<PAGE> 1
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HOTCHKIS AND
WILEY FUNDS
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Equity Fund For Insurance Companies
SEMI-ANNUAL REPORT
------------------------------------------------------------------------
December 31, 1999
725 South Figueroa Street
Suite 4000
Los Angeles, CA 90017-5400
(213) 430-1000
Investment Advisor
Hotchkis and Wiley
Distributor
Princeton Funds Distributor, Inc.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS.
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<PAGE> 2
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
We are pleased to present to you the semi-annual report of Hotchkis and
Wiley Equity Fund for Insurance Companies for the six months ended December 31,
1999.
The performance of the U.S. equity market over the last six months of the
year was extraordinary. Major U.S. equity indexes again hit new highs, with the
S&P 500 Index up 7.7% and the Nasdaq Composite Index up an astounding 51.7%. In
the fourth quarter alone, the S&P gained 15.1% while the Nasdaq soared 48.3%.
All appears to be grand, but is it really? The nagging question still remains --
are current prices supported by fundamentals and can these prices continue to
advance?
During the third quarter, the S&P 500 was down -6.2%, with all sectors of
the market posting losses, except for technology (up 4.3%). In our opinion,
concentrated areas of the market were being driven almost exclusively by
speculation and the money continued to flow in the direction of increased
speculative frenzy. The mania surrounding internet stocks was clearly at one end
of the spectrum. However, this was the tip of the iceberg. More established
companies, such as Lucent, Dell, Microsoft and many other high flyers, were
using their stock to participate in many of the same startups.
By year-end, the speculative excesses of the market not only continued to
exist, but actually had accelerated through the fourth quarter. At first glance,
the gains posted by the S&P 500 for all 1999 suggest that optimism abounds;
however, illusions run deep. Of all the stocks that comprise the S&P 500, almost
half (49%) actually posted negative returns for the year. Interestingly, those
companies that reported negative earnings in 1999 produced the strongest returns
(+68%). In a market where earnings were not rewarded, companies that had
positive earnings support trailed the market average with a 10% return. There
certainly is no shortage of speculative fever in this market, and, in our
opinion, there is a misguided belief that future earnings for all the high
flyers will somehow miraculously materialize.
One is left to ask the question, "Why are investors pricing the technology
sector so excessively?" Earnings growth (for those technology companies that
have earnings) has not been substantial enough to justify the price appreciation
of the Indexes. Interest rates have risen over the last year, which would argue
for contraction of valuation multiples, not expansion. The compelling
explanation is a surge in net cash inflows into technology sector mutual funds.
In the first 10 months of 1999, net inflows into tech-sector stock funds totaled
an astounding $17 billion. This compared to only $600 million in all of 1998,
and was more than all net inflows into tech mutual funds for the preceding 10
years combined. Retail investors have become enamored with the returns of these
funds and continue to throw money blindly at these investments with no concern
for underlying valuation. The risk for these investors is if true valuation
ultimately wins out (as history suggests it always does) and there is a sizable
correction.
A closer look at the S&P 500 reveals a remarkably concentrated and narrow
market. The technology sector now represents almost 30% of the S&P 500, up from
about 10% in 1993. In terms of contribution to returns, the top 31 stocks of the
S&P 500 (mainly technology and telecommunication issues) accounted for the
entire performance of the Index. Conversely, the "value" stocks of the index
(i.e., below market price-to-earnings ratio and above market dividend yield)
actually posted a -2% return. It would be easy to understand this widening price
disparity if the relative fundamentals of the
<PAGE> 3
two groups were also widening. They were not! The relative P/E ratio of the top
31 contributors to the Index versus the value constituents continued to expand
in 1999, even though the relative earnings growth expectations for these two
groups actually narrowed. This paradox was particularly apparent in the fourth
quarter, as the relative P/E's of the market leaders soared while their relative
growth rates diminished. The top 31 are now trading at 50.1 times forward
earnings, while the value group is priced at a modest 11.0 times forward
earnings.
