<PAGE> 1
ANNUAL REPORT
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
HOTCHKIS AND WILEY FUNDS JUNE 30, 2000
725 SOUTH FIGUEROA STREET [LOGO]
SUITE 4000
LOS ANGELES, CALIFORNIA 90017-5400 HOTCHKIS AND WILEY FUNDS
800-236-4479
INTERNATIONAL FUND
INVESTMENT ADVISER --------------------------------------------------
MERCURY ADVISORS
725 SOUTH FIGUEROA STREET Seeks current income and long-term growth of
SUITE 4000 income, accompanied by growth of capital. The Fund
LOS ANGELES, CALIFORNIA 90017-5400 invests in international stocks.
LEGAL COUNSEL
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 32232-1621
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
International Fund for the fiscal year ended June 30, 2000.
The twelve-month period could be divided into two distinct periods. In the first
eight months, the "new economy" mania went truly global. In virtually every
developed equity market, the best performance was concentrated in a few sectors
and growth stocks dramatically outperformed value stocks. Through much of the
year, markets continued to be dominated by the technology, media and
telecommunications ("TMT") industries, taking the cue from the phenomenal
performance of the new economy-dominated Nasdaq Composite Index in the U.S. The
primary reason for the Fund's underperformance compared to the MSCI EAFE Index
during the fiscal year ended June 30, 2000 was the Fund's focus on value stocks
during a period when TMT and growth stocks outperformed value.
After a considerable period, when it appeared that the new investment paradigm
had completely vanquished the competition, valuation criteria re-emerged in the
investors' lexicon. Investors in the high-flying technology industries turned
their attention to earnings and started questioning the growth assumptions that
had thus far sustained these stocks. Recent developments expose the fragility of
the optimistic assumptions that supported the valuations placed on these "must
have" stocks.
The price difference between the most expensive and the cheapest stocks peaked
during this period at a ratio twice as high as the long-term norm. In the last
four months, this disparity began correcting, although it remains much higher
than the historic average. This divergence still leaves room for relative gains
by the previously neglected sectors of the market. Index performance has been so
dominated by the large cap, highly rated TMT sector companies that the relative
performance prospects for the forgotten sectors are much improved. Even the new
economy stocks depend on the willingness of the old economy stocks to continue
funding capital expenditures that feed the revenue growth estimates driving
these must-have go-go companies. We therefore expect these valuation
differentials to retract to more normal levels. We believe interest rates will
likely rise for the greater part of this year, and we have modest expectations
for general gains in the world stock markets.
The Fund benefited strongly in the market's rotation out of the most expensive
stocks during the first and second calendar quarters of 2000. Our holdings in
the old economy had reached such rock bottom valuations that any general decline
in the market had little impact. Further, our insistence on owning stocks with
tangible valuation and current yield served us well, as these criteria started
to find favor with other market participants. In fact, in overall declining
markets, some of these stocks actually registered positive gains. Market
volatility exceeded even the schizophrenic peaks we experienced last year at the
height of the Asian crisis. The Fund has taken on a decidedly defensive tilt in
the past few months. The Fund continues to invest in stocks with a healthy
dividend yield premium over the benchmark: as of June 30, 2000, the investments
in the Fund's portfolio had over a 65% dividend yield premium to the MSCI EAFE
Index.*
<PAGE> 3
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 dividend yield referred to is that of the securities held in the Fund's
portfolio; it is not reflective of the yield distributed to Fund shareholders.
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.
