<PAGE> 1
ANNUAL REPORT
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
HOTCHKIS AND WILEY FUNDS LOGO JUNE 30, 2000
725 SOUTH FIGUEROA STREET
SUITE 4000 [TORCH LOGO]
LOS ANGELES, CALIFORNIA 90017-5400
HOTCHKIS AND WILEY FUNDS
800-236-4479
SHORT-TERM INVESTMENT FUND
INVESTMENT ADVISER --------------------------------------------------
MERCURY ADVISORS
725 SOUTH FIGUEROA STREET Seeks to maximize total return, consistent with
SUITE 4000 preservation of capital. The Fund invests in
LOS ANGELES, CALIFORNIA 90017-5400 bonds of varying maturities with a portfolio
duration which will generally not exceed one
LEGAL COUNSEL year.
GARDNER, CARTON & DOUGLAS
321 NORTH CLARK STREET
CHICAGO, ILLINOIS 60610
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
100 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
DISTRIBUTOR
FAM DISTRIBUTORS, INC.
P.O. BOX 9081
PRINCETON, NEW JERSEY 08543-9081
TRANSFER AGENT
FINANCIAL DATA SERVICES, INC.
P.O. BOX 41621
JACKSONVILLE, FLORIDA 33232-1621
CUSTODIAN
BROWN BROTHERS HARRIMAN & CO.
40 WATER STREET
BOSTON, MASSACHUSETTS 02109-3661
</TABLE>
<TABLE>
<S> <C>
THIS MATERIAL MUST BE PRECEDED MERCURY ADVISORS: INVESTMENT ADVISER
OR ACCOMPANIED BY A PROSPECTUS.
</TABLE>
<PAGE> 2
[HOTCHKIS AND WILEY FUNDS LOGO]
DEAR SHAREHOLDER:
We are pleased to present to you the annual report of the Hotchkis and Wiley
Short-Term Investment Fund for the fiscal year ended June 30, 2000.
A booming economy is fundamentally bad for the bond market as it signals
potential future inflationary pressures resulting from an excess of demand
relative to supply. The past twelve months were no exception. The economy grew
at an estimated 6.0% rate during the last twelve months. Consumer spending, the
result of full employment and a booming equity market, has been the key driver
of this torrid growth. Investment spending has also been a vital component of
growth as corporations have invested in productivity-enhancing technology in
order to remain competitive. These productivity enhancements have kept inflation
contained, particularly relative to such strong economic growth, but recently
signs of increasing inflation began to emerge.
Meanwhile, technical changes in the market became increasingly important. In
spite of a steaming economy, longer-maturity U.S. Treasuries actually rallied as
the Treasury Department began to reduce the supply of outstanding debt by
purchasing and retiring billion of dollars of bonds. The Treasury buybacks were
a result of record federal surpluses and are expected to continue for several
years. The increased current demand and anticipation of reduced future supply
caused 30-year Treasury yields to fall by 7 basis points during the past year.
In the meantime, the Federal Reserve Bank continued to slow the economy by
increasing short-term rates. The Fed raised the Federal Funds Rate by 150 basis
points in five separate moves over the past twelve months. In sympathy,
short-term Treasury rates rose between 83 and 118 basis points.
With short-term rates rising and long-term rates falling, the yield curve
continued to invert. In fact, at the end of the period, three-month Treasury
yields, at 5.86%, were only 4 basis points lower than 30 year Treasury yields.
At the beginning of the period this difference was a more normal 121 basis
points.
Non-Treasury sectors of the bond market did not perform nearly as well as
Treasuries, particularly longer-maturity issues. Corporate securities suffered
as the Fed raised rates and investors fled to higher quality positions. In
general, lower quality and longer maturity corporate bonds fared the worst. Many
below-investment-grade bonds posted negative total returns for the twelve-month
period as the negative price effects of spread widening more than offset their
initial yield advantage. Floating-rate debt, the coupon payments of which adjust
upwards as rates rise, outperformed fixed-rate issues. Adjusted for duration
differences, mortgage- and asset-backed securities performed in-line with the
overall market. However, in both cases, longer-maturity issues underperformed
shorter-maturity issues. Non-U.S. bonds posted fairly weak returns as global
growth remained strong. However, emerging market issues were extremely strong,
bouncing back as those economies regained some momentum.