In the past, we have made comparisons of the excesses in the current market
to other manias, e.g., nifty fifty in the mid 70's, Japan in the late 80's,
biotech in the early 90's. We would like to note one other. In the 1840's,
British speculators became infatuated with railroad stocks. Although those who
invested in the railroads ultimately made little money (competition and
regulation steadily eroded margins), the over-investment in railroad capacity in
the UK tremendously benefited the overall economy. Railways changed the nature
of most other businesses.
Perhaps the beneficiaries of the internet economy will not be those who
have invested in e-businesses, but rather traditional companies that ultimately
profit from the opportunity provided by the internet. A prime example is General
Motors. In dealing with customers, GM is aggressively looking at ways to
reconfigure its distribution system around the internet to reduce cost and
increase efficiency. In dealing with suppliers, GM is using an integrated
web-based procurement solution, Commerce One. The potential from this initiative
is so immense that GM was able to leverage its involvement with Commerce One
into a 20% equity stake in the company. At today's prices, that equity stake is
worth $2.8 billion or $4.29/share. In addition, GM's 70% ownership of GM Hughes,
a direct play on satellite communications, is worth some $30 billion, or
$46/share. On a sum of the parts basis, GM's core automotive business is now
selling for about $25/share, an extremely low multiple of current earnings and
cash flow. An investment in GM at its current price provides exposure to a
technology business but at a very reasonable price. At December 31, 1999, the
Fund had 2.5% of its assets invested in GM.
As a value investor, we are frustrated with what we see as the
irrationality of today's market, but we also recognize that these same market
dynamics have created an incredible (perhaps unprecedented) opportunity. Our
conviction to value has not wavered. We remain committed to many of the
out-of-favor areas of the market, such as the manufacturing and consumer
cyclicals and the electric utilities. For example, Reynolds Metals, Ford Motor
and Illinova were in the Fund's top-ten holdings at December 31, 1999. Solid
companies with strong earnings prospects have been ignored by investors and are
now grossly undervalued relative to the overall market.
The current market's extreme pricing inefficiencies create huge
opportunities for the disciplined value investor. Our time-proven investment
processes position the Fund to benefit from any rotation to value.
<PAGE> 4
TOTAL RETURNS FOR PERIODS ENDED 12/31/99*
<TABLE>
<CAPTION>
EQUITY FUND FOR
INSURANCE COMPANIES S&P 500 INDEX
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<S> <C> <C>
Six Months................................................. (12.73)% 7.95%
One Year................................................... (4.29) 21.14
Five Years................................................. 16.62 28.66
Since Inception (1/29/93).................................. 13.04 16.32
</TABLE>
* Average annual total return for periods greater than one year.
Past performance is no guarantee of future performance.
As always, we appreciate the trust you place in us. We thank you for your
continued support and we look forward to reporting to you again in six months.
Sincerely,
Nancy D. Celick sig
Nancy D. Celick
President
HOTCHKIS AND WILEY FUNDS
The opinions expressed above are as of December 31, 1999. They are subject to
change and any forecasts made cannot be guaranteed. The Fund might not continue
to hold any securities mentioned and has no obligation to disclose purchases or
sales in these securities.
Total returns and average annual total returns are net of all charges and fees
and assume the reinvestment of capital gains distributions and shareholder
dividends at net asset value. The investment advisor pays all operating expenses
of the Fund other than the management fee. Were it not to pay such expenses, net
returns would be lower. Investment return and principal will vary so that
shares, when redeemed, may be worth more or less than their original cost. Past
performance is no guarantee of future performance.
The S&P 500 Index is an unmanaged index, representing the aggregate market value
of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The 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
Indexes do not reflect the payment of transaction costs, fees and expenses
associated with an investment in the Fund. The securities and weightings among
securities in the Fund differ substantially from those in the Indexes, and the
Fund's value disciplines often prevent investments in major stocks in the
Indexes. The Fund's returns may not correlate with the Indexes. It is not
possible to invest directly in an index.