2
<PAGE> 4
INTERNATIONAL FUND - INVESTOR CLASS
OCTOBER 1, 1990 - JUNE 30, 2000
[LINE GRAPH]
<TABLE>
<CAPTION>
INTERNATIONAL FUND MSCI-EAFE INDEX
------------------ ---------------
<S> <C> <C>
10000 10000
10047 11063
10642 11896
Jun-91 10132 11256
11411 12231
12092 12446
11900 10978
Jun-92 12965 11221
12074 11401
11770 10971
13169 12297
Jun-93 13921 13543
14882 14451
17156 14586
16447 15105
Jun-94 16248 15887
17264 15913
16652 15761
16854 16067
Jun-95 18052 16197
19204 16885
19965 17582
20825 18103
Jun-96 21412 18403
21761 18394
23616 18701
23830 18421
Jun-97 26044 20826
26789 20692
24874 19085
28252 21907
Jun-98 28071 22155
22917 19020
26469 22966
26559 23302
Jun-99 29252 23910
30174 24976
32666 29235
32457 29221
Jun-00 33817 28081
</TABLE>
<TABLE>
<CAPTION>
Ended 6/30/00
-------------
Investor Class Fund MSCI EAFE
------------------------------------------------------------------------------
<S> <C> <C>
One Year 15.60% 17.44%
------------------------------------------------------------------------------
Five Years 13.38% 11.63%
------------------------------------------------------------------------------
Since Inception (10/1/90) 13.31% 11.17%
------------------------------------------------------------------------------
Distributor Class
------------------------------------------------------------------------------
One Year 15.36% 17.44%
------------------------------------------------------------------------------
Since Inception (6/2/99) 16.26% 18.80%
------------------------------------------------------------------------------
</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 MSCI EAFE 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 voluntarily
paid annual operating expenses in excess of 1.00% of the Fund's average net
assets until March 1, 1999, when it stopped capping expenses. Were the
investment adviser not to have paid such expenses, net returns would have been
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 Distributor Class pays an annual 0.25% 12b-1 fee.
There are special risk considerations when investing in foreign companies
through an international fund, 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.
INDEXES:
The Nasdaq Composite Index is an unmanaged index which covers 4,500 stocks
traded over-the-counter. It represents many small company stocks, but is heavily
influenced by about 100 of the largest Nasdaq stocks. It is a value-weighted
index calculated on price change only and does not include income.
The MSCI EAFE Index is an arithmetical average weighted by market value of
the performance of over 1,000 non-U.S. companies representing 20 stock markets
in Europe, Australia, New Zealand and the Far East.
The indexes do not reflect payment of transaction costs, fees and expenses
associated with an investment in the Fund. The Fund's value disciplines may
prevent or restrict investment in major stocks in its benchmark index, the MSCI
EAFE Index. It is not possible to invest directly in an index.
3
<PAGE> 5
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
COMMON STOCKS -- 94.1% Shares Value
------------------------------------------------------------
<S> <C> <C>
AUSTRALIA -- 1.6%
------------------------------------------------------------
REGIONAL BANKS -- 1.6%
............................................................
Australia and New Zealand
Banking Group, Ltd. 2,889,995 $ 22,228,061
.................... ..................... ---------
22,228,061
Total Australia
------------------------------------------------------------
CANADA -- 4.9%
------------------------------------------------------------
INSURANCE: MULTI-LINE -- 4.0%
............................................................
Manulife Financial
Corporation 1,658,236 29,209,664
............................................................
Sun Life Financial Services
of Canada 1,567,481 26,394,446
.................... ..................... ---------
55,604,110
------------------------------------------------------------
TELECOM SERVICES -- 0.9%
............................................................
BCE, Inc. 532,800 12,621,502
.................... ..................... ---------
68,225,612
Total Canada
------------------------------------------------------------
FINLAND -- 1.0%
------------------------------------------------------------
PAPER -- 1.0%
............................................................
UPM-Kymmene OYJ 563,765 14,052,239
.................... ..................... ---------
14,052,239
Total Finland
------------------------------------------------------------
FRANCE -- 10.0%
------------------------------------------------------------
BEVERAGES -- 1.2%
............................................................
Pernod Ricard SA 309,223 16,897,432
------------------------------------------------------------
CHEMICALS -- 2.6%
............................................................
Aventis SA 487,859 35,755,748
------------------------------------------------------------
MONEY CENTER BANKS -- 2.7%
............................................................
BNP Paribas 388,160 37,509,853
------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES -- 1.1%
............................................................
Societe BIC SA 324,259 15,947,164
------------------------------------------------------------
OIL -- INTERNATIONAL -- 2.4%
............................................................
Total Fina Elf SA 218,321 33,613,606
.................... ..................... ---------
139,723,803
Total France
------------------------------------------------------------
GERMANY -- 1.8%
------------------------------------------------------------
BANKS -- 0.4%
............................................................
DePfa Deutsche
Pfandbriefbank AG 58,620 5,928,875
------------------------------------------------------------
CHEMICALS -- 0.1%
............................................................