The Fund was positioned for rising interest rates, and this duration decision
added to relative returns. In terms of yield curve strategy, or maturity
structure, the Fund held more intermediate issues than its index, hurting
returns and contributing to the Fund's underperformance compared to the Merrill
Lynch
<PAGE> 3
6-Month U.S. Treasury Bill Index. Sector strategies, on balance, detracted from
relative returns. In general, holdings of non-Treasury issues for additional
yield had a negative impact. Specifically, overweighting corporates with limited
use of below investment grade issues detracted from performance. A neutral to
slight underweighting of mortgage-backed securities did not significantly impact
the portfolio. A larger-than-index allocation to asset-backed securities
improved performance. Finally, security selection added to returns primarily
through large positions in floating-rate securities and Treasury Inflation
Protected Securities.
We appreciate your continued support and look forward to serving your investment
needs in the months and years ahead.
Sincerely,
/s/ Nancy D. Celick
Nancy D. Celick
President
HOTCHKIS AND WILEY FUNDS
The opinions expressed in the Shareholder letter are as of June 30, 2000.
They are subject to change and any forecasts made cannot be guaranteed. The Fund
may not continue to hold any securities mentioned and has no obligation to
disclose purchases or sales in these securities.
2
<PAGE> 4
SHORT-TERM INVESTMENT FUND
MAY 18, 1993 - JUNE 30, 2000
[LINE GRAPH]
<TABLE>
<CAPTION>
MERRILL LYNCH 6-MONTH TREASURY
SHORT TERM INVESTMENT FUND INDEX
-------------------------- ------------------------------
<S> <C> <C>
10000.00 10000.00
Jun 93 10028.00 10033.00
10273.00 10121.00
10506.00 10203.00
10651.00 10272.00
Jun 94 10777.00 10362.00
10870.00 10476.00
10971.00 10600.00
11216.00 10786.00
Jun 95 11401.00 10966.00
11592.00 11122.00
11830.00 11293.00
12048.00 11429.00
Jun 96 12225.00 11572.00
12355.00 11735.00
12560.00 11893.00
12712.00 12047.00
Jun 97 12929.00 12229.00
13146.00 12399.00
13336.00 12557.00
13549.00 12731.00
Jun 98 13755.00 12905.00
14005.00 13111.00
14105.00 13258.00
14253.00 13405.00
Jun 99 14401.00 13546.00
14580.00 13713.00
14763.00 13872.00
14915.00 14071.00
Jun 00 15085.00 14294.00
</TABLE>
<TABLE>
<CAPTION>
Ended 6/30/00
-------------
Fund ML 6-mo.
<S> <C> <C>
------------------------------------------------------------------------
One Year 4.75% 5.52%
------------------------------------------------------------------------
Five Years 5.76% 5.44%
------------------------------------------------------------------------
Since Inception (5/18/93) 5.94% 5.14%
------------------------------------------------------------------------
</TABLE>
HOW A $10,000 INVESTMENT HAS GROWN:
The chart above shows the growth of a $10,000 investment in the Fund as
compared to the performance of the Merrill Lynch 6-month U.S. Treasury Bill
Index. The table below the chart shows the average annual total returns of an
investment over various periods.
Total returns and average annual total returns for the Fund are net of all
charges and fees and assume reinvestment of capital gains distributions and
shareholder dividends at net asset value. The investment adviser pays annual
operating expenses in excess of 0.48% of the Fund's average net assets. Were the
investment adviser not to pay such expenses, net returns would be lower.
Investment returns and principal will vary so that shares, when redeemed, may be
worth more or less than their original cost. Past performance is no guarantee of
future results.
The Fund may invest a portion of its assets in non-investment grade debt
securities, commonly referred to as high yield or "junk" bonds, which may be
subject to greater market fluctuations and risk of loss of income and principal
than securities in higher rating categories. The Fund may also invest a portion
of its assets in emerging market and other foreign securities, which involve
special risks including fluctuating foreign exchange rates, foreign government
regulations, differing degrees of liquidity, and the possibility of substantial
volatility due to adverse political, economic or other developments.
