of investing in the Funds with the cost of
investing in other mutual funds. The example assumes that you invest $10,000 in
the Funds and that each Fund returns 5% each year. After one year, the example
does not take into consideration the Advisor's agreement to subsidize expenses.
Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
Total
Small Inter- Return Low
Cap national Balanced Bond Duration
Fund Fund Fund Fund Fund
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One Year.............................................. $ 156 $ 129 $ 122 $ 92 $ 85
Three Years........................................... $ 483 $ 403 $ 409 $ 343 $ 286
Five Years............................................ $ 834 $ 697 $ 716 $ 613 $ 505
Ten Years............................................. $1,824 $1,534 $1,590 $1,386 $1,134
</TABLE>
10
<PAGE> 57
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
STOCK FUNDS
SMALL CAP FUND
The Small Cap Fund's investment objective is CAPITAL APPRECIATION.
The Small Cap Fund invests at least 65% of its total assets in stocks of small
U.S. companies. A "small company" is one with a market capitalization of less
than $2 billion at the time of investment.
The Small Cap Fund can invest up to 20% of its total assets in foreign
securities.
INTERNATIONAL FUND
The International Fund's investment objective is to provide CURRENT INCOME and
LONG-TERM GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
The International Fund invests at least 65% of its total assets in stocks in at
least ten foreign markets. Ordinarily, the Fund invests in stocks of companies
located in the developed foreign markets and invests at least 80% of its total
assets in stocks that pay dividends. It also may invest in stocks that don't pay
dividends or interest, but have growth potential unrecognized by the market or
changes in business or management that indicate growth potential.
BALANCED FUND
The Balanced Fund's investment objective is to PRESERVE CAPITAL while producing
a HIGH TOTAL RETURN. The Advisor's current goal is a return at least 4% greater
than the rate of inflation as measured by the Consumer Price Index.
The Balanced Fund's assets are allocated among stocks and bonds. The Advisor
uses a proprietary model to set the amount invested in each category. Generally
stocks will be at least 20% of the Fund's total assets and bonds at least 25%.
Historically, the Fund's allocation to stocks has ranged from 27% to 59%, and to
bonds from 41% to 73%.
The Balanced Fund seeks to achieve growth of capital through its investment in
stocks. It may purchase common stocks or securities with common stock
characteristics (like convertible preferred stocks, convertible bonds or
warrants).
The Balanced Fund seeks to earn income and reduce fluctuation in the value of
the Fund's shares through its investments in bonds and preferred stocks. The
Fund invests in bonds with a portfolio duration of two to five years. The
Balanced Fund only purchases investment grade bonds and preferred stocks as
follows:
- - U.S. Government securities
- - preferred stocks
- - mortgage-backed and other asset-backed securities
- - corporate bonds
- - bonds that are convertible into stocks
- - bank certificates of deposit, fixed time deposits and bankers' acceptances
- - repurchase agreements, reverse repurchase agreements and dollar rolls
- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities
- - obligations of international agencies or supra-national entities
- - municipal bonds
11
<PAGE> 58
After the Fund buys a security, it may be given a lower rating or stop being
rated. This will not require the Fund to sell it, but the Advisor will consider
the change in rating in deciding whether to keep the security. It is expected
that the average credit quality of the Fund's bonds will be AA/Aa or higher.
Because the Balanced Fund allocates its assets among stocks and bonds, it may
not be able to achieve a total return as high as a fund with complete freedom to
invest its assets in any one type of security. Likewise, because at least 25% of
the Balanced Fund's portfolio will normally consist of bonds, the Fund may not
achieve as much capital appreciation as a portfolio investing only in stocks.
Although the Balanced Fund intends to invest in bonds to keep the price of the
Fund's shares more stable, it can invest in intermediate- and long-term bonds,
which fluctuate in price more than money market obligations.
The Balanced Fund can invest up to 20% of its total assets in foreign
securities.
BOND FUNDS
TOTAL RETURN BOND FUND
The Total Return Bond Fund's investment objective is to MAXIMIZE LONG-TERM TOTAL
RETURN. The Fund invests in bonds with a portfolio duration of two to eight
years. Investments are concentrated in areas of the bond market (based on
quality, sector, coupon or maturity) that the Advisor believes are relatively
undervalued.
LOW DURATION FUND
The Low Duration Fund's investment objective is to MAXIMIZE TOTAL RETURN,
consistent with CAPITAL PRESERVATION. The Fund invests in bonds with a portfolio
duration of one to three years. The total rate of return for this Fund is
expected to rise and fall less than a longer duration bond fund like the Total
Return Bond Fund.
TYPES OF BOND FUND INVESTMENTS
The Bond Funds seek to achieve their objectives by investing mainly in
investment grade, interest-bearing securities of varying maturities. These
include:
- - U.S. Government securities
- - preferred stocks
- - mortgage-backed and other asset-backed securities
- - corporate bonds
- - bonds that are convertible into stocks
- - bank certificates of deposit, fixed time deposits and bankers' acceptances
- - repurchase agreements, reverse repurchase agreements and dollar rolls
- - obligations of foreign governments or their subdivisions, agencies and
instrumentalities
- - obligations of international agencies or supra-national entities
- - municipal bonds
12
<PAGE> 59
RATINGS LIMITATIONS
Total Return Bond Fund
- - at least 85% of total assets rated at least investment grade or, if
short-term, the second highest quality grade, by a major rating agency such as
Moody's Investors Service ("Moody's") or Standard & Poor's Ratings Group
("S&P")
- - up to 15% of total assets rated below investment grade (below Baa by Moody's
or below BBB by S&P), but none below B
- - can invest in unrated securities if the Advisor believes them to be of
comparable quality
Low Duration Fund
- - at least 70% of total assets rated at least A or, if short-term, the second
highest quality grade, by a major rating agency
- - up to 30% of total assets rated Baa by Moody's or BBB by S&P
- - up to 10% of total assets rated below investment grade, but none below B
- - can invest in unrated securities if the Advisor believes them to be of
comparable quality
After a Fund buys a security, it may be given a lower rating or stop being
rated. This will not require the Fund to sell it, but the Advisor will consider
the change in rating in deciding whether to keep the security.
MATURITY AND DURATION REQUIREMENTS
Maturity. The EFFECTIVE MATURITY of a bond is the weighted average period over
which principal is expected to be repaid. STATED MATURITY is the date when the
issuer is scheduled to make the final payment of principal. Effective maturity
is different than stated maturity because it estimates the effect of expected
principal prepayments and call provisions.
Duration. The Bond Funds have different portfolio "durations." Duration measures
the potential volatility of the price of a bond or a portfolio of bonds prior to
maturity. Duration is the magnitude of the change in price of a bond 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 bond with interest payments occurring before principal is repaid,
duration is ordinarily less than maturity. Generally, the lower the stated or
coupon rate of interest of a bond, the longer the duration. The higher the
stated or coupon rate of interest of a bond, the shorter the duration. The
calculation of duration is based on estimates.
Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the durations shown below, each Bond Fund's price would
change as follows:
<TABLE>
<CAPTION>
FUND DURATION CHANGE IN INTEREST RATES
---- -------- ------------------------
<S> <C> <C>
Total Return Bond 4.5 yrs. 1% decline -> 4.5% gain in Fund price
1% rise -> 4.5% decline in Fund price
Low Duration 2 yrs. 1% decline -> 2% gain in Fund price
1% rise -> 2% decline in Fund price
</TABLE>
Other factors such as changes in credit quality, prepayments, the shape of the
yield curve and liquidity affect the price of the Bond Funds and may correlate
with changes in interest rates. These factors can increase swings in the Funds'
share prices during periods of volatile interest rate changes.
13
<PAGE> 60
FOREIGN BONDS
Each Bond Fund may invest in foreign bonds as follows:
- - up to 25% of total assets in foreign bonds that are denominated in U.S.
dollars
- - up to 15% of total assets in foreign bonds that are not denominated in U.S.
dollars
- - up to 15% of total assets in emerging market foreign bonds
MONEY MARKET INVESTMENTS
To meet redemptions and when waiting to invest cash receipts, the Funds may
invest in short-term, investment grade bonds and other money market instruments.
Also, the Funds temporarily can invest up to 100% of their assets in short-term,
investment grade bonds and other money market instruments in response to adverse
market, economic or political conditions. The Funds may not achieve their
objectives using this type of investing.
PORTFOLIO TURNOVER
As a result of the strategies described above, the Balanced Fund and the Bond
Funds may have an annual portfolio turnover rate above 100%. Portfolio turnover
is generally the percentage found by dividing the lesser of portfolio purchases
or sales by the monthly average value of the portfolio. High portfolio turnover
(100% or more) results in higher mark ups and other transaction costs and can
affect these Funds' performance. It also can result in a greater amount of
distributions as ordinary income rather than long-term capital gains.
TYPES OF SECURITIES USED IN PRINCIPAL STRATEGIES
U.S. GOVERNMENT SECURITIES
The Bond Funds and the Balanced Fund can invest in U.S. Government securities.
U.S. Government securities include direct obligations issued by the United
States Treasury, like Treasury bills, certificates of indebtedness, notes, bonds
and parts of notes or bonds. U.S. Government agencies and instrumentalities that
issue or guarantee securities include the Federal National Mortgage Association
("Fannie Mae"), Government National Mortgage Association ("Ginnie Mae"), Federal
Home Loan Mortgage Association ("Freddie Mac"), Federal Financing Bank, and
Student Loan Marketing Association ("Sallie Mae").
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 are
backed by the right of the agency to borrow from the Treasury. Others are
supported only by the credit of the agency and not by the Treasury. If the
securities are not backed by the full faith and credit of the United States, the
owner must look mainly to the agency issuing the obligation for repayment.
CORPORATE BONDS
The Bond Funds and the Balanced Fund can invest in corporate bonds. These
include variable and floating rate bonds and corporate commercial paper.
The Bond Funds and the Balanced Fund can invest in structured debentures and
structured notes, which are hybrid instruments with characteristics of both
bonds and swap agreements. The prices of structured debentures and structured
notes can be more volatile than and are often not correlated to other bonds.
14
<PAGE> 61
The Bond Funds and the Balanced Fund can invest in inverse floaters and tiered
index bonds. In general, the interest rates on tiered index bonds and inverse
floaters move in the opposite direction of prevailing interest rates.
ASSET-BACKED SECURITIES
The Bond Funds and the Balanced Fund can invest in securities whose principal
and interest payments are backed by various types of assets, including
automobile loans, credit card loans, and home equity loans.
MORTGAGE-BACKED SECURITIES
The Bond Funds and the Balanced Fund can invest in mortgage-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations ("CMOs").
OTHER STRATEGIES
The Funds use certain other investment strategies:
- - BOND INVESTMENTS IN STOCK FUNDS: the Stock Funds buy common stocks and
securities with common stock characteristics, like convertible preferred
stocks, convertible bonds or warrants. They also may buy bonds. Convertible
securities and bonds will be rated investment grade (the four highest grades)
by a major rating agency like Moody's or S&P or, if unrated, be of comparable
quality in the Advisor's opinion. In addition, the Small Cap Fund may invest
up to 5% of its total assets in convertible securities and bonds rated below
investment grade, but not below B, or, if unrated, of comparable quality in
the Advisor's opinion. After a Stock Fund buys a bond or convertible security,
it may be given a lower rating or stop being rated. This would not require the
Fund to sell the security, but the Advisor will consider the change in rating
in deciding whether the Fund should keep the security.
- - REPURCHASE AGREEMENTS: the Funds can enter into repurchase agreements
involving U.S. Government securities with commercial banks or broker-dealers.
This is a method of short-term investment of cash where the Fund would buy
securities from a bank or broker-dealer and sell them back a short time later
(usually overnight) for a slightly higher price. Each Fund intends to be fully
"collateralized" as to such agreements, and the collateral will be
marked-to-market daily. But if the person obligated to repurchase from the
Fund defaults, there may be possible delays and expenses in liquidating the
securities, a decline in their value and loss of interest income.
- - MUNICIPAL BONDS: the Bond Funds and the Balanced Fund can invest in municipal
bonds issued by or on behalf of the governments of states, territories or
possessions of the United States, the District of Columbia and their agencies
and instrumentalities. These include general obligation bonds, revenue bonds
and private activity bonds.
- - REAL ESTATE INVESTMENT TRUSTS: the Funds can invest in securities of real
estate investment trusts or REITs.
- - DERIVATIVES: the Funds may use "derivatives," whose performance is derived
from the performance of an underlying asset. The Funds may use derivatives to
hedge against changes in interest rates, foreign currency exchange rates or
securities prices; for liquidity; or as part of their overall investment
strategies. Types of derivatives that the Funds may use include futures
contracts (Bond Funds only), forward contracts and options. Derivatives allow
a Fund to increase or decrease the level of risk to which the Fund is exposed
more quickly and efficiently than transactions in other types of instruments.
Derivatives, however, are volatile and involve significant risks, including
credit risk, currency risk, leverage risk, liquidity risk and index risk. Each
Fund will mark liquid
15
<PAGE> 62
assets as segregated or enter offsetting positions to cover its obligations,
if any, under options, futures contracts and swap agreements to avoid
leveraging the Fund.
- - BORROW MONEY: each Fund can borrow up to 10% of the value of its total assets.
The Bond Funds and the Balanced Fund can enter into reverse repurchase
agreements in which they sell securities and agree to buy them back for a
fixed price at a later date. They also can use dollar rolls in which they sell
securities for delivery in the current month while agreeing to buy very
similar securities at a later date from the same party. Reverse repurchase
agreements and dollar rolls involve leverage and are treated as borrowings by
the Funds.
- - LEND SECURITIES: each Bond Fund can lend up to 33 1/3% of the value of its
total assets.
- - SHORT SALES AGAINST-THE-BOX: each Fund can borrow and sell "short" securities
when it also owns an equal amount of those securities (or their equivalent).
No more than 25% of a Fund's total assets can be held as collateral for short
sales at any one time.
- - WHEN-ISSUED OR DELAYED DELIVERY: the Funds can buy securities on a when-issued
or delayed delivery basis. The Funds will mark liquid assets as segregated in
an amount equal to the when-issued securities.
- - CORPORATE LOANS: the Funds can invest in corporate loans. Commercial banks and
other financial institutions make corporate loans to companies that need
capital to grow or restructure. Borrowers generally pay interest on corporate
loans at rates that change in response to changes in market interest rates
such as the London Interbank Offered Rate ("LIBOR") or the prime rates of U.S.
banks. As a result, the value of corporate loan investments is generally less
responsive to shifts in market interest rates. Because the trading market for
corporate loans is less developed than the secondary market for bonds and
notes, the Fund may experience difficulties from time to time in selling its
corporate loans. Borrowers frequently provide collateral to secure repayment
of these obligations. Leading financial institutions often act as agent for a
broader group of lenders, generally referred to as a "syndicate." The
syndicate's agent arranges the corporate loans, holds collateral and accepts
payments of principal and interest. If the agent developed financial problems,
a Fund may not recover its investment, or there might be a delay in the Fund's
recovery. By investing in a corporate loan, a Fund becomes a member of the
syndicate.
- - ILLIQUID INVESTMENTS: each Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities, it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
- restricted securities: Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities
that a Fund buys directly from the issuer. Private placement and other
restricted securities may not be listed on an exchange and may have no
active trading market.
Restricted securities may be illiquid. A Fund may be unable to sell them
on short notice or may be able to sell them only at a price below current
value. A Fund may get only limited information about the issuer, so may
be less able to predict a loss. In addition, if Fund management receives
material adverse non-public information about the issuer, the Fund will
not be able to sell the security.
- 144A: Rule 144A securities are restricted securities that can be resold
to qualified institutional buyers but not the general public. Rule 144A
securities may have an active trading market but carry the risk that the
active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are considered
liquid.
16
<PAGE> 63
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
a Fund. As with any mutual fund, there can be no guarantee that a Fund will meet
its goals or that the Fund's performance will be positive for any period of
time.
MARKET AND SELECTION RISK
Market risk is the risk that the stock or bond market will go down in value,
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the market or other funds with similar
investment objectives and investment strategies. These risks apply to all of the
Funds.
RISKS OF INVESTING IN SMALL COMPANIES
The Small Cap Fund invests in the securities of small companies. Investment in
small companies involves more risk than investing in larger, more established
companies. Small companies may have limited product lines or markets. They may
be less financially secure than larger, more established companies. They may
depend on a small number of key personnel. If a product fails, or if management
changes, or there are other adverse developments, the Fund's investment in a
small cap company may lose substantial value.
Securities of small companies generally trade in lower volumes and are subject
to greater and more unpredictable price changes than larger cap securities or
the stock market as a whole. Investing in securities of small companies requires
a long-term view.
FOREIGN MARKET RISK
Since the Funds, particularly the International Fund, may invest in foreign
securities, they offer the potential for more diversification than an investment
only in the United States. This is because stocks traded on foreign markets have
often (though not always) performed differently than stocks in the United
States. However, such investments involve special risks not present in U.S.
investments that can increase the chances that a Fund will lose money. In
particular, investments in foreign securities involve the following risks, which
are generally greater for investments in emerging markets:
- - The economies of some foreign markets often do not compare favorably with that
of the United States in areas such as growth of gross national product,
reinvestment of capital, resources, and balance of payments. Some of these
economies may rely heavily on particular industries or foreign capital. They
may be more vulnerable to adverse diplomatic developments, the imposition of
economic sanctions against a particular country or countries, changes in
international trading patterns, trade barriers and other protectionist or
retaliatory measures.
- - Investments in foreign markets may be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets or the imposition of punitive
taxes.
- - The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices. They
could also impair a Fund's ability to purchase or sell foreign securities or
transfer its assets or income back into the United States, or otherwise
adversely affect a Fund's operations.
17
<PAGE> 64
- - Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts and political and social
instability. Legal remedies available to investors in some foreign countries
may be less extensive than those available to investors in the United States.
- - Because there are generally fewer investors on foreign exchanges and a smaller
number of shares traded each day, it may be difficult for a Fund to buy and
sell securities on those exchanges. In addition, prices of foreign securities
may go up and down more than prices of securities traded in the United States.
- - Foreign markets may have different clearance and settlement procedures. In
certain markets, settlements may be unable to keep pace with the volume of
securities transactions. If this occurs, settlement may be delayed and a
Fund's assets may be uninvested and not earning returns. A Fund also may miss
investment opportunities or be unable to sell an investment because of these
delays.
- - The value of a Fund's foreign holdings (and hedging transactions in foreign
currencies) will be affected by changes in currency exchange rates.
- - The costs of non-U.S. securities transactions tend to be higher than those of
U.S. transactions.
- - International trade barriers or economic sanctions against certain non-U.S.
countries may adversely affect a Fund's non-U.S. holdings.
- - If a Fund purchases a bond issued by a foreign government, the government may
be unwilling or unable to make payments when due. There may be no formal
bankruptcy proceeding by which the Fund would be able to collect amounts owed
by a foreign government.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU)
Certain European countries entered into EMU in an effort to, among other things,
reduce barriers between countries, increase competition among companies, reduce
government subsidies in certain industries, and reduce or eliminate currency
fluctuations among these countries. EMU has established a single common European
currency (the "euro") that was introduced on January 1, 1999 and is expected to
replace the existing national currencies of all EMU participants by July 1,
2002. Certain securities (beginning with government and corporate bonds) were
redenominated in the euro, and are listed, traded, declaring dividends and
making other payments only in euros. Although EMU is generally expected to have
a beneficial effect, it could negatively affect the Funds in a number of
situations, including as follows:
- - If the transition to the euro, or EMU as a whole, does not proceed as planned,
the Funds' investments could be adversely affected. For example, sharp
currency fluctuations, exchange rate volatility, and other disruptions of the
markets could occur.
- - Withdrawal from EMU by a participating country could also have a negative
effect on the Funds' investments, for example if securities redenominated in
euros are transferred back into that country's national currency.
RISKS OF CONVERTIBLE SECURITIES
Convertibles are generally bonds or preferred stocks that may be converted into
common stock. Convertibles typically pay current income, as either interest
(bond convertibles) or dividends (preferred stocks). A convertible's value
usually reflects both the stream of current income payments and the value of the
underlying common stock.
18
<PAGE> 65
The market value of a convertible performs like regular bonds; that is, if
market interest rates rise, the value of a convertible usually falls. Since it
is convertible into common stock, the convertible also has the same types of
market and issuer risk as the underlying common stock. These risks apply to all
of the Funds.
ADDITIONAL BOND RISKS
- - MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage-backed securities will
be paid off more quickly than originally anticipated. Prepayment reduces the
yield to maturity and average life of the mortgage-backed securities. In
addition, when a Fund reinvests the proceeds of a prepayment, it may receive a
lower interest rate than the rate on the security that was prepaid. This risk
is known as "prepayment risk." When interest rates rise, certain types of
mortgage-backed securities will be paid off more slowly than originally
anticipated and the value of these securities will fall. This risk is known as
extension risk.
Because of prepayment risk and extension risk, mortgage-backed securities
react differently to changes in interest rates than other bonds. Small
movements in interest rates (both up and down) may quickly and significantly
reduce the value of certain mortgage-backed securities.
Mortgage-backed securities are issued by Federal government agencies like
Ginnie Mae, Freddie Mac or Fannie Mae. Principal and interest payments on
mortgage-backed securities issued by Federal government agencies are
guaranteed by either the Federal government or the government agency. This
means that such securities have very little credit risk. Other mortgage-backed
securities are issued by private corporations rather than Federal agencies.
Private mortgage-backed securities have credit risk as well as prepayment risk
and extension risk.
Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations (CMOs). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing
costs). CMOs are created by dividing the principal and interest payments
collected on a pool of mortgages into several revenue streams (tranches) with
different priority rights to portions of the underlying mortgage payments.
Certain CMO tranches may represent a right to receive interest only (IOs),
principal only (POs) or an amount that remains after other floating-rate
tranches are paid (an inverse floater). These securities are frequently
referred to as "mortgage derivatives" and may be extremely sensitive to
changes in interest rates. If a Fund invests in CMO tranches (including CMO
tranches issued by government agencies) and interest rates move in a manner
not anticipated by Fund management, it is possible that the Fund could lose
all or substantially all of its investment.
- - ASSET-BACKED SECURITIES -- Like traditional bonds, the value of asset-backed
securities typically increases when interest rates fall and decreases when
interest rates rise. Certain asset-backed securities may also be subject to
the risk of prepayment. In a period of declining interest rates, borrowers may
pay what they owe on the underlying assets more quickly than anticipated.
Prepayment reduces the yield to maturity and the average life of the asset-
backed securities. In addition, when a Fund reinvests the proceeds of a
prepayment, it may receive a lower interest rate than the rate on the security
that was prepaid. In a period of rising interest rates, prepayments may occur
at a slower rate than expected. As a result, the average maturity of the
Fund's portfolio will increase. The value of long-term securities changes more
widely in response to changes in interest rates than shorter-term securities.
19
<PAGE> 66
- - CREDIT RISK -- Credit risk is the risk that the issuer of bonds will be unable
to pay the interest or principal when due. The degree of credit risk depends
on both the financial condition of the issuer and on the terms of the specific
bonds.
- - INTEREST RATE RISK -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than do prices of shorter term securities.
- - CALL AND REDEMPTION RISK -- Investments in bonds carry the risk that a bond's
issuer will call the bond for redemption prior to the bond's maturity. If
there is an early call of a bond, a Fund may lose income and may have to
invest the proceeds of the redemption in bonds with lower yields than the
called bond.
- - JUNK BONDS -- Junk bonds are bonds that are rated below investment grade by
the major rating agencies or are unrated securities that the Funds' Advisor
believes are of comparable quality. Although junk bonds generally pay higher
rates of interest than investment grade bonds, they are high risk investments
that may cause income and principal losses for a Fund. Junk bonds generally
are less liquid and experience more price volatility than higher rated debt
securities. The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer's bankruptcy, claims of other creditors may have priority
over the claims of junk bond holders, leaving few or no assets available to
repay junk bond holders. Junk bonds may be subject to greater call and
redemption risk than higher rated debt securities.
- - WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When-issued, delayed-delivery securities and forward
commitments involve the risk that the security a Fund buys will lose value
prior to its delivery to the Fund. There also is the risk that the security
will not be issued or that the other party will not meet its obligation, in
which case the Fund loses the investment opportunity of the assets it has set
aside to pay for the security and any gain in the security's price.
- - VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations are
floating rate securities that consist of an interest in a long-term bond and
the conditional right to demand payment prior to the bond's maturity from a
bank or other financial institution. If the bank or other financial
institution is unable to pay on demand, a Fund may be adversely affected. In
addition, these securities are subject to credit risk.
- - INDEXED AND INVERSE FLOATING RATE SECURITIES -- A Bond Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. A Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, inverse floaters change in value in a manner
that is opposite to most bonds -- that is, interest rates on inverse floaters
will decrease when short-term rates increase and increase when short-term
rates decrease. Investments in indexed securities and inverse floaters may
subject a Fund to the risks of reduced or eliminated interest payments.
Investments in indexed securities also may subject a Fund to loss of
principal. In addition, certain indexed securities and inverse floaters may
increase or decrease in value at a greater rate than the underlying interest
rate, which effectively leverages a Fund's investment. As a result, the market
value of such securities will generally be more volatile than that of fixed
rate securities. Both indexed securities and inverse floaters can be
derivative securities and can be considered speculative.
- - SOVEREIGN DEBT -- The Bond Funds may invest in sovereign debt securities.
These securities are issued or guaranteed by foreign government entities.
Investments in sovereign debt subject the Funds to the risk that a
20
<PAGE> 67
government entity may delay or refuse to pay interest or repayment of
principal on its sovereign debt. Some of these reasons may include cash flow
problems, insufficient foreign currency reserves, political considerations,
the relative size of its debt position to its economy or its failure to put in
place economic reforms required by the International Monetary Fund or other
multilateral agencies. If a government entity defaults, it may ask for more
time in which to pay or for further loans. There is no legal process for
collecting sovereign debts that a government does not pay.
- - CORPORATE LOANS -- Corporate loans are subject to the risk of loss of
principal and income. Borrowers do not always provide collateral for corporate
loans and the value of the collateral may not completely cover the borrower's
obligations at the time of a default. If a borrower files for protection from
its creditors under the U.S. bankruptcy laws, these laws may limit a Fund's
rights to its collateral. In addition, the value of collateral may erode
during a bankruptcy case. In the event of a bankruptcy, the holder of a
corporate loan may not recover its principal, may experience a long delay in
recovering its investment and may not receive interest during the delay.
RISKS OF DERIVATIVES
Derivatives involve the following risks:
- - CREDIT RISK -- Credit risk is the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to a Fund.
- - CURRENCY RISK -- Currency risk is the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S. dollar terms)
of an investment.
- - LEVERAGE RISK -- Leverage risk is the risk associated with certain types of
investments or trading strategies that relatively small market movements may
result in large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that greatly
exceed the amount originally invested.
- - LIQUIDITY RISK -- Liquidity risk is the risk that certain securities may be
difficult or impossible to sell at the time that the seller would like or at
the price that the seller believes the security is currently worth.
- - INDEX RISK -- If the derivative is linked to the performance of an index, it
will be subject to the risks associated with changes in that index. If the
index changes, a Fund could receive lower interest payments or experience a
reduction in the value of the derivative to below what the Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite
direction to the index), may create leverage, to the extent that they increase
or decrease in value at a rate that is a multiple of the changes in the
applicable index.
Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Funds and
the risks associated with these instruments.
THE ADVISOR AND PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
THE ADVISOR
Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017-5400, has been the Funds' investment advisor since 1984. The
Advisor is a division of Merrill Lynch Asset Management, L.P., a Delaware
limited partnership. The Advisor supervises and arranges the purchase and sale
of securities held in the Funds'
21
<PAGE> 68
portfolios and administers the Funds. The Advisor also manages other mutual
funds and separate investment advisory accounts.
The table below shows the annual fees paid to the Advisor as a percentage of
average net assets.
<TABLE>
<CAPTION>
FUND %
---- ---
<S> <C>
Small Cap................................................... .75
International............................................... .75
Balanced.................................................... .75
Total Return Bond........................................... .55
Low Duration................................................ .46
</TABLE>
Although not required to do so, the Advisor has agreed to make reimbursements so
that the regular annual operating expenses of the Distributor Class of each Fund
except the Small Cap and International Funds will be limited as follows:
<TABLE>
<CAPTION>
EXPENSE LIMITS
(AS A
PERCENTAGE OF
AVERAGE NET
FUND ASSETS)
---- -------------------
<S> <C>
Balanced................................................... 1.20
Total Return Bond.......................................... .90
Low Duration............................................... .83
</TABLE>
The Advisor has agreed to these expense limits through February 2000, and will
thereafter give shareholders at least 30 days' notice if this reimbursement
policy will change.
The Advisor is allowed to allocate brokerage based on sales of shares of funds
managed by the Advisor but has not done so yet.
SUBADVISORS
The Advisor has entered into subadvisory agreements with Mercury Asset
Management International Limited, 33 King William Street, London, England EC4R
9AS, and Merrill Lynch Asset Management U.K. Limited, Ropemaker Place, 25
Ropemaker Street, London, England E2Y 9LY, affiliated investment advisors that
are indirect subsidiaries of Merrill Lynch & Co., Inc. The subadvisory
arrangements are for investment research, recommendations and other
investment-related services to be provided to the International Fund. There is
no increase in the aggregate fees paid by the International Fund for these
services.
PORTFOLIO MANAGERS
The portfolio managers who have responsibility for the day-to-day management of
the Funds' portfolios are listed below.
SMALL CAP FUND
The 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. Before
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
22
<PAGE> 69
1995. Mr. Green joined the Advisor in 1997. Before that, Mr. Green was
associated with Goldman Sachs Asset Management, where he worked as an investment
analyst from November 1995. Before that, he was an investment manager and
analyst with Prudential Investment Advisors.
INTERNATIONAL FUND
The portfolio managers of the International Fund are Sarah Ketterer, Harry
Hartford and David Chambers. Ms. Ketterer is a managing director of the Advisor
and has served as portfolio manager of the Fund since it began in October 1990.
Before 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 is a managing director of the Advisor and has
served as a portfolio manager of the Fund since May 1994. Before joining the
Advisor, Mr. Hartford was with the Investment Bank of Ireland (now Bank of
Ireland Asset Management) as a senior manager of International and Global
Equities from 1985 to 1994. Mr. Chambers is a managing director of the Advisor
and has served as a portfolio manager of the Fund since October 1996. He has
been associated with Mercury Asset Management International in London since July
1998. Before joining the Advisor, Mr. Chambers was with Baring Asset Management,
Inc. as senior vice president of Global Equities from 1992 to 1995 and Baring
Brothers, London, England as assistant director of Corporate Finance from 1990
to 1991.
BALANCED FUND
The portfolio managers of the Balanced 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 and the asset allocation strategy. Mr.
DeBard is a managing director of the Advisor and has served as portfolio manager
of the Fund since it began in August 1985. Mr. DeBard and Mr. Sanchez have
responsibility for the day-to-day management of the bond portion of the Fund's
portfolio. Mr. Sanchez has served as portfolio manager of the Fund since joining
the Advisor in August 1996. Before 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.
BOND FUNDS
The portfolio managers of the Bond 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 under "Balanced Fund." Mr.
Queen joined the Advisor in 1997. Before 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.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). A Fund could be adversely affected
if the computer systems used by the Fund's management or other Fund service
providers do not properly address this problem before January 1, 2000. The
Funds' management expects to have addressed this problem before then, and does
not anticipate that the services it provides will be adversely affected. The
Funds' other service providers have told the Funds' management that they also
expect to resolve the Year 2000 Problem, and the Funds' management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Funds could be negatively affected. The Year
2000 Problem could also have a negative impact on
23
<PAGE> 70
the companies in which the Funds invest. The negative impact may be greater for
companies in foreign markets, especially emerging markets, since they may be
less prepared for the Year 2000 Problem than domestic companies and markets. If
the companies in which the Funds invest have Year 2000 Problems, the Funds'
returns could be adversely affected.
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
The Small Cap, International, Balanced, Total Return Bond and Low Duration Funds
offer two classes of shares, Investor Class and Distributor Class. The Equity
Income, Mid-Cap, Global Equity and Short-Term Investment Funds and the Equity
Fund for Insurance Companies, other series of the Hotchkis and Wiley Funds (the
"Trust"), offer only Investor Class shares. Distributor Class shares, to which
this Prospectus relates, are purchased from administrators, broker-dealers and
other institutions that provide accounting, recordkeeping or other services to
investors and that have an administrative services agreement with the Trust or
the Advisor ("Distributors"). Distributor Class shares are subject to an annual
Rule 12b-1 fee of .25% of average net assets and no sales charge. Purchasers of
Investor Class shares do not pay a sales charge or a 12b-1 fee. Both classes pay
advisory fees and other expenses, like custody and brokerage fees.
You can buy and own Distributor Class shares only through an account with a
Distributor. Each Distributor will establish its own procedures for the purchase
of Distributor Class shares, including minimum initial and additional
investments for shares of each Fund and the acceptable methods of payment for
shares.
The Funds have adopted a Rule 12b-1 Plan that permits the Distributor Class
shares to make payments to Distributors for distribution services they provide.
Because these fees are paid out of the Funds' assets on an on-going basis, over
time these fees will increase your cost of investment and may cost you more than
paying other types of sales charges.
PRICING OF FUND SHARES
The net asset value per share of each class of each Fund is calculated every day
that the New York Stock Exchange is open for trading, at the close of regular
trading (currently 4:00 p.m., Eastern Time). The net asset value per share is
the value of a Fund's assets, minus its liabilities, divided by the number of
Fund shares outstanding. The value of portfolio securities is determined on the
basis of the market value of such securities or, when market prices are not
available, at fair value. The Funds will price purchase orders at the net asset
value next determined after the request is received in good order by a
Distributor.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You can redeem shares (sell them back to the Funds) only through an account with
a Distributor. Each Distributor will establish its own procedures for the sale
of Distributor Class shares and the payment of redemption proceeds.
If the redemption request is in PROPER FORM, the shares will be sold at the net
asset value next determined after the Distributor receives the request. The
Funds value their shares as of the close of regular trading on the New York
Stock Exchange. If your Distributor is closed on one of those days, you may not
be able to sell back your shares and their price could be affected.
24
<PAGE> 71
DELAYS IN REDEEMING SHARES
At certain times when allowed by the SEC, we may delay sending redemption
proceeds to Distributors.
PAYMENTS
Redemption proceeds for your account will be paid to Distributors within three
business days.
CHANGES TO REDEMPTION PROCEDURES
The redemption procedures may be modified at any time on 30 days' notice to
shareholders.
REDEMPTION IN KIND
The Funds reserve the right to pay redemption proceeds in securities instead of
cash in certain circumstances.
HOW TO EXCHANGE SHARES
- --------------------------------------------------------------------------------
You can exchange Distributor Class shares in a Fund for Distributor Class shares
of another Fund subject to the policies and procedures adopted by the
Distributors. Shares are exchanged at the next price calculated on a day the New
York Stock Exchange is open, after an exchange is received and accepted by your
Distributor. For tax purposes, exchanges are a sale and purchase.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Funds pay income dividends, if any, as follows:
<TABLE>
<S> <C>
Monthly Total Return Bond Fund
Low Duration Fund
Quarterly Balanced Fund
Yearly Small Cap Fund
International Fund
</TABLE>
The Funds pay distributions of any net realized short-term gains and any net
capital gains every year.