SGL Carbon AG # 27,944 1,867,220
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
DIVERSIFIED MANUFACTURING OPERATIONS -- 1.3%
............................................................
E.On AG 378,289 $ 18,640,643
.................... ..................... ---------
26,436,738
Total Germany
------------------------------------------------------------
HONG KONG -- 5.8%
------------------------------------------------------------
BUILDING & CONSTRUCTION -- MISC. -- 0.5%
............................................................
New World Development
Company Limited 6,005,000 6,605,631
------------------------------------------------------------
ELECTRIC: INTEGRATED -- 2.6%
............................................................
Shandong International Power
Development Company
Limited # 100,602 14,841,289
............................................................
Hongkong Electric Holdings
Limited 6,455,000 20,784,383
.................... ..................... ---------
35,625,672
------------------------------------------------------------
MINING SERVICES -- 0.2%
............................................................
Yanzhou Coal Mining Co.,
Ltd. 14,414,000 2,976,991
------------------------------------------------------------
PUBLISHING -- 0.7%
............................................................
South China Morning Post
(Holdings), Ltd. 12,383,000 9,610,554
------------------------------------------------------------
REAL ESTATE -- 1.8%
............................................................
Hang Lung Development
Company 4,298,000 3,335,715
............................................................
Henderson Land Development
Co., Ltd. 5,094,000 22,414,044
.................... ..................... ---------
25,749,759
.................... ..................... ---------
80,568,607
Total Hong Kong
------------------------------------------------------------
IRELAND -- 2.7%
------------------------------------------------------------
PAPER -- 1.1%
............................................................
Jefferson Smurfit Group PLC 9,040,545 15,600,595
------------------------------------------------------------
REGIONAL BANKS -- 1.6%
............................................................
Allied Irish Banks PLC 2,492,918 22,393,483
.................... ..................... ---------
37,994,078
Total Ireland
------------------------------------------------------------
ITALY -- 1.8%
------------------------------------------------------------
TELECOMMUNICATIONS -- 1.8%
............................................................
Telecom Italia SPA 1,822,600 25,161,001
.................... ..................... ---------
25,161,001
Total Italy
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
4
<PAGE> 6
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
JAPAN -- 9.6%
------------------------------------------------------------
LEISURE/TOYS -- 5.3%
............................................................
Nintendo Co., Ltd. 249,900 $ 43,742,284
............................................................
NAMCO Limited 845,400 30,522,481
.................... ..................... ---------
74,264,765
------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES -- 1.9%
............................................................
Canon, Inc. 536,000 26,748,100
------------------------------------------------------------
RETAIL-CONVENIENCE STORE -- 0.2%
............................................................
Circle K Japan Co., Ltd. 75,000 2,729,080
------------------------------------------------------------
SMALL LOANS & FINANCE -- 2.2%
............................................................
Promise Company, Ltd. 164,000 12,989,190
............................................................
Sanyo Shinpan Finance Co.,
Ltd. 479,300 17,032,935
.................... ..................... ---------
30,022,125
.................... ..................... ---------
133,764,070
Total Japan
------------------------------------------------------------
NETHERLANDS -- 9.4%
------------------------------------------------------------
CHEMICALS -- 1.8%
............................................................
Akzo Nobel N.V 579,356 24,716,079
------------------------------------------------------------
ELECTRONICS -- 3.0%
............................................................
Philips Electronics N.V. 890,600 42,177,778
------------------------------------------------------------
INSURANCE -- MULTI-LINE -- 1.9%
............................................................
ING Groep N.V. 400,916 27,212,015
------------------------------------------------------------
REGIONAL BANKS -- 1.1%
............................................................
ABN AMRO Holding N.V. 627,300 15,431,424
------------------------------------------------------------
TELECOMMUNICATIONS -- 1.6%
............................................................
Koninklijke KPN N.V. 499,030 22,413,532
.................... ..................... ---------
131,950,828
Total Netherlands
------------------------------------------------------------
NEW ZEALAND -- 1.7%
------------------------------------------------------------
TELECOMMUNICATIONS -- 1.7%
............................................................
Telecom Corporation of New
Zealand 6,746,390 23,663,185
.................... ..................... ---------
23,663,185
Total New Zealand
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
PORTUGAL -- 1.7%
------------------------------------------------------------
TELEPHONE -- 1.7%
............................................................