<PAGE> 5
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
COMMON STOCKS--97.9% SHARES VALUE
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<S> <C> <C>
AEROSPACE--4.9%
Lockheed Martin Corporation............................ 31,200 $ 682,500
Northrop Grumman Corporation........................... 16,500 892,031
Rockwell International Corporation..................... 6,000 287,250
-----------
1,861,781
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ALUMINUM--3.5%
Alcoa, Inc. ........................................... 400 33,200
Reynolds Metals Company................................ 16,900 1,294,963
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1,328,163
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APPAREL & TEXTILES--0.7%
Russell Corporation.................................... 15,300 256,275
-----------
APPLIANCE & HOUSEHOLD FURNITURE--1.3%
Whirlpool Corporation.................................. 7,500 487,969
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AUTO PARTS--4.7%
Dana Corporation....................................... 18,800 562,825
Delphi Automotive Systems Corporation.................. 15,925 250,819
Meritor Automotive, Inc. .............................. 10,000 193,750
Tenneco, Inc. ......................................... 8,600 80,087
TRW Inc. .............................................. 13,600 706,350
-----------
1,793,831
-----------
AUTOS & TRUCKS--5.4%
Ford Motor Company..................................... 20,600 1,100,813
General Motors Corporation............................. 13,200 959,475
-----------
2,060,288
-----------
BEVERAGES--0.9%
Anheuser-Busch Companies, Inc. ........................ 5,100 361,462
-----------
CHEMICALS--3.0%
The Dow Chemical Company............................... 5,300 708,213
Eastman Chemical Company............................... 8,700 414,881
-----------
1,123,094
-----------
</TABLE>
See Notes to the Financial Statements.
1
<PAGE> 6
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
December 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
CONTAINERS--1.2%
Pactiv Corporation..................................... 43,000 $ 456,875
-----------
ELECTRICAL UTILITIES--10.9%
CMS Energy Corporation................................. 12,600 392,963
Central & South West Corporation....................... 7,000 140,000
DTE Energy Company..................................... 6,100 191,387
Edison International................................... 7,100 185,931
Entergy Corporation.................................... 7,400 190,550
GPU, Inc. ............................................. 5,400 161,662
Illinova Corporation................................... 28,700 997,325
PECO Energy Company.................................... 12,900 448,275
P P & L Resources, Inc. ............................... 12,937 295,934
Public Service Enterprises Group, Inc. ................ 10,600 369,012
SCANA Corporation...................................... 17,800 478,375
ScottishPower plc ADR.................................. 3,828 107,184
Texas Utilities Company................................ 5,502 195,665
-----------
4,154,263
-----------
ENGINEERING & CONSTRUCTION--0.8%
Harsco Corporation..................................... 9,300 295,275
-----------
FOREST PRODUCTS--3.0%
Georgia-Pacific (Timber Group)......................... 12,300 302,887
Weyerhaeuser Company................................... 11,800 847,388
-----------
1,150,275
-----------
HEALTHCARE: DRUGS--0.7%
American Home Products Corporation..................... 6,500 256,344
-----------
INSURANCE: LIFE--2.7%
American General Corporation........................... 7,687 583,251
Lincoln National Corporation........................... 10,800 432,000
-----------
1,015,251
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INSURANCE: PROPERTY CASUALTY--4.0%
The Allstate Corporation............................... 29,700 712,800
Safeco Corporation..................................... 15,600 388,050
St. Paul Companies, Inc. .............................. 12,800 431,200
-----------
1,532,050
-----------
</TABLE>
See Notes to the Financial Statements.
2
<PAGE> 7
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
December 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
LEISURE/TOYS--0.9%
Fortune Brands, Inc. .................................. 10,000 $ 330,625
-----------
MACHINERY--1.7%
CNH Global N.V......................................... 48,300 642,994
-----------
MEDICAL PRODUCTS & SUPPLIES--1.1%
Baxter International, Inc. ............................ 6,700 420,844
-----------
METALS: MISC.--0.6%
Phelps Dodge Corporation............................... 3,200 214,800
-----------
OFFICE EQUIPMENT & SUPPLIES--1.5%
Xerox Corporation...................................... 26,100 592,144
-----------
OIL--DOMESTIC--7.5%
Conoco Inc.--Class B................................... 14,184 352,827
Occidental Petroleum Corporation....................... 35,200 761,200
Phillips Petroleum Company............................. 16,900 794,300
Sunoco Inc. ........................................... 3,100 72,850
USX-Marathon Group, Inc. .............................. 23,200 572,750
Ultramar Diamond Shamrock Corporation.................. 14,100 319,894
-----------
2,873,821
-----------
OIL--INTERNATIONAL--0.4%
Texaco Inc. ........................................... 3,100 168,369
-----------
PAPER--4.3%
Georgia-Pacific Group.................................. 9,400 477,050
International Paper Company............................ 20,465 1,154,993
-----------
1,632,043
-----------
PHOTOGRAPHY/IMAGING--2.2%
Eastman Kodak Company.................................. 12,800 848,000
-----------
POLLUTION CONTROL--0.4%
Waste Management, Inc. ................................ 9,930 170,672
-----------
RAILROADS--1.6%
CSX Corporation........................................ 3,100 97,263
Norfolk Southern Corporation........................... 24,000 492,000
-----------
589,263
-----------
</TABLE>
See Notes to the Financial Statements.