The Merrill Lynch 6-Month U.S. Treasury Bill Index is an unmanaged index of
Treasury securities with maturities of six months, which securities are
guaranteed as to the timely payment of principal and interest by the U.S.
government. The Fund owns securities not reflected in this Index or guaranteed.
The Index does not reflect payment of transaction costs, fees and expenses
associated with an investment in the Fund. It is not possible to invest directly
in an index.
3
<PAGE> 5
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
CORPORATE BONDS Principal
AND NOTES -- 49.1% Amount Value
------------------------------------------------------------
<S> <C> <C>
AEROSPACE/DEFENSE -- 0.4%
............................................................
Raytheon Company, (Acquired
3/02/2000, cost $250,000),
7.4700%, 3/01/2002 # r $ 250,000 $ 249,848
------------------------------------------------------------
BANKS -- 5.8%
............................................................
Bancwest Corp., 6.2500%,
8/15/2000 800,000 799,022
............................................................
Korea Development Bank, 9.6000%,
12/01/2000 675,000 679,954
............................................................
MBNA Corporation, 7.1275%,
6/17/2002 # 350,000 348,949
............................................................
Unibanco Grand Cayman, (Acquired
11/15/1999, cost $447,561),
7.7500%, 8/14/2000 r 450,000 450,081
............................................................
Wells Fargo Bank, N.A., CLB
8/01/2000, 6.8913%, 5/02/2005
# 900,000 898,693
...................... ...................... ---------
3,176,699
------------------------------------------------------------
CABLE TELEVISION -- 2.4%
............................................................
Cox Enterprises, Inc., (Acquired
5/01/2000, cost $1,300,000),
7.5525%, 5/01/2003 # r 1,300,000 1,297,630
------------------------------------------------------------
BUILDING PRODUCTS-WOOD -- 1.6%
............................................................
Rayonier Inc., 7.1200%,
2/23/2001 # 900,000 899,957
------------------------------------------------------------
ELECTRIC: INTEGRATED -- 1.8%
............................................................
SCANA Corporation, (Acquired
1/31/2000, cost $1,000,000),
CLB 8/08/2000, 7.1525%,
2/08/2002 # r 1,000,000 999,895
------------------------------------------------------------
EUROBANKS -- 10.5%
............................................................
Credit Industriel et Commercial
(CIC), 7.4750%, 6/29/2049 # 1,450,000 1,389,028
............................................................
Foreningsbanken Kredit AB, CLB
12/18/2001, 7.5275%,
12/29/2049 # 1,000,000 1,000,097
............................................................
</TABLE>
<TABLE>
------------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
Nordbanken, CLB 10/25/2001,
6.9337%, 10/29/2049 # $ 550,000 $ 547,827
............................................................
Okobank, CLB 10/25/2001,
7.2975%, 9/29/2049 # 1,050,000 1,048,240
............................................................
Robert Fleming Capital Ltd., CLB
5/07/2001, 7.3450%, 5/07/2006
# 1,000,000 995,262
............................................................
Skandinavinska Enskilda Banken,
CLB 6/28/2003, 7.2550%,
6/29/2049 # 800,000 789,216
...................... ...................... ---------
5,769,670
------------------------------------------------------------
FINANCIAL SERVICES -- 20.0%
............................................................
AT & T Capital Corp., 6.7800%,
10/24/2000 # 500,000 500,371
............................................................
Associates Corp. N.A., 6.9025%,
5/08/2003 # 625,000 624,863
............................................................
Bear Stearns Co. Inc., 7.1250%,
3/28/2003 # 1,500,000 1,498,461
............................................................
Countrywide Home Loans, Inc.:
7.2500%, 3/19/2003 # 750,000 750,136
............................................................
7.3275%, 3/16/2005 # 750,000 740,311
............................................................
Finova Capital Corp., 7.0275%,
6/18/2003 # 2,000,000 1,683,392
............................................................
Fuji Finance Grand Cayman,
7.1137%, 8/29/2049 # 750,000 728,515
............................................................
Golden State Holdings, CLB
8/01/2000, 7.3913%, 8/01/2003
# 1,900,000 1,809,566
............................................................
Lehman Brothers Holdings,
7.2900%, 6/01/2001 # 900,000 900,562
............................................................
National Westminster BK,
7.2925%, 9/16/2002 # 1,000,000 1,003,451
............................................................