TAXES
Dividends
If you do not hold your shares in an IRA, 401(k) plan or another qualified
tax-deferred retirement plan, dividends are taxable to you whether you receive
them in cash or reinvest in additional shares. Income dividends and
distributions of short-term capital gains are subject to federal income tax as
ordinary income at rates up to 39.6% for individuals. Long-term capital gains
distributed by a Fund are taxable at capital gains tax rates no matter how long
you have held your shares. For federal income tax purposes, the long-term
capital gains rate for individuals currently is 20%.
25
<PAGE> 72
Selling/Exchanging Shares
You may need to pay income tax when you sell or exchange shares in the Funds.
Unless you are a dealer in securities, any gain or loss realized upon the sale
or redemption of shares in any of the Funds will be treated as long-term capital
gain or loss if you held the shares for more than one year, and as short-term
capital gain or loss if you held the shares for one year or less.
Corporations
Corporations investing in the Funds may be eligible for a dividends-received
deduction. See "Dividends and Tax Status" in the SAI for additional information
about the deduction.
This discussion refers only to certain potential federal income tax
consequences. An investment in a Fund also may have state or local income tax
consequences. Please consult your own tax advisor for advice about your tax
situation regarding federal, state and local taxes.
26
<PAGE> 73
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Distributor Class has not commenced operations as of June 30, 1999, except
for the International and Total Return Bond Funds, which commenced operations on
June 2, 1999. The financial highlights are for the Investor Class shares unless
otherwise noted. The Investor Class shares are not subject to an annual
distribution fee of .25% of average net assets. The financial highlights tables
are intended to help you understand each Fund's financial performance for the
past five years (or, if shorter, the period of the Fund's operations). Certain
information reflects financial results for a single Fund share. The total
returns in the tables represent the rate that an investor would have earned (or
lost) on an investment in a Fund (assuming reinvestment of all dividends and
distributions). These financial highlights were audited by
PricewaterhouseCoopers LLP. The accountants' report and the Funds' financial
statements are included in the SAI and the Funds' annual report, which are
available upon request. Further performance information is contained in the
annual report.
<TABLE>
<CAPTION>
Investor Class
Year Ended June 30,
------------------------------------------------
SMALL CAP FUND 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............... $ 26.48 $23.83 $21.33 $21.53 $19.53
------- ------ ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ (0.05)(2) (0.06)(1) 0.03 0.05(1) (0.06)
Net realized and unrealized gain (loss) on
investments............................... (3.88) 5.13 5.62 2.80 2.84
------- ------ ------- ------ ------
Total from investment operations............ (3.93) 5.07 5.65 2.85 2.78
------- ------ ------- ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)...... -- (0.05) (0.09) -- --
Distributions (from realized gains)......... (1.53) (2.37) (3.06) (3.05) (0.78)
------- ------ ------- ------ ------
Total distributions......................... (1.53) (2.42) (3.15) (3.05) (0.78)
------- ------ ------- ------ ------
Net Asset Value, End of Year..................... $ 21.02 $26.48 $23.83 $21.33 $21.53
======= ====== ======= ====== ======
TOTAL RETURN..................................... (14.26)% 22.24% 29.74% 14.24% 14.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)............... $53.4 $94.9 $27.5 $16.5 $20.5
Ratio of expenses to average net assets:
Before expense reimbursement................... 1.19% 0.94% 1.30% 1.21% 1.49%
After expense reimbursement.................... 1.05% 0.94% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average
net assets:
Before expense reimbursement................... (0.40)% (0.23)% (0.20)% 0.03% (0.82)%
After expense reimbursement.................... (0.26)% (0.23)% 0.10% 0.24% (0.34)%
Portfolio turnover rate 105% 85% 88% 119% 81%
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
(2)Net investment income per share is calculated using ending balances prior to
consideration of adjustment for permanent book and tax differences.
27
<PAGE> 74
<TABLE>
<CAPTION>
Distributor Class Investor Class
Investor Class June 2, 1999* Year Ended June 30,
Year Ended through ---------------------------------------
INTERNATIONAL FUND June 30, 1999 June 30, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 25.33 $25.20 $ 24.17 $ 20.44 $17.70 $16.79
-------- ------ -------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income....... 0.59 0.05 0.59 0.59(1) 0.56(1) 0.28
Net realized and unrealized
gain (loss) on
investments............... 0.40 0.47 1.23 3.78 2.51 1.52
-------- ------ -------- ------- ------ ------
Total from investment
operations................ 0.99 0.52 1.82 4.37 3.07 1.80
-------- ------ -------- ------- ------ ------
LESS DISTRIBUTIONS:
Dividends (from net
investment income)........ (0.25) -- (0.66) (0.48) (0.14) (0.44)
Distributions (from realized
gains).................... (0.34) -- -- (0.16) (0.19) (0.45)
-------- ------ -------- ------- ------ ------
Total distributions......... (0.59) -- (0.66) (0.64) (0.33) (0.89)
-------- ------ -------- ------- ------ ------
Net Asset Value, End of Period... $ 25.73 $25.72 $ 25.33 $ 24.17 $20.44 $17.70
======== ====== ======== ======= ====== ======
TOTAL RETURN..................... 4.22% 2.06%++ 7.77% 21.59% 18.61% 11.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(millions)..................... $1,378.9 $1.1 $1,476.8 $888.5 $331.0 $51.5
Ratio of expenses to average net
assets:
Before expense reimbursement... 0.95% 1.30%+ 0.89% 1.07% 1.11% 1.39%
After expense reimbursement.... 0.95% 1.30%+ 0.89% 1.00% 1.00% 1.00%
Ratio of net investment income to
average net assets:
Before expense reimbursement... 1.98% 2.77%+ 2.32% 2.59% 2.67% 2.45%
After expense reimbursement.... 1.98% 2.77%+ 2.32% 2.66% 2.78% 2.83%
Portfolio turnover rate.......... 41%+++ 41%+++ 20% 18% 12% 24%
</TABLE>
(*) Commencement of operations.
(1)Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
+ Annualized.
++ Not annualized.
+++Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
28
<PAGE> 75
<TABLE>
<CAPTION>
Investor Class
Year Ended June 30,
----------------------------------------------
BALANCED FUND 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............... $19.84 $19.38 $18.27 $16.74 $15.71
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................... 0.77 0.89 0.90(1) 0.94 0.89
Net realized and unrealized gain (loss) on
investments............................... (0.04) 1.58 1.86 1.53 1.53
------ ------ ------ ------ ------
Total from investment operations............ 0.73 2.47 2.76 2.47 2.42
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)...... (0.75) (0.90) (0.99) (0.92) (0.80)
Distributions (from realized gains)......... (0.82) (1.11) (0.66) (0.02) (0.57)
Return of capital........................... -- -- -- -- (0.02)
------ ------ ------ ------ ------
Total distributions......................... (1.57) (2.01) (1.65) (0.94) (1.39)
------ ------ ------ ------ ------
Net Asset Value, End of Year..................... $19.00 $19.84 $19.38 $18.27 $16.74
====== ====== ====== ====== ======
TOTAL RETURN..................................... 4.04% 13.29% 15.75% 15.04% 16.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)............... $97.9 $104.6 $90.2 $70.6 $32.1
Ratio of expenses to average net assets:
Before expense reimbursement................... 0.98% 0.93% 0.98% 1.06% 1.19%
After expense reimbursement.................... 0.95% 0.93% 0.98% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement................... 3.99% 4.49% 4.77% 5.20% 5.44%
After expense reimbursement.................... 4.02% 4.49% 4.77% 5.26% 5.63%
Portfolio turnover rate.......................... 135% 121% 117% 92% 51%
</TABLE>
(1)Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
29
<PAGE> 76
<TABLE>
<CAPTION>
Investor Class
Distributor Class Investor Class December 6,
Investor Class June 2, 1999* Year Ended June 30, 1994*
Year Ended through ------------------------ through
TOTAL RETURN BOND FUND June 30, 1999 June 30, 1999 1998 1997 1996 June 30, 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $13.46 $12.88 $13.04 $12.78 $12.94 $12.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............ 0.81 0.06 0.89 0.99 0.84(1) 0.46
Net realized and unrealized gain
(loss) on investments.......... (0.49) (0.03) 0.50 0.30 0.06 0.94
------ ------ ------ ------ ------ ------
Total from investment
operations..................... 0.32 0.03 1.39 1.29 0.90 1.40
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment
income)........................ (0.83) (0.06) (0.97) (0.92) (0.93) (0.46)
Distributions (from realized
gains)......................... (0.10) -- -- (0.11) (0.13) --
------ ------ ------ ------ ------ ------
Total distributions.............. (0.93) (0.06) (0.97) (1.03) (1.06) (0.46)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period........ $12.85 $12.85 $13.46 $13.04 $12.78 $12.94
====== ====== ====== ====== ====== ======
TOTAL RETURN.......................... 2.30% 0.23%++ 11.04% 10.48% 7.05% 11.88%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(millions).......................... $124.3 $0.4 $45.2 $14.3 $43.4 $15.3
Ratio of expenses to average net
assets:
Before expense reimbursement........ 0.79% 1.18%+ 1.02% 0.95% 0.98% 2.93%+
After expense reimbursement......... 0.65% 0.90%+ 0.65% 0.65% 0.68% 0.80%+
Ratio of net investment income to
average net assets:
Before expense reimbursement........ 5.64% 5.98%+ 6.28% 6.78% 6.86% 4.92%+
After expense reimbursement......... 5.78% 6.26%+ 6.65% 7.08% 7.16% 7.05%+
Portfolio turnover rate............... 233%+++ 233%+++ 195% 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.
++ Not annualized.
+++Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
30
<PAGE> 77
<TABLE>
<CAPTION>
Investor Class
Year Ended June 30,
----------------------------------------------
LOW DURATION FUND 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year............... $10.20 $10.23 $10.12 $10.15 $ 9.93
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................... 0.60 0.66 0.66 0.68 0.75
Net realized and unrealized gain (loss) on
investments............................... (0.28) 0.05 0.10 0.06 0.23
------ ------ ------ ------ ------
Total from investment operations............ 0.32 0.71 0.76 0.74 0.98
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income)...... (0.59) (0.68) (0.64) (0.72) (0.75)
Dividends (from realized gains)............. (0.02) (0.06) (0.01) (0.05) (0.01)
------ ------ ------ ------ ------
Total distributions......................... (0.61) (0.74) (0.65) (0.77) (0.76)
------ ------ ------ ------ ------
Net Asset Value, End of Year..................... $ 9.91 $10.20 $10.23 $10.12 $10.15
====== ====== ====== ====== ======
TOTAL RETURN..................................... 3.15% 7.19% 7.79% 7.47% 10.23%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)............... $410.0 $253.2 $171.2 $189.2 $123.3
Ratio of expenses to average net assets:
Before expense reimbursement................... 0.64% 0.65% 0.66% 0.60% 0.75%
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................... 5.65% 6.39% 6.26% 7.07% 7.43%
After expense reimbursement.................... 5.71% 6.46% 6.34% 7.09% 7.61%
Portfolio turnover rate.......................... 201% 119% 202% 50% 71%
</TABLE>
31
<PAGE> 78
- --------------------------------------------------------------------------------
HOTCHKIS AND WILEY FUNDS
725 SOUTH FIGUEROA STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90017
800-236-4479
INFORMATION ABOUT THE FUNDS
Please read this Prospectus before you invest in the Funds. Keep the Prospectus
for future reference. You can get additional information about the Funds in:
- - Statement of Additional Information (SAI) (incorporated by reference
into -- legally a part of -- this Prospectus)
- - Annual Report (contains a discussion of market conditions and investment
strategies that affected Fund performance)
- - Semi-annual Report
To get this information and other information regarding the Funds free of charge
or for shareholder questions, contact:
Firstar Mutual Fund Services, LLC
615 East Michigan Avenue, 3rd Floor
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
(800) 236-4479
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
- - call 1-800-SEC-0330 for information on the Commission's Public Reference Room,
where documents can be reviewed and copied
- - the information is available at the SEC's Internet site at http://www.sec.gov
- - copies of the information retrievable from the SEC's Internet site are
available for a fee by writing to the SEC's Public Reference Section
You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with information
that is different.
Investment Company Act File No. 811-4182
PROSPECTUS
AUGUST 27, 1999
[LOGO]
HOTCHKIS AND WILEY FUNDS
DISTRIBUTOR CLASS SHARES
-------------------------------------------------------
SMALL CAP FUND
-------------------------------------------------------
INTERNATIONAL FUND
-------------------------------------------------------
BALANCED FUND
-------------------------------------------------------
TOTAL RETURN BOND FUND
-------------------------------------------------------
LOW DURATION FUND
-------------------------------------------------------
<PAGE> 79
HOTCHKIS AND
WILEY FUNDS
EQUITY FUND FOR INSURANCE COMPANIES
THE FUND SEEKS
- CURRENT INCOME
- LONG-TERM GROWTH OF INCOME
- GROWTH OF CAPITAL
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR THE ACCURACY OF THIS PROSPECTUS.
IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
------------------------
PROSPECTUS
------------------------
AUGUST 27, 1999
<PAGE> 80
TABLE OF CONTENTS
<TABLE>
<S> <C>
Key Facts................................................... 2
Investment Objective and Policies........................... 4
Investment Risks............................................ 6
How the Fund is Managed..................................... 8
How to Buy Shares........................................... 9
How to Redeem Shares........................................ 9
Dividends and Taxes......................................... 10
Financial Highlights........................................ 11
Information About the Fund.............................back cover
</TABLE>
KEY FACTS
This section highlights important information about the Fund. Use this
summary to compare the Fund to other mutual funds. More detailed information
follows the summary.
INVESTMENT OBJECTIVE AND MAIN STRATEGIES
The Fund's objective is
- current income
- long-term growth of income
- growth of capital
The Fund invests mainly in stocks that provide dividends or interest over
the short- and long-term and increase in value. The Fund invests mostly in the
common stocks of large U.S. companies.
VALUE INVESTING
Hotchkis and Wiley (the "Advisor") follows a value style. This means that
the Advisor buys stocks that it believes are currently undervalued by the market
and thus have a lower price than their true worth. Typical value characteristics
include:
- low price-to-earnings ratio relative to the market
- high yield relative to the market
- low price-to-book value ratio relative to the market
- financial strength
Stocks may be "undervalued" because they are part of an industry that is
out of favor with investors generally. Even in those industries, though,
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.
This value discipline sometimes prevents investments in stocks that are in
well-known indexes, like the S&P 500.
MAIN RISKS
As with any mutual fund, the value of the Fund's investments, and therefore
the value of Fund shares, may go up or down. These changes may occur because the
stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the Fund's
investments goes down, you may lose money.
See "Investment Risks" for more information about the risks associated with
the Fund.
2
<PAGE> 81
THE FUND'S PERFORMANCE
The bar chart and table below provides some indication of the risks of
investing in the Fund by showing changes in the Fund's performance from
year-to-year and by showing how the Fund's average annual total returns for 1
and 5 years and since inception compare with those of a broad measure of market
performance. How the Fund has performed in the past is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
Total Return
<S> <C>
1994 -2.06%
1995 34.36%
1996 19.07%
1997 32.33%
1998 6.45%
</TABLE>
Total return for the six months ended June 30, 1999: 9.67%.
Since the Fund began, its best performance for a single quarter was 10.24% (3rd
quarter of 1997) and its worst single quarter performance was -10.47% (3rd
quarter of 1998).
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS 1 5 LIFE
(FOR THE PERIODS ENDED DECEMBER 31, 1998) YEAR YEARS 1/29/93
- -----------------------------------------------------------------------------------------
Equity Fund for Insurance Companies....................... 6.45% 17.16% 16.28%
- -----------------------------------------------------------------------------------------
S&P 500 Index............................................. 28.76% 24.15% 21.82%
- -----------------------------------------------------------------------------------------
</TABLE>
This chart compares the Fund's performance with the returns of the S&P 500
Index, a capital weighted, unmanaged index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York Stock
Exchange.
3
<PAGE> 82
FEES AND EXPENSES
This table shows the expenses paid by the Fund. No sales load, exchange fee
or redemption fee is imposed on the purchase or sale of Fund shares.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
---------------------------------------------
<S> <C>
Management fees............................................. 0.52%
Other expenses.............................................. -0-(1)
----
TOTAL ANNUAL FUND OPERATING EXPENSES........................ 0.52%
====
</TABLE>
- ---------------
(1)The Advisor pays all of the Fund's operating expenses other than the
management fee.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
This example compares the cost of investing in the Fund
with that of other funds. The example assumes that you
invest $10,000 in the Fund and that the Fund has a return
of 5% each year. Your actual costs may be higher or
lower.................................................... $52 $167 $291 $653
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide CURRENT INCOME and LONG-TERM
GROWTH OF INCOME, accompanied by GROWTH OF CAPITAL.
The Fund invests mostly in common stocks of large U.S. companies. Normally,
the Fund invests at least 80% of its total assets in stocks that pay dividends.
It also may invest in stocks that don't pay dividends or interest, but have
growth potential unrecognized by the market or changes in business or management
that indicate growth potential.
The Fund can invest up to 10% of its total assets in foreign securities.
MONEY MARKET INVESTMENTS
To meet redemptions and when waiting to invest cash receipts, the Fund may
invest in short-term, investment grade bonds and other money market instruments.
Also, the Fund temporarily can invest in short-term, investment grade bonds and
other money market instruments in response to adverse market, economic or
political conditions. The Fund may not achieve its objective using this type of
investing. 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.
OTHER STRATEGIES
- - BOND INVESTMENTS: the Fund buys common stocks and securities with common stock
characteristics, like convertible preferred stocks, convertible bonds or
warrants. It also may buy bonds. Convertible securities and bonds will be
rated investment grade (the four highest grades) by a major rating agency like
Moody's Investors Service or Standard & Poor's Ratings Group ("S&P") or, if
unrated, be of comparable quality in the Advisor's opinion. After the Fund
buys a bond or convertible security, it may be given a lower rating or stop
being rated. This would not require the Fund to sell the security, but the
Advisor will consider the change in rating in deciding whether the Fund should
keep the security.
- - REPURCHASE AGREEMENTS: the Fund can enter into repurchase agreements involving
U.S. Government securities with commercial banks or broker-dealers. This is a
method of short-term investment of cash where the Fund would buy securities
from a bank or broker-dealer and sell them back a short time later (usually
overnight) for a slightly higher price. The Fund intends to be fully
"collateralized" as to such
4
<PAGE> 83
agreements, and the collateral will be marked-to-market daily. But if the
person obligated to repurchase from the Fund defaults, there may be possible
delays and expenses in liquidating the securities, a decline in their value
and loss of interest income.
- - REAL ESTATE INVESTMENT TRUSTS: the Fund can invest in securities of real
estate investment trusts or REITs.
- - DERIVATIVES: the Fund may use "derivatives," whose performance is derived from
the performance of an underlying asset. The Fund may use derivatives to hedge
against changes in interest rates, foreign currency exchange rates or
securities prices; for liquidity; or as part of its overall investment
strategies. Types of derivatives that the Fund may use include forward
contracts and options. Derivatives allow the Fund to increase or decrease the
level of risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Derivatives, however, are volatile
and involve significant risks, including credit risk, currency risk, leverage
risk, liquidity risk and index risk. The Fund will mark liquid assets as
segregated or enter offsetting positions to cover its obligations, if any,
under options, futures contracts and swap agreements to avoid leveraging the
Fund.
- - BORROW MONEY: the Fund can borrow up to 10% of the value of its total assets.
- - SHORT SALES AGAINST-THE-BOX: the Fund can borrow and sell "short" securities
when it also owns an equal amount of those securities (or their equivalent).
No more than 25% of the Fund's total assets can be held as collateral for
short sales at any one time.
- - WHEN-ISSUED OR DELAYED DELIVERY: the Fund can buy securities on a when-issued
or delayed delivery basis. The Fund will mark liquid assets as segregated in
an amount equal to the when-issued securities.
- - CORPORATE LOANS: the Fund can invest in corporate loans. Commercial banks and
other financial institutions make corporate loans to companies that need
capital to grow or restructure. Borrowers generally pay interest on corporate
loans at rates that change in response to changes in market interest rates
such as the London Interbank Offered Rate ("LIBOR") or the prime rates of U.S.
banks. As a result, the value of corporate loan investments is generally less
responsive to shifts in market interest rates. Because the trading market for
corporate loans is less developed than the secondary market for bonds and
notes, the Fund may experience difficulties from time to time in selling its
corporate loans. Borrowers frequently provide collateral to secure repayment
of these obligations. Leading financial institutions often act as agent for a
broader group of lenders, generally referred to as a "syndicate". The
syndicate's agent arranges the corporate loans, holds collateral and accepts
payments of principal and interest. If the agent developed financial problems,
the Fund may not recover its investment, or there might be a delay in the
Fund's recovery. By investing in a corporate loan, the Fund becomes a member
of the syndicate.
- - ILLIQUID INVESTMENTS: the Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund
buys illiquid securities, it may be unable to quickly resell them or may be
able to sell them only at a price below current value.
- restricted securities: Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities
that the Fund buys directly from the issuer. Private placement and other
restricted securities may not be listed on an exchange and may have no
active trading market.
Restricted securities may be illiquid. The Fund may be unable to sell
them on short notice or may be able to sell them only at a price below
current value. The Fund may get only limited information about the
issuer, so may be less able to predict a loss. In addition, if Fund
management receives material adverse non-public information about the
issuer, the Fund will not be able to sell the security.
- 144A: Rule 144A securities are restricted securities that can be resold
to qualified institutional buyers but not the general public. Rule 144A
securities may have an active trading market but carry the risk that the
active trading market may not continue. Under policies adopted by the
Trustees, Rule 144A securities with active trading markets are considered
liquid.
5
<PAGE> 84
INVESTMENT RISKS
This section contains a summary discussion of the general risks of
investing in the Fund. As with any mutual fund, there can be no guarantee that
the Fund will meet its goals or that the Fund's performance will be positive for
any period of time.
MARKET AND SELECTION RISK -- Market risk is the risk that the stock or bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the investments
that Fund management selects will underperform the stock market or other funds
with similar investment objectives and investment strategies.
FOREIGN MARKET RISK -- Since the Fund may invest in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because stocks traded on foreign markets have often
(though not always) performed differently than stocks in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular,
investment in foreign securities involves the following risks.
- The economies of some foreign markets often do not compare favorably with
that of the United States in areas such as growth of gross national
product, reinvestment of capital, resources, and balance of payments.
Some of these economies may rely heavily on particular industries or
foreign capital. They may be more vulnerable to adverse diplomatic
developments, the imposition of economic sanctions against a particular
country or countries, changes in international trading patterns, trade
barriers and other protectionist or retaliatory measures.
- Investments in foreign markets may be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets or the imposition of
punitive taxes.
- The governments of certain countries may prohibit or impose substantial
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices.
They also could impair the Fund's ability to purchase or sell foreign
securities or transfer its assets or income back into the United States,
or otherwise adversely affect the Fund's operations.
- Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government
securities, difficulties in enforcing favorable legal judgments in
foreign courts, and political and social instability. Legal remedies
available to investors in some foreign countries may be less extensive
than those available to investors in the United States.
- Because there are generally fewer investors on foreign exchanges and a
smaller number of shares traded each day, it may be difficult for the
Fund to buy and sell securities on those exchanges. In addition, prices
of foreign securities may go up and down more than prices of securities
traded in the United States.
- Foreign markets may have different clearance and settlement procedures.
In certain markets, settlements may be unable to keep pace with the
volume of securities transactions. If this occurs, settlement may be
delayed and the Fund's assets may be uninvested and not earning returns.
The Fund also may miss investment opportunities or be unable to sell an
investment because of these delays.
- The value of the Fund's foreign holdings (and hedging transactions in
foreign currencies) will be affected by changes in currency exchange
rates.
- The costs of non-U.S. securities transactions tend to be higher than
those of U.S. transactions.
- International trade barriers or economic sanctions against certain
non-U.S. countries may adversely affect the Fund's non-U.S. holdings.
6
<PAGE> 85
- If the Fund purchases a bond issued by a foreign government, the
government may be unwilling or unable to make payments when due. There
may be no formal bankruptcy proceeding by which the Fund would be able to
collect amounts owed by a foreign government.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU) Certain European countries
entered into EMU in an effort to, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
countries. EMU has established a single common European currency (the "euro")
that was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro,
and are listed, traded, declaring dividends and making other payments only in
euros. Although EMU is generally expected to have a beneficial effect, it could
negatively affect the Fund in a number of situations, including as follows:
- If the transition to the euro, or EMU as a whole, does not proceed as
planned, the Fund's investments could be adversely affected. For example,
sharp currency fluctuations, exchange rate volatility, and other
disruptions of the markets could occur.
- Withdrawal from EMU by a participating country could also have a negative
effect on the Fund's investments, for example if securities redenominated
in euros are transferred back into that country's national currency.
RISKS OF CONVERTIBLE SECURITIES -- Convertibles are generally bonds or
preferred stocks that may be converted into common stock. Convertibles typically
pay current income, as either interest (bond convertibles) or dividends
(preferred stocks). A convertible's value usually reflects both the stream of
current income payments and the value of the underlying common stock. The market
value of a convertible performs like regular bonds; that is, if market interest
rates rise, the value of a convertible usually falls. Since it is convertible
into common stock, the convertible also has the same types of market and issuer
risk as the underlying common stock.
ADDITIONAL BOND RISKS --
- CREDIT RISK -- Credit risk is the risk that the issuer of bonds will be
unable to pay the interest or principal when due. The degree of credit
risk depends on both the financial condition of the issuer and on the
terms of the specific bonds.
- INTEREST RATE RISK -- Interest rate risk is the risk that prices of bonds
generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than do prices of shorter term
securities.
- CALL AND REDEMPTION RISK -- Investments in bonds carry the risk that a
bond's issuer will call the bond for redemption prior to the bond's
maturity. If there is an early call of a bond, the Fund may lose income
and may have to invest the proceeds of the redemption in bonds with lower
yields than the called bond.
- CORPORATE LOANS -- Corporate loans are subject to the risk of loss of
principal and income. Borrowers do not always provide collateral for
corporate loans and the value of the collateral may not completely cover
the borrower's obligations at the time of a default. If a borrower files
for protection from its creditors under the U.S. bankruptcy laws, these
laws may limit the Fund's rights to its collateral. In addition, the
value of collateral may erode during a bankruptcy case. In the event of a
bankruptcy, the holder of a corporate loan may not recover its principal,
may experience a long delay in recovering its investment and may not
receive interest during the delay.
RISKS OF DERIVATIVES -- Derivatives involve the following risks:
- CREDIT RISK -- Credit risk is the risk that the counterparty on a
derivative transaction will be unable to honor its financial obligation
to the Fund.
7
<PAGE> 86
- CURRENCY RISK -- Currency risk is the risk that changes in the exchange
rate between two currencies will adversely affect the value (in U.S.
dollar terms) of an investment.
- LEVERAGE RISK -- Leverage risk is the risk associated with certain types
of investments or trading strategies that relatively small market
movements may result in large changes in the value of an investment.
Certain investments or trading strategies that involve leverage can
result in losses that greatly exceed the amount originally invested.
- LIQUIDITY RISK -- Liquidity risk is the risk that certain securities may
be difficult or impossible to sell at the time that the seller would like
or at the price that the seller believes the security is currently worth.
- INDEX RISK -- If the derivative is linked to the performance of an index,
it will be subject to the risks associated with changes in that index. If
the index changes, the Fund could receive lower interest payments or
experience a reduction in the value of the derivative to below what the
Fund paid. Certain indexed securities, including inverse securities
(which move in an opposite direction to the index), may create leverage,
to the extent that they increase or decrease in value at a rate that is a
multiple of the changes in the applicable index.
Please see the Statement of Additional Information (SAI) for detailed
information regarding the types of derivatives that can be used by the Fund and
the risks associated with these instruments.
HOW THE FUND IS MANAGED
ORGANIZATION
The Fund is one of ten series of shares, each having separate assets and
liabilities, of the Hotchkis and Wiley Funds (the Trust). The Board may, at its
own discretion, create additional series of shares.
THE ADVISOR
Hotchkis and Wiley, located at 725 South Figueroa Street, Suite 4000, Los
Angeles, California 90017-5400 has been investment advisor to the Fund since
1994. The Advisor is a division of Merrill Lynch Asset Management, L.P., a
Delaware limited partnership. The Advisor supervises and arranges the purchase
and sale of securities held in the portfolio of the Fund and administers the
Fund. The Advisor also manages other mutual funds and separate investment
advisory accounts.
For the fiscal year ended June 30, 1999, the Fund paid the Advisor a
management fee of 0.52% of the Fund's average net assets. The Advisor pays all
of the regular annual operating expenses relating to the Fund.
PORTFOLIO MANAGERS
The 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 and
began co-managing the Fund in April 1994. She 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.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
8
<PAGE> 87
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the companies in which
the Fund invests. The negative impact may be greater for companies in foreign
markets, since they are less prepared for the Year 2000 Problem than domestic
companies and markets. If the companies in which the Fund invests have Year 2000
Problems, the Fund's returns could be adversely affected.
HOW TO BUY 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 Fund 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 Milwaukee
ABA #0750-00022
For credit to Firstar Mutual Fund Services
Account #112-952-137
For further credit to Hotchkis and Wiley Funds
Equity Fund for Insurance Companies
Account # [Shareholder account number]
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.
PRICING OF FUND SHARES
The net asset value per share of the Fund is calculated every day that the
New York Stock Exchange is open for trading, at the close of regular trading
(currently 4:00 p.m., Eastern Time), except that the net asset value need 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 Fund shares outstanding. The
value of portfolio securities is determined on the basis of the market value of
such securities or, when market prices are unavailable, at fair value.
HOW TO REDEEM SHARES
A shareholder wishing to redeem shares (sell them back to the Fund) may do
so at any time by writing or delivering instructions to the Fund at 725 South
Figueroa Street, Suite 4000, Los Angeles, California 90017-5400. 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, and signatures must be guaranteed. Any questions
concerning documents needed should be directed to (213) 430-1000.
9
<PAGE> 88
DELAYS IN REDEEMING SHARES
At certain times when allowed by the SEC, we may delay sending your check
or wiring your redemption proceeds.
PAYMENTS
Payment also may be delayed up to 12 days if you bought shares with a
check.
CHANGES TO REDEMPTION PROCEDURES
The redemption procedures may be modified at any time on 30 days' notice to
shareholders.
REDEMPTION IN KIND
The Fund reserves the right to pay shareholders with large accounts
securities instead of cash in certain circumstances.
DIVIDENDS AND TAXES
The Fund expects to pay income dividends quarterly. The Fund will pay
distributions of any net realized short-term gains and any capital gains every
year.
Income dividends and distributions of short-term capital gains are taxed as
ordinary income. Long-term capital gains distributed by the Fund are taxable at
capital gains tax rates no matter how long you have held the shares. The capital
gains rates differ depending on how long the Fund owned the securities.
Corporations investing in the Fund may be eligible for a dividends-received
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.
Please consult your own tax advisor for advice about your tax situation.
10
<PAGE> 89
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). These financial highlights were audited by
PricewaterhouseCoopers LLP. The accountants' report and the Fund's financial
statements are included in the SAI and the annual report, which are available
upon request. Further performance information is contained in the annual report.
<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 (loss) 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 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 rate......................... 14% 21% 22% 21% 29%
</TABLE>
11
<PAGE> 90
INFORMATION ABOUT THE FUND
Please read this Prospectus before you invest in the Fund. Keep the
Prospectus for future reference. You can get additional information about the
Fund in:
- Statement of Additional Information (SAI) (incorporated by reference
into -- legally a part of -- this Prospectus)
- Annual Report (contains a discussion of market conditions and investment
strategies that affected Fund performance)
- Semi-annual Report
To get this information and other information regarding the Fund free of
charge or for shareholder questions, contact:
Hotchkis and Wiley
725 South Figueroa Street
Suite 4000
Los Angeles, CA 90017-5400
(213) 430-1000 (call collect)
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
- call 1-800-SEC-0330 for information on the Commission's Public Reference
Room, where documents can be reviewed and copied
- the information is available at the SEC's Internet site at
http://www.sec.gov
- copies of the information retrievable from the SEC's Internet site are
available for a fee by writing to the SEC's Public Reference Section
You should rely only on the information contained in this Prospectus when
deciding whether to invest. No one is authorized to provide you with information
that is different.
Investment Company Act File No. 811-4182
<PAGE> 91
HOTCHKIS AND WILEY FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 27, 1999
This Statement of Additional Information is not a prospectus, and it should
be read in conjunction with the prospectus dated August 27, 1999 for the
Investor Class shares of the Equity Income Fund, the Mid-Cap Fund, the Small Cap
Fund, the International Fund, the Global Equity Fund, the Balanced Fund, the
Total Return Bond Fund, the Low Duration Fund and the Short-Term Investment
Fund, the prospectus dated August 27, 1999 for the Distributor Class shares of
the Small Cap Fund, the International Fund, the Balanced Fund, the Total Return
Bond Fund and the Low Duration Fund and the prospectus dated August 27, 1999 for
the Equity Fund for Insurance Companies. Copies of the prospectuses may be
obtained at no charge from Hotchkis and Wiley Funds (the "Trust"), 725 South
Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400. 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 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 may be referred to as the "Bond
Funds" and the other Funds may be referred to as the "Stock Funds." Hotchkis and
Wiley (the "Advisor") is the investment advisor to the Funds.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trust History............................................... B-2
Description of the Funds, Their Investments and Risks....... B-2
Investment Restrictions................................... B-2
Repurchase Agreements..................................... B-3
U.S. Government Securities................................ B-3
Municipal Obligations..................................... B-4
Corporate Debt Securities................................. B-6
Convertible Securities.................................... B-6
Mortgage-Related Securities............................... B-6
Asset-Backed Securities................................... B-9
Risk Factors Relating to Investing in Mortgage-Related and
Asset-Backed Securities................................. B-10
Duration.................................................. B-10
Derivative Instruments.................................... B-11
Foreign Securities........................................ B-15
Foreign Currency Options and Related Risks................ B-16
Forward Foreign Currency Exchange Contracts............... B-17
Foreign Investment Risks.................................. B-19
Risk Factors Relating to Investing in High Yield
Securities.............................................. B-21
Illiquid Securities....................................... B-21
Reverse Repurchase Agreements............................. B-22
Dollar Rolls.............................................. B-22
Borrowing................................................. B-23
Loans of Portfolio Securities............................. B-23
When-Issued Securities.................................... B-23
Real Estate Investment Trusts............................. B-23
Shares of Other Investment Companies...................... B-24
Limited Partnerships...................................... B-24
Temporary Defensive Position.............................. B-24
Portfolio Turnover........................................ B-24
Management.................................................. B-24
The Advisor............................................... B-26
Subadvisors............................................... B-27
Principal Underwriter..................................... B-27
Rule 12b-1 Plan........................................... B-28
Other Service Providers................................... B-28
Portfolio Transactions and Brokerage...................... B-28
Trust Shares................................................ B-30
Purchase and Redemption of Shares........................... B-31
Issuance of Fund Shares for Securities.................... B-31
Redemption in Kind........................................ B-31
Net Asset Value............................................. B-31
Dividends and Tax Status.................................... B-32
Performance Information..................................... B-34
General Information About the Trust's Shareholders.......... B-35
Appendix--Description of Ratings............................ A-1
Financial Statements
Report of Independent Accountants
</TABLE>
B-1
<PAGE> 92
TRUST HISTORY
The Trust was organized on August 22, 1984 as a Massachusetts business
trust. Before October 7, 1994, the Trust was called "Olympic Trust." The Trust
is a diversified, open-end, management investment company currently consisting
of ten separate series.
DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS
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 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.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions (in addition to their
investment objectives) 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 (1)
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 (2) 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.