Portugal Telecom SA
"registered" 2,065,342 $ 23,284,845
.................... ..................... ---------
23,284,845
Total Portugal
------------------------------------------------------------
SINGAPORE -- 3.8%
------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES -- 1.9%
............................................................
Creative Technology, Ltd. 1,085,838 25,924,382
------------------------------------------------------------
DIVERSIFIED COMPANIES -- 0.2%
............................................................
Jardine Matheson Holdings,
Ltd. 691,400 3,028,332
------------------------------------------------------------
MONEY CENTER BANKS -- 1.7%
............................................................
United Overseas Bank, Ltd. 3,676,432 24,027,578
.................... ..................... ---------
52,980,292
Total Singapore
------------------------------------------------------------
SPAIN -- 3.5%
------------------------------------------------------------
OIL COMP-INTEGRATED -- 1.7%
............................................................
Repsol YPF, S.A. 1,196,830 23,922,831
------------------------------------------------------------
TELECOMMUNICATIONS -- 1.8%
............................................................
Telefonica S.A. 1,199,849 25,881,126
.................... ..................... ---------
49,803,957
Total Spain
------------------------------------------------------------
SWEDEN -- 1.3%
------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.3%
............................................................
Electrolux AB -- Class B 1,142,980 17,787,797
.................... ..................... ---------
17,787,797
Total Sweden
------------------------------------------------------------
SWITZERLAND -- 5.7%
------------------------------------------------------------
BUILDING MATERIALS -- 1.8%
............................................................
Geberit International AG 76,704 25,707,939
------------------------------------------------------------
MACHINERY -- 1.9%
............................................................
SIG Schweizerische
Industrie-Gesellschaft
Holding "registered" 19,682 12,382,194
............................................................
Sulzer AG "registered" # 20,829 13,897,955
.................... ..................... ---------
26,280,149
------------------------------------------------------------
MEDICAL PRODUCTS & SUPPLIES -- 2.0%
............................................................
Novartis AG "registered" 17,873 28,401,594
.................... ..................... ---------
80,389,682
Total Switzerland
------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 7
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
--------------------------------------------------------------------------------
INTERNATIONAL FUND
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM -- 27.8%
------------------------------------------------------------
AEROSPACE/DEFENSE -- 1.7%
............................................................
BAE Systems PLC 3,808,414 $ 23,755,739
------------------------------------------------------------
AIRLINES -- 1.8%
............................................................
BAA PLC 3,215,452 25,801,507
------------------------------------------------------------
AUTO -- 0.7%
............................................................
Lex Service PLC 1,865,410 9,418,838
------------------------------------------------------------
BEVERAGES -- 1.7%
............................................................
Allied Domecq PLC 4,468,934 23,680,952
------------------------------------------------------------
BUILDING MATERIALS -- 1.8%
............................................................
Hanson PLC 3,523,830 24,914,892
------------------------------------------------------------
DIVERSIFIED COMPANIES -- 5.9%
............................................................
Cookson Group PLC 5,184,729 17,308,596
............................................................
TI Group PLC 3,433,020 18,711,388
............................................................
Tomkins PLC 7,986,267 25,965,948
............................................................
Williams PLC 3,515,430 20,491,151
.................... ..................... ---------
82,477,083
------------------------------------------------------------
FOODS -- 1.6%
............................................................
Unilever PLC 3,613,876 21,885,699
------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 1.2%
............................................................
Reckitt Benckiser PLC 1,458,471 16,340,175
------------------------------------------------------------
INSURANCE: MULTI-LINE -- 2.9%
............................................................
Allied Zurich AG PLC 1,730,684 20,477,359
............................................................
CGNU PLC 1,243,995 20,717,555
.................... ..................... ---------
41,194,914
------------------------------------------------------------
PUBLISHING -- 3.1%
............................................................
Reed International PLC 3,137,790 27,316,113
............................................................
United News & Media PLC 1,097,035 15,778,702
.................... ..................... ---------
43,094,815
------------------------------------------------------------
REGIONAL BANKS -- 2.0%
............................................................
Lloyds TSB Group PLC 1,461,987 13,811,959
............................................................
Royal Bank of Scotland Group
PLC 877,386 14,691,732
.................... ..................... ---------
28,503,691
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS -- 1.0%
............................................................