Textron Financial Corp.,
6.5810%, 9/17/2002 # 750,000 750,293
...................... ...................... ---------
10,989,921
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 6
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
OIL: INTEGRATED -- 2.8%
............................................................
Occidental Petroleum, 6.2400%,
11/24/2000 $ 450,000 $ 447,797
............................................................
LG-Caltex Oil Corp., 7.5950%,
10/29/2001 # 1,100,000 1,098,558
...................... ...................... ---------
1,546,355
------------------------------------------------------------
TELECOMMUNICATIONS -- 3.8%
............................................................
Sprint Spectrum L.P., CLB
8/15/2001, 11.0000%, 8/15/2006 650,000 699,861
............................................................
WorldCom, Inc., 7.0500%,
11/26/2001 # 1,400,000 1,400,928
...................... ...................... ---------
2,100,789
------------------------------------------------------------
Total corporate bonds and notes
(cost $27,378,405) 27,030,764
------------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 2.0%
------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.2%
............................................................
Federal Home Loan Mortgage
Corporation, CLB, 2118 Z,
6.5000%, 12/15/2028 42,620 32,180
............................................................
Federal National Mortgage
Association, 1993-142 SA,
8.0643%, 10/25/2022 # 88,320 81,524
...................... ...................... ---------
113,704
------------------------------------------------------------
PASS-THROUGH SECURITIES -- 1.7%
............................................................
Federal Housing Authority
Project, 7.4300%, 2/01/2023 130,638 122,800
............................................................
Government National Mortgage
Association:
8570, 7.1250%, 10/20/2019 # 181,187 182,613
............................................................
8346, 7.1250%, 12/20/2023 # 638,427 643,556
...................... ...................... ---------
948,969
------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
STRIPPED MORTGAGE-BACKED SECURITIES -- 0.1%
............................................................
Federal National Mortgage
Association:
1993-129 J (IO), 6.5000%,
2/25/2007 $ 322,319 $ 19,029
............................................................
1993-97L (IO), 7.5000%,
5/25/2023 22,929 94
...................... ...................... ---------
19,123
------------------------------------------------------------
Total government agency
mortgage-backed securities
(cost $1,117,861) 1,081,796
------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED
SECURITIES -- 30.7%
------------------------------------------------------------
ASSET-BACKED SECURITIES -- 21.2%
............................................................
ACC Automobile Receivables
Trust, (Acquired 6/24/1999,
cost $530,255), CLB, 1997-C A,
6.4000%, 3/17/2004 r 529,098 526,074
............................................................
Americredit Automobile
Receivables Trust:
CLB, 1998-A A2, 6.7825%,
11/05/2001 # 54,471 54,504
............................................................
CLB, 1999-A A2, 5.3830%,
4/05/2002 277,787 277,322
............................................................
Associates Manufactured Housing
Pass-Through Certificates,
CLB, 1996-2 A4, 6.6000%,
6/15/2027 500,000 493,468
............................................................
BankBoston Home Equity Loan
Trust, CLB, 1998-1 A1,
6.4600%, 4/25/2012 61,067 60,816
............................................................
CIT Marine Trust, CLB, 1999-A
A1, 5.4500%, 9/15/2006 403,208 401,508
............................................................
COMM, (Acquired 6/28/2000, cost
$1,000,000), CLB, 2000-FL2A A,
6.7370%, 1/15/2003 # r 1,000,000 1,000,391
............................................................
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 7
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
Commercial Financial Services
Securitized Multiple Asset
Rated Trust, (Acquired
9/24/1997, cost $360,974),
1997-5 A1, 7.7200%, 6/15/2005
r + $ 360,974 $ 108,292
............................................................
Countrywide Home Equity Loan
Trust, CLB, 1999-A CTFS,
6.7525%, 4/15/2025 # 809,479 811,693
............................................................
Credit-Based Asset Servicing and
Securities, CLB, 2000-CB2 A1A,
7.0613%, 9/25/2029 # 667,324 669,436
............................................................
Duck Auto Grantor Trust,
(Acquired 4/21/1999, cost
$201,230), CLB, 1999-A A1,
5.6500%, 3/15/2004 r 201,261 197,887
............................................................