B-2
<PAGE> 93
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 Bond
Funds) will purchase any additional portfolio securities while such
borrowings are outstanding. (The Bond 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 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 Bond 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 Bond 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 Bond Funds.)
Any percentage limitation on a Fund's investments is determined when the
investment is made, unless otherwise noted.
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
and Bond 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 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,
B-3
<PAGE> 94
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.
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.
MUNICIPAL OBLIGATIONS
The Balanced and Bond Funds may invest in municipal obligations. The two
principal classifications of municipal bonds, notes and commercial paper are
"general obligation" and "revenue" bonds, notes or commercial paper. General
obligation bonds, notes or commercial paper are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds, notes or commercial paper include states,
counties, cities, towns and other governmental units. Revenue bonds, notes and
commercial paper are payable from the revenues derived from a particular
facility or class of facilities or, in some cases, from specific revenue
sources. Revenue bonds, notes or commercial paper are issued for a wide variety
of purposes, including the financing of electric, gas, water and sewer systems
and other public utilities; industrial development and pollution control
facilities; single and multifamily housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.
Included within the revenue bonds category are participations in municipal
lease obligations or installment purchase contracts of municipalities
(collectively, "lease obligations"). State and local governments issue lease
obligations to acquire equipment leases and facilities. Lease obligations may
have risks not normally associated with general obligation or other revenue
bonds. Leases and installment purchase or conditional sale contracts (which may
provide for title to the leased asset to pass eventually to the issuer) have
developed as a means for governmental issuers to acquire property and equipment
without the necessity of complying with the constitutional and statutory
requirements generally applicable for the
B-4
<PAGE> 95
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligations may experience difficulty in exercising their rights, including
disposition of the property.
Private activity obligations are issued to finance, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain facilities for water supply, gas, electricity, sewage or solid waste
disposal. Private activity obligations are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities. Shareholders, depending on
their individual tax status, may be subject to the federal alternative minimum
tax on the portion of a distribution attributable to these obligations. Interest
on private activity obligations will be considered exempt from federal income
taxes; however, shareholders should consult their own tax advisors to determine
whether they may be subject to the federal alternative minimum tax.
Resource recovery obligations are a type of municipal revenue obligation
issued to build facilities such as solid waste incinerators or waste-to-energy
plants. Usually, a private corporation will be involved and the revenue cash
flow will be supported by fees or units paid by municipalities for the use of
the facilities. The viability of a resource recovery project, environmental
protections regulations and project operator tax incentives may affect the value
and credit quality of these obligations.
Tax, revenue or bond anticipation notes are issued by municipalities in
expectation of future tax or other revenues which are payable from these
specific taxes or revenues. Bond anticipation notes usually provide interim
financing in advance of an issue of bonds or notes, the proceeds of which are
used to repay the anticipation notes. Tax-exempt commercial paper is issued by
municipalities to help finance short-term capital or operating needs in
anticipation of future tax or other revenue.
A variable rate obligation is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate obligation has terms which provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Variable or floating rate obligations may be secured by bank letters of credit.
Variable rate auction and residual interest obligations are created when an
issuer or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable-rate instruments. The interest rate
on one portion reflects short-term interest rates, while the interest rate on
the other portion is typically higher than the rate available on the original
fixed-rate bond.
Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the municipal bond and municipal note
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The achievement of the Balanced and Bond Funds'
investment objectives is dependent in part on the continuing ability of the
issuers of municipal securities in which the Balanced and Bond Funds invest to
meet their obligations for the payment of principal and interest when due.
Obligations of issuers of municipal securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978, as amended. Therefore, the
possibility exists that, as a result of litigation or other conditions, the
ability of any issuer to pay, when due, the principal of and interest on its
municipal securities may be materially affected.
B-5
<PAGE> 96
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 prospectuses. 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" (that is, its value as a fixed-income security)
or its "conversion value" (that is, 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 Bond Funds and the Balanced 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 agencies or instrumentalities,
such as the Government National Mortgage Association ("Ginnie Mae"), the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"); (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.
B-6
<PAGE> 97
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.
Ginnie Mae is a wholly-owned United States Government corporation within
the Department of Housing and Urban Development. Ginnie Mae 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 Ginnie Mae (such as savings and loan institutions,
commercial banks and mortgage banks), and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Obligations of Fannie Mae and Freddie Mac 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. Fannie Mae and Freddie Mac may borrow from the U.S. Treasury
to meet its obligations, but the U.S. Treasury is under no obligation to lend to
Fannie Mae or Freddie Mac.
Private mortgage pass-through securities are structured similarly to Ginnie
Mae, Fannie Mae, and Freddie Mac 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. 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 Ginnie Mae,
Freddie Mac, or Fannie Mae. 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
B-7
<PAGE> 98
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.
The Bond Funds and the Balanced 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
B-8
<PAGE> 99
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 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.
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 Bond Funds and the Balanced 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
B-9
<PAGE> 100
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, 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 Bond Funds and the Balanced 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.
B-10
<PAGE> 101
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 prospectuses, to the extent consistent with their
investment objectives and policies and the investment restrictions listed in
this Statement of Additional Information, 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 Bond 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 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 involve 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
B-11
<PAGE> 102
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 prospectuses and if permitted by its investment restrictions. 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 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 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.
B-12
<PAGE> 103
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.
B-13
<PAGE> 104
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.
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.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
a Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.
The particular securities comprising the index underlying the index
financial futures contract may vary from the securities held by a Fund. As a
result, the Fund's ability to hedge effectively all or a portion of the value of
its securities through the use of such financial futures contracts will depend
in part on the degree to which price movements in the index underlying the
financial futures contract correlate with the price movements of the securities
held by the Fund. The correlation may be affected by disparities in the Fund's
investments as compared to those comprising the index and general economic or
political factors. In addition, the correlation between movements in the value
of the index may be subject to change over time as additions to and deletions
from the index alter its structure. The correlation between futures contracts on
U.S. Government securities and the securities held by a Fund may be adversely
affected by similar factors and the risk of imperfect correlation between
movements in the prices of such futures contracts and the prices of securities
held by the Fund may be greater. The trading of futures contracts also is
subject to certain market risks, such as inadequate trading activity, which
could at times make it difficult or impossible to liquidate existing positions.
Each Fund expects to liquidate a majority of the futures contracts it
enters into through offsetting transactions on the applicable contract market.
There can be no assurance, however, that a liquid secondary market will exist
for any particular futures contract at any specific time. Thus, it may not be
possible to close out a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. In such situations, if the Fund has insufficient cash, it may
be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments. The liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices have in the past moved beyond the daily limit on a number of
consecutive trading days. A Fund will enter into a futures position only if, in
the judgment of the Advisor, there appears to be an actively traded secondary
market for such futures contracts.
B-14
<PAGE> 105
The successful use of transactions in futures and related options also
depends on the ability of the Advisor to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a futures contract or
option is held by a Fund or such rates move in a direction opposite to that
anticipated, the Fund may realize a loss on a hedging transaction which is not
fully or partially offset by an increase in the value of portfolio securities.
As a result, the Fund's total return for such period may be less than if it had
not engaged in the hedging transaction.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. There is also the risk of loss by a Fund
of margin deposits in the event of the bankruptcy of a broker with whom the Fund
has an open position in a financial futures contract.
The amount of risk a Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option on
a futures contract also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.
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 Bond 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 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 Bond 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 Bond 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 Funds, that invest solely in
securities in developed markets. There is no assurance that any Bond Fund will
achieve these results.
The Bond 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
B-15
<PAGE> 106
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 Bond 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 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 Bond 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 Bond 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.
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
B-16
<PAGE> 107
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 (that is, 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
B-17
<PAGE> 108
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 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
B-18
<PAGE> 109
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 segregating 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 to
correctly 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 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.
FOREIGN INVESTMENT RISKS
Foreign Market Risk. Because the Funds may invest in foreign securities,
the Funds offer you more diversification than an investment only in the United
States since prices of securities traded on foreign markets have often, though
not always, moved counter to prices in the United States. Foreign security
investment, however, involves special risks not present in U.S. investments that
can increase the chances that the Funds will lose money. In particular, the
Stock Funds are subject to the risk that because there are generally fewer
investors on foreign exchanges and a smaller number of shares traded each day,
it may be difficult for a Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may fluctuate more than prices of
securities traded in the United States.
Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.
Currency Risk and Exchange Risk. Securities in which a Fund invests may be
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign currency,
your investment in a security denominated in that currency loses value because
the currency is worth fewer U.S. dollars. Similarly when the U.S. dollar
decreases in value against a foreign currency, your investment in a security
denominated in that currency gains value because the currency is worth more
B-19
<PAGE> 110
U.S. dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.
For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU establishes a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and are now
listed, traded, declaring dividends and making other payments only in euros.
No assurance can be given that the changes planned for the EU can be
successfully implemented, or that these changes will result in the economic and
monetary unity and stability intended. There is a possibility that EMU will not
be completed, or will be completed but then partially or completely unwound.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which could diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU at any time by an
initial participant could cause disruption of the financial markets as
securities redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major economic
power. Such developments could have an adverse impact on the Funds' investments
in Europe generally or in specific countries participating in EMU. Gains or
losses from euro conversion may be taxable to International and Global Equity
Fund shareholders under foreign or, in certain limited circumstances, U.S. tax
laws.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws to
protect investors the way that the United States securities laws do. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for a Fund's portfolio
manager to completely and accurately determine a company's financial condition.
Certain Risks of Holding Fund Assets Outside the United States. A Fund
generally holds the foreign securities in which it invests outside the United
States in foreign banks and securities depositories. These foreign banks and
securities depositories may be recently organized or new to the foreign custody
business. They may also have operations subject to limited or no regulatory
oversight. Also, the laws of certain countries may put limits on a Fund's
ability to recover its assets if a foreign bank or depository or issuer of a
security or any of their agents goes bankrupt. In addition, it can be expected
that it will be more expensive for a Fund to buy, sell and hold securities in
certain foreign markets than it is in the U.S. market due to higher brokerage,
transaction, custody and/or other costs. The increased expense of investing in
foreign markets reduces the amount a Fund can earn on its investments.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically involved with the
settlement of
B-20
<PAGE> 111
U.S. investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for a Fund to carry out transactions. If a Fund
cannot settle or is delayed in settling a purchase of securities, it may miss
attractive investment opportunities and certain of its assets may be uninvested
with no return earned thereon for some period. If a Fund cannot settle or is
delayed in settling a sale of securities, it may lose money if the value of the
security then declines or, if it has contracted to sell the security to another
party, the Fund could be liable to that party for any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES
A description of security ratings is attached as an Appendix. Lower-rated
or unrated (that is, 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 generally 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
United States) or because they have 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 having 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. 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
B-21
<PAGE> 112
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.
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, among others, 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 (for example, 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 must 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 Advisor; and
(2) it must not be "traded flat" (that is, 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.
REVERSE REPURCHASE AGREEMENTS
The Balanced and Bond 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 these
Funds for purposes of the limit applicable to borrowings.
DOLLAR ROLLS
The Balanced and Bond 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
B-22
<PAGE> 113
cash equivalent security position that matures on or before the forward
settlement date of the dollar roll transaction.
The Balanced and Bond Funds will segregate cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to their obligations with respect to
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 these
Funds for purposes of the limit applicable to borrowings.
BORROWING
As a fundamental policy, the Stock 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 Bond 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 Bond 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.
WHEN-ISSUED SECURITIES
The 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.
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. REITs offer investors greater
liquidity and diversification than direct ownership of properties, as well as
greater
B-23
<PAGE> 114
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.
SHARES OF OTHER INVESTMENT COMPANIES
The Funds can invest in securities of other investment companies except to
the extent prohibited by law. Like all equity investments, these investments may
go up or down in value. They also may not perform in correlation with a Fund's
principal strategies. The Funds will pay additional fees through their
investments in other investment companies.
LIMITED PARTNERSHIPS
The Stock Funds can invest in limited partnership interests.
TEMPORARY DEFENSIVE POSITION
When adverse market or economic conditions indicate to the Advisor that a
temporary defensive strategy is appropriate, a Fund may invest all or part of
its assets in short-term investment grade debt obligations of the U.S.
Government, its agencies and instrumentalities, bank certificates of deposit,
bankers' acceptances, high quality commercial paper, demand notes and repurchase
agreements.
PORTFOLIO TURNOVER
The decrease in portfolio turnover for the Low Duration Fund from fiscal
1997 to fiscal 1998 was attributable to significant positive cash additions.
MANAGEMENT
The Trustees oversee the actions of the Funds' Advisor and other service
providers and decide upon matters of general policy. The Trustees also review
the actions of the Funds' officers, who conduct and supervise the daily business
operations of the Funds. The Trustees (* denotes "interested" Trustee as defined
in the 1940 Act, due to the relationship with the Advisor); and officers of the
Trust are:
Michael Baxter* (36) -- Trustee -- 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. Co-Head of the Advisor (since 1999); Managing
Director of the Advisor (since 1996); Partner of the Advisor (1994 - 1996);
Portfolio Manager of the Advisor (since 1990).
Robert L. Burch III (65) -- Trustee -- One Rockefeller Plaza, New York, NY
10020. Managing Partner, A.W. Jones Co. (investments); Chairman, Jonathan Mfg.
Corp. (slide manufacturing).
John A. G. Gavin (68) -- Trustee -- 2100 Century Park West, Los Angeles, CA
90067. Partner and Managing Director, Hicks, Muse, Tate & Furst (Latin America)
(private equity investment firm) (since 1994); Chairman, Gamma Services Corp.
(venture capital) (since 1968); Principal, Gavin, Dailey & Partners (consulting)
(since 1993); U.S. Ambassador to Mexico (1981 - 1986); Director, Apex Mortgage
Capital, Inc., Atlantic Richfield Co., International Wire Corp. and Krause's
Furniture.
Joe Grills (64) -- Trustee -- P.O. Box 98, Rapidan, VA 22733. Member of the
Committee of Investment of Employee Benefit Assets of the Financial Executives
Institute ("CIEBA") (since 1986); Member of CIEBA's Executive Committee (since
1988) and its Chairman (from 1991 - 1992); Assistant Treasurer of International
Business Machines Incorporated ("IBM") and Chief Investment Officer of IBM
Retirement Funds (1986 - 1993); Member of the Investment Advisory Committees of
the State of New York Common Retirement Fund and the Howard Hughes Medical
Institute (since 1997); Director, Duke Management Company (since 1992) and Vice
Chairman (since 1998); Director, Kimco Realty Corporation (since 1997);
Director, LaSalle Street Fund (since 1995); Member of the Investment Advisory
Committee of the Virginia Retirement System (since 1998); Director, Montpelier
Foundation (since 1998); Trustee or Director of 24 registered investment
companies (consisting of 56 portfolios) for which Merrill Lynch Asset
Management, L.P. or its affiliate, Fund Asset Management, L.P., is the advisor.
B-24
<PAGE> 115
Nigel Hurst-Brown* (48) -- Trustee -- 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400. Co-Head of the Advisor (since 1999); Managing
Director of Merrill Lynch Mercury Asset Management (since 1998); Director of
Mercury Asset Management Group Plc. (since 1990).
Robert B. Hutchinson (79) -- Trustee -- 2525 Montevista Place West,
Seattle, WA 98198. Former Chairman (1987 - 88) and Director (1976 - 1988),
Prudential Bank (savings bank); Director and former Senior Vice President,
Finance and Secretary, Simpson Investment Co. (holding company for a wood
products company, pulp and paper company and a PVC products company); Director,
Enterprises International, Inc. (industrial strapping material manufacturer).
Madeleine A. Kleiner (48) -- Trustee -- 1900 Avenue of the Stars, Suite
1700, Los Angeles, CA 90067. Former Senior Executive Vice President, Chief
Administrative Officer and General Counsel (1995 - 1998), H.F. Ahmanson &
Company and Home Savings of America, FSB (banking company); Partner
(1983 - 1995), Gibson, Dunn & Crutcher (law firm).
Merle T. Welshans (81) -- Trustee -- 14360 Ladue Road, Chesterfield, MO
63017. Adjunct Professor of Finance, Washington University; Chairperson of the
Investment Committee of the Missouri United Methodist Foundation; Trustee,
Deaconess Hospital Foundation.
Richard R. West (61) -- Trustee -- Box 604, Genoa, NV 89411. Professor of
Finance (since 1984), Dean (1984 - 1993), and currently Dean Emeritus, New York
University Leonard N. Stern School of Business Administration; Director, Vornado
Realty Trust, Inc. and Vornado Operating (real estate holding company);
Director, Bowne & Co., Inc. (financial printers); Director, Alexander's, Inc.
(real estate company); Trustee or Director of 62 registered investment companies
(consisting of 86 portfolios) for which Merrill Lynch Asset Management, L.P. or
its affiliate, Fund Asset Management, L.P., is the advisor.
Nancy D. Celick (48) -- President and Principal Executive Officer -- 725
South Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400. Chief
Administrative Officer of the Advisor (since 1998); Chief Financial Officer of
the Advisor (1993 - 1998); Chief Financial Officer of Kennedy-Wilson, Inc.
(auction marketing services) (1992 - 1993); Chief Financial Officer of First
National Corporation (bank holding company) (1984 - 1992).
Roger DeBard, PhD (58) -- Executive Vice President -- 725 South Figueroa
Street, Suite 4000, Los Angeles, CA 90017-5400. Managing Director of the Advisor
(since 1995); Partner of the Advisor (1994 - 1995); Principal of the Advisor
(1992 - 1994); Portfolio Manager of the Advisor (1985 - 1992).
Mark D. Cone (32) -- Vice President -- 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400. Vice President of the Advisor; Retail Account
Manager, Neuberger & Berman (1991 - 1994).
Anna Marie S. Lopez (31) -- Treasurer, Principal Financial and Accounting
Officer and Assistant Secretary -- 725 South Figueroa Street, Suite 4000, Los
Angeles, CA 90017-5400. Compliance Officer of the Advisor (since 1997); Manager,
Price Waterhouse (1991 - 1997).
Turner Swan (37) -- Secretary -- 725 South Figueroa Street, Suite 4000, Los
Angeles, CA 90017-5400. Attorney with the Advisor (since 1997); Attorney,
Sheppard, Mullin, Richter & Hampton LLP (1995 - 1997); Attorney, Trout Trading
Management Company Ltd. (1993 - 1995).
Gracie Fermelia (38) -- Vice President, Assistant Secretary and Assistant
Treasurer -- 725 South Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400.
Vice President of the Advisor. Senior Manager, Price Waterhouse (1985 - 1994).
Mr. Hutchinson and Mr. Welshans will retire from the Board on November 12,
1999.
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, 1999 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 which has
B-25
<PAGE> 116
an investment advisor that is an affiliated person of the Advisor ("Fund
Complex") for the year ended December 31, 1998.
<TABLE>
<CAPTION>
TOTAL 1998
COMPENSATION
FROM TRUST
AND FUND
AGGREGATE COMPLEX
COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES*
--------------- ------------ ------------
<S> <C> <C>
Michael Baxter..................................... $ -0- $ -0-
Robert L. Burch III................................ $18,000 $ 20,000
John A. G. Gavin................................... $15,000 $ 20,000
Joe Grills......................................... $18,000 $186,333
Nigel Hurst-Brown.................................. $ -0- $ -0-
Robert B. Hutchinson............................... $18,000 $ 18,500
Merle T. Welshans.................................. $18,000 $ 20,000
Richard R. West.................................... $18,000 $326,125
</TABLE>
- ---------------
* Each Trustee also serves as a Trustee of the Hotchkis and Wiley Variable
Trust. Messrs. Grills and West also serve on the boards of other investment
companies advised by Merrill Lynch Asset Management, L.P. and its advisory
affiliates.
For information as to ownership of shares, see "General Information About
the Trust's Shareholders."
THE ADVISOR
The Advisor provides the Funds with management and investment advisory
services. Hotchkis and Wiley, a division of Merrill Lynch Asset Management, L.P.
("MLAM"), is located at 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017-5400. MLAM is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc., a financial services holding company located in Delaware.
MLAM and its advisory affiliates act as the investment advisor for more than 140
registered investment companies and offer portfolio management and portfolio
analysis services to individual and institutional accounts.
Each Fund, except for the Equity Fund for Insurance Companies and the Bond
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. The Low
Duration Fund pays the Advisor a fee at the annual rate of 0.46% of its average
daily net assets. The Short-Term Investment Fund pays the Advisor 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 through
$249,999,999, 0.30% of the Fund's average daily net assets from $250,000,000
through $499,999,999, and 0.25% of the Fund's average daily net assets over
$500,000,000.
In addition, prior to March 1, 1999, the Advisor had 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 Fund
to 1.00% of each Fund's average net assets and had 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. Effective March 1, 1999, the Advisor has agreed to
limit the annual operating expenses of the Investor Class of each Fund as
follows: Equity Income Fund-0.95%, Mid-Cap Fund-1.15%, Global Equity Fund-1.25%,
Balanced Fund-0.95%, Total Return Bond Fund-0.65%, Low Duration Fund-0.58% and
Short-Term Investment Fund-0.48%. The Advisor has agreed to limit the annual
operating expenses of the Distributor Class of each such Fund to an amount which
is .25% higher than the limit for the Investor Class of the same Fund. Effective
March 1, 1999, there is no limit on the annual expenses of the Small Cap Fund
and the International Fund. There is no limit on the annual expenses of the
Equity Fund for Insurance Companies, which are paid by the Advisor.
B-26
<PAGE> 117
As a result of its agreement to limit Fund expenses, for the year ended
June 30, 1999, the Advisor waived a portion of its fee with respect to the
Equity Income Fund, Mid-Cap Fund, Small Cap Fund, Global Equity Fund, Balanced
Fund, Total Return Bond Fund, Low Duration Fund, and Short-Term Investment Fund
in the amounts of $2,088, $59,578, $84,856, $68,393, $26,952, $125,162,
$230,145, and $85,670, respectively. For the year ended June 30, 1999, the
Equity Income Fund, Small Cap Fund, International Fund, Balanced Fund, Total
Return Bond Fund, Low Duration Fund, and Short-Term Investment Fund paid
$1,176,425, $357,779, $10,084,942, $747,848, $342,503, $1,469,150, and $84,035,
respectively, to the Advisor. The Mid-Cap Fund and Global Equity Fund paid no
advisory fees and were reimbursed $13,497 and $16,239, respectively, by the
Advisor for the year ended June 30, 1999.
As a result of its agreement to limit Fund expenses, for the year ended
June 30, 1998, the Advisor waived a portion of its fee with respect to the
Mid-Cap Fund, Global Equity Fund, Total Return Bond Fund, Low Duration Fund, and
Short-Term Investment Fund in the amounts of $92,525, $111,644, $86,499,
$144,309, and $105,600, respectively. For the year ended June 30, 1998, the
Equity Income Fund, Small Cap Fund, International Fund, Balanced Fund, Total
Return Bond Fund, and Low Duration Fund paid $1,424,185, $491,489, $8,732,479,
$761,196, $39,539, and $773,803, respectively, to the Advisor. The Mid-Cap Fund,
Global Equity Fund, and Short-Term Investment Fund paid no advisory fees and
were reimbursed $52,325, $67,175, and $11,030, respectively, by the Advisor for
the year ended June 30, 1998.
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 Fund, International Fund, Total Return Bond Fund, Low Duration Fund
paid $1,411,861, $82,914, $562,261, $3,694,456, $70,395 and $632,940,
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.
For the fiscal years ended June 30, 1999, 1998 and 1997, the Equity Fund
for Insurance Companies paid $206,371, $196,908 and $147,584, 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.
SUBADVISORS
The Advisor has entered into subadvisory agreements with Mercury Asset
Management International Limited and Merrill Lynch Asset Management U.K.
Limited, affiliated investment advisors that are indirect subsidiaries of
Merrill Lynch & Co., Inc. The subadvisory arrangements are for investment
research, recommendations and other investment-related services to be provided
to the International and Global Equity Funds at rates of compensation as may be
agreed by the parties. There is no increase in the aggregate fees paid by these
Funds for such services.
PRINCIPAL UNDERWRITER
Princeton Funds Distributor, Inc., 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is the Funds' distributor and makes a continuous offering of the
Funds' shares. It is not compensated by the Funds, except that it may receive
payments under the Rule 12b-1 plan described below. The distributor is an
indirect subsidiary of Merrill Lynch & Co., Inc., and is an affiliate of the
Advisor.
B-27
<PAGE> 118
RULE 12b-1 PLAN
The Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act that allows the Distributor Class of the Small Cap, International,
Balanced, Total Return Bond and Low Duration Funds to make payments to
administrators, broker/dealers or other institutions that provide accounting,
record-keeping or other services to investors and that have an administration
services agreement with the Trust or the Advisor to make Distributor Class
shares available to their clients ("Recipients"). Recipients are paid .25% on an
annualized basis of the average net asset value of the Distributor Class shares
invested through the Recipient as compensation for providing
distribution-related services such as advertising, printing and mailing
prospectuses to other than current shareholders, and training sales personnel
regarding the Funds.
No expenses were paid under the Distribution Plan during the fiscal year
ended June 30, 1999.
OTHER SERVICE PROVIDERS
The Trust's custodian, Firstar Bank Milwaukee, N.A., 615 East Michigan
Street, Milwaukee, Wisconsin 53202, is responsible for holding the Funds' assets
and Firstar Mutual Fund Services, LLC ("FMFS"), located at the same address,
acts as the Trust's accounting services agent, transfer agent and dividend
paying agent. FMFS provides customary transfer agency services to the Funds,
including handling of shareholder communications, the processing of shareholder
transactions, the maintenance of shareholder account records, the payment of
dividends and distributions and related functions. For these services, FMFS
receives an annual fee of $10.00 per omnibus account and $14.00 per other
shareholder account. FMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, allocable communication
expenses and other costs.
The Chase Manhattan Bank, Four Chase MetroTech Center, Brooklyn, New York
11245, through its global custody network, provides custodial services for
assets of the Trust held outside the U.S.
The Trust's independent accountant, PricewaterhouseCoopers LLP, 100 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202, examines the Trust's financial
statements and assists in the preparation of certain reports to the Securities
and Exchange Commission.
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", that is, 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 Advisor acts 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.
B-28
<PAGE> 119
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.
During the three most recent fiscal years of the Trust, the following
brokerage commissions were paid by the Funds:
<TABLE>
<CAPTION>
FUND ENDED 6/30/99 ENDED 6/30/98 ENDED 6/30/97
---- ------------- ------------- -------------
<S> <C> <C> <C>
Equity Income..................................... $ 88,009 $ 110,157 $ 230,762
Mid-Cap........................................... $ 27,997 $ 11,847 $ 1,984*
Small Cap......................................... $ 247,112*** $ 195,891** $ 31,024
International..................................... $2,651,000 $2,249,821** $1,506,506
Global Equity..................................... $ 11,346 $ 22,157 $ 11,449*
Balanced.......................................... $ 26,518 $ 23,692 $ 25,414
Low Duration...................................... $ -0- $ -0- $ -0-
Total Return Bond................................. $ -0- $ -0- $ -0-
Short-Term Investment............................. $ -0- $ -0- $ -0-
Equity Fund for Insurance Companies............... $ 12,121 $ 16,115 $ 14,527
</TABLE>
- ---------------
* Period from commencement of operations on January 2, 1997 through June 30,
1997.
** The increase in commissions paid by the Funds is due to significant
increases in those Funds' assets, resulting in an increase in investment
purchases from the previous year.
*** The increase in commissions paid by the Small Cap Fund is due to a
significant decrease in the Fund's assets, resulting in an increase in
investment transactions from the previous year.
The Advisor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a registered broker-dealer, and the other broker-dealer
subsidiaries of Merrill Lynch & Co., Inc. For the fiscal year ended June 30,
1999, transactions with affiliated broker-dealers were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF AGGREGATE DOLLAR
AMOUNT OF TRANSACTIONS
PERCENTAGE OF AGGREGATE BROKERAGE INVOLVING PAYMENT OF
COMMISSIONS PAID TO AFFILIATED COMMISSIONS PAID TO COMMISSIONS EFFECTED THROUGH
FUND BROKER-DEALERS AFFILIATED BROKER-DEALERS AFFILIATED BROKER-DEALERS
---- ------------------------------ --------------------------------- -------------------------------
<S> <C> <C> <C>
Global Equity........ $ 173 1.52% 1.03%
International........ $328,247 12.38% 10.04%
</TABLE>
B-29
<PAGE> 120
Differences in percentages in International Fund transactions are generally
due to agency cross trades done for no commission and smaller volume orders
through affiliated broker-dealers. (Commissions for foreign transactions are
generally on a volume basis.)
The value of any Fund's aggregate holdings of the securities of its regular
brokers or dealers (as defined in Rule 10b-1 of the 1940 Act) as of June 30,
1999 was as follows:
<TABLE>
<CAPTION>
REGULAR AGGREGATE
FUND BROKER-DEALER HOLDINGS
---- --------------- ----------
<S> <C> <C>
Balanced.............................. Lehman Brothers $ 897,442
Total Return Bond..................... Lehman Brothers $1,871,276
Low Duration.......................... Lehman Brothers $9,760,152
Short-Term Investment................. Lehman Brothers $1,783,836
Bear Stearns $1,499,652
</TABLE>
TRUST SHARES
The Small Cap Fund, International Fund, Balanced Fund, Total Return Bond
Fund and Low Duration Fund each offer two classes of shares: Distributor Class
shares and Investor Class shares. Each other Fund offers shares of a single
class called Investor Class shares.
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,
except that the Distributor Class shares are subject to distribution fees
payable under the Plan of Distribution. 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 additional
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.
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 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.
B-30
<PAGE> 121
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, 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.
PURCHASE AND REDEMPTION OF SHARES
ISSUANCE OF FUND SHARES FOR SECURITIES
Investors may purchase Fund shares for consideration consisting of
securities rather than cash when, in the judgment of the Advisor, the
securities: (a) meet the investment objective and policies of the Fund, (b) are
liquid and not subject to restrictions on resale, and (c) have a value that is
readily ascertainable via listing on or trading in a recognized United States or
international exchange or market.
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.
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.
B-31
<PAGE> 122
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 Stock Market ("NSM") 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 NSM. Unlisted equity securities that are not included in
NSM are valued at the average of the quoted bid and asked prices in the
over-the-counter market.
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. 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 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
Each 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 stock, securities, or foreign currencies or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities, or currencies; and (2) 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,
securities of other regulated investment companies, 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
B-32
<PAGE> 123
(other than U.S. Government securities or the securities of other regulated
investment companies). In addition, in order not to be subject to federal
taxation, each Fund must distribute to its shareholders at least 90% of its
investment company taxable income earned in each year.
A Fund is required to pay an excise tax to the extent it does not
distribute to its shareholders during any calendar year at least 98% of its
ordinary income for that calendar year, 98% of the excess of its capital gains
over its 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.
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, and any
ordinary dividend 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.
The per share dividends of Distributor Class shares will be lower than the
per share dividends on Investor Class shares of the same Fund, as a result of
the distribution fee applicable to the Distributor Class shares. The per share
distributions of net capital gains, if any, will be paid in the same amount for
each class of the same Fund.
B-33
<PAGE> 124
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, 1999 are as
follows:
<TABLE>
<CAPTION>
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
------ ------ ----- ---------
<S> <C> <C> <C> <C> <C>
Equity Income Fund................. 7.32% 19.15% 13.42% 12.63% (Since 6/24/87)
Mid-Cap Fund....................... 7.66% -- -- 16.03% (Since 1/2/97)
Small Cap Fund..................... -14.26% 12.26% 12.88% 12.14% (Since 9/20/85)
Global Equity Fund................. 5.40% -- -- 10.18% (Since 1/2/97)
International Fund................. 4.22% 12.48% -- 13.05% (Since 10/1/90)
Balanced Fund...................... 4.04% 12.80% 10.81% 11.75% (Since 8/13/85)
Total Return Bond Fund............. 2.30% -- -- 9.32% (Since 12/6/94)
Low Duration Fund.................. 3.15% 7.15% -- 7.40% (Since 5/18/93)
Short-Term Investment Fund......... 4.70% 5.97% -- 6.14% (Since 5/18/93)
Equity Fund for Insurance
Companies........................ 7.29% 20.33% -- 16.57% (Since 1/29/93)
</TABLE>
No Distributor Class shares were outstanding as of June 30, 1999, except
for the International and Total Return Bond Funds, which commenced operations on
June 2, 1999. Performance information for a full year is not yet available.
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:
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).
B-34
<PAGE> 125
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, 1999 were 6.48%, 6.11%,
and 5.40%, respectively. No Distributor Class shares were outstanding for 30
days on June 30, 1999.
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, Inc., Morningstar, Inc. 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, Morningstar 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'S SHAREHOLDERS
PRINCIPAL HOLDERS:
As of July 30, 1999, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Equity Income Fund:
McDonalds Charities Investment Program, P.O. Box 9242, Boston, MA
02209-9242 -- 15.84%
Northern States Power Company, P.O. Box 64482, St. Paul, MN
55164-0482 -- 11.92%
Bernsen Foundation, 15 W. 6th Street, Suite 1308, Tulsa, OK
74119-5407 -- 6.79%
Sun Health, P.O. Box 9800, Calabasas, CA 91372-0800 -- 6.27%
W.A. Foote Memorial Hospital, Inc., 205 N. East Avenue, Jackson, MI
49201-1753 -- 6.20%
As of July 30, 1999, the following shareholder 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
94104-4122 -- 12.46%
MANAGEMENT:
As of July 30, 1999, the Trust's officers and Trustees as a group owned
0.08% of the Equity Income Fund's outstanding shares.
- --------------------------------------------------------------------------------
B-35
<PAGE> 126
PRINCIPAL HOLDERS:
As of July 30, 1999, Merrill Lynch Retirement Plans, 4800 Deer Lake Drive,
E Floor 3, Jacksonville, FL 32246-6484, owned of record, and to the knowledge of
the Trust, beneficially 48.25% of the Mid-Cap Fund's outstanding shares and may
be deemed a controlling person of that Fund.
As of July 30, 1999, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Mid-Cap Fund:
Elizabeth Janeway Foundation, P.O. Box 60078, Los Angeles, CA
90060-0078 -- 9.99%
John F. Hotchkis, 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 8.96%
MANAGEMENT:
As of July 30, 1999, the Trust's officers and Trustees as a group owned
3.26% of the Mid-Cap Fund's outstanding shares.
- --------------------------------------------------------------------------------
PRINCIPAL HOLDERS:
As of July 30, 1999, the following shareholder owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Small Cap Fund:
Merrill Lynch Retirement Plans, 4800 Deer Lake Drive, E Floor 3,
Jacksonville, FL 32246-6484 -- 32.10%
As of July 30, 1999, the following shareholders 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
94104-4122 -- 12.77%
National Financial Services Corp., One World Financial Center, 5th Floor,
200 Liberty Street, New York, NY 10281-1003 -- 8.76%
MANAGEMENT:
As of July 30, 1999, the Trust's officers and Trustees as a group owned
3.01% of the Small Cap Fund's outstanding shares.
- --------------------------------------------------------------------------------
PRINCIPAL HOLDERS:
As of July 30, 1999, the following shareholder owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the International Fund:
Merrill Lynch Retirement Plans, 4800 Dear Lake Drive, E Floor 3,
Jacksonville, FL 32246-6484 -- 16.86%
As of July 30, 1999, the following shareholders 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
94104-4122 -- 30.03%
National Financial Services Corp., One World Financial Center, 5th Floor,
200 Liberty Street, New York, NY 10281-1003 -- 11.58%
Salomon Smith Barney Inc., 333 W 34th Street, Floor 7, New York, NY
10001-2402 -- 7.40%
MANAGEMENT:
As of July 30, 1999, the Trust's officers and Trustees as a group owned
0.06% of the International Fund's outstanding shares.