British Telecommunications
PLC 1,065,599 $ 13,777,768
------------------------------------------------------------
THERAPEUTICS -- 1.2%
............................................................
Celltech Group PLC 902,331 17,486,505
------------------------------------------------------------
TOBACCO -- 1.2%
............................................................
BAT Industries PLC 2,435,894 16,263,880
.................... ..................... ----------
388,596,458
Total United Kingdom
.................... ..................... ----------
Total common stocks
(cost $1,106,377,634) 1,316,611,253
------------------------------------------------------------
PREFERRED STOCKS -- 0.7%
------------------------------------------------------------
GERMANY -- 0.7%
------------------------------------------------------------
BUILDING MATERIALS -- 0.7%
............................................................
Dyckerhoff AG 393,249 9,990,508
.................... ..................... ---------
Total Germany 9,990,508
.................... ..................... ---------
Total preferred stocks
(cost $13,075,573) 9,990,508
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM Principal
INVESTMENTS -- 3.6% Amount
------------------------------------------------------------
<S> <C> <C>
COMMERCIAL PAPER -- 3.6%
............................................................
Safeway, 7.1500%, 07/05/2000 $49,960,278 49,960,278
.................... ..................... ---------
Total short-term investments
(cost $49,960,278) 49,960,278
.................... ..................... ---------
Total investments -- 98.4%
(cost $1,169,413,485) 1,376,562,039
Other assets in excess of
liabilities -- 1.6% 22,273,083
.................... ..................... -------------
Total net assets -- 100.0% $1,398,835,122
------------------------------------------------------------
</TABLE>
# -- Non-income producing security.
See Notes to the Financial Statements
6
<PAGE> 8
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL FUND June 30, 2000
----------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value*.................................... $1,376,562,039
Cash...................................................... 3,825,454
Dividends and interest receivable......................... 5,700,563
Receivable for investments sold........................... 27,328,181
Receivable for foreign currency........................... 16,280,381
Receivable for Fund shares sold........................... 29,485,945
Prepaid expenses.......................................... 38,810
--------------
Total assets.......................................... 1,459,221,373
--------------
LIABILITIES:
Payable to Adviser........................................ 870,189
Payable for investments purchased......................... 9,667,886
Payable for foreign currency.............................. 16,254,097
Payable for Fund shares repurchased....................... 32,155,632
Accrued expenses and other liabilities.................... 1,438,447
--------------
Total liabilities..................................... 60,386,251
--------------
Net assets............................................ $1,398,835,122
==============
NET ASSETS CONSIST OF:
Paid in capital........................................... $1,091,552,912
Undistributed net investment income....................... 11,655,824
Undistributed net realized gain on securities............. 88,528,028
Net unrealized appreciation of securities and foreign
currency................................................ 207,098,358
--------------
Net assets............................................ $1,398,835,122
==============
CALCULATION OF NET ASSET VALUE PER SHARE -- INVESTOR CLASS:
Net assets................................................ $1,393,912,805
Shares outstanding (unlimited shares of no par value
authorized)............................................. 51,010,921
Net asset value per share (offering and redemption
price).................................................. $ 27.33
==============
CALCULATION OF NET ASSET VALUE PER SHARE -- DISTRIBUTOR
CLASS:
Net assets................................................ $ 4,922,317
Shares outstanding (unlimited shares of no par value
authorized)............................................. 180,523
Net asset value per share (offering and redemption
price).................................................. $ 27.27
==============
*Cost of Investments........................................ $1,169,413,485
==============
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 9
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
INTERNATIONAL FUND June 30, 2000
---------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Income*
Dividends............................................... $ 33,888,734
Interest................................................ 2,876,976
------------
Total income........................................ 36,765,710
------------
Expenses
Advisory fee............................................ 10,327,484
Legal and auditing fees................................. 213,963
Custodian fees and expenses............................. 1,004,602
Accounting and transfer agent fees and expenses......... 2,158,048
Administration fee...................................... 350,758
Trustees' fees and expenses............................. 89,346
Reports to shareholders................................. 276,947
Registration fees....................................... 44,927
Distribution fees -- Distributor Class.................. 7,390
Other expenses.......................................... 55,647
------------
Total expenses...................................... 14,529,112
------------
Net investment income................................... 22,236,598