First Tennessee Auto Grantor
Trust, (Acquired 4/17/1998,
cost $132,763), CLB, 1998A-A,
6.1340%, 4/15/2003 r 132,763 132,774
............................................................
GMAC Mortgage Corporation Loan
Trust, CLB, 2000-HLTV A1,
6.8513%, 11/18/2015 # 959,920 959,752
............................................................
Green Tree Home Improvement Loan
Trust, CLB, 1997-A HEA5,
7.2100%, 3/15/2028 144,411 144,536
............................................................
Green Tree Recreational,
Equipment & Consumer Trust,
CLB, 1996-C A1, 6.8913%,
10/15/2017 # 454,677 454,638
............................................................
Harley-Davidson Eaglemark
Motorcycle Trust, CLB, 1999-A
A1, 5.2500%, 7/15/2003 401,822 396,636
............................................................
IMC Home Equity Loan Trust, CLB,
1998-3 A3, 6.1600%, 5/20/2014 511,767 509,630
............................................................
Nationslink Funding Corporation,
CLB, 1999-SL A1V, 6.9850%,
4/10/2007 # 578,909 579,115
............................................................
Navistar Financial Corporation
Owner Trust, CLB, 1996-B A3,
6.3300%, 4/21/2003 149,281 149,349
............................................................
</TABLE>
<TABLE>
------------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
Nomura Asset Securities
Corporation, CLB, 1995-MD3
A1A, 8.1700%, 3/04/2020 $ 754,298 $ 762,812
............................................................
Nomura Depositor Trust,
(Acquired 9/03/1999, cost
$1,080,283), 1998-ST1 A3A,
7.2013%, 1/15/2003 # r 1,100,000 1,084,703
............................................................
Peco Energy Transition Trust,
CLB, 1999-A A3, 6.4475%,
3/01/2006 # 1,000,000 998,025
............................................................
Residential Asset Securities
Corporation, CLB, 1999-RS2
AI1, 6.5350%, 7/25/2029 598,419 593,228
............................................................
Resolution Trust Corporation,
CLB, 1994-C2G A3, 8.0000%,
4/25/2025 328,155 313,337
...................... ...................... ---------
11,679,926
------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.5%
............................................................
Citicorp Mortgage Securities,
Inc., CLB, 1994-4 A6, 6.0000%,
2/25/2009 824,989 799,558
............................................................
Medallion Trust, CLB, 2000-1G
A1, 6.5090%, 7/12/2031 # 675,000 675,264
............................................................
PNC Mortgage Securities Corp.,
CLB, 1997-3 1A5, 7.0000%,
5/25/2027 1,500,000 1,485,548
............................................................
Prudential Home Mortgage
Securities, CLB, 1993-41 A4,
2.1648%, 10/25/2000 # 64,896 64,613
............................................................
Residential Funding Mortgage
Securities, Inc., CLB,
1998-S17 A6, 6.7500%,
8/25/2028 69,957 69,667
............................................................
Salomon Brothers Mortgage
Securities VI, CLB, 1986-1 A,
6.0000%, 12/25/2011 219,304 212,281
............................................................
Salomon Brothers Mortgage
Securities VII, CLB, 1998-NC3
A2, 6.4100%, 8/25/2028 1,000,000 993,955
............................................................
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 8
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENT FUND
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------------------------------------
<S> <C> <C>
Walsh Acceptance, (Acquired
3/06/1997, cost $117,234),
CLB, 1997-2 A, 7.6513%,
3/01/2027 # r $ 116,325 $ 94,357
............................................................
Washington Mutual, CLB, 2000-1
A1, 6.9413%, 6/25/2024 # 845,186 844,033
...................... ...................... ---------
5,239,276
------------------------------------------------------------
Total non-agency mortgage-backed securities
(cost $17,254,704) 16,919,202
------------------------------------------------------------
U.S. TREASURY
OBLIGATIONS -- 12.4%
------------------------------------------------------------
U.S. Treasury Inflation Index,
3.6250%, 7/15/2002 6,841,216 6,798,458
------------------------------------------------------------
Total U.S. Treasury obligations
(cost $6,790,139) 6,798,458
------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 8.6%
------------------------------------------------------------
COMMERCIAL PAPER -- 8.5%
............................................................
Enron Corp., 7.1700%, 7/06/2000
4(2) 2,700,000 2,697,311
............................................................