- --------------------------------------------------------------------------------
B-36
<PAGE> 127
PRINCIPAL HOLDERS:
As of July 30, 1999, John F. Hotchkis, 725 S. Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400, owned of record, and to the knowledge of the Trust,
beneficially 34.57% of the Global Equity Fund outstanding shares and may be
deemed a controlling person of that Fund.
As of July 30, 1999, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Global Equity Fund:
Merrill Lynch Retirement Plans, 4800 Deer Lake Drive, E Floor 3,
Jacksonville, FL 32246-6484 -- 25.25%
Hotchkis and Wiley, 725 S. Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 8.76%
Elizabeth Janeway Foundation, P.O. Box 60078, Los Angeles, CA
90060-0078 -- 5.10%
MANAGEMENT:
As of July 30, 1999, the Trust's officers and Trustees as a group owned
0.42% of the Global Equity Fund's outstanding shares.
- --------------------------------------------------------------------------------
PRINCIPAL HOLDERS:
As of July 30, 1999, Mac & Co., 1 Cabot Road, Medford, MA 02155-5141, owned
of record, and to the knowledge of the Trust, beneficially 29.69% of the
Balanced Fund's outstanding shares and may be deemed to be a controlling person
of that Fund.
As of July 30, 1999, the following shareholder owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Balanced Fund:
Chase Bank of Texas, P.O. Box 2558, Houston, TX 77252-2558 -- 10.10%
As of July 30, 1999, the following shareholder owned of record, but not
beneficially, more than five percent of the outstanding shares of the Balanced
Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 28.35%
MANAGEMENT:
As of July 30, 1999, the Trust's officers and Trustees as a group owned
1.45% of the Balanced Fund's outstanding shares.
- --------------------------------------------------------------------------------
PRINCIPAL HOLDERS:
As of July 30, 1999, the following shareholders owned of record, and to the
knowledge of the Trust, beneficially more than five percent of the outstanding
shares of the Total Return Bond Fund:
Merrill Lynch Retirement Plans, 4800 Deer Lake Drive, E Floor 3,
Jacksonville, FL 32246-6484 -- 21.21%
Golden Books Retirement Plan, 10101 Science Drive, Sturtevant, WI
53177-1757 -- 6.62%
As of July 30, 1999, the following shareholders 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
94104-4122 -- 32.27%
National Financial Services Corp., One World Financial Center, 5th Floor,
200 Liberty Street, New York, NY 10281-1003 -- 28.99%
B-37
<PAGE> 128
MANAGEMENT:
As of July 30, 1999, the Trust's officers and Trustees as a group owned
0.02% of the Total Return Bond Fund's outstanding shares.
- --------------------------------------------------------------------------------
PRINCIPAL HOLDERS:
As of July 30, 1999, the following shareholders 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
94104-4122 -- 49.71%
National Financial Services Corp., One World Financial Center, 5th Floor,
200 Liberty Street, New York, NY 10281-1003 -- 17.71%
MANAGEMENT:
As of July 30, 1999, the Trust's officers and Trustees as a group owned
0.15% of the Low Duration Fund's outstanding shares.
- --------------------------------------------------------------------------------
PRINCIPAL HOLDERS:
As of July 30, 1999, the following shareholders 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:
United Airlines Group Investment Trust, P.O. Box 92956, Chicago, IL
60675-2956 -- 11.97%
Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles, CA
90017-5400 -- 6.23%
As of July 30, 1999, the following shareholders owned of record, but not
beneficially, more than five percent of the outstanding shares of the Short-Term
Investment Fund:
Charles Schwab & Co. Inc., 101 Montgomery Street, San Francisco, CA
94104-4122 -- 39.34%
National Financial Services, Corp., One World Financial Center, 5th Floor,
200 Liberty Street, New York, NY 10281-1003 -- 16.02%
National Investor Services Corp., 55 Water Street, Floor 32, New York, NY
10041-3299 -- 7.13%
B-38
<PAGE> 129
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
(that is, 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-1
repayment ability will often be evidenced by many of these characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
"PRIME-2" -- Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited
A-1
<PAGE> 130
above, but to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Adequate alternate
liquidity is maintained.
MUNICIPAL BOND RATINGS:
Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or "MIG" with variable rate demand obligations being
designated as "VMIG." A VMIG rating may also be assigned to commercial paper
programs which are characterized as having variable short-term maturities, but
having neither a variable rate nor demand feature. Factors used in determining
ratings include liquidity of the borrower and short-term cyclical elements.
STANDARD & POOR'S RATING GROUP
BOND RATINGS:
"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
"AA" -- An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
"A" -- An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its commitment on the
obligation.
Obligations rated BB and B are regarded as having significant speculative
characteristics. While such obligations will likely have some quality and
protective characteristics, these may be 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 designation 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 sign (+) 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.
MUNICIPAL BOND RATINGS:
S&P uses SP-1, SP-2 and SP-3 to rate short-term municipal obligations. A rating
of SP-1 denotes a strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a (+)
designation.
A-2
<PAGE> 131
FITCH INVESTORS SERVICE, INC.
BOND RATINGS:
The following summarizes the ratings used by Fitch for corporate bonds:
"AAA" -- Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" -- Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
"A" -- High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
"BBB" -- Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
"BB" -- Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
"B" -- Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
PLUS (+) MINUS (--) -- Plus and minus signs may be appended to a rating to
denote relative status within major rating categories. Such suffixes are not
added to the "AAA" long-term rating category or to short-term ratings other than
"F1."
SHORT-TERM DEBT RATINGS:
"F1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
"F2" -- Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
"F3" -- Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
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.
A-3
<PAGE> 132
"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.
A-4
<PAGE> 133
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 98.8% Shares Value
- ------------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 5.5%
............................................................
Lockheed Martin Corporation 87,900 $ 3,274,275
............................................................
Northrop Grumman Corporation 51,700 3,428,356
............................................................
Rockwell International
Corporation 25,000 1,518,750
..................... ...................... -----------
8,221,381
- ------------------------------------------------------------
APPAREL & TEXTILES -- 0.5%
............................................................
Russell Corporation 40,000 780,000
- ------------------------------------------------------------
AUTO PARTS -- 4.1%
............................................................
Dana Corporation 62,900 2,897,331
............................................................
Delphi Automotive Systems
Corporation 42,949 797,241
............................................................
Meritor Automotive, Inc. 7,100 181,050
............................................................
TRW Inc. 40,300 2,211,463
..................... ...................... -----------
6,087,085
- ------------------------------------------------------------
AUTOS & TRUCKS -- 4.6%
............................................................
Ford Motor Company 70,000 3,950,625
............................................................
General Motors Corporation 44,000 2,904,000
..................... ...................... -----------
6,854,625
- ------------------------------------------------------------
BANKS -- 7.8%
............................................................
Bank One Corporation 57,400 3,418,887
............................................................
First Security Corporation 42,800 1,166,300
............................................................
First Union Corporation 50,400 2,368,800
............................................................
Fleet Financial Group, Inc. 47,000 2,085,625
............................................................
KeyCorp 61,000 1,959,625
............................................................
UnionBanCal Corporation 17,300 624,963
..................... ...................... -----------
11,624,200
- ------------------------------------------------------------
BEVERAGES -- 0.7%
............................................................
Anheuser-Busch Companies, Inc. 14,500 1,028,594
- ------------------------------------------------------------
BUILDING & FOREST
PRODUCTS -- 2.7%
............................................................
Georgia-Pacific (Timber Group) 54,000 1,363,500
............................................................
Weyerhaeuser Company 38,000 2,612,500
..................... ...................... -----------
3,976,000
- ------------------------------------------------------------
CHEMICALS -- 1.9%
............................................................
The Dow Chemical Company 16,000 2,030,000
............................................................
Eastman Chemical Company 16,000 828,000
..................... ...................... -----------
2,858,000
- ------------------------------------------------------------
CONGLOMERATES -- 1.9%
............................................................
Tenneco, Inc. 120,000 2,865,000
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
ENGINEERING AND CONSTRUCTION -- 1.0%
............................................................
Harsco Corporation 48,595 $ 1,555,040
- ------------------------------------------------------------
FINANCIAL SERVICES -- 4.8%
............................................................
Associates First Capital
Corporation -- Class A 6,800 301,325
............................................................
Fannie Mae 46,000 3,145,250
............................................................
Household International, Inc. 53,400 2,529,825
............................................................
Transamerica Corporation 16,000 1,200,000
..................... ...................... -----------
7,176,400
- ------------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 2.0%
............................................................
Whirlpool Corporation 41,000 3,034,000
- ------------------------------------------------------------
INSURANCE -- 5.2%
............................................................
American General Corporation 29,300 2,208,487
............................................................
Lincoln National Corporation 28,000 1,464,750
............................................................
Safeco Corporation 52,000 2,294,500
............................................................
St. Paul Companies, Inc. 57,600 1,832,400
..................... ...................... -----------
7,800,137
- ------------------------------------------------------------
LEISURE/TOYS -- 0.7%
............................................................
Fortune Brands, Inc. 24,500 1,013,687
- ------------------------------------------------------------
MACHINERY -- 2.0%
............................................................
New Holland N.V. 170,000 2,911,250
- ------------------------------------------------------------
METALS & MINING -- 4.4%
............................................................
Alcoa, Inc. 48,000 2,970,000
............................................................
Phelps Dodge Corporation 12,000 743,250
............................................................
Reynolds Metals Company 48,000 2,832,000
..................... ...................... -----------
6,545,250
- ------------------------------------------------------------
NATURAL GAS -- 0.8%
............................................................
Eastern Enterprises 27,000 1,073,250
- ------------------------------------------------------------
OIL -- DOMESTIC -- 8.3%
............................................................
Atlantic Richfield Company 23,507 1,964,303
............................................................
Occidental Petroleum
Corporation 133,000 2,809,625
............................................................
Phillips Petroleum Company 61,000 3,069,063
............................................................
Texaco Inc. 18,000 1,125,000
............................................................
USX-Marathon Group, Inc. 72,000 2,344,500
............................................................
Ultramar Diamond Shamrock
Corporation 47,200 1,029,550
..................... ...................... -----------
12,342,041
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
1
<PAGE> 134
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
PAPER -- 3.6%
............................................................
Georgia-Pacific Group 30,000 $ 1,421,250
............................................................
International Paper Company 78,000 3,939,000
..................... ...................... -----------
5,360,250
- ------------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.8%
............................................................
Eastman Kodak Company 39,700 2,689,675
- ------------------------------------------------------------
POLLUTION CONTROL -- 2.4%
............................................................
Browning-Ferris Industries,
Inc. 51,000 2,193,000
............................................................
Waste Management, Inc. 26,000 1,397,500
..................... ...................... -----------
3,590,500
- ------------------------------------------------------------
RAILROADS -- 1.9%
............................................................
CSX Corporation 17,500 792,969
............................................................
Norfolk Southern Corporation 67,000 2,018,375
..................... ...................... -----------
2,811,344
- ------------------------------------------------------------
RETAIL -- 4.1%
............................................................
Intimate Brands, Inc. 7,350 348,206
............................................................
J.C. Penney Company, Inc. 54,000 2,622,375
............................................................
May Department Stores Company 39,900 1,630,913
............................................................
Sears, Roebuck & Company 32,000 1,426,000
..................... ...................... -----------
6,027,494
- ------------------------------------------------------------
SAVINGS & LOANS -- 2.0%
............................................................
Washington Mutual, Inc. 85,400 3,021,025
- ------------------------------------------------------------
STEEL -- 2.7%
............................................................
Allegheny Teledyne, Inc. 41,000 927,625
............................................................
USX-U.S. Steel Group, Inc. 113,000 3,051,000
..................... ...................... -----------
3,978,625
- ------------------------------------------------------------
TOBACCO -- 3.5%
............................................................
Philip Morris Companies, Inc. 130,000 5,224,375
- ------------------------------------------------------------
TRUCKING -- 0.4%
............................................................
Ryder System, Inc. 21,000 546,000
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
UTILITY -- ELECTRIC -- 9.1%
............................................................
CMS Energy Corporation 55,000 $ 2,303,125
............................................................
Central & South West
Corporation 48,000 1,122,000
............................................................
DTE Energy Company 38,000 1,520,000
............................................................
Edison International 25,500 682,125
............................................................
Entergy Corporation 25,500 796,875
............................................................
GPU, Inc. 22,000 928,125
............................................................
Illinova Corporation 95,000 2,588,750
............................................................
PECO Energy Company 12,500 523,438
............................................................
P P & L Resources, Inc. 23,000 707,250
............................................................
Public Service Enterprises
Group, Inc. 30,000 1,226,250
............................................................
SCANA Corporation 46,000 1,075,250
..................... ...................... -----------
13,473,188
- ------------------------------------------------------------
UTILITY -- TELEPHONE -- 8.4%
............................................................
AT&T Corporation 65,000 3,627,813
............................................................
ALLTEL Corporation 40,000 2,860,000
............................................................
Bell Atlantic Corporation 44,500 2,909,187
............................................................
GTE Corporation 14,500 1,098,375
............................................................
SBC Communications, Inc. 33,000 1,914,000
..................... ...................... -----------
12,409,375
..................... ...................... -----------
Total common stock (cost 146,877,791
$114,699,851)
- ------------------------------------------------------------
VARIABLE RATE Principal
DEMAND NOTES* -- 1.3% Amount
- ------------------------------------------------------------
General Mills, Inc., 4.8250% $1,982,735 1,982,735
............................................................
Total variable rate demand
notes (cost $1,982,735) 1,982,735
- ------------------------------------------------------------
Total investments -- 100.1%
(cost $116,682,586) 148,860,526
............................................................
Liabilities in excess of other
assets -- (0.1%) (126,207)
..................... ...................... -----------
$148,734,319
Total net assets -- 100.0%
- ------------------------------------------------------------
</TABLE>
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rate listed is as of June 30, 1999.
See Notes to the Financial Statements
2
<PAGE> 135
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
MID-CAP FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 95.8% Shares Value
- -------------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 3.9%
.............................................................
Northrop Grumman Corporation 4,000 $ 265,250
- -------------------------------------------------------------
APPAREL & TEXTILES -- 3.8%
.............................................................
Coats Viyella PLC ADR 44,600 106,509
.............................................................
Russell Corporation 8,100 157,950
....................... ....................... ---------
264,459
- -------------------------------------------------------------
AUTO PARTS -- 4.6%
.............................................................
Dana Corporation 2,072 95,441
.............................................................
Lear Corporation # 2,800 139,300
.............................................................
Meritor Automotive, Inc. 3,300 84,150
....................... ....................... ---------
318,891
- -------------------------------------------------------------
BANKS -- 6.4%
.............................................................
Compass Bancshares, Inc. 1,725 47,006
.............................................................
Colonial BancGroup, Inc. 6,500 90,594
.............................................................
UnionBanCal Corporation 8,300 299,838
....................... ....................... ---------
437,438
- -------------------------------------------------------------
COMMUNICATIONS & MEDIA -- 3.1%
.............................................................
Groupe AB SA ADR # 65,300 212,225
- -------------------------------------------------------------
COMPUTER SOFTWARE &
SERVICES -- 5.8%
.............................................................
Cambridge Technology Partners, Inc.
# 1,900 33,369
.............................................................
InaCom Corporation # 19,212 242,551
.............................................................
PeopleSoft, Inc. # 7,100 122,475
....................... ....................... ---------
398,395
- -------------------------------------------------------------
ELECTRIC PRODUCTS -- 2.2%
.............................................................
UCAR International, Inc. # 6,000 151,500
- -------------------------------------------------------------
FINANCIAL SERVICES -- 2.5%
.............................................................
Radian Group Inc. 3,500 170,843
- -------------------------------------------------------------
FOODS -- 9.2%
.............................................................
Dean Foods Company 8,300 344,969
.............................................................
Interstate Bakeries Corporation 5,800 130,138
.............................................................
Nabisco Group Holdings Corporation 8,100 158,456
....................... ....................... ---------
633,563
- -------------------------------------------------------------
HEALTHCARE -- DRUGS -- 0.4%
.............................................................
Bergen Brunswig Corporation --Class
A 1,600 27,600
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
HEALTHCARE -- MISCELLANEOUS -- 3.2%
.............................................................
Beverly Enterprises, Inc. # 9,000 $ 72,562
.............................................................
Total Renal Care Holdings, Inc. # 9,400 146,288
....................... ....................... ---------
218,850
- -------------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 3.4%
.............................................................
Whirlpool Corporation 3,200 236,800
- -------------------------------------------------------------
INSURANCE -- 6.2%
.............................................................
ESG Re Limited 13,900 208,500
.............................................................
Harleysville Group, Inc. 3,400 69,700
.............................................................
IPC Holdings Limited 3,000 60,000
.............................................................
Ohio Casualty Corporation 1,200 43,350
.............................................................
St. Paul Companies, Inc. 1,400 44,538
....................... ....................... ---------
426,088
- -------------------------------------------------------------
MACHINERY -- 3.4%
.............................................................
New Holland N.V. 13,700 234,613
- -------------------------------------------------------------
METALS & MINING -- 0.9%
.............................................................
Reynolds Metals Company 1,000 59,000
- -------------------------------------------------------------
MISCELLANEOUS -- 1.2%
.............................................................
American Coin Merchandising, Inc. # 13,000 84,500
- -------------------------------------------------------------
OIL -- DOMESTIC -- 3.2%
.............................................................
Occidental Petroleum Corporation 6,300 133,088
.............................................................
Pennzoil-Quaker State Company 1,100 16,500
.............................................................
USX -- Marathon Group, Inc. 2,100 68,381
....................... ....................... ---------
217,969
- -------------------------------------------------------------
OIL & GAS DRILLING -- 8.8%
.............................................................
Amerada Hess Corporation 600 35,700
.............................................................
Diamond Offshore Drilling, Inc. 2,700 76,613
.............................................................
Kerr-McGee Corporation 2,300 115,431
.............................................................
PennzEnergy Company 3,600 60,075
.............................................................
Triton Energy Limited # 29,300 314,975
....................... ....................... ---------
602,794
- -------------------------------------------------------------
PAPER -- 2.7%
.............................................................
Chesapeake Corporation 1,800 67,387
.............................................................
Consolidated Papers, Inc. 4,500 120,375
....................... ....................... ---------
187,762
- -------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 136
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
MID-CAP FUND
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL -- 1.5%
.............................................................
Browning-Ferris Industries, Inc. 2,400 $ 103,200
- -------------------------------------------------------------
RETAIL -- JEWELRY -- 2.1%
.............................................................
Friedman's Inc. 16,500 143,344
- -------------------------------------------------------------
SAVINGS & LOANS -- 1.1%
.............................................................
Charter One Financial, Inc. 2,625 73,008
- -------------------------------------------------------------
SECURITY SERVICES -- 1.9%
.............................................................
Pittston Brink's Group 4,800 128,400
- -------------------------------------------------------------
STEEL -- 3.0%
.............................................................
USX-U.S. Steel Group, Inc. 7,600 205,200
- -------------------------------------------------------------
TOBACCO -- 2.8%
.............................................................
R.J. Reynolds Tobacco Holdings,
Inc. # 4,200 132,300
.............................................................
Universal Corporation/VA 2,200 62,562
....................... ....................... ---------
194,862
- -------------------------------------------------------------
TRANSPORTATION -- AIR -- 1.2%
.............................................................
AMR Corporation # 1,200 81,900
- -------------------------------------------------------------
TRUCKING -- 0.7%
.............................................................
Ryder System, Inc. 1,800 46,800
- -------------------------------------------------------------
UTILITY -- ELECTRIC -- 6.6%
.............................................................
CMP Group Inc. 6,500 170,219
.............................................................
Illinova Corporation 5,600 152,600
.............................................................
P P & L Resources, Inc. 2,339 71,924
.............................................................
SCANA Corporation 2,600 60,775
....................... ....................... ---------
455,518
....................... ....................... ---------
Total common stock (cost 6,580,772
$6,632,207)
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
VARIABLE RATE Principal
DEMAND NOTES* -- 4.9% Amount Value
<S> <C> <C>
General Mills, Inc., 4.8250% $171,873 $ 171,873
.............................................................
Pitney Bowes, Inc., 4.8250% 165,249 165,249
....................... ....................... ---------
Total variable rate demand notes 337,122
(cost $337,122)
- -------------------------------------------------------------
Total investments -- 100.7% (cost
$6,969,329) 6,917,894
.............................................................
Liabilities in excess of
other assets -- (0.7)% (47,214)
....................... ....................... ---------
$6,870,680
Total net assets -- 100.0%
- -------------------------------------------------------------
</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, 1999.
ADR -- American Depository Receipts.
# -- Non-income producing security.
See Notes to the Financial Statements
4
<PAGE> 137
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 96.7% Shares Value
- ------------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 4.8%
............................................................
AVTEAM, Inc. # 347,300 $ 2,539,631
- ------------------------------------------------------------
AUTO PARTS -- 3.5%
............................................................
Titan International, Inc. 157,900 1,875,063
- ------------------------------------------------------------
CHEMICALS -- 3.2%
............................................................
The Carbide/Graphite Group, Inc. # 119,500 1,710,344
- ------------------------------------------------------------
COMMERCIAL SERVICES -- 0.5%
............................................................
FirstService Corporation # 16,100 245,525
- ------------------------------------------------------------
COMMUNICATIONS & MEDIA -- 1.3%
............................................................
Groupe AB SA ADR # 215,500 700,375
- ------------------------------------------------------------
COMPUTERS -- 3.1%
............................................................
Creative Technology, Ltd. 46,700 627,531
............................................................
Hutchinson Technology, Inc. # 36,500 1,012,875
...................... ...................... ----------
1,640,406
- ------------------------------------------------------------
COMPUTER SOFTWARE &
SERVICES -- 10.2%
............................................................
Cambridge Technology Partners, Inc.
# 80,300 1,410,269
............................................................
Engineering Animation, Inc. # 24,200 512,737
............................................................
InaCom Corporation # 239,348 3,021,768
............................................................
Tech Data Corporation # 12,750 487,687
...................... ...................... ----------
5,432,461
- ------------------------------------------------------------
COMPUTER SYSTEMS -- 1.7%
............................................................
Radisys Corporation # 23,100 898,006
- ------------------------------------------------------------
ELECTRONICS -- 0.9%
............................................................
Stoneridge, Inc. # 34,900 471,150
- ------------------------------------------------------------
ENGINEERING AND
CONSTRUCTION -- 0.3%
............................................................
Stone & Webster, Inc. 5,700 151,762
- ------------------------------------------------------------
ENTERTAINMENT -- 3.2%
............................................................
Midway Games Inc. # 69,300 896,569
............................................................
THQ Inc. # 29,100 836,625
...................... ...................... ----------
1,733,194
- ------------------------------------------------------------
FINANCE -- MISCELLANEOUS -- 2.2%
............................................................
Executive Risk, Inc. 13,600 1,156,850
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
FOOD, BEVERAGE & TOBACCO -- 8.4%
............................................................
Canandaigua Brands, Inc. # 5,000 $ 262,189
............................................................
Interstate Bakeries Corporation 77,400 1,736,662
............................................................
J & J Snack Foods Corporation # 74,300 1,783,200
............................................................
The Earthgrains Company 27,900 720,169
...................... ...................... ----------
4,502,220
- ------------------------------------------------------------
HEALTHCARE -- MISCELLANEOUS -- 7.2%
............................................................
Beverly Enterprises, Inc. # 132,500 1,068,281
............................................................
Total Renal Care Holdings, Inc. # 145,300 2,261,231
............................................................
Ventas, Inc. 99,700 535,888
...................... ...................... ----------
3,865,400
- ------------------------------------------------------------
INSURANCE -- 7.0%
............................................................
ESG Re Limited 206,400 3,096,000
............................................................
Horace Mann Educators Corporation 7,400 201,187
............................................................
Stirling Cooke Brown Holdings
Limited 107,600 443,850
...................... ...................... ----------
3,741,037
- ------------------------------------------------------------
MACHINERY -- 8.5%
............................................................
Denison International PLC ADR # 138,700 2,132,513
............................................................
Hawk Corporation Class A # 96,300 848,644
............................................................
JLG Industries, Inc. 3,000 61,125
............................................................
New Holland N.V. 88,700 1,518,987
...................... ...................... ----------
4,561,269
- ------------------------------------------------------------
MISCELLANEOUS -- 4.0%
............................................................
American Coin Merchandising, Inc. # 282,000 1,833,000
............................................................
Mac-Gray Corporation # 33,300 291,375
............................................................
Ralcorp Holdings, Inc. # 2,500 40,156
...................... ...................... ----------
2,164,531
- ------------------------------------------------------------
OIL EXPLORATION &
PRODUCTION -- 0.6%
............................................................
Abraxas Petroleum Corporation # 74,500 88,469
............................................................
Tom Brown, Inc. # 14,300 222,544
...................... ...................... ----------
311,013
- ------------------------------------------------------------
OIL & GAS DRILLING -- 1.0%
............................................................
Triton Energy Limited # 51,200 550,400
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 138
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
SMALL CAP FUND
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
PUBLISHING -- 3.0%
............................................................
Playboy Enterprises, Inc. Class A # 34,200 $ 803,700
............................................................
Playboy Enterprises, Inc. # 29,100 772,969
...................... ...................... ----------
1,576,669
- ------------------------------------------------------------
RETAIL -- APPAREL -- 2.0%
............................................................
Payless ShoeSource, Inc. # 20,400 1,091,400
- ------------------------------------------------------------
RETAIL -- JEWELRY -- 2.4%
............................................................
Friedman's, Inc. 150,500 1,307,469
- ------------------------------------------------------------
SECURITY SERVICES -- 6.3%
............................................................
Pittston Brink's Group 124,900 3,341,075
- ------------------------------------------------------------
STEEL -- 0.9%
............................................................
Armco Inc. # 70,200 465,075
- ------------------------------------------------------------
TRANSPORTATION -- AIR
FREIGHT -- 3.5%
............................................................
AirNet Systems, Inc. # 139,900 1,888,650
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
UTILITY -- ELECTRIC -- 7.0%
............................................................
Central Hudson Gas & Electric
Corporation 2,000 $ 84,000
............................................................
CMP Group Inc. 119,000 3,116,312
............................................................
Cleco Corporation 2,600 78,975
............................................................
MDU Resources Group, Inc. 4,000 91,250
............................................................
Public Service Company of New
Mexico 4,200 83,475
............................................................
Rochester Gas and Electric
Corporation 3,300 87,656
............................................................
UGI Corporation 4,400 88,825
............................................................
The United Illuminating Company 2,000 84,875
...................... ...................... ----------
3,715,368
...................... ...................... ----------
Total common stock (cost 51,636,343
$60,313,444)
- ------------------------------------------------------------
Total investments -- 96.7% (cost
$60,313,444) 51,636,343
............................................................
Other assets in excess of
liabilities -- 3.3% 1,740,425
...................... ...................... ----------
$53,376,768
Total net assets -- 100.0%
- ------------------------------------------------------------
</TABLE>
ADR -- American Depository Receipts.
# -- Non-income producing security.
See Notes to the Financial Statements
6
<PAGE> 139
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 93.5% Shares Value
- ------------------------------------------------------------
<S> <C> <C>
AUSTRALIA -- 3.3%
- ------------------------------------------------------------
BANKS -- 1.6%
............................................................
Australia and New Zealand
Banking Group, Ltd. 2,981,050 $ 21,919,833
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.7%
............................................................
Pioneer International, Ltd. 9,105,173 23,202,883
..................... ..................... ------------
45,122,716
Total Australia
- ------------------------------------------------------------
AUSTRIA -- 0.5%
- ------------------------------------------------------------
STEEL -- 0.5%
............................................................
Boehler -- Uddeholm AG 140,010 6,929,744
..................... ..................... ------------
6,929,744
Total Austria
- ------------------------------------------------------------
CANADA -- 3.7%
- ------------------------------------------------------------
BANKS -- 1.2%
............................................................
Canadian Imperial Bank of
Commerce 715,022 16,956,471
- ------------------------------------------------------------
DIVERSIFIED
INDUSTRIALS -- 1.5%
............................................................
Imasco, Ltd. 733,630 19,677,799
- ------------------------------------------------------------
METALS & MINERALS -- 1.0%
............................................................
Noranda, Inc. 1,070,329 14,029,040
..................... ..................... ------------
50,663,310
Total Canada
- ------------------------------------------------------------
FINLAND -- 2.4%
- ------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 2.4%
............................................................
Metra OYJ 507,332 10,726,388
............................................................
UPM-Kymmene OYJ 780,340 22,373,610
..................... ..................... ------------
33,099,998
Total Finland
- ------------------------------------------------------------
FRANCE -- 9.5%
- ------------------------------------------------------------
BANKS -- 2.5%
............................................................
Banque Nationale de Paris 171,685 14,307,083
............................................................
Societe Generale 115,655 20,385,148
..................... ..................... ------------
34,692,231
- ------------------------------------------------------------
BEVERAGES -- 1.4%
............................................................
Pernod Ricard SA 287,923 19,301,769
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
............................................................
Lafarge SA 218,032 20,732,828
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
CONSUMER DURABLES -- MISCELLANEOUS -- 1.1%
............................................................
Societe BIC SA 286,125 $ 15,094,156
- ------------------------------------------------------------
OIL -- INTERNATIONAL -- 3.0%
............................................................
Elf Aquitaine SA 156,755 23,005,607
............................................................
Total SA 138,143 17,823,524
..................... ..................... ------------
40,829,131
..................... ..................... ------------
130,650,115
Total France
- ------------------------------------------------------------
GERMANY -- 7.5%
- ------------------------------------------------------------
BANKS -- 1.0%
............................................................
Commerzbank AG 457,680 13,901,275
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.6%
............................................................
Dyckerhoff AG 41,200 12,450,083
............................................................
Friedrich Grohe AG 32,968 9,316,452
..................... ..................... ------------
21,766,535
- ------------------------------------------------------------
CHEMICALS -- 2.2%
............................................................
Hoechst AG 482,306 21,837,081
............................................................
SGL Carbon AG # 113,719 8,796,334
..................... ..................... ------------
30,633,415
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 0.9%
............................................................
Buderus AG 33,100 13,279,600
- ------------------------------------------------------------
DIVERSIFIED
INDUSTRIALS -- 1.8%
............................................................
VEBA AG 415,695 24,437,515
..................... ..................... ------------
104,018,340
Total Germany
- ------------------------------------------------------------
HONG KONG -- 4.4%
- ------------------------------------------------------------
METALS & MINING -- 0.6%
............................................................
Yanzhou Coal Mining Co., Ltd. 21,746,000 7,707,471
- ------------------------------------------------------------
PRINTING & PUBLISHING -- 1.2%
............................................................
South China Morning Post
(Holdings), Ltd. 30,941,000 17,346,963
- ------------------------------------------------------------
REAL ESTATE
DEVELOPMENT -- 2.6%
............................................................
Hang Lung Development Company 12,148,000 15,148,011
............................................................
New World Development Co.,
Ltd. 6,851,000 20,529,424
..................... ..................... ------------
35,677,435
..................... ..................... ------------
60,731,869
Total Hong Kong
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 140
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
IRELAND -- 2.7%
- ------------------------------------------------------------
FOOD PRODUCERS -- 1.1%
............................................................
Greencore Group PLC 4,885,960 $ 15,117,451
- ------------------------------------------------------------
PAPER -- 1.6%
............................................................
Jefferson Smurfit Group PLC 9,664,145 22,675,258
..................... ..................... ------------
37,792,709
Total Ireland
- ------------------------------------------------------------
ITALY -- 3.0%
- ------------------------------------------------------------
OIL EXPLORATION & PRODUCTION -- 1.3%
............................................................
ENI SPA 3,111,524 18,580,573
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.7%
............................................................
Telecom Italia SPA 1,933,600 20,101,782
............................................................
Telecom Italia SPA -- RNC 586,000 3,179,002
..................... ..................... ------------
23,280,784
..................... ..................... ------------
41,861,357
Total Italy
- ------------------------------------------------------------
JAPAN -- 8.5%
- ------------------------------------------------------------
ELECTRONIC COMPONENTS -- 3.5%
............................................................
Nintendo Co., Ltd. 340,800 47,893,364
- ------------------------------------------------------------
ELECTRONICS -- 1.1%
............................................................
Nichicon Corporation 1,105,000 16,113,075
- ------------------------------------------------------------
FINANCIAL SERVICES -- 2.1%
............................................................
Promise Company, Ltd. 493,400 29,145,844
- ------------------------------------------------------------
LEISURE -- TOYS -- 1.8%
............................................................
NAMCO, Ltd. 926,300 24,871,757
..................... ..................... ------------
118,024,040
Total Japan
- ------------------------------------------------------------
NETHERLANDS -- 7.8%
- ------------------------------------------------------------
BANKS -- 1.0%
............................................................
ABN AMRO Holding N.V. 648,880 14,053,713
- ------------------------------------------------------------
CHEMICALS -- 1.5%
............................................................
Akzo Nobel N.V. 473,351 19,918,235
- ------------------------------------------------------------
ELECTRONICS -- 2.0%
............................................................
Koninklijke (Royal) Philips
Electronics N.V. 276,570 27,283,373
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
INSURANCE -- MULTI-LINE -- 2.3%
............................................................
Fortis (NL) N.V. 302,977 $ 9,358,665
............................................................
ING Groep N.V. 414,711 22,454,958
..................... ..................... ------------
31,813,623
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.0%
............................................................
Koninklijke KPN N.V. 298,195 13,993,268
..................... ..................... ------------
107,062,212
Total Netherlands
- ------------------------------------------------------------
NORWAY -- 0.6%
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 0.6%
............................................................
Kvaerner PLC -- Class A # 400,043 8,232,069
..................... ..................... ------------
8,232,069
Total Norway
- ------------------------------------------------------------
SINGAPORE -- 2.9%
- ------------------------------------------------------------
COMPUTERS -- 2.0%
............................................................
Creative Technology, Ltd. 2,107,252 28,316,199
- ------------------------------------------------------------
DIVERSIFIED
INDUSTRIALS -- 0.9%
............................................................
Jardine Matheson Holdings,
Ltd. 2,534,600 12,673,000
..................... ..................... ------------
40,989,199
Total Singapore
- ------------------------------------------------------------
SPAIN -- 2.8%
- ------------------------------------------------------------
BANKS -- 1.4%
............................................................
Banco Santander Central
Hispano, S.A. 1,774,800 18,487,500
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 1.4%
............................................................
Telefonica de Espana S.A. 404,973 19,509,374
..................... ..................... ------------
37,996,874
Total Spain
- ------------------------------------------------------------
SWEDEN -- 1.5%
- ------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.5%
............................................................
Electrolux AB -- Class B 985,730 20,637,490
..................... ..................... ------------
20,637,490
Total Sweden
- ------------------------------------------------------------
SWITZERLAND -- 6.1%
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.3%
............................................................
Geberit International AG # 78,877 17,986,554
- ------------------------------------------------------------
INSURANCE -- 0.6%
............................................................
Schweizerische
Rueckversicherungs-
Gesellschaft "registered" 4,634 8,823,260
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 141
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
MACHINERY & EQUIPMENT -- 2.2%
............................................................
SIG Schweizerische Industrie-
Gesellschaft Holding 20,307 $ 12,095,897
............................................................
Sulzer AG "registered" # 29,435 17,892,754
..................... ..................... ------------
29,988,651
- ------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 2.0%
............................................................
Novartis AG "registered' 18,488 26,995,857
..................... ..................... ------------
83,794,322
Total Switzerland
- ------------------------------------------------------------
UNITED KINGDOM -- 26.3%
- ------------------------------------------------------------
AUTOS -- 1.2%
............................................................