3
<PAGE> 8
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
December 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
REGIONAL BANKS--5.7%
Bank One Corporation................................... 18,200 $ 583,537
First Security Corporation............................. 8,200 209,356
First Union Corporation................................ 13,370 438,703
Fleet Financial Group, Inc. ........................... 12,000 417,750
KeyCorp................................................ 14,200 314,175
UnionBanCal Corporation................................ 5,000 197,187
-----------
2,160,708
-----------
RETAIL: DEPARTMENT STORES--1.1%
May Department Stores Company.......................... 13,000 419,250
-----------
RETAIL: GENERAL MERCHANDISE--1.9%
J.C. Penney Company, Inc. ............................. 13,600 271,150
Sears, Roebuck & Company............................... 15,100 459,606
-----------
730,756
-----------
SAVINGS & LOANS--3.7%
Fannie Mae............................................. 12,300.. 767,981
Washington Mutual, Inc. ............................... 24,424 635,024
-----------
1,403,005
-----------
SMALL LOANS & FINANCE--1.6%
Associates First Capital Corporation--Class A.......... 742 20,359
Household International, Inc. ......................... 16,119 600,433
-----------
620,792
-----------
STEEL--2.4%
USX-U.S. Steel Group, Inc. ............................ 27,800 917,400
-----------
TELEPHONE--8.8%
AT&T Corporation....................................... 20,250 1,027,688
ALLTEL Corporation..................................... 9,400 777,263
Bell Atlantic Corporation.............................. 10,780 663,644
GTE Corporation........................................ 1,400 98,787
SBC Communications, Inc. .............................. 16,090 784,387
-----------
3,351,769
-----------
TOBACCO--2.3%
Philip Morris Companies, Inc. ......................... 37,700 874,169
-----------
</TABLE>
See Notes to the Financial Statements.
4
<PAGE> 9
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
December 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
TRUCKING--0.5%
Ryder System, Inc. .................................... 8,000 $ 195,500
-----------
Total common stocks (cost $33,319,332)................. 37,290,120
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
VARIABLE RATE DEMAND NOTES*--1.9% AMOUNT
- --------------------------------------------------------------------------------------
<S> <C> <C>
Pitney Bowes, Inc., 6.095%............................. $734,650 734,650
-----------
Total variable rate demand notes (cost $734,650)....... 734,650
-----------
Total investments--99.8% (cost $34,053,982)................. 38,024,770
Other assets in excess of liabilities--0.2%................. 80,190
-----------
TOTAL NET ASSETS--100.0%............................... $38,104,960
===========
</TABLE>
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<TABLE>
<C> <S>
* Variable rate demand notes are considered short-term
obligations and are payable on demand. Interest rates change
periodically on specified dates. The rates listed are as of
December 31, 1999.
</TABLE>
See Notes to the Financial Statements.
5
<PAGE> 10
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
December 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $34,053,982)............... $38,024,770
Dividends and interest receivable...................... 106,652
Prepaid expenses....................................... 4,958
-----------
Total assets...................................... 38,136,380
-----------
LIABILITIES:
Payable to Advisor..................................... 11,209
Payable to Custodian................................... 7,499
Accrued expenses and other liabilities................. 12,712
-----------
Total liabilities................................. 31,420
-----------
Net assets........................................ $38,104,960
===========
NET ASSETS CONSIST OF:
Paid in capital........................................ $33,731,872
Undistributed (distributions in excess of) net
investment income..................................... (8,603)
Undistributed net realized gains on investments........ 410,903
Net unrealized appreciation on investments............. 3,970,788
-----------
Net assets........................................ $38,104,960
===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)........................................... 2,762,579
Net asset value per share (offering and redemption
price)................................................ $ 13.79
===========
</TABLE>
See Notes to the Financial Statements.