Fort James Corporation, 7.2500%,
7/05/2000 4(2) 2,000,000 1,998,389
...................... ...................... ---------
4,695,700
------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------
<CAPTION>
Principal
Amount Value
<S> <C> <C>
CERTIFICATES OF DEPOSIT -- 0.1%
............................................................
Brown Brothers Call Deposit,
5.5000% $ 24,000 $ 24,000
------------------------------------------------------------
Total short-term investments
(cost $4,719,700) 4,719,700
------------------------------------------------------------
Total investments -- 102.8%
(cost $57,260,809) 56,549,920
------------------------------------------------------------
Liabilities in excess of other
assets -- (2.8)% (1,528,544)
...................... ...................... ---------
$55,021,376
Total net assets -- 100.0%
------------------------------------------------------------
</TABLE>
# -- Variable rate security. The rate listed is as of June 30, 2000.
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). Issuer in bankruptcy.
See Notes to the Financial Statements
7
<PAGE> 9
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT FUND June 30, 2000
---------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $56,549,920
Dividends and interest receivable......................... 476,294
Receivable for investments sold........................... 1,637
Receivable for Fund shares sold........................... 134,111
Prepaid expenses.......................................... 13,891
-----------
Total assets.......................................... 57,175,853
-----------
LIABILITIES:
Payable to Advisor........................................ 3,426
Payable to custodian...................................... 40,841
Payable for investments purchased......................... 1,000,000
Payable for Fund shares repurchased....................... 1,023,727
Dividends payable......................................... 49,305
Accrued expenses and other liabilities.................... 37,178
-----------
Total liabilities..................................... 2,154,477
-----------
Net assets............................................ $55,021,376
===========
NET ASSETS CONSIST OF:
Paid in capital........................................... $56,213,761
Undistributed net investment income....................... 77,165
Undistributed net realized loss on securities............. (558,662)
Net unrealized depreciation of securities................. (710,889)
-----------
Net assets............................................ $55,021,376
===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)............................................. 5,540,663
Net asset value per share (offering and redemption
price).................................................. $ 9.93
===========
*Cost of Investments........................................ $57,260,809
===========
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 10
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
SHORT-TERM INVESTMENT FUND June 30, 2000
---------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income
Interest................................................ $3,581,849
----------
Total income........................................ 3,581,849
----------
Expenses
Advisory fee............................................ 219,595
Legal and auditing fees................................. 7,514
Custodian fees and expenses............................. 15,800
Accounting and transfer agent fees and expenses......... 90,129
Administration fee...................................... 20,512
Trustees' fees and expenses............................. 3,897
Reports to shareholders................................. 8,963
Registration fees....................................... 29,560
Other expenses.......................................... 1,965
----------
Total expenses...................................... 397,935
Less, expense reimbursement............................. (134,421)
----------
Net expenses........................................ 263,514
----------
Net investment income................................... 3,318,335
----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on securities and foreign currency.... (393,848)
Net change in unrealized depreciation of securities..... (342,363)
----------
Net loss on investments................................... (736,211)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $2,582,124
==========
</TABLE>
See Notes to the Financial Statements
9
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
SHORT-TERM INVESTMENT FUND June 30, 2000 June 30, 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 3,318,335 $ 2,350,298
Net realized loss on securities and foreign currency.... (393,848) (50,623)
Net change in unrealized depreciation of securities..... (342,363) (407,341)
------------ -------------
Net increase in net assets resulting from
operations.......................................... 2,582,124 1,892,334
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................... (3,213,379) (2,307,426)
------------ -------------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................... 74,616,993 121,678,835
Shares issued in connection with payment of dividends
and distributions...................................... 2,607,535 1,750,451
Cost of shares redeemed................................. (72,428,242) (100,196,327)
------------ -------------
Net increase in net assets resulting from Fund share
transactions........................................ 4,796,286 23,232,959
------------ -------------
Total increase in net assets................................ 4,165,031 22,817,867
NET ASSETS:
Beginning of year....................................... 50,856,345 28,038,478
------------ -------------
End of year*............................................ $ 55,021,376 $ 50,856,345
============ =============
*Including undistributed (distributions in excess of) net
investment income of:..................................... $ 77,165 $ (18,601)
============ =============
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................. 7,435,661 12,032,563
Shares issued in connection with payment of dividends
and distributions...................................... 260,699 173,571
Shares redeemed......................................... (7,218,518) (9,911,294)
------------ -------------
Net increase........................................ 477,842 2,294,840
============ =============
</TABLE>
See Notes to the Financial Statements
10
<PAGE> 12
NOTES TO THE FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 2000
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 include financial information for the Short-Term Investment Fund (the
"Fund"); financial statements for the other Funds are reported on separately.