Lex Service PLC 1,828,630 16,862,367
- ------------------------------------------------------------
BANKS -- 3.1%
............................................................
Lloyds TSB Group PLC 1,512,287 20,500,738
............................................................
National Westminster Bank PLC 1,034,061 21,923,267
..................... ..................... ------------
42,424,005
- ------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
............................................................
Hanson PLC 2,275,447 20,211,450
- ------------------------------------------------------------
CHEMICALS -- 3.4%
............................................................
BOC Group PLC 1,009,808 19,737,735
............................................................
Laporte PLC 2,424,113 27,397,368
..................... ..................... ------------
47,135,103
- ------------------------------------------------------------
CONSUMER DURABLES -- MISCELLANEOUS -- 1.0%
............................................................
Reckitt & Colman PLC 1,332,381 13,892,970
- ------------------------------------------------------------
DIVERSIFIED -- 2.0%
............................................................
Cookson Group PLC 8,227,860 27,754,761
- ------------------------------------------------------------
DIVERSIFIED
INDUSTRIALS -- 3.2%
............................................................
Tomkins PLC 5,996,213 25,992,411
............................................................
Williams PLC 2,638,437 17,425,995
..................... ..................... ------------
43,418,406
- ------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 3.1%
............................................................
Invensys PLC 3,888,748 18,404,738
............................................................
TI Group PLC 3,551,130 23,789,884
..................... ..................... ------------
42,194,622
- ------------------------------------------------------------
FOOD & BEVERAGES -- 1.7%
............................................................
Allied Domecq PLC 2,432,594 23,467,017
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
INSURANCE -- 2.5%
............................................................
Allied Zurich AG PLC 1,304,264 $ 16,395,816
............................................................
CGU PLC 1,286,795 18,589,969
..................... ..................... ------------
34,985,785
- ------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 0.6%
............................................................
Medeva PLC 4,627,140 7,512,538
- ------------------------------------------------------------
PRINTING & PUBLISHING -- 1.0%
............................................................
United News & Media PLC 1,488,355 14,311,106
- ------------------------------------------------------------
RETAIL -- FOOD CHAINS -- 0.7%
............................................................
Safeway PLC 2,502,850 10,030,732
- ------------------------------------------------------------
TOBACCO -- 0.9%
............................................................
B.A.T. Industries PLC 1,338,714 12,587,372
- ------------------------------------------------------------
WATER -- TREATMENT -- 0.4%
............................................................
Thames Water PLC 367,874 5,833,563
..................... ..................... ------------
362,621,797
Total United Kingdom
..................... ..................... ------------
Total common stock 1,290,228,161
(cost $1,138,929,554)
- ------------------------------------------------------------
Principal
SHORT-TERM INVESTMENTS -- 2.5% Amount
- ------------------------------------------------------------
COMMERCIAL PAPER -- 2.2%
- ------------------------------------------------------------
TRW Incorporated
6.05%, 7/01/1999 $30,000,000 30,000,000
- ------------------------------------------------------------
VARIABLE RATE DEMAND
NOTES* -- 0.3%
- ------------------------------------------------------------
Chase Manhattan Bank, 3.3593% 4,683,200 4,683,200
..................... ..................... ------------
Total short-term investments 34,683,200
(cost $34,683,200)
- ------------------------------------------------------------
Total investments -- 96.0%
(cost $1,173,612,754) 1,324,911,361
............................................................
Other assets in excess of
liabilities -- 4.0% 55,134,613
..................... ..................... ------------
$1,380,045,974
Total net assets -- 100.0%
- ------------------------------------------------------------
</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
rate listed is as of June 30, 1999.
See Notes to the Financial Statements
9
<PAGE> 142
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 98.1% Shares Value
- -------------------------------------------------------------
<S> <C> <C>
AUSTRALIA -- 3.5%
- -------------------------------------------------------------
BANKS -- 1.7%
.............................................................
Australia and New Zealand Banking
Group, Ltd. 16,940 $ 124,561
- -------------------------------------------------------------
BUILDING MATERIALS -- 1.4%
.............................................................
Pioneer International, Ltd. 41,863 106,680
- -------------------------------------------------------------
DIVERSIFIED COMPANIES -- 0.4%
.............................................................
Reinsurance Australia Corporation,
Ltd. 39,233 32,720
....................... ....................... ---------
263,961
Total Australia
- -------------------------------------------------------------
CANADA -- 1.1%
- -------------------------------------------------------------
FOREST PRODUCTS & PAPER -- 0.0%
.............................................................
Nexfor, Inc. 1 6
- -------------------------------------------------------------
METALS & MINERALS -- 1.1%
.............................................................
Noranda, Inc. 6,385 83,690
- -------------------------------------------------------------
OIL EXPLORATION &
PRODUCTION -- 0.0%
.............................................................
Canadian Hunter Exploration Ltd. # 1 11
....................... ....................... ---------
83,707
Total Canada
- -------------------------------------------------------------
FRANCE -- 5.8%
- -------------------------------------------------------------
BANKS -- 2.3%
.............................................................
Banque Nationale de Paris 820 68,333
.............................................................
Societe Generale 625 110,161
....................... ....................... ---------
178,494
- -------------------------------------------------------------
BEVERAGES -- 1.1%
.............................................................
Pernod Ricard SA 1,200 80,446
- -------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
.............................................................
Lafarge SA 1,202 114,299
- -------------------------------------------------------------
OIL -- INTERNATIONAL -- 0.9%
.............................................................
Total SA 514 66,317
....................... ....................... ---------
439,556
Total France
- -------------------------------------------------------------
GERMANY -- 5.2%
- -------------------------------------------------------------
BANKS -- 1.0%
.............................................................
Commerzbank AG 2,500 75,933
- -------------------------------------------------------------
CHEMICALS -- 1.7%
.............................................................
Hoechst AG 2,759 124,918
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
DIVERSIFIED INDUSTRIALS -- 1.6%
.............................................................
VEBA AG 2,014 $ 118,397
- -------------------------------------------------------------
MEDICAL PRODUCTS -- 0.9%
.............................................................
Draegerwerk AG 4,985 70,436
....................... ....................... ---------
389,684
Total Germany
- -------------------------------------------------------------
HONG KONG -- 3.5%
- -------------------------------------------------------------
BANKS -- 1.5%
.............................................................
Dao Heng Bank Group, Ltd. 25,500 114,372
- -------------------------------------------------------------
REAL ESTATE DEVELOPMENT -- 1.3%
.............................................................
New World Development Co., Ltd. 33,000 98,886
- -------------------------------------------------------------
RETAIL -- SPECIALTY -- 0.7%
.............................................................
Dickson Concepts International,
Ltd. 73,500 52,102
....................... ....................... ---------
265,360
Total Hong Kong
- -------------------------------------------------------------
IRELAND -- 2.9%
- -------------------------------------------------------------
FOOD PRODUCERS -- 0.9%
.............................................................
Greencore Group PLC 21,160 65,470
- -------------------------------------------------------------
PAPER -- 2.0%
.............................................................
Jefferson Smurfit Group PLC 63,990 150,142
....................... ....................... ---------
215,612
Total Ireland
- -------------------------------------------------------------
ITALY -- 2.7%
- -------------------------------------------------------------
OIL EXPLORATION &
PRODUCTION -- 1.0%
.............................................................
ENI SPA 12,000 71,658
- -------------------------------------------------------------
TELECOMMUNICATIONS -- 1.7%
.............................................................
Telecom Italia SPA 10,600 110,198
.............................................................
Telecom Italia SPA -- RNC 3,425 18,580
....................... ....................... ---------
128,778
....................... ....................... ---------
200,436
Total Italy
- -------------------------------------------------------------
JAPAN -- 7.5%
- -------------------------------------------------------------
AUTO PARTS -- 1.0%
.............................................................
NIFCO, Inc. 8,000 76,867
- -------------------------------------------------------------
ELECTRONIC COMPONENTS -- 3.2%
.............................................................
Nintendo Co., Ltd. 1,700 238,905
- -------------------------------------------------------------
ELECTRONICS -- 1.6%
.............................................................
Nichicon Corporation 8,000 116,656
- -------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
10
<PAGE> 143
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES -- 1.7%
.............................................................
Promise Company, Ltd. 2,200 $ 129,957
....................... ....................... ---------
562,385
Total Japan
- -------------------------------------------------------------
NETHERLANDS -- 6.5%
- -------------------------------------------------------------
BANKS -- 1.0%
.............................................................
ABN AMRO Holding N.V. 3,585 77,645
- -------------------------------------------------------------
CHEMICALS -- 1.3%
.............................................................
Akzo Nobel N.V. 2,420 101,832
- -------------------------------------------------------------
ELECTRONICS -- 1.8%
.............................................................
Koninklijke (Royal) Philips
Electronics N.V. 1,343 132,505
- -------------------------------------------------------------
INSURANCE -- MULTI-LINE -- 1.6%
.............................................................
ING Groep N.V. 2,255 122,099
- -------------------------------------------------------------
TELECOMMUNICATIONS -- 0.8%
.............................................................
Koninklijke KPN N.V. 1,300 61,005
....................... ....................... ---------
495,086
Total Netherlands
- -------------------------------------------------------------
NEW ZEALAND -- 1.3%
- -------------------------------------------------------------
BUILDING MATERIALS -- 1.3%
.............................................................
Fletcher Challenge Building 69,015 100,573
....................... ....................... ---------
100,573
Total New Zealand
- -------------------------------------------------------------
SINGAPORE -- 2.9%
- -------------------------------------------------------------
COMPUTERS -- 2.0%
.............................................................
Creative Technology, Ltd. 11,200 150,500
- -------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 0.9%
.............................................................
Jardine Matheson Holdings, Ltd. 14,000 70,000
....................... ....................... ---------
220,500
Total Singapore
- -------------------------------------------------------------
SPAIN -- 1.4%
- -------------------------------------------------------------
TELECOMMUNICATIONS -- 1.4%
.............................................................
Telefonica de Espana S.A. 2,244 108,104
....................... ....................... ---------
108,104
Total Spain
- -------------------------------------------------------------
SWEDEN -- 1.5%
- -------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.5%
.............................................................
Electrolux AB -- Class B 5,525 115,673
....................... ....................... ---------
115,673
Total Sweden
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
SWITZERLAND -- 6.8%
- -------------------------------------------------------------
BUILDING MATERIALS -- 2.2%
.............................................................
Forbo Holding AG "registered" 161 $ 64,002
.............................................................
Geberit International AG # 451 102,843
....................... ....................... ---------
166,845
- -------------------------------------------------------------
INSURANCE -- 0.7%
.............................................................
Schweizerische Rueckversicherungs-
Gesellschaft "registered" 27 51,409
- -------------------------------------------------------------
MACHINERY & EQUIPMENT -- 2.0%
.............................................................
Saurer AG "registered" # 141 76,278
.............................................................
SIG Schweizerische
Industrie-Gesellschaft Holding 126 75,052
....................... ....................... ---------
151,330
- -------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 1.9%
.............................................................
Novartis AG "registered" 99 144,558
....................... ....................... ---------
514,142
Total Switzerland
- -------------------------------------------------------------
UNITED KINGDOM -- 20.4%
- -------------------------------------------------------------
APPAREL & TEXTILES -- 1.6%
.............................................................
Coats Viyella PLC 154,380 124,108
- -------------------------------------------------------------
BANKS -- 3.1%
.............................................................
Lloyds TSB Group PLC 8,337 113,017
.............................................................
National Westminster Bank PLC 5,700 120,847
....................... ....................... ---------
233,864
- -------------------------------------------------------------
BUILDING MATERIALS -- 1.5%
.............................................................
Hanson PLC 12,770 113,428
- -------------------------------------------------------------
DIVERSIFIED -- 1.2%
.............................................................
Cookson Group PLC 27,000 91,078
- -------------------------------------------------------------
DIVERSIFIED INDUSTRIALS -- 2.9%
.............................................................
Elementis PLC 55,010 90,180
.............................................................
Tomkins PLC 29,832 129,316
....................... ....................... ---------
219,496
- -------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 2.5%
.............................................................
Invensys PLC 11,106 52,563
.............................................................
TI Group PLC 20,540 137,603
....................... ....................... ---------
190,166
- -------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
11
<PAGE> 144
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
FOOD & BEVERAGES -- 1.9%
.............................................................
Allied Domecq PLC 12,690 $ 122,419
.............................................................
Tesco PLC 7,520 19,351
....................... ....................... ---------
141,770
- -------------------------------------------------------------
INSURANCE -- 2.2%
.............................................................
Allied Zurich AG PLC 5,870 73,791
.............................................................
CGU PLC 6,340 91,592
....................... ....................... ---------
165,383
- -------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 0.6%
.............................................................
Medeva PLC 25,878 42,015
- -------------------------------------------------------------
PRINTING & PUBLISHING -- 1.0%
.............................................................
United News & Media PLC 8,276 79,577
- -------------------------------------------------------------
TOBACCO -- 0.9%
.............................................................
B.A.T. Industries PLC 7,230 67,981
- -------------------------------------------------------------
WATER -- TREATMENT -- 1.0%
.............................................................
Pennon Group PLC 4,518 75,632
....................... ....................... ---------
1,544,498
Total United Kingdom
- -------------------------------------------------------------
UNITED STATES -- 25.1%
- -------------------------------------------------------------
AEROSPACE -- 1.0%
.............................................................
Northrop Grumman Corporation 1,100 72,944
- -------------------------------------------------------------
AUTO PARTS -- 1.5%
.............................................................
Dana Corporation 2,400 110,550
- -------------------------------------------------------------
AUTOS & TRUCKS -- 0.9%
.............................................................
Ford Motor Company 1,260 71,111
- -------------------------------------------------------------
BANKS -- 1.7%
.............................................................
Bank One Corporation 2,106 125,439
- -------------------------------------------------------------
BUILDING & FOREST PRODUCTS -- 1.3%
.............................................................
Weyerhaeuser Company 1,450 99,688
- -------------------------------------------------------------
CONGLOMERATES -- 1.3%
.............................................................
Tenneco, Inc. 4,000 95,500
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
FINANCIAL SERVICES -- 1.4%
.............................................................
Household International, Inc. 2,210 $ 104,699
- -------------------------------------------------------------
INSURANCE -- 1.1%
.............................................................
Safeco Corporation 1,800 79,425
- -------------------------------------------------------------
MACHINERY -- 2.2%
.............................................................
New Holland N.V. 9,750 166,969
- -------------------------------------------------------------
METALS & MINING -- 1.6%
.............................................................
Alcoa, Inc. 2,000 123,750
- -------------------------------------------------------------
OIL -- DOMESTIC -- 2.2%
.............................................................
Occidental Petroleum Corporation 3,400 71,825
.............................................................
Phillips Petroleum Company 1,840 92,575
....................... ....................... ---------
164,400
- -------------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 1.3%
.............................................................
Eastman Kodak Company 1,400 94,850
- -------------------------------------------------------------
SAVINGS & LOANS -- 0.9%
.............................................................
Fannie Mae 1,050 71,794
- -------------------------------------------------------------
TOBACCO -- 1.5%
.............................................................
Philip Morris Companies, Inc. 2,905 116,745
- -------------------------------------------------------------
UTILITY -- ELECTRIC -- 0.9%
.............................................................
GPU, Inc. 1,590 67,078
- -------------------------------------------------------------
UTILITY -- TELEPHONE -- 4.3%
.............................................................
AT&T Corporation 1,950 108,834
.............................................................
ALLTEL Corporation 1,800 128,700
.............................................................
GTE Corporation 1,200 90,900
....................... ....................... ---------
328,434
....................... ....................... ---------
1,893,376
Total United States
- -------------------------------------------------------------
Total common stock
(cost $6,810,227) 7,412,653
- -------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
12
<PAGE> 145
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
GLOBAL EQUITY FUND
<TABLE>
<CAPTION>
SHORT-TERM Principal
INVESTMENTS -- 1.4% Amount Value
- -------------------------------------------------------------
<S> <C> <C>
VARIABLE RATE DEMAND NOTES* -- 1.4%
- -------------------------------------------------------------
Chase Manhattan Bank, 3.3593% $107,718 $ 107,718
- -------------------------------------------------------------
CASH EQUIVALENTS -- 0.0%
- -------------------------------------------------------------
Chase Bank Domestic Liquidity Fund 689 689
....................... ....................... ---------
Total short-term investments (cost 108,407
$108,407)
- -------------------------------------------------------------
Total investments -- 99.5%
(cost $6,918,634) 7,521,060
.............................................................
Other assets in excess of
liabilities -- 0.5% 40,836
....................... ....................... ---------
$7,561,896
Total net assets -- 100.0%
- -------------------------------------------------------------
</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
rate listed is as of June 30, 1999.
See Notes to the Financial Statements
13
<PAGE> 146
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
BALANCED FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 47.1% Shares Value
- ------------------------------------------------------------
<S> <C> <C>
AEROSPACE -- 2.3%
............................................................
Lockheed Martin Corporation 23,300 $ 867,925
............................................................
Northrop Grumman Corporation 15,400 1,021,212
............................................................
Rockwell International
Corporation 5,800 352,350
...................... ...................... ----------
2,241,487
- ------------------------------------------------------------
APPAREL & TEXTILES -- 0.3%
............................................................
Russell Corporation 15,000 292,500
- ------------------------------------------------------------
AUTO PARTS -- 1.8%
............................................................
Dana Corporation 15,800 727,788
............................................................
Delphi Automotive Systems
Corporation 13,294 246,770
............................................................
Meritor Automotive, Inc. 2,000 51,000
............................................................
TRW Inc. 13,600 746,300
...................... ...................... ----------
1,771,858
- ------------------------------------------------------------
AUTOS & TRUCKS -- 2.2%
............................................................
Ford Motor Company 21,000 1,185,188
............................................................
General Motors Corporation 14,300 943,800
...................... ...................... ----------
2,128,988
- ------------------------------------------------------------
BANKS -- 2.5%
............................................................
Bank One Corporation 17,300 1,030,431
............................................................
First Security Corporation 8,200 223,450
............................................................
First Union Corporation 15,000 705,000
............................................................
KeyCorp 8,600 276,275
............................................................
UnionBanCal Corporation 5,900 213,137
...................... ...................... ----------
2,448,293
- ------------------------------------------------------------
BEVERAGES -- 0.6%
............................................................
Anheuser-Busch Companies, Inc. 9,000 638,438
- ------------------------------------------------------------
BUILDING & FOREST
PRODUCTS -- 1.2%
............................................................
Georgia-Pacific Corporation
(Timber Group) 13,000 328,250
............................................................
Weyerhaeuser Company 12,300 845,625
...................... ...................... ----------
1,173,875
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
CHEMICALS -- 1.3%
............................................................
The Dow Chemical Company 5,200 $ 659,750
............................................................
Eastman Chemical Company 9,400 486,450
............................................................
Millennium Chemicals, Inc. 4,442 104,665
...................... ...................... ----------
1,250,865
- ------------------------------------------------------------
CONGLOMERATES -- 1.0%
............................................................
Tenneco, Inc. 39,600 945,450
- ------------------------------------------------------------
ENGINEERING &
CONSTRUCTION -- 0.5%
............................................................
Harsco Corporation 14,000 448,000
- ------------------------------------------------------------
FINANCIAL SERVICES -- 2.0%
............................................................
Associates First Capital
Corporation -- Class A 2,400 106,350
............................................................
Fannie Mae 12,500 854,688
............................................................
Fleet Financial Group, Inc. 600 26,625
............................................................
Household International, Inc. 11,200 530,600
............................................................
Transamerica Corporation 6,000 450,000
...................... ...................... ----------
1,968,263
- ------------------------------------------------------------
HEALTHCARE -- DRUGS -- 0.2%
............................................................
American Home Products
Corporation 600 34,500
............................................................
Bristol Myers Squibb Company 1,700 119,744
...................... ...................... ----------
154,244
- ------------------------------------------------------------
HEALTHCARE -- MEDICAL PRODUCTS -- 0.1%
............................................................
Baxter International, Inc. 2,200 133,375
- ------------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES -- 1.0%
............................................................
Whirlpool Corporation 13,000 962,000
- ------------------------------------------------------------
INSURANCE -- 3.0%
............................................................
American General Corporation 9,100 685,913
............................................................
Harleysville Group, Inc. 14,500 297,250
............................................................
Lincoln National Corporation 10,400 544,050
............................................................
Safeco Corporation 18,500 816,312
............................................................
St. Paul Companies, Inc. 20,600 655,337
...................... ...................... ----------
2,998,862
- ------------------------------------------------------------
LEISURE/TOYS -- 0.5%
............................................................
Fortune Brands, Inc. 13,000 537,875
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
14
<PAGE> 147
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
BALANCED FUND
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
MACHINERY -- 1.1%
............................................................
Deere & Company 1,400 $ 55,475
............................................................
New Holland N.V. 57,200 979,550
...................... ...................... ----------
1,035,025
- ------------------------------------------------------------
METALS & MINING -- 2.3%
............................................................
Alcoa, Inc. 14,000 866,250
............................................................
Phelps Dodge Corporation 8,400 520,275
............................................................
Reynolds Metals Company 14,500 855,500
...................... ...................... ----------
2,242,025
- ------------------------------------------------------------
OIL -- DOMESTIC -- 3.7%
............................................................
Atlantic Richfield Company 6,200 518,088
............................................................
Occidental Petroleum
Corporation 26,500 559,812
............................................................
Phillips Petroleum Company 22,500 1,132,031
............................................................
Texaco Inc. 4,500 281,250
............................................................
USX-Marathon Group, Inc. 25,000 814,062
............................................................
Ultramar Diamond Shamrock
Corporation 14,700 320,644
...................... ...................... ----------
3,625,887
- ------------------------------------------------------------
PAPER -- 1.8%
............................................................
Georgia-Pacific Group 10,000 473,750
............................................................
International Paper Company 26,000 1,313,000
...................... ...................... ----------
1,786,750
- ------------------------------------------------------------
PHOTOGRAPHY & OPTICAL -- 0.8%
............................................................
Eastman Kodak Company 11,600 785,900
- ------------------------------------------------------------
POLLUTION CONTROL -- 1.4%
............................................................
Browning-Ferris Industries,
Inc. 18,400 791,200
............................................................
Waste Management, Inc. 10,000 537,500
...................... ...................... ----------
1,328,700
- ------------------------------------------------------------
RAILROADS -- 1.1%
............................................................
CSX Corporation 9,700 439,531
............................................................
Norfolk Southern Corporation 22,000 662,750
...................... ...................... ----------
1,102,281
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
RETAIL -- 2.0%
............................................................
Intimate Brands, Inc. 2,940 $ 139,283
............................................................
J.C. Penney Company, Inc. 19,100 927,544
............................................................
May Department Stores Company 12,600 515,025
............................................................
Sears, Roebuck & Company 8,800 392,150
...................... ...................... ----------
1,974,002
- ------------------------------------------------------------
SAVINGS & LOANS -- 0.9%
............................................................
Washington Mutual, Inc. 24,300 859,612
- ------------------------------------------------------------
STEEL -- 0.8%
............................................................
USX-U.S. Steel Group, Inc. 29,000 783,000
- ------------------------------------------------------------
TOBACCO -- 1.9%
............................................................
Philip Morris Companies, Inc. 47,400 1,904,887
- ------------------------------------------------------------
TRUCKING -- 0.1%
............................................................
Ryder System, Inc. 4,500 117,000
- ------------------------------------------------------------
UTILITY -- ELECTRIC -- 5.0%
............................................................
CMS Energy Corporation 9,500 397,813
............................................................
Central & South West
Corporation 14,500 338,937
............................................................
DTE Energy Company 12,000 480,000
............................................................
Edison International 19,000 508,250
............................................................
Entergy Corporation 7,700 240,625
............................................................
GPU, Inc. 5,800 244,687
............................................................
Illinova Corporation 28,000 763,000
............................................................
PECO Energy Company 14,000 586,250
............................................................
P P & L Resources, Inc. 10,000 307,500
............................................................
PacifiCorp 12,000 220,500
............................................................
Public Service Enterprises
Group, Inc. 7,000 286,125
............................................................
SCANA Corporation 14,000 327,250
............................................................
Texas Utilities Company 6,300 259,875
...................... ...................... ----------
4,960,812
- ------------------------------------------------------------
UTILITY -- GAS PIPELINE -- 0.2%
............................................................
Peoples Energy Corporation 4,500 169,594
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
15
<PAGE> 148
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
BALANCED FUND
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
UTILITY -- TELEPHONE -- 3.5%
............................................................
AT&T Corporation 15,800 $ 881,837
............................................................
ALLTEL Corporation 9,400 672,100
............................................................
Bell Atlantic Corporation 12,500 817,188
............................................................
GTE Corporation 4,000 303,000
............................................................
SBC Communications, Inc. 13,000 754,000
...................... ...................... ----------
3,428,125
- ------------------------------------------------------------
Total common stock (cost
$38,969,491) 46,197,973
- ------------------------------------------------------------
Principal
CORPORATE BONDS -- 14.6% Amount
- ------------------------------------------------------------
BANKS -- 1.5%
............................................................
MBNA Corporation, 5.505%,
6/17/2002 # $ 1,500,000 1,492,602
- ------------------------------------------------------------
EUROBANKS -- 6.1%
............................................................
Foreningsbanken Kredit AB, CLB
12/18/2001, 5.92625%,
12/29/2049 # 2,500,000 2,474,991
............................................................
Nordbanken, CLB 10/25/2001
5.92625%, 10/29/2049 # 2,000,000 1,956,940
............................................................
Okobank, CLB 9/09/2002
5.59875%, 9/29/2049 # 1,500,000 1,510,722
...................... ...................... ----------
5,942,653
- ------------------------------------------------------------
FINANCIAL SERVICES -- 3.5%
............................................................
Countrywide Home Loans, Inc.,
6.84%, 10/22/2004 2,500,000 2,483,303
............................................................
Lehman Brothers Holdings,
5.50125%, 6/01/2001 # 900,000 897,442
...................... ...................... ----------
3,380,745
- ------------------------------------------------------------
RETAIL -- 1.2%
............................................................
Rite Aid Corp. (Acquired
12/16/1998, cost $747,645),
6.00%, 12/15/2005 r 750,000 695,127
............................................................
Rite Aid Corp. 7.125%,
1/15/2007 475,000 462,860
...................... ...................... ----------
1,157,987
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION -- 2.3%
............................................................
Delta Air Lines ETC:
9.90%, 1/02/2002 $ 150,000 $ 159,729
10.50%, 4/30/2016 750,000 923,674
............................................................
Northwest Airlines, Inc.,
11.30%, 12/21/2012 1,049,292 1,216,657
...................... ...................... ----------
2,300,060
- ------------------------------------------------------------
Total corporate bonds (cost
$15,656,856) 14,274,047
- ------------------------------------------------------------
GOVERNMENT AGENCY
MORTGAGE-BACKED
SECURITIES -- 6.0%
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.4%
............................................................
Federal Home Loan Mortgage
Corporation
1588 SA, 7.48888%, 9/15/2023
# 700,000 564,527
............................................................
2067 PD, 6.50%, 9/15/2026 2,900,000 2,809,361
...................... ...................... ----------
3,373,888
- ------------------------------------------------------------
PASS-THROUGH SECURITIES -- 2.4%
............................................................
Federal National Mortgage
Association
Pool #313608, 6.50%,
7/01/2012 2,360,375 2,329,921
- ------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.2%
............................................................
Federal National Mortgage
Association
1994-53 E (PO), 0.00%,
11/25/2023 214,503 210,946
- ------------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $6,062,799) 5,914,755
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
16
<PAGE> 149
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
BALANCED FUND
<TABLE>
<CAPTION>
NON-AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 13.7% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES -- 9.7%
............................................................
Ditech Home Loan Owner Trust,
CLB 1997-1 A3, 6.71%,
8/15/2018 $ 1,750,000 $ 1,755,679
............................................................
GMAC Commercial Mortgage
Securities Inc., 1999-C2 A2,
6.945%, 9/15/2033 1,150,000 1,148,879
............................................................
GREAT 1998-1 A1 (Acquired
7/02/98, cost $1,106,571)
7.33%, 9/15/2007 r + 1,106,571 331,971
............................................................
Green Tree Financial
Corporation, CLB 1996-5 B2,
8.45%, 7/15/2027 1,549,754 1,353,299
............................................................
Heilig-Meyers Master Trust
(Acquired 2/20/1998, cost
$1,399,872), CLB 1998-1A A,
6.125%, 1/20/2007 r 1,400,000 1,376,739
............................................................
Nomura Asset Securities
Corporation:
CLB 1995-MD3 A1B, 8.15%,
3/04/2020 1,000,000 1,053,465
............................................................
CLB 1998-D6 A1B, 6.59%,
3/17/2028 2,500,000 2,431,463
...................... ...................... ----------
9,451,495
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 2.4%
............................................................
Independent National Mortgage
Corporation, CLB 1996-D A2,
7.00%, 5/25/2026 9,114 9,106
............................................................
PNC Mortgage Securities
Corporation, CLB 1996-1 A11,
7.50%, 6/25/2026 1,986,978 1,979,040
............................................................
Prudential Home Mortgage
Securities, CLB 1993-54,
Class A17, 3.77545%,
1/25/2024 # 500,000 394,688
...................... ...................... ----------
2,382,834
- ------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 1.6%
............................................................
Chase Commercial Mortgage
Securities Corporation, CLB
1997-1 X (IO), 1.438176%,
4/19/2015 # 21,952,535 1,536,677
- ------------------------------------------------------------
Total non-agency
mortgage-backed securities
(cost $13,518,409) 13,371,006
- ------------------------------------------------------------
PREFERRED STOCKS -- 0.9% Shares Value
- ------------------------------------------------------------
Home Ownership Funding 2,
(Acquired 2/20/1997, Cost
$1,000,000) r 1,000 $ 861,000
- ------------------------------------------------------------
U.S. TREASURY Principal
OBLIGATIONS -- 17.2% Amount
- ------------------------------------------------------------
U.S. Treasury Notes:
4.00%, 10/31/2000 $12,500,000 12,245,605
............................................................
5.75%, 4/30/2003 3,150,000 3,153,937
............................................................
6.50%, 10/15/2006 1,350,000 1,393,454
- ------------------------------------------------------------
Total U.S. Treasury obligations
(cost $16,882,919) 16,792,996
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 0.0%
- ------------------------------------------------------------
VARIABLE RATE DEMAND NOTES* -- 0.0%
............................................................
General Mills, Inc., 4.8250% 7,874 7,874
............................................................
Sara Lee, Corp., 4.8200% 465 465
...................... ...................... ----------
Total short-term investments 8,339
(cost $8,339)
- ------------------------------------------------------------
Total investments -- 99.5%
(cost $92,098,813) 97,420,116
............................................................
Other assets in excess of
liabilities -- 0.5% 477,986
...................... ...................... ----------
$97,898,102
Total net assets -- 100.0%
- ------------------------------------------------------------
</TABLE>
# Variable rate security. The rate listed is as of June 30, 1999.
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of June 30, 1999.
IO -- Interest Only.
PO -- Principal 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.
+ -- Security Fair Valued under procedures established by the Board of Trustees
(See Note 1).
See Notes to the Financial Statements
17
<PAGE> 150
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 33.5% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
BANKS -- 2.6%
............................................................
MBNA Corporation, 5.505%,
6/17/2002 # $ 500,000 $ 497,534
............................................................
Sovereign Bancorp, CLB 6.625%,
3/15/2001 1,750,000 1,744,405
............................................................
Unibanco Grand Cayman (Acquired
4/21/1999, cost $1,050,809),
10.75%, 4/28/2000 r 1,050,000 1,057,875
..................... ...................... ----------
3,299,814
- ------------------------------------------------------------
CABLE -- 4.5%
............................................................
Charter Communication Holdings
LLC (Acquired 3/12/1999, cost
$2,592,070), CLB 4/01/2004,
8.625%, 4/01/2009 r 2,600,000 2,509,000
............................................................
CSC Holdings Inc., 7.25%,
7/15/2008 2,200,000 2,101,000
............................................................
USA Networks Inc., 6.75%,
11/15/2005 1,000,000 960,843
..................... ...................... ----------
5,570,843
- ------------------------------------------------------------
EUROBANKS -- 1.0%
............................................................
Nordbanken, CLB 9/27/2001
5.9925%, 9/29/2049 # 1,300,000 1,282,112
- ------------------------------------------------------------
FINANCIAL SERVICES -- 7.9%
............................................................
AT & T Capital Corp., 5.34%,
10/24/2000 # 500,000 499,769
............................................................
Countrywide Home Loans, Inc.,
6.25%, 4/15/2009 2,000,000 1,845,204
............................................................
Countrywide Home Loans, Inc.,
6.85%, 6/15/2004 1,700,000 1,701,525
............................................................
Golden State Holdings, CLB
8/1/2000, 5.995%, 8/01/2003 # 3,000,000 2,947,218
............................................................
Lehman Brothers Holdings,
6.20%, 1/15/2002 1,900,000 1,871,276
............................................................
Pan Pacific Ind. Inv. PLC
(Acquired 6/18/1999, cost
$971,987), 0.00%, 4/28/2007 r 2,000,000 990,960
..................... ...................... ----------
9,855,952
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
INDUSTRIAL -- 3.0%
............................................................
Coca-Cola Femsa SA, 8.95%,
11/01/2006 $1,110,000 $ 1,101,925
............................................................
Lennar Corp., CLB 7.625%,
3/01/2009 2,750,000 2,612,505
..................... ...................... ----------
3,714,430
- ------------------------------------------------------------
MISCELLANEOUS -- 1.5%
............................................................
Liberty Property LP, CLB 7.75%,
4/15/2009 1,200,000 1,154,710
............................................................
Republic of Brazil, 11.625%,
4/15/2004 750,000 697,500
..................... ...................... ----------
1,852,210
- ------------------------------------------------------------
RETAIL -- 4.3%
............................................................
Great Atlantic & Pacific Tea,
7.70%, 1/15/2004 2,500,000 2,465,855
............................................................
Rite Aid Corp.:
(Acquired 12/16/1998, cost
$1,246,075), 6.00%,
12/15/2005 r 1,250,000 1,158,545
............................................................
(Acquired 3/30/1999, cost
$964,707), CLB 6.00%,
12/15/2005 r 1,000,000 926,836
............................................................
7.125%, 1/15/2007 850,000 828,276
..................... ...................... ----------
5,379,512
- ------------------------------------------------------------
SAVINGS & LOANS -- 0.4%
............................................................
Western Financial Savings, CLB
7/1/2000, 8.50%, 7/01/2003 500,000 457,604
- ------------------------------------------------------------
STEEL -- 2.2%
............................................................
Pohang Iron & Steel, 6.625%,
7/01/2003 2,900,000 2,745,218
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 2.6%
............................................................
Comcast Cellular Holdings, CLB
5/01/2002, 9.50%, 5/01/2007 1,300,000 1,460,875
............................................................
Telecom Argentina Stet. Fran.
(Acquired 6/25/1999, cost
$998,750), 9.75%, 7/12/2001 r 1,000,000 1,000,000
............................................................
MCI Worldcom, Inc., CLB
1/15/2001, 8.875%, 1/15/2006 775,000 822,559
..................... ...................... ----------
3,283,434
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
18
<PAGE> 151
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION -- 1.9%
............................................................
Bombardier Capital Inc.
(Acquired 1/22/1999, cost
$1,496,910), CLB 6.00%,
1/15/2002 r $1,500,000 $ 1,476,006
............................................................
Delta Air Lines ETC:
CLB 9.90%, 1/02/2002 250,000 266,214
............................................................