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on securities and foreign currency.... 132,891,780
Net change in unrealized appreciation of securities and
foreign currency....................................... 55,922,798
------------
Net gain on investments................................... 188,814,578
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $211,051,176
============
*Net of Foreign Taxes Withheld.............................. $ 3,867,855
============
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 10
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
INTERNATIONAL FUND June 30, 2000 June 30, 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income................................... $ 22,236,598 $ 26,606,581
Net realized gain on securities and foreign currency
transactions........................................... 132,891,780 70,779,798
Net change in unrealized appreciation (depreciation) of
securities and foreign currency........................ 55,922,798 (42,099,206)
-------------- --------------
Net increase in net assets resulting from
operations.......................................... 211,051,176 55,287,173
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- INVESTOR
CLASS:
Net investment income................................... (37,662,541) (14,481,803)
Net realized gain on securities transactions............ (75,054,374) (19,626,614)
-------------- --------------
Total dividends and distributions................... (112,716,915) (34,108,417)
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- DISTRIBUTOR
CLASS:
Net investment income................................... (85,103) --
Net realized gain on securities transactions............ (172,601) --
-------------- --------------
Total dividends and distributions................... (257,704) --
-------------- --------------
FUND SHARE TRANSACTIONS -- INVESTOR CLASS:
Net proceeds from shares sold........................... 3,271,006,382 2,002,009,131
Shares issued in connection with payment of dividends
and distributions...................................... 89,209,615 29,138,880
Cost of shares redeemed................................. (3,443,097,857) (2,150,212,412)
-------------- --------------
Net decrease in net assets resulting from Fund share
transactions........................................ (82,881,860) (119,064,401)
-------------- --------------
FUND SHARE TRANSACTIONS -- DISTRIBUTOR CLASS:
Net proceeds from shares sold........................... 4,536,924 1,126,235
Shares issued in connection with payment of dividends
and distributions...................................... -- --
Cost of shares redeemed................................. (942,473) --
-------------- --------------
Net increase in net assets resulting from Fund share
transactions........................................ 3,594,451 1,126,235
-------------- --------------
Total increase (decrease) in net assets..................... 18,789,148 (96,759,410)
NET ASSETS:
Beginning of year....................................... 1,380,045,974 1,476,805,384
-------------- --------------
End of year*............................................ $1,398,835,122 $1,380,045,974
============== ==============
*Including undistributed net investment income of:.......... $ 11,655,824 $ 12,552,468
============== ==============
CHANGES IN SHARES OUTSTANDING -- INVESTOR CLASS:
Shares sold............................................. 124,995,665 85,591,643
Shares issued in connection with payment of dividends
and distributions...................................... 3,484,750 1,297,951
Shares redeemed......................................... (131,064,969) (91,604,448)
-------------- --------------
Net decrease........................................ (2,584,554) (4,714,854)
============== ==============
CHANGES IN SHARES OUTSTANDING -- DISTRIBUTOR CLASS:
Shares sold............................................. 171,642 44,593
Shares issued in connection with payment of dividends
and distributions...................................... -- --
Shares redeemed......................................... (35,712) --
-------------- --------------
Net increase........................................ 135,930 44,593
============== ==============
</TABLE>
See Notes to the Financial Statements
9
<PAGE> 11
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 International Fund (the
"Fund"); financial statements for the other Funds are reported on separately.
Investment operations of the Fund began on October 1, 1990. The Fund seeks
current income and long-term growth of income, accompanied by growth of capital.
Effective April 1, 1999, the Fund 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 the 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. Sales of Distributor Class shares commenced
on June 2, 1999. 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
10
<PAGE> 12
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.
FORWARD CURRENCY EXCHANGE CONTRACTS: The Fund utilizes forward currency exchange
contracts for the purpose of hedging foreign currency risk. Under these
contracts, it is obligated to exchange currencies at specific future dates.
Risks arise from the possible inability of counter-parties to meet the terms of
their contracts and from movements in currency values.
FEDERAL INCOME TAXES: It is 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. 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).
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 annually. 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 AGREEMENTS. The Fund has an investment advisory agreement
with the Adviser with which 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 0.75% as applied to the Fund's daily net assets.