Investment operations of the Fund began on May 18, 1993. The Fund seeks to
maximize total return, consistent with preservation of capital. 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. Fixed-income securities are normally valued on the
basis of quotes obtained from brokers and dealers or pricing services. Certain
fixed-income securities for which daily market quotations are not readily
available may be valued pursuant to guidelines established by the Board of
Trustees, with reference to fixed-income securities whose prices are more
readily obtainable or an appropriate matrix utilizing similar factors. As a
broader market does not exist, the proceeds received upon the disposal of such
securities may differ from quoted values previously furnished by such market
makers. Securities for which market quotations are not otherwise available are
valued at fair value as determined in good faith by Mercury Advisors (the
"Adviser"), formerly Hotchkis and Wiley, under procedures established by the
Board of Trustees. Short-term investments which mature in less than 60 days are
valued at amortized cost (unless the Board of Trustees determines that this
method does not represent fair value), if their original maturity was 60 days or
less, or by amortizing the values as of the 61st day prior to maturity, if their
original term to maturity exceeded 60 days. Investments quoted in foreign
currency are valued daily in U.S. dollars on the basis of the foreign currency
exchange rate prevailing at the time of valuation.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Fund are maintained
in U.S. dollars. For the 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 Fund does not isolate and treat as ordinary income that
portion of the results of operations arising as a result of changes in the
exchange rate from the fluctuations arising from changes in the market prices of
securities held during the period. However, for federal income tax purposes, the
Fund does isolate and treat as ordinary income the effect of changes in foreign
exchange rates arising from actual foreign currency transactions and the effect
of changes in foreign exchange rates arising from trade date and settlement date
differences.
11
<PAGE> 13
FEDERAL INCOME TAXES: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and the Fund
intends to distribute substantially all of its investment company net taxable
income and net capital gains to shareholders. Therefore, no federal income tax
provision is required.
INCOME AND 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.
RESTRICTED SECURITIES: The Fund owns investment securities which are
unregistered and thus restricted as to resale. Resales of such securities may
require registration or be limited to qualified institutional buyers. At June
30, 2000, the Fund had restricted securities with an aggregate market value of
$10,837,632, representing 20% of the net assets of the Fund. Of this amount, the
Fund had restricted securities that were determined to the illiquid pursuant to
guidelines adopted by the Board of Trustees with an aggregate market value of
$325,449, representing 1% of the net assets of the Fund.
WHEN-ISSUED SECURITIES: The Fund may purchase securities on a when-issued or
delayed delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into the agreement,
these securities may be delivered and paid for at a future date, generally
within 45 days. The Fund records purchases of when-issued securities and
reflects the values of such securities in determining net asset value in the
same manner as other portfolio securities. The Fund maintains at all times cash
or other liquid assets in an amount at least equal to the amount of outstanding
commitments for when-issued securities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared
and paid monthly. Distributions of net realized capital gains, if any, will be
declared and paid at least annually. The Fund 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 AGREEMENT. The Fund has an investment advisory agreement
with the Adviser with whom certain officers and Trustees of the Trust are
affiliated. The Adviser is an indirect wholly-owned subsidiary of Merrill Lynch
& Co., Inc. The Adviser receives a fee, computed daily and payable monthly, at
the annual rate of 0.40% as applied to the Fund's daily net assets. The Adviser
has contractually agreed to pay all operating expenses in excess of 0.48% as
applied to the Fund's daily net assets through June 30, 2001. For the year ended
June 30, 2000, the Adviser paid $134,421 of operating expenses on behalf of the
Fund.
12
<PAGE> 14
Certain authorized agents of the Fund charge a fee for accounting and
shareholder services that they provide to the Fund on behalf of certain
shareholders; the portion of this fee paid by the Fund is included within
Accounting and transfer agent fees and expenses in the Statement of Operations.