10.50%, 4/30/2016 500,000 615,782
..................... ...................... ----------
2,358,002
- ------------------------------------------------------------
UTILITIES -- 1.6%
............................................................
CMS Energy Corp., CLB 8.00%,
7/01/2001# 2,000,000 1,996,286
- ------------------------------------------------------------
Total corporate bonds and notes
(cost $42,743,995) 41,795,417
- ------------------------------------------------------------
GOVERNMENT AGENCY
MORTGAGE-BACKED
SECURITIES -- 22.8%
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 22.5%
............................................................
Federal Home Loan Mortgage
Corporation:
............................................................
1564 SE, CLB 9.12167%,
8/15/2008 # 119,179 122,195
............................................................
1565 OC, CLB 6.84544%,
8/15/2008 # 1,827,135 1,736,051
............................................................
1261 J, CLB 8.00%, 7/15/2021 703,629 725,247
............................................................
1573 GC, CLB 11.51138%,
1/15/2023 # 546,583 530,566
............................................................
1588 SA, 7.48888%, 9/15/2023
# 1,625,000 1,310,510
............................................................
2067 PD, 6.50%, 9/15/2026 1,200,000 1,162,494
............................................................
2118 Z, CLB 6.50%, 12/15/2028 605,555 517,785
............................................................
Pool #C00716, 6.00%,
2/01/2029 4,003,829 3,780,210
............................................................
Pool #C25556, 6.50%,
4/01/2029 4,983,343 4,829,393
............................................................
Pool #E00617, 5.50%,
1/01/2014 4,438,693 4,211,206
............................................................
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
Federal National Mortgage
Association:
Pool #313608, 6.50%,
7/01/2012 $2,360,375 $ 2,329,921
............................................................
1994-27 SD, 6.9478%,
3/25/2023 # 2,515,648 2,264,644
............................................................
G93-27 SB, 7.7434%, 8/25/2023
# 43,813 35,322
............................................................
Pool #481469, 6.00%,
2/01/2029 4,247,907 4,005,284
............................................................
1999-13 ZD, 9.7203%,
4/25/2029 # 433,562 451,952
..................... ...................... ----------
28,012,780
- ------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.3%
............................................................
Federal National Mortgage
Association:
G93-32 E, 0.00% (PO),
9/25/2023 353,496 334,922
............................................................
1998-48 CI (IO), 6.50%,
8/25/2028 190,840 35,049
..................... ...................... ----------
369,971
- ------------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $29,163,799) 28,382,751
- ------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED
SECURITIES -- 23.2%
- ------------------------------------------------------------
ASSET-BACKED
SECURITIES -- 17.7%
............................................................
Associates Manufactured Housing
Pass-Through Certificates,
CLB 1996-2 A4, 6.60%,
6/15/2027 500,000 502,207
............................................................
CIT Marine Trust, CLB 1999-A
A2, 5.80%, 4/15/2010 2,000,000 1,994,290
............................................................
Commercial Financial Services
Securitized Multiple Asset
Rated Trust (Acquired
9/24/1997, cost $360,984),
1997-5 A1, 7.72%, 6/15/2005 r
+ 361,069 108,321
............................................................
Commercial Mortgage Acceptance
Corporation (Acquired
3/13/1998, cost $282,837),
CLB 1996-C2 A2, 7.0357%,
9/15/2023 # r 279,733 284,036
............................................................
Commercial Resecuritization
Trust (Acquired 2/10/1999,
cost $967,760), CLB 1999-ABC1
A, 6.74%, 1/27/2009 r 977,998 953,548
............................................................
</TABLE>
See Notes to the Financial Statements
19
<PAGE> 152
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
CPS Auto Trust, CLB 1998-1 A,
6.00%, 8/15/2003 $ 330,961 $ 331,085
............................................................
The C.S. First Boston Mortgage
Securities Corp. Commercial
Mortgage Pass-Through
Certificates, 1998-C1 A1B,
6.48%, 5/17/2008 750,000 723,139
............................................................
Delta Funding Home Equity Loan
Trust, CLB 5.98%, 2/15/2023 2,000,000 1,985,370
............................................................
Ditech Home Loan Owner Trust,
CLB 1997-1 A3, 6.71%,
8/15/2018 600,000 601,947
............................................................
GMAC Commercial Mortgage
Securities Inc., CLB 1999-C2
A2, 6.945%, 9/15/2033 2,600,000 2,597,465
............................................................
GREAT (Acquired 7/02/1998, cost
$158,082), 1998-1 A1, 7.33%,
9/15/2007 r + 158,082 47,425
............................................................
Green Tree Financial
Corporation:
1995-4 A4, CLB 6.75%,
6/15/2025 382,658 385,013
............................................................
1996-5 B2, CLB 8.45%,
7/15/2027 799,873 698,477
............................................................
Green Tree Recreational,
Equipment & Consumer Trust,
CLB 1996-B CTFS, 7.70%,
7/15/2018 450,000 433,811
............................................................
Heilig-Meyers Master Trust
(Acquired 2/20/1998, cost
$499,954), CLB 1998-1A A,
6.125%, 1/20/2007 r 500,000 491,693
............................................................
Nomura Asset Securities
Corporation:
1995-MD3 A1B, CLB 8.15%,
3/04/2020 750,000 790,099
............................................................
1998-D6 A1B, CLB 6.59%,
3/17/2028 2,850,000 2,771,867
............................................................
Nomura Depositor Trust
(Acquired 6/28/1999, cost
$1,183,500), CLB 1998-ST1 A2,
5.475%, 1/15/2003 # r 1,200,000 1,183,500
............................................................
Nomura Depositor Trust
(Acquired 6/28/1999, cost
$486,914), CLB 1998-ST1 A3,
5.5675%, 1/15/2003 # r 500,000 485,390
............................................................
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
Resolution Trust Corporation,
1994-C2 G, CLB 8.00%,
4/25/2025 $ 514,528 $ 518,533
............................................................
1994-C1 E, CLB 8.00%,
6/25/2026 1,997,828 1,974,729
............................................................
Structured Asset Securities
Corporation, 1993-C1 C,
6.60%, CLB 10/25/2024 1,100,091 1,093,215
............................................................
The Ugly Duckling Auto Grantor
Trust, (Acquired 12/18/1998,
cost $1,072,044), CLB 1998-D
A, 5.90%, 5/15/2003 r 1,133,905 1,136,870
..................... ...................... ----------
22,092,030
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.5%
............................................................
Blackrock Capital Finance LP
(Acquired 6/23/1997, cost
$171,004), CLB 1997-AW (AP),
7.9377%, 12/25/2035 # r 172,053 179,013
............................................................
CMC Securities Corporation IV,
CLB 1994-G A4, 7.00%,
9/25/2024 200,000 190,421
............................................................
Citicorp Mortgage Securities,
Inc., CLB 1997-3 A2, 6.92%,
8/25/2027 62,935 63,121
............................................................
Collateralized Mortgage
Obligations Trust, CLB 57 D,
9.90%, 2/01/2019 259,015 272,363
............................................................
GE Capital Mortgage Services,
Inc., 1994-24 A4, 7.00%,
7/25/2024 169,843 161,933
............................................................
Housing Securities, Inc.:
1994-1 AB2, (Acquired
3/03/1995, cost $288,664),
CLB 6.50%, 3/25/2009 r 437,369 323,653
............................................................
1994-2 B1, CLB 6.50%,
7/25/2009 228,915 180,843
............................................................
Independent National Mortgage
Corporation, CLB 1995-F A5,
8.25%, 5/25/2010 750,000 766,270
............................................................
Ocwen Residential MBS Corp.
(Acquired 6/18/1998, cost
$564,912), CLB 1998-R2 AP,
6.1474%, 11/25/2034 r # 565,619 570,774
............................................................
Prudential Home Mortgage
Securities CLB 1993-50 A11,
8.75%, 11/25/2023 # 3,312,928 3,263,234
............................................................
</TABLE>
See Notes to the Financial Statements
20
<PAGE> 153
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
Prudential Home Mortgage
Securities CLB 1993-54 A17,
3.77545%, 1/25/2024 # $1,150,000 $ 907,781
..................... ...................... ----------
6,879,406
- ------------------------------------------------------------
Total non-agency
mortgage-backed securities
(cost $29,689,970) 28,971,436
- ------------------------------------------------------------
PREFERRED STOCKS -- 0.4% Shares
- ------------------------------------------------------------
Home Ownership Funding 2,
(Acquired 2/20/1997, cost
$500,000) r 500 430,500
- ------------------------------------------------------------
U.S. TREASURY Principal
OBLIGATIONS -- 14.1% Amount
- ------------------------------------------------------------
U.S. Treasury Bonds: 6.375%,
8/15/2027 $ 375,000 383,203
............................................................
U.S. Treasury Notes: 5.75%,
4/30/2003 9,500,000 9,511,875
............................................................
7.25%, 8/15/2004 2,750,000 2,921,875
............................................................
6.50%, 10/15/2006 3,950,000 4,077,143
............................................................
U.S. Treasury Strips: 0.00%,
2/15/2009 1,200,000 668,627
..................... ...................... ----------
Total U.S. Treasury obligations 17,562,723
(cost $17,904,412)
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 5.7%
- ------------------------------------------------------------
COMMERCIAL PAPER -- 5.7%
............................................................
Conseco, Inc., 5.42%, 7/01/1999
4(2) 400,000 400,000
............................................................
TRW Inc., 6.05%, 7/01/1999 4(2) 6,000,000 6,000,000
............................................................
Tyson Foods, Inc., 6.05%,
7/01/1999 700,000 700,000
..................... ...................... ----------
7,100,000
Total commercial paper
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
VARIABLE RATE DEMAND NOTES* -- 0.0%
............................................................
General Mills, Inc., 4.825%,
12/31/2031 $ 42,434 $ 42,434
- ------------------------------------------------------------
Total short term investments
(cost $7,142,434) 7,142,434
- ------------------------------------------------------------
Total investments -- 99.7%
(cost $127,144,610) 124,285,261
............................................................
Other assets in excess of
liabilities -- 0.3% 384,363
..................... ...................... ----------
$124,669,624
Total net assets -- 100.0%
- ------------------------------------------------------------
</TABLE>
# Variable rate security. The rate listed is as of June 30, 1999.
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of June 30, 1999.
IO -- Interest Only.
PO -- Principal 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 Security requiring resale to institutional investors.
+ -- Security Fair Valued under procedures established by the Board of Trustees
(See Note 1).
See Notes to the Financial Statements
21
<PAGE> 154
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 37.2% Amount Value
- ------------------------------------------------------------
<S> <C> <C>
AUTO -- 1.2%
............................................................
TRW, Inc., (Acquired
6/18/1999, cost $5,100,000),
5.5987%, 6/28/2000 # r $ 5,100,000 $ 5,102,550
- ------------------------------------------------------------
BANKS -- 4.5%
............................................................
Korea Development Bank,
9.60%, 12/01/2000 4,220,000 4,366,223
............................................................
MBNA Corporation,
5.505%, 6/17/2002 # 1,125,000 1,119,452
............................................................
MBNA Global Capital
Securities, CLB 2/01/2007,
5.795%, 2/01/2027 # 2,000,000 1,740,560
............................................................
Sovereign Bancorp, CLB,
6.625%, 3/15/2001 7,150,000 7,127,141
............................................................
Unibanco Grand Cayman,
(Acquired 4/21/1999, cost
$4,003,082), 10.75%,
4/28/2000 r 4,000,000 4,030,000
..................... ...................... -----------
18,383,376
- ------------------------------------------------------------
CABLE -- 1.6%
............................................................
TCI Communications, Inc.,
8.00%, 8/01/2005 4,600,000 4,852,388
............................................................
USA Networks Inc.
6.75%, 11/15/2005 1,700,000 1,633,433
..................... ...................... -----------
6,485,821
- ------------------------------------------------------------
EUROBANKS -- 6.0%
............................................................
Foreningsbanken Kredit AB, CLB
12/18/2001, 5.92625%,
12/29/2049 # 5,750,000 5,692,480
............................................................
Nordbanken, CLB 10/25/2001,
5.595%, 10/29/2049 # 6,680,000 6,536,180
............................................................
Okobank:
CLB 9/09/2002, 5.5987%,
9/29/2049,# 3,750,000 3,776,805
............................................................
CLB 10/14/1999, 6.45%,
10/29/2049, # 2,000,000 2,006,900
............................................................
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
Skandinavinska Enskilda
Banken, CLB 6/28/2003,
6.26375%, 6/29/2049 # $ 3,500,000 $ 3,431,960
............................................................
Svenska Handls Banken, CLB
3/03/2002, 5.5687%,
3/29/2049 # 3,250,000 3,162,406
..................... ...................... -----------
24,606,731
- ------------------------------------------------------------
FINANCIAL SERVICES -- 10.8%
............................................................
AT & T Capital Corp.,
5.34%, 10/24/2000 # 2,750,000 2,748,730
............................................................
Case Credit Corporation,
6.15%, 3/01/2002 4,000,000 3,938,900
............................................................
Countrywide Home Loans, Inc.,
5.69%, 3/16/2005 # 5,000,000 4,987,650
............................................................
Golden State Holdings, CLB
8/01/2000, 5.995%, 8/01/2003
# 9,900,000 9,725,819
............................................................
Lehman Brothers Holdings,
5.50125%, 6/01/2001 # 800,000 797,726
............................................................
Lehman Brothers Holdings,
6.20%, 1/15/2002 9,100,000 8,962,426
............................................................
Pan Pacific Ind. Inv. Plc.,
(Acquired 6/18/1999, cost
$3,887,947), 0.00%,
4/28/2007 r 8,000,000 3,963,840
............................................................
Providian National Bank, CLB
4/10/2000, 5.60%, 4/10/2001
# 4,000,000 4,000,908
............................................................
U.S. West Capital Funding:
(Acquired 6/03/1999, cost
$5,000,000), CLB 9/15/1999,
5.546%, 6/15/2000 # r 5,000,000 4,997,900
............................................................
(Acquired 6/14/1999, cost
$249,985) CLB 9/15/1999,
5.546%, 6/15/2000 # r 250,000 249,895
..................... ...................... -----------
44,373,794
- ------------------------------------------------------------
INDUSTRIAL -- 1.0%
............................................................
Coca-Cola Femsa SA,
8.95%, 11/01/2006 2,875,000 2,854,084
............................................................
Suiza Foods Corp., CLB
12/15/2001, 10.00%,
12/15/2006 1,000,000 1,120,000
..................... ...................... -----------
3,974,084
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
22
<PAGE> 155
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS -- 0.6%
............................................................
Republic of Brazil,
11.625%, 4/15/2004 $ 2,700,000 $ 2,511,000
- ------------------------------------------------------------
RETAIL -- 3.9%
............................................................
Great Atlantic & Pacific Tea,
7.70%, 1/15/2004 6,433,000 6,345,138
............................................................
Rite Aid Corp.,
(Acquired 12/16/1998, cost
$3,943,167), 5.50%,
12/15/2000 r 3,950,000 3,874,721
............................................................
6.70%, 12/15/2001 4,200,000 4,184,170
............................................................
6.70%, 12/15/2001 1,450,000 1,444,535
..................... ...................... -----------
15,848,564
- ------------------------------------------------------------
STEEL -- 2.4%
............................................................
Pohang Iron & Steel,
6.625%, 7/01/2003 10,530,000 9,967,982
- ------------------------------------------------------------
TELECOMMUNICATIONS -- 2.4%
............................................................
Comcast Cellular Holdings, CLB
5/01/2002, 9.50%, 5/01/2007 5,010,000 5,629,988
............................................................
Telecom Argentina Stet. Fran.
(Acquired 6/25/1999, cost
$3,995,000), 9.75%,
7/12/2001 r 4,000,000 4,000,000
..................... ...................... -----------
9,629,988
- ------------------------------------------------------------
TRANSPORTATION -- 1.6%
............................................................
Bombardier Capital, Inc., CLB
(Acquired 1/22/1999, cost
$6,711,147), 6.00%,
1/15/2002 r 6,725,000 6,617,427
- ------------------------------------------------------------
UTILITIES -- 1.2%
............................................................
CMS Energy Corp., CLB,
8.00%, 7/01/2001 # 5,000,000 4,990,715
..................... ...................... -----------
Total corporate bonds and
notes 152,492,032
(cost $153,969,651)
- ------------------------------------------------------------
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 11.7% Amount Value
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 11.4%
............................................................
Federal Home Loan Mortgage Corporation:
............................................................
1564 SB, 8.4066%, 8/15/2008
# $ 771,272 $ 778,112
............................................................
Pool #E00617, 5.50%,
1/01/2014 12,921,527 12,259,289
............................................................
1336 H, 7.75%, 1/15/2021 174,071 176,702
............................................................
1477 P, 10.5233%, 3/15/2023
# 25,680 25,191
............................................................
1617 D, 6.50%, 11/15/2023 71,000 66,756
............................................................
2118 Z, CLB 6.50%,
12/15/2028, 2,961,148 2,531,958
............................................................
2141 WZ, 6.50%, 4/15/2029 2,619,864 2,560,944
............................................................
Federal National Mortgage
Association:
............................................................
1991-153 N, 7.50%, 2/25/2007 207,422 209,534
............................................................
1993-6 S, 10.6575%,
1/25/2008 # 876,208 853,821
............................................................
Pool #313608 , 6.50%,
7/01/2012 7,411,577 7,315,952
............................................................
Pool #413738, 6.50%,
1/01/2013 12,956,886 12,789,716
............................................................
1988-26 C, 7.50%, 7/25/2018 28,164 28,320
............................................................
1991-147 K, 7.00%, 1/25/2021 2,005 2,014
............................................................
1992-138 O, 7.50%, 7/25/2022 9,403 9,391
............................................................
1993-45 SB, 9.82%, 4/25/2023
# 592,169 573,177
............................................................
1997-59 SU, 8.6883%,
9/25/2023 # 893,675 875,208
............................................................
1994-60 D, 7.00%, 4/25/2024 30,000 29,080
............................................................
1997-76 FT, 5.43125%,
9/17/2027 # 973,868 936,683
............................................................
1999-13 ZC, 7.65919%,
4/25/2029 # 3,887,494 3,911,096
............................................................
1999-13 ZD, 9.72053%,
4/25/2029 # 932,157 971,696
..................... ...................... -----------
46,904,640
- ------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
23
<PAGE> 156
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.3%
............................................................
Federal National Mortgage
Association:
............................................................
1993-72 J (IO), 6.50%,
12/25/2006 $ 578,532 $ 26,424
............................................................
1993-97 L (IO), 7.50%,
5/25/2023 516,525 15,989
............................................................
1994-53 E (PO), 0.00%,
11/25/2023 1,131,506 1,112,741
............................................................
1998-48 CI (IO), 6.50%,
8/25/2028 756,185 138,879
..................... ...................... -----------
1,294,033
- ------------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $49,199,491) 48,198,673
- ------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED
SECURITIES -- 31.4%
- ------------------------------------------------------------
ASSET-BACKED
SECURITIES -- 26.2%
............................................................
ACC Automobile Receivables
Trust, CLB, (Acquired
6/24/1999, cost
$2,601,604),1997-C A, 6.40%,
3/17/2004 r 2,595,925 2,601,605
............................................................
BankBoston Home Equity Loan
Trust, CLB, 1998-1 A1,
6.46%, 4/25/2012 1,331,112 1,330,533
............................................................
Champion Auto Grantor Trust
(Acquired 3/18/1998, cost
$951,512), CLB, 1998-A A,
6.11%, 10/15/2002 r 951,527 952,419
............................................................
CIT Marine Trust, CLB, 1999-A
A2, 5.80%, 4/15/2010 4,200,000 4,188,009
............................................................
Cityscape Home Equity Loan
Trust, CLB, 1996-4 A10,
7.40%, 9/25/2027 3,219,438 3,185,733
............................................................
Commercial Financial Services
Securitized Multiple Asset
Rated Trust (Acquired
9/24/1997, cost $2,256,682),
1997-5 A1, 7.72%, 6/15/2005
r + 2,256,682 677,005
............................................................
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
Commercial Mortgage Acceptance
Corporation, CLB, (Acquired
3/13/1998, cost $1,212,157),
1996-C2 A2, 7.0357%,
9/15/2023 # r $ 1,198,857 $ 1,217,298
............................................................
Commercial Mortgage Asset
Trust, CLB, 1999-C1 A1,
6.25%, 8/17/2006 1,975,243 1,944,064
............................................................
Commercial Resecuritization
Trust, CLB, (Acquired
2/10/1999, cost
$3,871,038),1999-ABC1 A,
6.74%, 1/27/2009 r 3,911,992 3,814,192
............................................................
Contimortgage Home Equity Loan
Trust, CLB, 1998-1 A5,
6.43%, 4/15/2016 7,550,000 7,520,442
............................................................
Countrywide Home Equity Loan
Trust, CLB, 1999-A CTFS,
5.3075%, 4/15/2025 # 1,230,961 1,230,769
............................................................
CPS Auto Trust, CLB, 1998-1 A,
6.00%, 8/15/2003 1,323,843 1,324,340
............................................................
Ditech Home Loan Owner Trust,
CLB, 1997-1 A2, 6.59%,
4/15/2013 1,711,466 1,715,941
............................................................
Ditech Home Loan Owner Trust,
CLB, 1997-1 A3, 6.71%,
8/15/2018 3,280,000 3,290,644
............................................................
Firstplus Home Loan Trust,
CLB, 1998-4 A4, 6.32%,
3/10/2017 5,000,000 4,978,975
............................................................
First Tennessee Auto Grantor
Trust, CLB, (Acquired
4/17/1998, cost $1,429,464),
1998-A A, 6.134%, 4/15/2003
r 1,429,464 1,435,145
............................................................
GREAT, (Acquired 7/02/1998,
cost $2,709,970), 1998-1 A1,
7.330%, 9/15/2007 r + 2,709,970 812,991
............................................................
Green Tree Financial
Corporation, CLB:
1995-4 A4, 6.75%, 6/15/2025 5,199,359 5,231,361
............................................................
1996-5 B2, 8.45%, 7/15/2027 4,145,001 3,619,560
............................................................
Green Tree Recreational,
Equipment & Consumer Trust,
CLB:
1996-C A1, 5.2275%,
10/15/2017 7,531,759 7,524,114
............................................................
1996-B CTFS, 7.70%,
7/15/2018 2,250,000 2,169,056
............................................................
</TABLE>
See Notes to the Financial Statements
24
<PAGE> 157
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
Heilig-Meyers Master Trust
(Acquired 2/20/1998, cost
$4,099,626), 1998-1A A,
6.125%, 1/20/2007 r $ 4,100,000 $ 4,031,879
............................................................
The Money Store Residential
Trust, CLB, 1998-I A2,
6.20%, 3/15/2008 2,250,000 2,250,281
............................................................
Nationslink Funding
Corporation, CLB, 1999-SL
A2, 6.0960%, 12/10/2001 2,050,000 2,043,922
............................................................
Nationslink Funding
Corporation, CLB, 1999-SL
A1V, 5.3025%, 4/10/2007 # 2,741,593 2,742,512
............................................................
Nomura Asset Securities
Corporation, CLB, 1995-MD3
A1B, 8.15%, 3/04/2020 2,750,000 2,897,029
............................................................
Nomura Depositor Trust, CLB,
(Acquired 6/28/1999, cost
$12,405,588), 1998-ST1 A3,
5.5675%, 1/15/2003 # r 12,738,992 12,366,771
............................................................
Resolution Trust Corporation,
CLB:
1992-C3 A3, 6.275%,
8/25/2023 # 184,279 184,279
............................................................
1992-C8 A2, 6.475%,
12/25/2023 # 601,483 602,815
............................................................
1994-C2 G, 8.00%, 4/25/2025 857,546 864,222
............................................................
1994-C1 E, 8.00%, 6/25/2026 6,813,205 6,734,431
............................................................
1994-C1 F, 8.00%, 6/25/2026 1,940,349 1,886,514
............................................................
Structured Asset Securities
Corporation, CLB, 1993-C1 C,
6.60%, 10/25/2024 4,250,350 4,223,785
............................................................
The Ugly Duckling Auto Grantor
Trust, CLB, (Acquired
12/18/1998, cost
$5,667,752), 1998-D A,
5.90%, 5/15/2003 r 5,669,524 5,684,349
..................... ...................... -----------
107,276,985
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 4.2%
............................................................
Blackrock Capital Finance
L.P., CLB, (Acquired
6/23/1997, Cost $940,524),
1997-R2 AW (AP), 7.9377%,
12/25/2035 # r $ 946,291 $ 984,570
............................................................
Citicorp Mortgage Securities,
Inc., CLB, 1997-3 A2, 6.92%,
8/25/2027 534,951 536,531
............................................................
Countrywide Funding
Corporation, CLB, 1994-17
A9, 8.00%, 7/25/2024 4,000 4,079
............................................................
First Union-Lehman Brothers
Commercial Mortgage
Trust,CLB, 1997-C1 A1,
7.15%, 2/18/2004 5,702,441 5,773,921
............................................................
Housing Securities, Inc., CLB,
1994-2 B1, 6.50%, 7/25/2009 204,928 161,893
............................................................
Independent National Mortgage
Corporation, CLB:
1995-A A4, 8.75%, 3/25/2025 13,069 13,210
............................................................
1996-D A2, 7.00%, 5/25/2026 39,061 39,027
............................................................
Morgan Stanley Mortgage Trust,
CLB, 8.9712%, 6/22/2018 962,170 978,326
............................................................
Ocwen Residential MBS Corp.,
CLB, (Acquired 6/18/1998,
cost $3,530,699), 1998-R2
AP, 6.1474%, 11/25/2034 # r 3,535,118 3,567,337
............................................................
Prudential Home Mortgage
Securities, Co., CLB,
1993-36 A10, 7.25%,
10/25/2023 372,501 374,365
............................................................
Residential Funding Mortgage
Securities, Inc., CLB:
1992-S5 A5, 7.50%, 2/25/2007 344,635 343,572
............................................................
1993-S9 A8, 9.479165%,
2/25/2008 # 58,127 58,127
............................................................
1998-S17 A6, 6.75%,
8/25/2028 2,316,820 2,321,095
............................................................
Salomon Brothers Mortgage
Securities VII, 1994-6 A1,
5.9511%, 5/25/2024 # 1,028,671 1,030,579
............................................................
</TABLE>
See Notes to the Financial Statements
25
<PAGE> 158
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
LOW DURATION FUND
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
Structured Mortgage Asset
Residential Trust, CLB:
1992-3A AA, 8.00%,
10/25/2007 $ 109,594 $ 111,726
............................................................
1991-1 H, 8.25%, 6/25/2022 91,697 93,320
............................................................
1993-5A AA, 6.76079%,
6/25/2024 # 35,917 34,221
............................................................
Walsh Acceptance, CLB,
(Acquired 3/06/1997, cost
$1,107,663), 1997-2 A,
6.125%, 3/01/2027 # r 1,099,077 967,188
..................... ...................... -----------
17,393,087
- ------------------------------------------------------------
PASS-THROUGH
SECURITIES -- 0.1%
............................................................
Citicorp Mortgage Securities,
Inc., CLB:
............................................................
1988-16 A1, 10.00%,
11/25/2018 26,519 27,868
............................................................
1989-8 A1, 10.50%, 6/25/2019 294,596 312,869
..................... ...................... -----------
340,737
- ------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.9%
............................................................
Asset Securitization
Corporation, 1997-D5 PS1
(IO), 1.396031%,
2/14/2041 # 14,702,676 1,360,071
............................................................
Chase Commercial Mortgage
Securities Corporation, CLB,
1997-1 X (IO), 1.4381%,
4/19/2015 # 24,292,939 1,700,506
............................................................
CS First Boston Mortgage
Securities Corporation, CLB,
(Acquired 8/14/1997, cost
$979,319), 1995-WF1 AX (IO),
3.3321%,
12/21/2027 # r 15,259,492 681,916
..................... ...................... -----------
3,742,493
- ------------------------------------------------------------
Total non-agency
mortgage-backed securities
(cost $134,650,061) 128,753,302
- ------------------------------------------------------------
PREFERRED STOCK -- 0.3% Shares
- ------------------------------------------------------------
Home Ownership Funding 2,
(Acquired 2/20/1997, cost
$1,500,000) r 1,500 1,291,500
- ------------------------------------------------------------
U.S. TREASURY Principal
OBLIGATIONS -- 17.7% Amount Value
- ------------------------------------------------------------
U.S. TREASURY NOTES:
............................................................
5.50%, 3/31/2000 $19,500,000 $ 19,548,750
............................................................
4.00%, 10/31/2000 20,000,000 19,592,969
............................................................
6.25%, 06/30/2002 30,775,000 31,275,094
............................................................
5.75%, 10/31/2002 2,000,000 2,005,000
..................... ...................... -----------
Total U.S. Treasury
obligations (cost 72,421,813
$72,335,249)
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 7.5%
- ------------------------------------------------------------
COMMERCIAL PAPER -- 7.5%
............................................................
Conseco, Inc., 5.42%,
7/01/1999 4(2) 6,900,000 6,900,000
............................................................
MCI Communications
Corporation, 5.78%,
1/27/2000 4(2) 8,000,000 7,730,267
............................................................
TRW Inc., 6.05%, 7/01/1999
4(2) 16,100,000 16,100,000
..................... ...................... -----------
30,730,267
Total commercial paper
- ------------------------------------------------------------
VARIABLE DEMAND NOTES
* -- 0.0%
............................................................
Pitney Bowes, Inc., 4.825%,
12/31/2031 72,075 72,075
- ------------------------------------------------------------
Total short-term investments
(cost $30,802,342) 30,802,342
- ------------------------------------------------------------
Total investments -- 105.8%
(cost $442,456,794) 433,959,662
............................................................
Liabilities in excess of other
assets -- (5.8)% (23,972,255)
..................... ...................... -----------
$409,987,407
Total net assets -- 100.0%
- ------------------------------------------------------------
</TABLE>
# Variable rate security. The rate listed is as of June 30, 1999.
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rate listed is as of June 30, 1999.
IO -- Interest Only.
PO -- Principal 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 Security requiring resale to institutional investors.
+ -- Security Fair Valued under procedures established by the Board of Trustees
(See Note 1).
See Notes to the Financial Statements
26
<PAGE> 159
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 36.1% Amount Value
- -------------------------------------------------------------
<S> <C> <C>
AUTO -- 1.9%
.............................................................
TRW Inc.(Acquired 6/18/1999, cost
$1,000,000), 5.5987%, 6/28/2000
# r $1,000,000 $ 1,000,500
- -------------------------------------------------------------
BANKS -- 5.2%
.............................................................
Korea Development Bank, 9.60%,
12/01/2000 675,000 698,389
.............................................................
MBNA Corporation, 5.505%,
6/17/2002 # 500,000 497,534
.............................................................
Providian National Bank, CLB
4/10/2000, 5.60%, 4/10/2001 # 1,000,000 1,000,227
.............................................................
Unibanco Grand Cayman (Acquired
4/21/1999, cost $450,371),
10.75%, 4/28/2000 r 450,000 453,375
...................... ....................... ----------
2,649,525
- -------------------------------------------------------------
EUROBANKS -- 7.6%
.............................................................
Foreningsbanken Kredit AB, CLB
12/18/2001, 5.92625%,
12/29/2049 # 750,000 742,497
.............................................................
Nordbanken, CLB 10/25/2001,
5.5950%, 10/29/2049 # 550,000 538,158
.............................................................
Okobank, CLB 9/09/2002 5.59875%,
9/29/2049 # 1,050,000 1,057,505
.............................................................
Skandinavinska Enskilda Banken,
CLB 6/28/2003, 6.26375%,
6/29/2049 # 800,000 784,448
.............................................................
Svenska Hndls Banken, CLB
3/03/2002, 5.5687%, 3/29/2049 # 750,000 729,786
...................... ....................... ----------
3,852,394
- -------------------------------------------------------------
FINANCIAL SERVICES -- 20.4%
.............................................................
Associates Corp. NA, 5.12%,
5/17/2002 # 1,000,000 999,376
.............................................................
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
AT & T Capital Corp., 5.34%,
10/24/2000 # $ 500,000 $ 499,769
.............................................................
AT & T Capital Corp., 5.17%,
04/09/2001 # 750,000 750,067
.............................................................
Bear Stearns Co. Inc., 5.425%,
3/15/2002 # 1,500,000 1,499,652
.............................................................
Countrywide Home Loans, Inc.,
5.6900%, 3/16/2005 # 750,000 748,147
.............................................................
Golden State Holdings, CLB
8/01/2000, 5.995%, 8/01/2003 # 1,900,000 1,866,571
.............................................................
Lehman Brothers Holdings,
5.50125%, 6/01/2001# 900,000 897,442
.............................................................
Lehman Brothers Holdings, 6.20%,
1/15/2002 900,000 886,394
.............................................................
Orix Credit Alliance (Acquired
4/06/1999, cost $750,000),
6.40%, 1/31/2000 r 750,000 747,002
.............................................................
Pan Pacific Ind. Inv. PLC
(Acquired 6/18/1999, cost
$485,993), 0.00%, 4/28/2007 r 1,000,000 495,480
.............................................................
US West Capital Funding (Acquired
6/03/1999, cost $1,000,000),
5.54625%, CLB 9/15/1999,
6/15/2000 # r 1,000,000 999,580
...................... ....................... ----------
10,389,480
- -------------------------------------------------------------
UTILITIES -- 1.0%
.............................................................
CMS Energy Corp., 8.00%, CLB
7/01/2001# 500,000 499,071
- -------------------------------------------------------------
Total corporate bonds and notes
(cost $18,407,352) 18,390,970
- -------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
27
<PAGE> 160
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
GOVERNMENT AGENCY
MORTGAGE-BACKED Principal
SECURITIES -- 5.4% Amount Value
- -------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.0%
.............................................................
Federal Home Loan Mortgage
Corporation, CLB 2118 Z, 6.50%,
12/15/2028 $ 370,144 $ 316,495
.............................................................
Federal National Mortgage
Association: 1993-142 SA,
9.33832%,
10/25/2022 # 179,912 177,102
.............................................................
1999-13 ZC, 7.65919%, 4/25/2029
# 1,017,333 1,023,509
...................... ....................... ----------
1,517,106
- -------------------------------------------------------------
PASS-THROUGH SECURITIES -- 2.3%
.............................................................
Federal Housing Authority
Project, 7.43%, 2/01/2023 132,776 134,818
.............................................................
Government National Mortgage
Association:
8570, 6.1250%, 10/20/2019 # 222,853 227,434
.............................................................
8346, 6.1250%, 12/20/2023 # 788,060 801,767
...................... ....................... ----------
1,164,019
- -------------------------------------------------------------
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.1%
.............................................................
Federal National Mortgage
Association:
1993-129 J (IO), 6.50%,
2/25/2007 626,849 45,090
.............................................................
1993-97 L (IO), 7.50%,
5/25/2023 190,496 5,897
...................... ....................... ----------
50,987
- -------------------------------------------------------------
Total government agency mortgage-
backed securities (cost
$2,773,673) 2,732,112
- -------------------------------------------------------------
NON-AGENCY
MORTGAGE-BACKED
SECURITIES -- 35.7%
- -------------------------------------------------------------
ASSET-BACKED SECURITIES -- 34.4%
.............................................................
ACC Automobile Receivables Trust
(Acquired 6/24/1999, cost
$991,087), CLB 1997-C A, 6.40%,
3/17/2004 r 988,924 991,088
.............................................................
Americredit Automobile
Receivables Trust, CLB 1998-A
A2, 5.0725%, 11/05/2001 # 844,304 844,603
.............................................................
Americredit Automobile
Receivables Trust, CLB 1999-A
A2, 5.383%, 4/05/2002 900,000 899,617
.............................................................