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 Fund to
make payments to administrators, broker/dealers or other institutions that
provide accounting, recordkeeping or other services to investors and that have
an administrative
11
<PAGE> 13
services agreement with the Trust or the Adviser 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 Fund. During the year ended
June 30, 2000, the Distributor Class of the Fund incurred expenses of $7,390
pursuant to the 12b-1 Plan.
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.
The Adviser has entered into subadvisory agreements with Merrill Lynch
Investment Managers International Limited and Merrill Lynch Asset Management
U.K. Limited, affiliated investment advisers 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 Fund. There is no increase in the aggregate fees paid by the Fund for
these services.
The Fund paid commissions on Fund transactions to an affiliated broker in the
amount of $336,970 during the year ended June 30, 2000.
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 $655,132,114
and $793,011,625, respectively.
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>
International Fund.......................................... $200,812,122 $290,533,442 $(89,721,320)
</TABLE>
At June 30, 2000, the cost of investments for federal income tax purposes was
$1,175,749,917. Any differences between book and tax are due primarily to wash
sale losses and mark-to-market adjustments for passive foreign investment
companies. At June 30, 2000, the Fund deferred, on a tax basis, post-October
foreign currency losses of $235,102.
12
<PAGE> 14
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 HW
International Value Fund and (ii) the establishment of a multi-class load
distribution structure.
NOTE 6.
FEDERAL TAX DISCLOSURE (UNAUDITED). During the year ended June 30, 2000, the
Fund generated $34,110,786 of foreign source income and paid $3,329,639 of
foreign taxes which the Fund will elect to pass through to its shareholders for
their 2000 tax returns. Updated data will be sent with 2000 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 2000 income tax returns.
For the year ended June 30, 2000, 1% of ordinary distributions paid qualifies
for the dividend received deduction available to corporate shareholders.
During the year ended June 30, 2000, each Class distributed net realized capital
gains (taxable as long term capital gains) of $0.8738 per share.
13
<PAGE> 15
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Distributor Class
Investor Class -----------------------------
Year Ended June 30, June 2, 1999*
--------------------------------------------------------- Year Ended through
INTERNATIONAL FUND 2000 1999 1998 1997 1996 June 30, 2000 June 30, 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $ 25.73 $ 25.33 $ 24.17 $ 20.44 $ 17.70 $25.72 $25.20
--------- --------- --------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............. 0.43(1) 0.59 0.59 0.59(1) 0.56(1) 0.39(1) 0.05
Net realized and unrealized gain
on investments.................. 3.43 0.40 1.23 3.78 2.51 3.41 0.47
--------- --------- --------- ------- ------- ------ ------
Total from investment
operations...................... 3.86 0.99 1.82 4.37 3.07 3.80 0.52
--------- --------- --------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment
income)......................... (0.76) (0.25) (0.66) (0.48) (0.14) (0.74) --
Distributions (from realized
gains).......................... (1.50) (0.34) -- (0.16) (0.19) (1.51) --
--------- --------- --------- ------- ------- ------ ------
Total distributions............... (2.26) (0.59) (0.66) (0.64) (0.33) (2.25) --
--------- --------- --------- ------- ------- ------ ------
Net Asset Value, End of Period........ $ 27.33 $ 25.73 $ 25.33 $ 24.17 $ 20.44 $27.27 $25.72
========= ========= ========= ======= ======= ====== ======
TOTAL RETURN.......................... 15.60% 4.22% 7.77% 21.59% 18.61% 15.36% 2.06%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).... $1,393.91 $1,378.90 $1,476.81 $888.53 $330.99 $4.92 $1.15
Ratio of expenses to average net
assets:
Before expense reimbursement...... 1.06% 0.95% 0.89% 1.07% 1.11% 1.31% 1.30%+
After expense reimbursement....... 1.06% 0.95% 0.89% 1.00% 1.00% 1.31% 1.30%+
Ratio of net investment income to
average net assets:
Before expense reimbursement...... 1.62% 1.98% 2.32% 2.59% 2.67% 1.37% 2.77%+
After expense reimbursement....... 1.62% 1.98% 2.32% 2.66% 2.78% 1.37% 2.77%+
Portfolio turnover rate............... 50% 41% 20% 18% 12% 50% 41%
</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.
See Notes to the Financial Statements
14
<PAGE> 16
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of Hotchkis and Wiley Funds and Shareholders of the
Hotchkis and Wiley International 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
International 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