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.
CREDIT FACILITY. Effective December 3, 1999, the Trust entered into a one year
Credit Agreement with a syndicate of bank lenders led by Bank of America
intended to provide the Fund with a source of cash to be used to meet redemption
requests from Fund shareholders. The Trust together with certain other open-end
investment companies advised by Merrill Lynch Investment Managers, L.P. and/or
its affiliates may borrow in the aggregate up to $1,000,000,000, except that in
no event may the borrowing by the Fund or any participating fund be in excess of
that permitted by its prospectus and Statement of Additional Information or by
applicable law. The Fund had no borrowings under the Credit Agreement for the
year ended June 30, 2000.
NOTE 4.
SECURITIES TRANSACTIONS. Purchases and sales of investment securities, other
than short-term investments, for the year ended June 30, 2000, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
---------------------------- ----------------------------
Fund U.S. Government Other U.S. Government Other
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Investment Fund.................................. 6,800,202 33,993,888 6,208,211 26,528,480
</TABLE>
As of June 30, 2000, 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>
Short-Term Investment Fund.................................. $(710,889) $116,758 $(827,647)
</TABLE>
At June 30, 2000, the cost of investments for federal income tax purposes was
$57,260,809. Any differences between book and tax are due primarily to wash sale
losses. At June 30, 2000, the Fund deferred, on a tax basis, post-October losses
of $434,177. Such amounts may be used to offset future capital gains. The Fund
utilized $73,268 of post-October losses from the prior year to offset current
year net capital gains. At June 30, 2000, the Fund had accumulated net realized
capital loss carryovers of $61,761 expiring in 2004, $38,974 expiring in 2005
and $23,750 expiring in 2008. To the extent the Fund realizes future net capital
gains, those gains will be offset by any unused capital loss carryover.
NOTE 5.
SUBSEQUENT EVENTS. The Board of Trustees has approved, effective on or about
October 5, 2000, (i) a change in the name of the Fund to Mercury Short-Term
Investment Fund and (ii) the establishment of a sales load.
NOTE 6.
FEDERAL TAX DISCLOSURE (UNAUDITED). For the year ended June 30, 2000, 9% of
dividends distributed were derived from interest on U.S. government securities
which is generally exempt from state income tax.
13
<PAGE> 15
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
SHORT-TERM INVESTMENT FUND 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $10.05 $10.13 $10.15 $10.17 $10.12
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.61 0.57 0.63 0.58 0.66
Net realized and unrealized gain (loss) on
investments........................................... (0.14) (0.11) 0.00 (0.01) 0.05
------ ------ ------ ------ ------
Total from investment operations........................ 0.47 0.46 0.63 0.57 0.71
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.59) (0.54) (0.65) (0.59) (0.66)
Return of capital....................................... -- -- -- -- (0.00)
------ ------ ------ ------ ------
Total distributions..................................... (0.59) (0.54) (0.65) (0.59) (0.66)
------ ------ ------ ------ ------
Net Asset Value, End of Year................................ $ 9.93 $10.05 $10.13 $10.15 $10.17
====== ====== ====== ====== ======
TOTAL RETURN................................................ 4.75% 4.70% 6.37% 5.77% 7.23%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $55.02 $50.86 $28.04 $21.72 $18.73
Ratio of expenses to average net assets:
Before expense reimbursement............................ 0.73% 0.68% 0.92% 0.96% 0.88%
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............................ 5.81% 5.32% 5.92% 5.34% 6.15%
After expense reimbursement............................. 6.06% 5.52% 6.36% 5.82% 6.55%
Portfolio turnover rate..................................... 79% 144% 121% 154% 60%
</TABLE>
See Notes to the Financial Statements
14
<PAGE> 16
HOTCHKIS
AND WILEY FUNDS
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of Hotchkis and Wiley Funds and Shareholders of the
Hotchkis and Wiley Short-Term Investment Fund:
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 Short-Term
Investment Fund (one of the ten portfolios of Hotchkis and Wiley Funds, the
"Fund") at June 30, 2000, the results of its operations for the year then ended
and the changes in its net assets and the financial highlights for each of the
periods indicated, in conformity with accounting principles generally accepted
in the United States. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, WI
August 17, 2000
15