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
Associates Manufactured Housing
Pass-Through Certificates, CLB
1996-2 A4, 6.60%, 6/15/2027 $ 500,000 $ 502,208
.............................................................
BankBoston Home Equity Loan
Trust, CLB 1998-1 A1, 6.46%,
4/25/2012 459,004 458,805
.............................................................
Champion Auto Grantor Trust
(Acquired 10/28/1997, cost
$57,203), CLB 1997-D A, 6.27%,
9/15/2002 r 57,203 57,239
.............................................................
CIT Marine Trust, CLB 1999-A A1,
5.45%, 9/15/2006 965,036 965,600
.............................................................
Commercial Financial Services
Securitized Multiple Asset
Rated Trust (Acquired
9/24/1997, cost $361,069),
1997-5 A1, 7.72%, 6/15/2005 r + 361,069 108,321
.............................................................
Countrywide Home Equity Loan
Trust, CLB 1999-A CTFS 5.3075%,
4/15/2025 # 984,769 984,615
.............................................................
Ditech Home Loan Owner Trust, CLB
1997-1 A2, 6.59%, 4/15/2013 684,586 686,376
.............................................................
First Tennessee Auto Grantor
Trust (Acquired 4/17/1998, cost
$386,342), CLB 1998-A A,
6.134%, 4/15/2003 r 386,342 387,877
.............................................................
Green Tree Home Improvement Loan
Trust, CLB 1997-A HEA5, 7.21%,
3/15/2028 840,634 847,893
.............................................................
Green Tree Recreational,
Equipment & Consumer Trust, CLB
1996-C A1, 5.2275%, 10/15/2017
# 876,423 875,533
.............................................................
Harley-Davidson Eaglemark
Motorcycle Trust, CLB 1999-1
A1, 5.25%, 7/15/2003 913,696 909,927
.............................................................
Nationslink Funding Corporation,
CLB 1999-SL A1V, 5.3025%,
4/10/2007 # 740,971 741,219
.............................................................
Navistar Financial Corp. Owner
Trust, CLB 1996-B A3, 6.33%,
4/21/2003 411,538 413,384
.............................................................
Nomura Asset Securities
Corporation, CLB 1995-MD3 A1A,
8.17%, 3/04/2020 819,020 845,396
.............................................................
</TABLE>
See Notes to the Financial Statements
28
<PAGE> 161
SCHEDULE OF INVESTMENTS -- JUNE 30, 1999
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
Nomura Depositor Trust (Acquired
6/28/1999, cost $1,084,875),
CLB 1998-ST1 A2, 5.4075%,
1/15/2003 # r $1,100,000 $ 1,084,875
.............................................................
Peco Energy Transition Trust, CLB
1999-A A3, 5.1875%, 3/1/2006 # 1,000,000 997,085
.............................................................
Resolution Trust Corporation:
1992-C3 A3, CLB 6.275%,
8/25/2023 # 307,131 307,131
.............................................................
1992-C8 A2, CLB 6.475%,
12/25/2023 # 816,678 818,487
.............................................................
1994-C2 G, CLB 8.00%, 4/25/2025 343,018 345,689
.............................................................
Structured Asset Securities
Corporation, CLB 1993-C1 C,
6.60%, 10/25/2024 500,041 496,916
.............................................................
The Ugly Duckling Auto Grantor
Trust (Acquired 12/18/1998,
cost $755,700), CLB 1998-D A,
5.90%, 5/15/2003 r 755,936 757,913
.............................................................
Duck Auto Grantor Trust (Acquired
4/21/1999, cost $470,840), CLB
1999-A A, 5.65%, 3/15/2004 r 470,914 470,723
.............................................................
Union Acceptance Corporation, CLB
1998-C A2, 5.44%, 10/09/2001 712,572 713,103
...................... ....................... ----------
17,511,623
- -------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.3%
.............................................................
Residential Funding Mortgage
Securities Inc., CLB 1998-S17
A6, 6.75%, 8/25/2028 231,682 232,109
.............................................................
Salomon Brothers Mortgage
Securities CLB VI, 1986-1 A,
6.00%, 12/25/2011 280,679 279,776
.............................................................
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
Walsh Acceptance (Acquired
3/06/1997, cost $184,611), CLB
1997-2 A, 6.125%, 3/01/2027 # r $ 183,179 $ 161,198
...................... ....................... ----------
673,083
- -------------------------------------------------------------
Total non-agency mortgage-backed
securities (cost $18,466,089) 18,184,706
- -------------------------------------------------------------
U.S. TREASURY
OBLIGATIONS -- 9.0%
- -------------------------------------------------------------
U.S. Treasury Notes:
5.75%, 10/31/2000 2,600,000 2,610,564
6.25%, 6/30/2002 1,925,000 1,956,281
...................... ....................... ----------
Total U.S. Treasury Notes (cost 4,566,845
$4,596,045)
- -------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 25.9%
- -------------------------------------------------------------
COMMERCIAL PAPER -- 25.9%
.............................................................
Conseco, Inc., 5.42%, 7/01/1999
4(2) 2,500,000 2,500,000
.............................................................
Firstar Corporation, 5.25%,
7/22/1999 4(2) 2,200,000 2,193,262
.............................................................
MCI Communications Corporation,
5.78%, 1/27/2000 4(2) 1,100,000 1,062,912
.............................................................
Ratheon Company, 5.10%, 7/01/1999
4(2) 2,500,000 2,500,000
.............................................................
TRW Inc., 6.05%, 7/01/1999 4(2) 2,500,000 2,500,000
.............................................................
Tyson Foods, Inc., 6.05%,
7/01/1999 2,400,000 2,400,000
...................... ....................... ----------
Total short-term investments 13,156,174
(cost $13,156,174)
- -------------------------------------------------------------
Total investments -- 112.1% (cost
$57,399,333) 57,030,807
.............................................................
Liabilities in excess of other
assets -- (12.1%) (6,174,462)
...................... ....................... ----------
$50,856,345
Total net assets -- 100.0%
- -------------------------------------------------------------
</TABLE>
# Variable rate security. The rate listed is as of June 30, 1999.
IO -- Interest Only.
CLB -- Callable.
r -- Restricted Security. Purchased in a private placement transaction; resale
to the public may require registration or may extend only to qualified
institutional buyers.
4(2) -- Restricted Security requiring resale to institutional investors.
+ -- Security Fair Valued under procedures established by the Board of Trustees
(See Note 1).
See Notes to the Financial Statements
29
<PAGE> 162
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
Equity
Income Mid-Cap Small
Fund Fund Cap Fund
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value*.................................... $148,860,526 $6,917,894 $51,636,343
Cash...................................................... -- -- --
Dividends and interest receivable......................... 359,122 11,939 24,801
Receivable for investments sold........................... 7,221,964 -- 1,331,569
Receivable for Fund shares sold........................... 41,300 16,574 826,173
Prepaid expenses.......................................... 13,921 7,050 22,159
------------ ---------- -----------
Total assets.......................................... 156,496,833 6,953,457 53,841,045
------------ ---------- -----------
LIABILITIES:
Payable for forward currency exchange contracts........... -- -- --
Payable to Advisor........................................ 99,245 -- 36,678
Payable for investments purchased......................... 6,754,735 60,748 340,111
Payable for Fund shares repurchased....................... 838,780 10,153 40,520
Dividends payable......................................... -- -- --
Accrued expenses and other liabilities.................... 69,754 11,876 46,968
------------ ---------- -----------
Total liabilities..................................... 7,762,514 82,777 464,277
------------ ---------- -----------
Net assets............................................ $148,734,319 $6,870,680 $53,376,768
============ ========== ===========
NET ASSETS CONSIST OF:
Paid in capital........................................... $101,687,250 $7,028,474 $69,722,301
Undistributed (distributions in excess of) net investment
income.................................................. 43,953 86,963 --
Undistributed net realized gain (loss) on securities...... 14,825,176 (193,322) (7,668,432)
Net unrealized appreciation (depreciation) of securities
and foreign currency.................................... 32,177,940 (51,435) (8,677,101)
------------ ---------- -----------
Net assets............................................ $148,734,319 $6,870,680 $53,376,768
============ ========== ===========
CALCULATION OF NET ASSET VALUE PER SHARE -- INVESTOR CLASS:
Net assets................................................ $148,734,319 $6,870,680 $53,376,768
Shares outstanding (unlimited shares of no par value
authorized)............................................. 7,451,017 571,338 2,539,030
Net asset value per share (offering and redemption
price).................................................. $ 19.96 $ 12.03 $ 21.02
============ ========== ===========
CALCULATION OF NET ASSET VALUE PER SHARE -- DISTRIBUTOR
CLASS:
Net assets................................................
Shares outstanding (unlimited shares of no par value
authorized).............................................
Net asset value per share (offering and redemption
price)..................................................
*Cost of Investments........................................ $116,682,586 $6,969,329 $60,313,444
============ ========== ===========
</TABLE>
See Notes to the Financial Statements
30
<PAGE> 163
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Low Short-Term
International Global Equity Balanced Return Bond Duration Investment
Fund Fund Fund Fund Fund Fund
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1,324,911,361 $7,521,060 $ 97,420,116 $124,285,261 $433,959,662 $57,030,807
-- 16,178 -- -- -- --
6,524,231 31,345 763,365 1,357,260 4,859,874 263,858
5,224,109 -- 12,586,495 184 20,279,671 3,121
49,114,266 -- 19,901 2,450,458 1,327,510 50,406
88,812 8,852 21,362 20,043 43,297 10,288
-------------- ---------- ------------ ------------ ------------ -----------
1,385,862,779 7,577,435 110,811,239 128,113,206 460,470,014 57,358,480
-------------- ---------- ------------ ------------ ------------ -----------
-- 428 -- -- -- --
824,747 86 52,950 25,950 99,035 11,578
2,666,784 -- 12,337,237 2,679,857 37,285,739 1,433,349
1,395,831 -- 467,695 538,138 12,787,124 4,997,014
-- -- -- 137,281 100,292 36,770
929,443 15,025 55,255 62,356 210,417 23,424
-------------- ---------- ------------ ------------ ------------ -----------
5,816,805 15,539 12,913,137 3,443,582 50,482,607 6,502,135
-------------- ---------- ------------ ------------ ------------ -----------
$1,380,045,974 $7,561,896 $ 97,898,102 $124,669,624 $409,987,407 $50,856,345
============== ========== ============ ============ ============ ===========
$1,170,840,321 $6,791,031 $ 88,791,457 $128,981,397 $419,909,000 $51,417,475
12,552,468 125,981 72,755 (79,637) 596,912 (18,601)
45,477,625 43,374 3,712,587 (1,372,787) (2,021,373) (174,003)
151,175,560 601,510 5,321,303 (2,859,349) (8,497,132) (368,526)
-------------- ---------- ------------ ------------ ------------ -----------
$1,380,045,974 $7,561,896 $ 97,898,102 $124,669,624 $409,987,407 $50,856,345
============== ========== ============ ============ ============ ===========
$1,378,899,059 $7,561,896 $ 97,898,102 $124,319,616 $409,987,407 $50,856,345
53,595,475 638,927 5,153,281 9,673,381 41,363,601 5,062,821
$ 25.73 $ 11.84 $ 19.00 $ 12.85 $ 9.91 $ 10.05
============== ========== ============ ============ ============ ===========
$ 1,146,915 $ 350,008
44,593 27,233
$ 25.72 $ 12.85
============== ============
$1,173,612,754 $6,918,634 $ 92,098,813 $127,144,610 $442,456,794 $57,399,333
============== ========== ============ ============ ============ ===========
</TABLE>
See Notes to the Financial Statements
31
<PAGE> 164
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Equity Small
Income Mid-Cap Cap
Fund Fund Fund
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income*
Dividends............................................... $ 4,613,052 $ 140,304 $ 397,179
Interest................................................ 96,121 12,380 68,572
------------ --------- ------------
Total income........................................ 4,709,173 152,684 465,751
------------ --------- ------------
Expenses
Advisory fee............................................ 1,178,513 46,081 442,635
Legal and auditing fees................................. 17,870 1,007 14,116
Custodian fees and expenses............................. 41,443 4,085 28,757
Accounting and transfer agent fees and expenses......... 90,191 49,592 122,017
Administration fee...................................... 58,925 1,713 25,625
Trustees' fees and expenses............................. 7,929 1,992 3,677
Reports to shareholders................................. 15,477 963 23,997
Registration fees....................................... 20,160 18,251 40,691
Distribution fees -- Distributor Class.................. -- -- --
Other expenses.......................................... 4,360 383 1,524
------------ --------- ------------
Total expenses...................................... 1,434,868 124,067 703,039
Less, expense reimbursement............................. (2,088) (59,578) (84,856)
------------ --------- ------------
Net expenses........................................ 1,432,780 64,489 618,183
------------ --------- ------------
Net investment income (loss)............................ 3,276,393 88,195 (152,432)
------------ --------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on securities and foreign
currency.............................................. 18,492,251 (192,150) (7,393,487)
Net change in unrealized appreciation (depreciation) of
securities and foreign currency....................... (11,950,809) 309,930 (9,556,411)
------------ --------- ------------
Net gain (loss) on investments............................ 6,541,442 117,780 (16,949,898)
------------ --------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................ $ 9,817,835 $ 205,975 $(17,102,330)
============ ========= ============
*Net of Foreign Taxes Withheld.............................. $ 15,172 $ 1,751 $ 12,760
============ ========= ============
</TABLE>
See Notes to the Financial Statements
32
<PAGE> 165
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global Total Low Short-Term
International Equity Balanced Return Bond Duration Investment
Fund Fund Fund Fund Fund Fund
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 36,458,801 $266,131 $ 1,508,116 $ 62,528 $ 187,582 $ --
2,899,944 1,580 3,627,224 5,429,419 23,070,713 2,553,946
------------ -------- ----------- ----------- ------------ ----------
39,358,745 267,711 5,135,340 5,491,947 23,258,295 2,553,946
------------ -------- ----------- ----------- ------------ ----------
10,084,942 52,154 774,800 467,665 1,699,295 169,705
232,864 1,085 14,867 12,186 60,292 5,616
827,737 11,951 35,204 29,672 89,115 18,784
944,477 54,728 95,712 95,292 255,881 52,003
250,009 2,366 41,047 28,763 137,731 13,769
55,403 2,092 6,077 5,382 18,221 3,814
266,658 1,360 12,163 8,705 43,198 4,509
46,228 17,940 27,191 27,991 50,776 20,164
208 -- -- 63 -- --
43,638 429 1,776 1,394 6,713 954
------------ -------- ----------- ----------- ------------ ----------
12,752,164 144,105 1,008,837 677,113 2,361,222 289,318
-- (68,393) (26,952) (125,162) (230,145) (85,670)
------------ -------- ----------- ----------- ------------ ----------
12,752,164 75,712 981,885 551,951 2,131,077 203,648
------------ -------- ----------- ----------- ------------ ----------
26,606,581 191,999 4,153,455 4,939,996 21,127,218 2,350,298
------------ -------- ----------- ----------- ------------ ----------
70,779,798 80,356 3,908,674 (572,730) (737,715) (50,623)
(42,099,206) 75,740 (3,677,845) (3,760,047) (9,809,554) (407,341)
------------ -------- ----------- ----------- ------------ ----------
28,680,592 156,096 230,829 (4,332,777) (10,547,269) (457,964)
------------ -------- ----------- ----------- ------------ ----------
$ 55,287,173 $348,095 $ 4,384,284 $ 607,219 $ 10,579,949 $1,892,334
============ ======== =========== =========== ============ ==========
$ 2,147,066 $ 13,239 $ 4,767 $ -- $ -- $ --
============ ======== =========== =========== ============ ==========
</TABLE>
See Notes to the Financial Statements
33
<PAGE> 166
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity Income Fund Mid-Cap Fund
----------------------------- -----------------------------
Year Ended Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..................... $ 3,276,393 $ 3,776,239 $ 88,195 $ 64,398
Net realized gain (loss) on securities and
foreign currency transactions.................. 18,492,251 29,878,073 (192,150) 928,847
Net change in unrealized appreciation
(depreciation) of securities and foreign
currency....................................... (11,950,809) 5,189,945 309,930 (555,561)
------------ ------------ ----------- ----------
Net increase (decrease) in net assets
resulting from operations.................. 9,817,835 38,844,257 205,975 437,684
------------ ------------ ----------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income............................ (3,285,265) (3,812,071) -- (66,341)
Net realized gain on securities transactions..... (24,468,165) (26,619,074) (807,762) (129,478)
------------ ------------ ----------- ----------
Total dividends and distributions............ (27,753,430) (30,431,145) (807,762) (195,819)
------------ ------------ ----------- ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.................... 45,268,422 23,627,560 3,117,822 6,338,383
Shares issued in connection with payment of
dividends and distributions.................... 25,424,531 29,778,874 806,204 194,620
Cost of shares redeemed.......................... (79,277,624) (72,438,773) (3,990,739) (1,222,885)
------------ ------------ ----------- ----------
Net increase (decrease) in net assets from
Fund share transactions.................... (8,584,671) (19,032,339) (66,713) 5,310,118
------------ ------------ ----------- ----------
Total increase (decrease) in net assets.............. (26,520,266) (10,619,227) (668,500) 5,551,983
NET ASSETS:
Beginning of year................................ 175,254,585 185,873,812 7,539,180 1,987,197
------------ ------------ ----------- ----------
End of year*..................................... $148,734,319 $175,254,585 $ 6,870,680 $7,539,180
============ ============ =========== ==========
*Including undistributed (distributions in excess of)
net investment income of: $ 43,953 $ 52,825 $ 86,963 $ --
============ ============ =========== ==========
CHANGES IN SHARES OUTSTANDING -- INVESTOR CLASS:
Shares sold...................................... 2,249,985 1,065,609 290,589 489,941
Shares issued in connection with payment of
dividends and distributions.................... 1,400,456 1,451,197 83,631 15,545
Shares redeemed.................................. (4,157,729) (3,307,554) (386,607) (92,361)
------------ ------------ ----------- ----------
Net increase (decrease)...................... (507,288) (790,748) (12,387) 413,125
============ ============ =========== ==========
CHANGES IN SHARES OUTSTANDING -- DISTRIBUTOR CLASS:
Shares sold......................................
Shares issued in connection with payment of
dividends and distributions....................
Shares redeemed..................................
Net increase.................................
</TABLE>
** Attributable to Investor Class only.
*** Net proceeds from shares sold includes $1,126,235 related to the Distributor
Class.
See Notes to the Financial Statements
34
<PAGE> 167
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Small Cap Fund International Fund Global Equity Fund
----------------------------- --------------------------------- -----------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ (152,432) $ (154,400) $ 26,606,581 $ 27,073,883 $ 191,999 $ 111,802
(7,393,487) 9,968,991 70,779,798 3,289,299 80,356 121,357
(9,556,411) (3,968,125) (42,099,206) 70,706,856 75,740 225,531
------------ ------------ --------------- --------------- ----------- ----------
(17,102,330) 5,846,466 55,287,173 101,070,038 348,095 458,690
------------ ------------ --------------- --------------- ----------- ----------
-- (111,869) (14,481,803) (32,976,929) (76,144) (175,171)
(4,099,720) (5,072,568) (19,626,614) -- (15,242) (91,582)
------------ ------------ --------------- --------------- ----------- ----------
(4,099,720) (5,184,437) (34,108,417)** (32,976,929) (91,386) (266,753)
------------ ------------ --------------- --------------- ----------- ----------
92,751,659 140,132,855 2,003,135,366*** 1,292,839,186 857,258 4,309,902
3,981,064 5,017,869 29,138,880 29,643,512 90,117 263,932
(117,067,181) (78,429,678) (2,150,212,412) (802,298,868) (987,473) (1,150,082)
------------ ------------ --------------- --------------- ----------- ----------
(20,334,458) 66,721,046 (117,938,166) 520,183,830 (40,098) 3,423,752
------------ ------------ --------------- --------------- ----------- ----------
(41,536,508) 67,383,075 (96,759,410) 588,276,939 216,611 3,615,689
94,913,276 27,530,201 1,476,805,384 888,528,445 7,345,285 3,729,596
------------ ------------ --------------- --------------- ----------- ----------
$ 53,376,768 $ 94,913,276 $ 1,380,045,974 $ 1,476,805,384 $ 7,561,896 $7,345,285
============ ============ =============== =============== =========== ==========
$ -- $ -- $ 12,552,468 $ (6,410,587) $ 125,981 $ (24,779)
============ ============ =============== =============== =========== ==========
4,577,685 5,096,875 85,591,643 52,830,892 79,898 388,720
208,433 207,693 1,297,951 1,253,628 8,656 25,235
(5,831,667) (2,875,106) (91,604,448) (32,528,515) (95,127) (104,646)
------------ ------------ --------------- --------------- ----------- ----------
(1,045,549) 2,429,462 (4,714,854) 21,556,005 (6,573) 309,309
============ ============ =============== =============== =========== ==========
44,593
--
--
---------------
44,593
===============
</TABLE>
See Notes to the Financial Statements
35
<PAGE> 168
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balanced Fund
--------------------------------------------
Year Ended Year Ended
June 30, 1999 June 30, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 4,153,455 $ 4,562,817
Net realized gain (loss) on securities transactions..... 3,908,674 5,754,835
Net change in unrealized appreciation (depreciation) of
securities............................................. (3,677,845) 2,122,314
------------ ------------
Net increase in net assets resulting from
operations.......................................... 4,384,284 12,439,966
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- INVESTOR
CLASS:
Net investment income................................... (4,073,380) (4,563,299)
Net realized gain on securities transactions............ (4,515,885) (5,598,223)
------------ ------------
Total dividends and distributions................... (8,589,265) (10,161,522)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- DISTRIBUTOR
CLASS:
Net investment income...................................
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 28,758,855 34,493,608
Shares issued in connection with payment of dividends
and distributions...................................... 8,305,107 9,851,285
Cost of shares redeemed................................. (39,556,292) (32,186,438)
------------ ------------
Net increase (decrease) in net assets from Fund
share transactions.................................. (2,492,330) 12,158,455
------------ ------------
Total increase (decrease) in net assets..................... (6,697,311) 14,436,899
NET ASSETS:
Beginning of year....................................... 104,595,413 90,158,514
------------ ------------
End of year*............................................ $ 97,898,102 $104,595,413
============ ============
*Including undistributed (distributions in excess of) net
investment income of: $ 72,755 $ 1,426
============ ============
CHANGES IN SHARES OUTSTANDING -- INVESTOR CLASS:
Shares sold............................................. 1,518,693 1,728,761
Shares issued in connection with payment of dividends
and distributions...................................... 445,955 508,237
Shares redeemed......................................... (2,083,905) (1,616,205)
------------ ------------
Net increase (decrease)............................. (119,257) 620,793
============ ============
CHANGES IN SHARES OUTSTANDING -- DISTRIBUTOR CLASS:
Shares sold.............................................
Shares issued in connection with payment of dividends
and distributions......................................
Shares redeemed.........................................
Net increase........................................
</TABLE>
** Net proceeds from shares sold and shares issued in connection with payment of
dividends and distributions include $349,125 and $1,610, respectively,
related to the Distributor Class.
See Notes to the Financial Statements
36
<PAGE> 169
- --------------------------------------------------------------------------------
<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, 1999 June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,939,996 $ 1,532,385 $ 21,127,218 $ 12,919,157 $ 2,350,298 $ 1,509,613
(572,730) 318,597 (737,715) 1,052,667 (50,623) (42,539)
(3,760,047) 504,670 (9,809,554) (221,716) (407,341) (20,572)
------------ ----------- ------------- ------------- ------------- ------------
607,219 2,355,652 10,579,949 13,750,108 1,892,334 1,446,502
------------ ----------- ------------- ------------- ------------- ------------
(5,340,145) (1,622,000) (21,925,763) (13,340,819) (2,307,426) (1,509,613)
(611,925) -- (642,509) (1,045,647) -- --
------------ ----------- ------------- ------------- ------------- ------------
(5,952,070) (1,622,000) (22,568,272) (14,386,466) (2,307,426) (1,509,613)
------------ ----------- ------------- ------------- ------------- ------------
(1,610)
------------
125,455,048** 33,566,256 535,272,087 182,933,522 121,678,835 50,189,024
5,443,498** 1,101,255 22,210,113 12,908,812 1,750,451 894,623
(46,130,262) (4,460,475) (388,657,005) (113,269,472) (100,196,327) (44,698,826)
------------ ----------- ------------- ------------- ------------- ------------
84,768,284 30,207,036 168,825,195 82,572,862 23,232,959 6,384,821
------------ ----------- ------------- ------------- ------------- ------------
79,421,823 30,940,688 156,836,872 81,936,504 22,817,867 6,321,710
45,247,801 14,307,113 253,150,535 171,214,031 28,038,478 21,716,768
------------ ----------- ------------- ------------- ------------- ------------
$124,669,624 $45,247,801 $ 409,987,407 $ 253,150,535 $ 50,856,345 $ 28,038,478
============ =========== ============= ============= ============= ============
$ (79,637) $ 34,272 $ 596,912 $ -- $ (18,601) $ (72,392)
============ =========== ============= ============= ============= ============
9,353,948 2,516,857 52,973,512 17,898,633 12,032,563 4,944,329
408,076 82,830 2,201,641 1,263,801 173,571 88,164
(3,450,832) (334,936) (38,637,818) (11,074,513) (9,911,294) (4,404,554)
------------ ----------- ------------- ------------- ------------- ------------
6,311,192 2,264,751 16,537,335 8,087,921 2,294,840 627,939
============ =========== ============= ============= ============= ============
27,108
125
--
------------
27,233
============
</TABLE>
See Notes to the Financial Statements
37
<PAGE> 170
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
JUNE 30, 1999
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
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 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 2,
1997 (the Mid-Cap Fund and the Global Equity Fund).
The Balanced 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.
Effective April 1, 1999, the Balanced, Small Cap, International, Total Return
Bond and Low Duration Funds have issued two classes of shares: Investor Class
and Distributor Class. Distributor Class shares are subject to an annual Rule
12b-1 fee of 0.25% of average net assets. Investor Class shares do not pay a
12b-1 fee. Each class of shares for each Fund has identical rights and
privileges except with respect to Rule 12b-1 fees paid by the Distributor Class,
voting rights on matters pertaining to a single class of shares and the exchange
privileges of each class of shares. As of June 30, 1999, the Balanced, Small Cap
and Low Duration Funds had no Distributor Class activity except for the purchase
of one share by Hotchkis and Wiley (the "Advisor") representing net assets of
$19, $21, and $10, respectively.
SECURITY VALUATION: Portfolio securities that are listed on a securities
exchange (whether domestic or foreign) or The Nasdaq Stock Market ("NSM") are
valued at the last sale price as of 4:00 p.m., Eastern time, or, in the absence
of recorded sales, at the average of readily available closing bid and asked
prices on such exchange or NSM. Unlisted securities that are not included in NSM
are valued at the average of the quoted bid and asked price in the over-the-
counter market. Fixed-income securities are normally valued on the basis of
quotes obtained from brokers and dealers or pricing services. Certain
fixed-income securities for which daily market quotations are not readily
available may be valued pursuant to guidelines established by the Board of
Trustees, with reference to fixed-income securities whose prices are more
readily obtainable or an appropriate matrix utilizing similar factors. As a
broader market does
38
<PAGE> 171
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 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.
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 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. 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 substantially all of its investment company net taxable
income and net capital gains to shareholders. Therefore, no federal income tax
provision is required.
INCOME AND 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. Net investment income, other than
class specific expenses, and realized and unrealized gains and losses are
allocated daily to each class of shares based upon the relative net asset value
of outstanding shares of each class of shares at the beginning of the day (after
adjusting for the current day's capital share activity of the respective class).
RESTRICTED SECURITIES: The Balanced, Total Return Bond, Low Duration and
Short-Term Investment Funds own investment securities which are unregistered and
thus restricted as to resale. Where future disposition of these securities
requires registration under the Securities Act of 1933, the Funds have the right
to include these securities in such registration, generally without cost to the
Funds. The Funds have no right to require registration of unregistered
securities. At June 30, 1999, the Balanced, Total Return Bond, Low Duration and
Short-Term Investment Funds had restricted securities with an aggregate market
value of $3,264,837, $15,313,945, $73,922,498 and $7,715,171, respectively,
representing 3%, 12%, 18% and 15% of the net assets of each Fund, respectively.
Of these amounts, the Balanced, Total Return Bond, Low Duration and Short-Term
Investment Funds had restricted securities that were determined to be illiquid
pursuant to guidelines adopted by the Board of Trustees with an
39
<PAGE> 172
aggregate market value of $331,971, $155,745, $3,300,993 and $404,337,
respectively, representing 0.3%, 0.1%, 0.8% and 0.8% of the net assets of each
Fund, respectively.
WHEN-ISSUED SECURITIES: The Funds may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Funds record purchases of when-issued securities and reflect
the values of such securities in determining net asset value in the same manner
as other portfolio securities. The Funds maintain at all times cash or other
liquid assets in an amount at least equal to the amount of outstanding
commitments for when-issued securities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid monthly for the Total Return Bond, Low Duration and Short-Term
Investment Funds, declared and paid quarterly for the Balanced and Equity Income
Funds and declared and paid annually for the Mid-Cap, Small Cap, International
and Global Equity Funds. Distributions of net realized capital gains, if any,
will be declared and paid at least annually. The Funds may utilize earnings and
profits distributed to shareholders on redemption of shares as part of the
dividends paid deduction.
OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is recognized
on the accrual basis. Generally accepted accounting principles require that
permanent financial reporting and tax differences relating to shareholder
distributions be reclassified within the capital accounts.
NOTE 2.
INVESTMENT ADVISORY AGREEMENTS. Each Fund has an investment advisory agreement
with the Advisor with whom certain officers and Trustees of the Trust are
affiliated. The Advisor is a division of Merrill Lynch Asset Management, L.P.,
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. The Advisor
receives a fee, computed daily and payable monthly, at the annual 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
40
<PAGE> 173
Fund's daily net assets. The annual expense caps for some of the Funds changed
effective March 1, 1999. For the year ended June 30, 1999, the Advisor
reimbursed the following expenses:
<TABLE>
<CAPTION>
International
Fund -- International
Equity Income Mid-Cap Small Cap Investor Fund --Distributor Global Equity Balanced
Fund Fund Fund Class Class Fund Fund
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Annual Advisory Rate....... 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Annual Cap on Expenses --
prior to March 1......... 1.00% 1.00% 1.00% 1.00% -- 1.00% 1.00%
Annual Cap on Expenses --
subsequent to March 1.... 0.95% 1.15% -- -- -- 1.25% 0.95%
Expenses Reimbursed........ $2,088 $59,578 $84,856 $0 $0 $68,393 $26,952
</TABLE>
<TABLE>
<CAPTION>
Total Return Total Return
Bond Fund -- Bond Fund -- Low Duration Short-Term
Investor Class Distributor Class Fund Investment Fund
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Annual Advisory Rate......................... 0.55% 0.55% 0.46% 0.40%
Annual Cap on Expenses -- prior to March 1... 0.65% -- 0.58% 0.48%
Annual Cap on Expenses -- subsequent to March
1.......................................... 0.65% 0.90% 0.58% 0.48%
Expenses Reimbursed.......................... $125,093 $69 $230,145 $85,670
</TABLE>
The Trust has adopted a plan pursuant to Rule 12b-1 under the Investment Company
Act of 1940 (the "12b-1 Plan") that allows the Distributor Class of the Small
Cap, International, Balanced, Total Return Bond and Low Duration Funds to make
payments to administrators, broker/dealers or other institutions that provide
accounting, recordkeeping or other services to investors and that have an
administration services agreement with the Trust or the Advisor to make
Distributor Class shares available to their clients ("Recipients"). Recipients
are paid an annual rate of 0.25% of the average net assets of the Distributor
Class shares invested through the Recipient as compensation for providing
distribution-related services such as advertising, printing and mailing
prospectuses to potential investors and training sales personnel regarding the
Funds. During the period ended June 30, 1999, the Distributor Class of the
International and Total Return Bond Funds incurred expenses of $208 and $63,
respectively, pursuant to the 12b-1 Plan.
Certain authorized agents of the Funds charge a fee for accounting and
shareholder services that they provide to the Funds on behalf of certain
shareholders; the portion of this fee paid by the Funds is included within
Accounting and transfer agent fees and expenses in the Statement of Operations.
The Advisor has entered into subadvisory agreements with Mercury Asset
Management International Limited and Merrill Lynch Asset Management U.K.
Limited, affiliated investment advisors that are indirect subsidiaries of
Merrill Lynch & Co., Inc. The subadvisory arrangements are for investment
research, recommendations, and other investment-related services to be provided
to the International and Global Equity Funds. There is no increase in the
aggregate fees paid by the Funds for these services.
The International and Global Equity Funds paid commissions on Fund transactions
to an affiliated broker in the amounts of $328,247 and $173, respectively,
during the year ended June 30, 1999.
41
<PAGE> 174
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 Funds, 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.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------------------------ ------------------------------
Fund U.S. Government Other U.S. Government Other
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Income Fund.............................. -- $ 27,289,577 -- $ 60,758,419
Mid-Cap Fund.................................... -- 6,756,175 -- 7,362,305
Small Cap Fund.................................. -- 61,652,661 -- 85,862,362
International Fund.............................. -- 526,880,293 -- 640,486,123
Global Equity Fund.............................. -- 2,750,821 -- 2,781,463
Balanced Fund................................... $112,137,782 24,637,111 $105,585,575 37,520,070
Total Return Bond Fund.......................... 158,522,021 110,173,269 127,775,304 62,817,428
Low Duration Fund............................... 531,227,253 329,611,371 476,477,567 207,104,333
Short-Term Investment Fund...................... 26,202,362 41,028,878 24,339,321 19,196,120
</TABLE>
As of June 30, 1999, 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.......................................... $ 31,907,975 $38,196,720 $ (6,288,745)
Mid-Cap Fund................................................ (82,447) 648,455 (730,902)
Small Cap Fund.............................................. (10,444,080) 3,228,820 (13,672,900)
International Fund.......................................... 139,098,914 219,815,064 (80,716,150)
Global Equity Fund.......................................... 556,460 1,191,669 (635,209)
Balanced Fund............................................... 5,267,232 9,682,465 (4,415,233)
Total Return Bond Fund...................................... (2,859,349) 394,539 (3,253,888)
Low Duration Fund........................................... (8,501,116) 1,227,971 (9,729,087)
Short-Term Investment Fund.................................. (368,526) 99,480 (468,006)
</TABLE>
At June 30, 1999, the cost of investments for federal income tax purposes was
$116,952,551, $7,000,341, $62,080,423, $1,185,812,447, $6,964,600, $92,152,884,
$127,144,610, $442,460,778 and $57,399,333 for the Equity Income, Mid-Cap, Small
Cap, International, Global Equity, Balanced, Total Return Bond, Low Duration and
Short-Term Investment Funds, respectively. Any differences between book and tax
are due primarily to wash sale losses. In addition, the cost basis differences
in the International Fund and Global Equity Fund are due to mark-to-market
adjustments for passive foreign investment companies.
42
<PAGE> 175
At June 30, 1999, the following Funds deferred, on a tax basis, post-October
losses of:
<TABLE>
<CAPTION>
Fund Post-October Losses
- -----------------------------------------------------------------------------------
<S> <C>
Mid-Cap Fund................................................ $ 339,647
Small Cap Fund.............................................. 4,058,500
Total Return Bond Fund...................................... 1,372,787
Low Duration Fund........................................... 1,293,682
Short-Term Investment Fund.................................. 73,268
</TABLE>
Such amounts may be used to offset future capital gains.
At June 30, 1999, the Small Cap Fund had accumulated net realized capital loss
carryovers of $1,842,953 expiring in 2007. The Low Duration Fund had accumulated
net realized capital loss carryovers of $723,707 expiring in 2007. The
Short-Term Investment Fund had accumulated net realized capital loss carryovers
of $61,761 expiring in 2004 and $38,974 expiring in 2005. The Short-Term
Investment Fund utilized capital loss carryovers of $5,206 in 1999. To the
extent that the Funds realize future net capital gains, those gains will be
offset by any unused capital loss carryover.
NOTE 4.
FORWARD CURRENCY EXCHANGE CONTRACT. At June 30, 1999, the Global Equity Fund had
entered into a "portfolio hedge" forward currency exchange contract that
obligates the Fund to deliver and receive currency at a specified future date.
The net unrealized depreciation of $428 is included in the net unrealized
appreciation (depreciation) section of the accompanying financial statements.
The terms of the open contract are as follows:
<TABLE>
<CAPTION>
Currency to U.S. $ Value at Currency to U.S. $ Value at
Settlement Date be Delivered June 30, 1999 be Received June 30, 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/31/99.............. 29,548,500 Japanese Yen $246,501 U.S. Dollars $246,073
</TABLE>
NOTE 5.
FEDERAL TAX DISCLOSURE (UNAUDITED). For the year ended June 30, 1999, the
following percent of dividends distributed were derived from interest on U.S.
government securities which is generally exempt from state income tax: Balanced
Fund 9%, Total Return Bond Fund 18%, Low Duration Fund 16% and Short-Term
Investment Fund 9%. For the year ended June 30, 1999, the following percent of
ordinary distributions paid qualifies for the dividend received deduction
available to corporate shareholders: Equity Income Fund 100%, Mid-Cap Fund 12%,
Small Cap Fund 3%, Global Equity Fund 26%, Balanced Fund 35%, Total Return Bond
Fund 1% and Low Duration Fund 1%.
During the year ended June 30, 1999, the International Fund generated
$39,260,565 of foreign source income and paid $2,147,066 of foreign taxes. The
Fund elects to pass foreign taxes through to the Fund's shareholders for their
1999 tax returns. Updated data will be sent with 1999 Forms 1099-DIV to enable
shareholders to have information to claim either a foreign tax credit or to take
a foreign tax deduction on their 1999 income tax returns.
43
<PAGE> 176
During the year ended June 30, 1999, the following Funds paid capital gain
dividends (taxable as long-term capital gains).
<TABLE>
<CAPTION>
Fund Per Share
- -------------------------------------------------------------------------
<S> <C>
Equity Income Fund.......................................... $2.8078
Mid-Cap Fund................................................ $0.3471
Small Cap Fund.............................................. $1.0951
International Fund.......................................... $0.3357
Global Equity Fund.......................................... $0.0227
Balanced Fund............................................... $0.7148
Total Return Bond Fund...................................... $0.0058
Low Duration Fund........................................... $0.0038
</TABLE>
Information regarding these distributions was provided with the 1998 Forms
1099-DIV sent to shareholders in January 1999.
44
<PAGE> 177
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
EQUITY INCOME FUND 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $22.02 $21.25 $18.91 $17.24 $15.07
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.41 0.46 0.49 0.45(1) 0.49
Net realized and unrealized gain on investments......... 0.82 4.02 4.15 2.89 2.48
------ ------ ------ ------ ------
Total from investment operations........................ 1.23 4.48 4.64 3.34 2.97
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.41) (0.46) (0.48) (0.57) (0.44)
Distributions (from realized gains)..................... (2.88) (3.25) (1.82) (1.10) (0.36)
------ ------ ------ ------ ------
Total distributions..................................... (3.29) (3.71) (2.30) (1.67) (0.80)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $19.96 $22.02 $21.25 $18.91 $17.24
====== ====== ====== ====== ======
TOTAL RETURN................................................ 7.32% 22.60% 26.15% 20.04% 20.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $148.7 $175.3 $185.9 $182.5 $127.1
Ratio of expenses to average net assets:
Before expense reimbursement............................ 0.91% 0.87% 0.88% 0.98% 1.02%
After expense reimbursement............................. 0.91% 0.87% 0.88% 0.98% 1.00%
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 2.09% 1.99% 2.49% 2.56% 3.11%
After expense reimbursement............................. 2.09% 1.99% 2.49% 2.56% 3.14%
Portfolio turnover rate..................................... 18% 23% 44% 24% 50%
</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 the Financial Statements
45
<PAGE> 178
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, January 2, 1997*
-------------------- through
MID-CAP FUND 1999 1998 June 30, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $12.92 $11.65 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.16 0.13 0.07
Net realized and unrealized gain on investments......... 0.46 1.60 1.64
------ ------ ------
Total from investment operations........................ 0.62 1.73 1.71
------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. -- (0.14) (0.06)
Distributions (from realized gains)..................... (1.51) (0.32) --
------ ------ ------
Total distributions..................................... (1.51) (0.46) (0.06)
------ ------ ------
Net Asset Value, End of Period.............................. $12.03 $12.92 $11.65
====== ====== ======
TOTAL RETURN................................................ 7.66% 15.00% 17.15%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $6.9 $7.5 $2.0
Ratio of expenses to average net assets:
Before expense reimbursement............................ 2.02% 2.72% 8.26%+
After expense reimbursement............................. 1.05% 1.00% 1.00%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement............................ 0.46% (0.52)% (5.39)%+
After expense reimbursement............................. 1.43% 1.20% 1.87%+
Portfolio turnover rate..................................... 113% 71% 23%++
</TABLE>
* Commencement of operations.
+ Annualized.
++ Not Annualized.
See Notes to the Financial Statements
46
<PAGE> 179
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
SMALL CAP FUND 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $26.48 $23.83 $21.33 $21.53 $19.53
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............................ (0.05)(2) (0.06)(1) 0.03 0.05(1) (0.06)
Net realized and unrealized gain (loss) on
investments........................................... (3.88) 5.13 5.62 2.80 2.84
------ ------ ------ ------ ------
Total from investment operations........................ (3.93) 5.07 5.65 2.85 2.78
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. -- (0.05) (0.09) -- --
Distributions (from realized gains)..................... (1.53) (2.37) (3.06) (3.05) (0.78)
------ ------ ------ ------ ------
Total distributions..................................... (1.53) (2.42) (3.15) (3.05) (0.78)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $21.02 $26.48 $23.83 $21.33 $21.53
====== ====== ====== ====== ======
TOTAL RETURN................................................ (14.26)% 22.24% 29.74% 14.24% 14.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $53.4 $94.9 $27.5 $16.5 $20.5
Ratio of expenses to average net assets:
Before expense reimbursement............................ 1.19% 0.94% 1.30% 1.21% 1.49%
After expense reimbursement............................. 1.05% 0.94% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement............................ (0.40)% (0.23)% (0.20)% 0.03% (0.82)%
After expense reimbursement............................. (0.26)% (0.23)% 0.10% 0.24% (0.34)%
Portfolio turnover rate..................................... 105% 85% 88% 119% 81%
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
(2) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
See Notes to the Financial Statements
47
<PAGE> 180
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Distributor Class Investor Class
Investor Class June 2, 1999* Year Ended June 30,
Year Ended through --------------------------------------------
INTERNATIONAL FUND June 30, 1999 June 30, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......... $ 25.33 $25.20 $ 24.17 $20.44 $17.70 $16.79
-------- ------ -------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................... 0.59 0.05 0.59 0.59(1) 0.56(1) 0.28
Net realized and unrealized gain on
investments............................. 0.40 0.47 1.23 3.78 2.51 1.52
-------- ------ -------- ------ ------ ------
Total from investment operations.......... 0.99 0.52 1.82 4.37 3.07 1.80
-------- ------ -------- ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).... (0.25) -- (0.66) (0.48) (0.14) (0.44)
Distributions (from realized gains)....... (0.34) -- -- (0.16) (0.19) (0.45)
-------- ------ -------- ------ ------ ------
Total distributions....................... (0.59) -- (0.66) (0.64) (0.33) (0.89)
-------- ------ -------- ------ ------ ------
Net Asset Value, End of Period................ $ 25.73 $25.72 $ 25.33 $24.17 $20.44 $17.70
======== ====== ======== ====== ====== ======
TOTAL RETURN.................................. 4.22% 2.06%++ 7.77% 21.59% 18.61% 11.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions)............ $1,378.9 $1.1 $1,476.8 $888.5 $331.0 $51.5
Ratio of expenses to average net assets:
Before expense reimbursement.............. 0.95% 1.30%+ 0.89% 1.07% 1.11% 1.39%
After expense reimbursement............... 0.95% 1.30%+ 0.89% 1.00% 1.00% 1.00%
Ratio of net investment income to average net
assets:
Before expense reimbursement.............. 1.98% 2.77%+ 2.32% 2.59% 2.67% 2.45%
After expense reimbursement............... 1.98% 2.77%+ 2.32% 2.66% 2.78% 2.83%
Portfolio turnover rate....................... 41%+++ 41%+++ 20% 18% 12% 24%
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
* Commencement of operations.
+ Annualized.
++ Not Annualized.
+++ Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
See Notes to the Financial Statements
48
<PAGE> 181
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30, January 2, 1997*
------------------------------ through
GLOBAL EQUITY FUND 1999 1998 June 30, 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $11.38 $11.09 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.35 0.28 0.14
Net realized and unrealized gain on investments......... 0.24 0.51 1.09
------ ------ ------
Total from investment operations........................ 0.59 0.79 1.23
------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.11) (0.32) (0.14)
Distributions (from realized gains)..................... (0.02) (0.18) --
------ ------ ------
Total distributions..................................... (0.13) (0.50) (0.14)
------ ------ ------
Net Asset Value, End of Period.............................. $11.84 $11.38 $11.09
====== ====== ======
TOTAL RETURN................................................ 5.40% 7.61% 12.32%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........................ $7.6 $7.3 $3.7
Ratio of expenses to average net assets:
Before expense reimbursement............................ 2.07% 2.88% 4.43%+
After expense reimbursement............................. 1.09% 1.00% 1.00%+
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 1.78% 0.00% 0.07%+
After expense reimbursement............................. 2.76% 1.88% 3.50%+
Portfolio turnover rate..................................... 40% 54% 18%++
</TABLE>
* Commencement of operations.
+ Annualized.
++ Not Annualized.
See Notes to the Financial Statements
49
<PAGE> 182
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
BALANCED FUND 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $19.84 $19.38 $18.27 $16.74 $15.71
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.77 0.89 0.90(1) 0.94 0.89
Net realized and unrealized gain (loss) on
investments........................................... (0.04) 1.58 1.86 1.53 1.53
------ ------ ------ ------ ------
Total from investment operations........................ 0.73 2.47 2.76 2.47 2.42
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.75) (0.90) (0.99) (0.92) (0.80)
Distributions (from realized gains)..................... (0.82) (1.11) (0.66) (0.02) (0.57)
Return of capital....................................... -- -- -- -- (0.02)
------ ------ ------ ------ ------
Total distributions..................................... (1.57) (2.01) (1.65) (0.94) (1.39)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $19.00 $19.84 $19.38 $18.27 $16.74
====== ====== ====== ====== ======
TOTAL RETURN................................................ 4.04% 13.29% 15.75% 15.04% 16.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $97.9 $104.6 $90.2 $70.6 $32.1
Ratio of expenses to average net assets:
Before expense reimbursement............................ 0.98% 0.93% 0.98% 1.06% 1.19%
After expense reimbursement............................. 0.95% 0.93% 0.98% 1.00% 1.00%
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 3.99% 4.49% 4.77% 5.20% 5.44%
After expense reimbursement............................. 4.02% 4.49% 4.77% 5.26% 5.63%
Portfolio turnover rate..................................... 135% 121% 117% 92% 51%
</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 the Financial Statements
50
<PAGE> 183
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Distributor Class Investor Class Investor Class
Investor Class June 2, 1999* Year Ended June 30, December 6, 1994*
Year Ended through ------------------------ through
TOTAL RETURN BOND FUND June 30, 1999 June 30, 1999 1998 1997 1996 June 30, 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $13.46 $12.88 $13.04 $12.78 $12.94 $12.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.81 0.06 0.89 0.99 0.84(1) 0.46
Net realized and unrealized gain (loss)
on investments....................... (0.49) (0.03) 0.50 0.30 0.06 0.94
------ ------ ------ ------ ------ ------
Total from investment operations....... 0.32 0.03 1.39 1.29 0.90 1.40
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment
income).............................. (0.83) (0.06) (0.97) (0.92) (0.93) (0.46)
Distributions (from realized gains).... (0.10) -- -- (0.11) (0.13) --
------ ------ ------ ------ ------ ------
Total distributions.................... (0.93) (0.06) (0.97) (1.03) (1.06) (0.46)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period............. $12.85 $12.85 $13.46 $13.04 $12.78 $12.94
====== ====== ====== ====== ====== ======
TOTAL RETURN............................... 2.30% 0.23%++ 11.04% 10.48% 7.05% 11.88%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)....... $124.3 $0.4 $45.2 $14.3 $43.4 $15.3
Ratio of expenses to average net assets:
Before expense reimbursement........... 0.79% 1.18%+ 1.02% 0.95% 0.98% 2.93%+
After expense reimbursement............ 0.65% 0.90%+ 0.65% 0.65% 0.68% 0.80%+
Ratio of net investment income to average
net assets:
Before expense reimbursement........... 5.64% 5.98%+ 6.28% 6.78% 6.86% 4.92%+
After expense reimbursement............ 5.78% 6.26%+ 6.65% 7.08% 7.16% 7.05%+
Portfolio turnover rate.................... 233%+++ 233%+++ 195% 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.
++ Not Annualized.
+++ Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
See Notes to the Financial Statements
51
<PAGE> 184
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
LOW DURATION FUND 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $10.20 $10.23 $10.12 $10.15 $ 9.93
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.60 0.66 0.66 0.68 0.75
Net realized and unrealized gain (loss) on
investments........................................... (0.28) 0.05 0.10 0.06 0.23
------ ------ ------ ------ ------
Total from investment operations........................ 0.32 0.71 0.76 0.74 0.98
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.59) (0.68) (0.64) (0.72) (0.75)
Distributions (from realized gains)..................... (0.02) (0.06) (0.01) (0.05) (0.01)
------ ------ ------ ------ ------
Total distributions..................................... (0.61) (0.74) (0.65) (0.77) (0.76)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $ 9.91 $10.20 $10.23 $10.12 $10.15
====== ====== ====== ====== ======
TOTAL RETURN................................................ 3.15% 7.19% 7.79% 7.47% 10.23%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $410.0 $253.2 $171.2 $189.2 $123.3
Ratio of expenses to average net assets:
Before expense reimbursement............................ 0.64% 0.65% 0.66% 0.60% 0.75%
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............................ 5.65% 6.39% 6.26% 7.07% 7.43%
After expense reimbursement............................. 5.71% 6.46% 6.34% 7.09% 7.61%
Portfolio turnover rate..................................... 201% 119% 202% 50% 71%
</TABLE>
See Notes to the Financial Statements
52
<PAGE> 185
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
SHORT-TERM INVESTMENT FUND 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $10.13 $10.15 $10.17 $10.12 $10.21
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.57 0.63 0.58 0.66 0.66
Net realized and unrealized gain (loss) on
investments........................................... (0.11) 0.00 (0.01) 0.05 (0.09)
------ ------ ------ ------ ------
Total from investment operations........................ 0.46 0.63 0.57 0.71 0.57
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.54) (0.65) (0.59) (0.66) (0.66)
Return of capital....................................... -- -- -- (0.00) --
------ ------ ------ ------ ------
Total distributions..................................... (0.54) (0.65) (0.59) (0.66) (0.66)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $10.05 $10.13 $10.15 $10.17 $10.12
====== ====== ====== ====== ======
TOTAL RETURN................................................ 4.70% 6.37% 5.77% 7.23% 5.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $50.9 $28.0 $21.7 $18.7 $19.8
Ratio of expenses to average net assets:
Before expense reimbursement............................ 0.68% 0.92% 0.96% 0.88% 1.26%
After expense reimbursement............................. 0.48% 0.48% 0.48% 0.48% 0.48%
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 5.32% 5.92% 5.34% 6.15% 5.74%
After expense reimbursement............................. 5.52% 6.36% 5.82% 6.55% 6.52%
Portfolio turnover rate..................................... 144% 121% 154% 60% 81%
</TABLE>
See Notes to the Financial Statements
53
<PAGE> 186
HOTCHKIS
AND WILEY FUNDS
- --------------------------------------------------------------------------------
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 Mid-Cap
Fund, the Small Cap Fund, the International Fund, the Global Equity Fund, the
Balanced Fund, the Total Return Bond Fund, the Low Duration Fund and the
Short-Term Investment Fund (nine of the ten portfolios of Hotchkis and Wiley
Funds, the "Funds") at June 30, 1999, the results of each of their operations,
the changes in each of their net assets and the 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, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, WI
August 11, 1999
54
<PAGE> 187
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> 188
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> 189
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> 190
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> 191
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> 192
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> 193
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> 194
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> 195
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> 196
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> 197
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> 198
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 LLP
Milwaukee, WI
August 11, 1999
12
<PAGE> 199
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a)(1) Restated Declaration of Trust2
(2) Certificate of Designation2
(3) Amended and Restated Certificate of Designation5
(b) By-Laws4
(d) (1) Investment Advisory Agreement relating to the
Balanced Fund2
(2) Investment Advisory Agreement relating to the
Equity Income Fund2
(3) Investment Advisory Agreement relating to the
International Fund2
(4) Investment Advisory Agreement relating to the
Equity Fund for Insurance Companies2
(5) Investment Advisory Agreement relating to the
Low Duration Fund2
(6) Investment Advisory Agreement relating to the
Total Return Bond Fund2
(7) Investment Advisory Agreement relating to the
Small Cap Fund2
(8) Investment Advisory Agreement relating to the
Short-Term Investment Fund2
(9) Investment Advisory Agreement
relating to the Mid-Cap Fund3
(10) Investment Advisory Agreement
relating to the Global Equity Fund3
(11) Sub-advisory Agreement with Mercury Asset
Management International Limited and Merrill
Lynch Asset Management U.K. Limited for the
International Fund5
(12) Sub-advisory Agreement with Mercury Asset
Management International Limited and Merrill
Lynch Asset Management U.K. Limited for the
Global Equity Fund5
(e) Agreement with Merrill Lynch Funds Distributor, Inc.4
(g) (1) Custodian Agreement with First Wisconsin Trust
Company4
C-1
<PAGE> 200
(2) Global Custody Tri-Party Agreement,
including Amendment to Foreign Subcustodian
Agreement4
(h) (1) Fund Administration Servicing Agreement1
(2) License Agreement with Merrill Lynch & Co., Inc.2
(3) Shareholder Servicing Agent Agreement4
(4) Expense Cap Agreement5
(i) Legal opinion*
(j) Consents of PricewaterhouseCoopers LLP*
(m) Distribution Plan under Rule 12b-1*
(o) Rule 18f-3 Plan5
1Incorporated 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 (File No. 2-96219).
2Incorporated 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 (File No. 2-96219).
3Incorporated herein by reference and previously filed as an exhibit to
Post-effective Amendment No. 24 to the Registration Statement on Form N-1A filed
via EDGAR on July 30, 1997 (File No. 2-96219).
4Incorporated herein by reference and previously filed as an exhibit to
Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A
filed via EDGAR on August 28, 1998 (File No. 2-96219).
5Incorporated herein by reference and previously filed as an exhibit to
Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A
filed via EDGAR on January 29, 1999 (File No. 2-96219).
- --------------------------
* Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See "General Information About the Trust's Shareholders" in the
Statement of Additional Information.
C-2
<PAGE> 201
ITEM 25. 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-3
<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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "The Advisor and Portfolio Managers" in the Prospectuses
constituting Part A of this Registration Statement and "Management--The Advisor"
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 27. PRINCIPAL UNDERWRITERS.
(a) The Registrant's principal underwriter, Princeton Funds
Distributor, Inc. ("PFD"), also acts as principal underwriter for the following
open-end registered investment companies:
Financial Institutions Series Trust, Hotchkis and Wiley Variable Trust,
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Disciplined
Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging
Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Federal Securities
Trust, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Funds for
Institutions Series, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Growth
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value
Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series
Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility
Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc., and Merrill Lynch
World Income Fund, Inc. PFD also acts as the principal underwriter for the
following closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Program, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
Merrill Lynch Senior Floating Rate Fund, Inc., and Merrill Lynch Senior Floating
Rate Fund II, Inc. A separate division of PFD acts as the principal underwriter
of a number of other investment companies.
C-4
<PAGE> 203
(b) Set forth below is information concerning each director and
officer of PFD. The principal business address of each such person is P.O. Box
9081, Princeton, New Jersey 08543-9011, except that the address of Messrs.
Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
Position(s) and Office(s) Position and Offices
Name with Princeton Funds Distributor with Registrant
---- -------------------------------- --------------------
<S> <C> <C>
Terry K. Glenn............. President and Director None
Michael G. Clark........... Treasurer and Director None
Thomas J. Verage........... Director None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
Donald C. Burke............ Vice President None
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
Michelle T. Lau............ Vice President None
Salvatore Venezia.......... Vice President None
William Wasel.............. Vice President None
Robert Harris.............. Secretary Assistant Secretary
</TABLE>
(c) Not applicable.
ITEM 28. 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, 725 S. Figueroa Street, Suite 4000, Los
Angeles, California 90017, Registrant's custodian and administrator, Firstar
Mutual Fund Services, LLC, 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 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-5
<PAGE> 204
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to the Registration
Statement under Rule 485(b) under the Securities Act and has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Los Angeles and State of California
on the 20th day of August, 1999.
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 August 20, 1999
- ----------------------------------------
Nancy D. Celick
/s/ ANNA MARIE LOPEZ Principal Financial and Accounting August 20, 1999
- ---------------------------------------- Officer
Anna Marie Lopez
/s/ MICHAEL S. BAXTER Trustee August 20, 1999
- ----------------------------------------
Michael S. Baxter
/s/ ROBERT L. BURCH III Trustee August 20, 1999
- ----------------------------------------
Robert L. Burch III
/s/ JOHN GAVIN Trustee August 20, 1999
- ----------------------------------------
John Gavin
/s/ JOE GRILLS Trustee August 20, 1999
- ----------------------------------------
Joe Grills
/s/ NIGEL HURST-BROWN Trustee August 20, 1999
- ----------------------------------------
Nigel Hurst-Brown
/s/ ROBERT B. HUTCHINSON Trustee August 20, 1999
- ----------------------------------------
Robert B. Hutchinson
/s/ MADELEINE A. KLEINER Trustee August 20, 1999
- ----------------------------------------
Madeleine A. Kleiner
/s/ MERLE T. WELSHANS Trustee August 20, 1999
- ----------------------------------------
Merle T. Welshans
/s/ RICHARD R. WEST Trustee August 20, 1999
- ----------------------------------------
Richard R. West
</TABLE>
<PAGE> 205
HOTCHKIS AND WILEY FUNDS
EXHIBIT INDEX
Exhibit
Number Description
- ------- ----------
(a) (1) Restated Declaration of Trust2
(2) Certificate of Designation2
(3) Amended and Restated Certificate of
Designation5
(b) By-Laws4
(d) (1) Investment Advisory Agreement relating to the
Balanced Fund2
(2) Investment Advisory Agreement relating to the Equity
Income Fund2
(3) Investment Advisory Agreement relating to the
International Fund2
(4) Investment Advisory Agreement relating to the Equity
Fund for Insurance Companies2
(5) Investment Advisory Agreement relating to the Low
Duration Fund2
(6) Investment Advisory Agreement to the Total Return
Bond Fund2
(7) Investment Advisory Agreement relating to the Small
Cap Fund2
(8) Investment Advisory Agreement relating to the
Short-Term Investment Fund2
(9) Investment Advisory Agreement relating to the Mid-Cap
Fund3
(10) Investment Advisory Agreement relating to the Global
Equity Fund3
(11) Sub-advisory Agreement with Mercury Asset Management
International Limited and Merrill Lynch Asset
Management U.K. Limited for the International Fund5
(12) Sub-advisory Agreement with Mercury Asset Management
International Limited and Merrill Lynch Asset
Management U.K. Limited for the Global Equity Fund5
(e) Agreement with Merrill Lynch Funds Distributor, Inc.4
(g) (1) Custodian Agreement with First Wisconsin Trust
Company4
(2) Global Custody Tri-Party Agreement, including
Amendment to Foreign Subcustodian Agreement4
(i) Legal opinion.*
(h) (1) Fund Administration Servicing Agreement1
(2) License Agreement with Merrill Lynch & Co., Inc.2
(3) Shareholder Servicing Agent Agreement4
(4) Expense Cap Agreement5
(j) Consents of PricewaterhouseCoopers LLP*
<PAGE> 206
Exhibit
Number Description
- ------- -----------
(m) Distribution Plan under Rule 12b-1*
(o) Rule 18f-3 Plan5
1Incorporated 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 (File No. 2-91216).
2Incorporated 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 (File No. 2-91216).
3Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 24 to the Registration Statement on Form N-1A
filed via EDGAR on July 30, 1997 (File No. 2-91216).
4Incorporated herein by reference and previously filed as an exhibit
to Post-effective Amendment No. 25 to the Registration Statement on Form N-1A
filed via EDGAR on August 28, 1998 (File No. 2-91216).
5Incorporated herein by reference and previously filed as an exhibit
to Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A
filed via EDGAR on January 29, 1999 (File No. 2-91216).
- --------------------------
* Filed herewith
2
<PAGE> 1
SULLIVAN & WORCESTER LLP
One Post Office Square
Boston, Massachusetts 02109
(617) 338-2800
Boston
August 20, 1999
The Trustees of
Hotchkis and Wiley Funds
725 South Figueroa St., Suite 4000
Los Angeles, California 90017-5400
Re: Hotckis and Wiley Funds
Ladies and Gentlemen:
You have requested our opinion, as your special Massachusetts counsel,
as to certain matters of Massachusetts law relating to the organization and
shares of Hotchkis and Wiley Funds, a trust with transferable shares under
Massachusetts law (the "Fund"). We understand that our opinion is requested in
connection with the filing by the Fund with the Securities and Exchange
Commission (the "SEC") of Post-Effective Amendment No. 29 to its Registration
Statement on Form N-1A under to the Securities Act of 1933, as amended (the
"Securities Act"), Registration No. 2-96219, and Post-Effective Amendment No. 31
to its Registration Statement under the Investment Company Act of 1940, as
amended, Registration No. 811-4182 (collectively, the "Amendment"), relating to
the several series and classes of shares of beneficial interest, without par
value, of the Fund (the "Shares"), and that you wish to file this letter with
the SEC as an exhibit to the Amendment.
The Fund was established pursuant to a Declaration of Trust dated August
22, 1984 (the "Original Declaration"), which, as theretofore amended, was
amended and restated in its entirety by a Restated Declaration of Trust dated
August 22, 1996, and thereafter amended by a Certificate of Designation dated
October 11, 1996, and an Amended Certificate of Designation dated October 20,
1997 (the Original Declaration, as so amended and restated and amended, the
"Amended and Restated Declaration"). The Amended and Restated Declaration was
thereafter supplemented by an Amended and Restated Certificate of Designation
dated January 27, 1999 (the "Certificate of Designation", and the Amended and
Restated Declaration, as supplemented by the Certificate of Designation, the
"Declaration").
For purposes of rendering this opinion, we have examined and are
familiar with the Amended and Restated Declaration and the Certificate of
Designation, and we have reviewed a proof of the Amendment which we are informed
is substantially the form to be filed with the SEC (including the form of the
Prospectuses (the "Prospectuses") and the Statement of Additional Information
(the "SAI") to be included therein), records of the actions taken by yourselves
and your predecessors as the Trustees of the Fund to authorize the issuance and
sale of its Shares, the By-laws
<PAGE> 2
The Trustees of
Hotchkis and Wiley Funds -2- August 20, 1999
of the Fund, as currently in effect, certificates of officers of the Fund and of
public officials as to matters of fact relevant to this opinion, and such other
documents and instruments, certified or otherwise identified to our
satisfaction, and such questions of law and fact, as we have considered
necessary or appropriate for purposes of this opinion. We call to your attention
that, in doing so, we have assumed the genuineness of the signatures on, and the
authenticity of, all documents furnished to us, and the conformity to the
originals of documents submitted to us as copies, which we have not
independently verified.
Based upon and subject to the foregoing, we hereby advise you that, in
our opinion, under the laws of Massachusetts:
1. The Fund is validly existing as a trust with transferable shares of
the type commonly called a Massachusetts business trust.
2. The Fund is authorized to issue an unlimited number of Shares; the
Shares of each Series and Class subject to the Registration Statement
have been duly and validly authorized by all requisite action of the
Trustees of the Fund, and no action by the shareholders of the Fund
is required in such connection.
3. The Shares, when duly sold, issued and paid for as contemplated by
the Prospectuses and the SAI, will be validly and legally issued,
fully paid and nonassessable by the Fund.
With respect to the opinion expressed in paragraph 3 above, we wish to
point out that the shareholders of a Massachusetts business trust may under some
circumstances be subject to assessment at the instance of creditors to pay the
obligations of such trust in the event that its assets are insufficient for the
purpose.
This letter expresses our opinions as to the provisions of the
Declaration and the laws of Massachusetts applying to business trusts generally,
but does not extend to the Massachusetts Securities Act, or to federal
securities or other laws.
We consent to your filing this letter with the SEC as an exhibit to the
Amendment, but we do not thereby concede that we come within the category of
persons whose consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/ SULLIVAN & WORCESTER LLP
SULLIVAN & WORCESTER LLP
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to use in the Statement of Additional Information constituting
part of this Post-Effective Amendment No. 29 to the registration statement on
Form N-1A (the "Registration Statement") of our report dated August 11, 1999,
relating to the financial statements and financial highlights of the Equity
Income Fund, the Mid-Cap Fund, the Small Cap Fund, the International Fund, the
Global Equity Fund, the Balanced Fund, the Total Return Bond Fund, the Low
Duration Fund and the Short-Term Investment Fund (nine of the ten 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
Prospectuses which constitute part of this Registration Statement. We also
consent to the reference to us under the heading "Other Service Providers" in
such Statement of Additional Information and to the reference to us under the
heading "Financial Highlights" in such Prospectuses.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
August 17, 1999
<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. 29 to the registration statement on
Form N-1A (the "Registration Statement") of our report dated August 11, 1999,
relating to the financial statements and financial highlights of the Equity Fund
for Insurance Companies (one of the ten 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 "Other Service Providers" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
August 17, 1999
<PAGE> 1
Exhibit (m)
DISTRIBUTION PLAN
OF
HOTCHKIS AND WILEY FUNDS
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 1st day of April, 1999, by and
between HOTCHKIS AND WILEY FUNDS, a Massachusetts business trust (the "Trust"),
and PRINCETON FUNDS DISTRIBUTOR, INC., a Delaware corporation ("PFD").
W I T N E S S E T H:
WHEREAS, the Trust engages in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, the Trust comprises ten separate funds (the "Funds"), each of
which pursues its own investment objective through separate investment policies,
and may in the future comprise one or more additional funds; and
WHEREAS, PFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Trust has entered into a Distribution Agreement with PFD,
pursuant to which PFD acts as the exclusive distributor and representative of
the Trust in the offer and sale of Distributor Class shares of certain Funds
(collectively, the "Distributor Class Shares"); and
WHEREAS, the Trust desires to adopt this Distribution Plan pursuant to
Rule 12b-1 under the Investment Company Act, pursuant to which the Trust will
pay a distribution fee to, or at the direction of, PFD in connection with the
distribution of Distributor Class Shares of the Funds; and
WHEREAS, Distributor Class Shares are sold to administrators,
broker-dealers, or other institutions that provide accounting, recordkeeping,
and/or other services to investors and that have an administrative services
agreement with the Trust and/or the Trust's investment advisor to make
Distributor Class Shares available to their clients (the "Recipients"); and
WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of this Distribution Plan will benefit the
Trust and its Distributor Class shareholders.
NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby
agrees to the terms of, this Distribution Plan (the "Plan") in accordance with
Rule 12b-1 under the Investment Company Act on the following terms and
conditions:
<PAGE> 2
1. Upon effectiveness of this Plan with respect to the Distributor Class
Shares of a Fund, the Trust, on behalf of such Fund, shall pay to each of the
Recipients a distribution fee under the Plan at the end of each quarter of 0.25%
on an annualized basis of the average daily net asset value of the Distributor
Class Shares of such Fund invested through such Recipient as compensation for
providing distribution related services to the Trust's shareholders, including,
but not limited to, the following:
(a) costs of printing and mailing of Trust prospectuses, statements of
additional information, any supplements thereto and shareholder reports
for prospective Fund shareholders;
(b) services relating to the development, preparation, printing and
mailing of Trust advertisements, sales literature and other promotional
materials describing and/or relating to the Trust and including
materials intended for broker-dealer only use or retail use;
(c) holding seminars and sales meetings designed to promote the
distribution of the Distributor Class Shares of the Funds;
(d) obtaining information and providing explanations to prospective Fund
shareholders regarding the investment objectives and policies and other
information about the Trust and its Funds, including the performance of
the Funds;
(e) training sales personnel regarding the Trust and the Funds; and
(f) financing any other activity that the Trust's Board of Trustees
determines is primarily intended to result in the sale of the
Distributor Class Shares.
Only distribution expenditures properly attributable to the sale of Distributor
Class Shares of a Fund will be used to justify any fee paid by the Trust with
respect to that Fund pursuant to this Plan, and, to the extent that such
expenditures relate to more than one Fund, the expenditures will be allocated
between or among the affected Funds in a manner deemed appropriate by the Board
of Trustees of the Trust.
2. PFD shall provide the Trust for review by the Board of Trustees, and
the Trustees shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 under the Investment Company Act regarding the
disbursement of the distribution fee during such period.
3. This Plan shall not take effect until it has been approved, together
with the provisions of any related agreements, by the initial Distributor Class
shareholder of each Fund and by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Trustees"), cast in person at a meeting called
for the purpose of voting on this Plan and such related agreements.
2
<PAGE> 3
4. This Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
this Plan in Paragraph 3.
5. This Plan may be terminated with respect to a Fund at any time by
vote of a majority of the Rule 12b-1 Trustees or by vote of a majority of the
outstanding Distributor Class Shares of that Fund.
6. This Plan may not be amended to increase materially the rate of
distribution payments provided for in Paragraph 1 unless such amendment is
approved in the manner provided for initial approval in Paragraph 3 and by a
vote of at least a majority, as defined in the Investment Company Act, of the
outstanding Distributor Class Shares of each Fund affected by the amendment, and
no material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal of Paragraph 3.
7. While this Plan is in effect, the selection and nomination of
Trustees who are not interested persons, as defined in the Investment Company
Act, of the Trust shall be committed to the discretion of the Trustees who are
not interested persons and a majority of the Trustees shall be Rule 12b-1
Trustees.
8. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 2 hereof, for a period of
not less than six years from the date of this Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
9. PFD understands that the obligations of this Agreement are not
binding upon any shareholder of the Trust personally, but bind only the Trust's
property; PFD represents that it has notice of the provisions of the Trust's
Declaration of Trust disclaiming shareholder liability for acts or obligations
of the Trust.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Distribution
Plan as of the date first above written.
HOTCHKIS AND WILEY FUNDS
By: /s/ Nancy D. Celick
--------------------------------
PRINCETON FUNDS DISTRIBUTOR, INC.
By: /s/ Terry Glenn
--------------------------------
4