6
<PAGE> 11
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
Six Months Ended December 31, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME
Income
Dividends.............................................. $ 593,334
Interest............................................... 10,322
-----------
Total income...................................... 603,656
-----------
Expenses
Advisory fee........................................... 105,986
Legal and auditing fees................................ 3,714
Custodian fees and expenses............................ 7,160
Accounting fee......................................... 12,358
Administration fee..................................... 2,464
Trustees' fees and expenses............................ 2,555
Reports to shareholders................................ 9,540
Other expenses......................................... 907
-----------
Total expenses.................................... 144,684
Less, expense reimbursement............................ (38,698)
-----------
Net expenses...................................... 105,986
-----------
Net investment income..................................... 497,670
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on securities transactions........... 2,055,261
Net change in unrealized depreciation of securities.... (8,104,827)
-----------
Net loss on investments........................... (6,049,566)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(5,551,896)
===========
</TABLE>
See Notes to the Financial Statements.
7
<PAGE> 12
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1999 YEAR ENDED
(UNAUDITED) JUNE 30, 1999
----------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income................................ $ 497,670 $ 955,430
Net realized gain on securities transactions......... 2,055,261 1,951,485
Net change in unrealized appreciation (depreciation)
of securities...................................... (8,104,827) 76,985
----------- -----------
Net increase (decrease) in net assets resulting
from operations............................... (5,551,896) 2,983,900
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................................ (506,273) (957,593)
Net realized gain on securities transactions......... (3,053,972) (3,955,702)
----------- -----------
Total dividends and distributions............... (3,560,245) (4,913,295)
----------- -----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold........................ 0 0
Shares issued in connection with payment of dividends
and distributions.................................. 3,560,245 4,913,295
Cost of shares redeemed.............................. (22,500) (29,999)
----------- -----------
Net increase in net assets from Fund share
transactions.................................. 3,537,745 4,883,296
----------- -----------
Total increase (decrease) in net assets................... (5,574,396) 2,953,901
NET ASSETS:
Beginning of period.................................. 43,679,356 40,725,455
----------- -----------
End of period*....................................... $38,104,960 $43,679,356
=========== ===========
*Including undistributed (distributions in excess of) net
investment income of:................................... $ (8,603) $ 0
=========== ===========
CHANGES IN SHARES OUTSTANDING:
Shares sold.......................................... 0 0
Shares issued in connection with payment of dividends
and distributions.................................. 262,901 307,125
Shares redeemed...................................... (1,470) (1,827)
----------- -----------
Net increase.................................... 261,431 305,298
=========== ===========
</TABLE>
See Notes to the Financial Statements.
8
<PAGE> 13
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1999
NOTE 1. ACCOUNTING POLICIES. The Equity Fund for Insurance Companies (the
"Fund") is a series of Hotchkis and Wiley Funds (the "Trust"), an
open-end, management investment company organized as a Massachusetts
business trust on August 22, 1984 and registered under the Investment
Company Act of 1940. The Fund commenced operations on January 29,
1993. The sole shareholder of the Fund is The Prudential Insurance
Company of America. The Fund seeks to provide current income and
long-term growth of income, accompanied by growth of capital. In
addition to the Fund, the Trust also offers the Balanced Fund, the
Small Cap Fund, the Equity Income Fund, the International Fund, the
Low Duration Fund, the Short-Term Investment Fund, the Total Return
Bond Fund, the Mid-Cap Fund, and the Global Equity Fund (collectively,
the "Funds"). The assets of each series are invested in separate,
independently managed portfolios. The following is a summary of
significant accounting policies followed by the Fund in the
preparation of the financial statements.
SECURITY VALUATION: Portfolio securities that are listed on a
securities exchange (whether domestic or foreign) or The Nasdaq Stock
Market ("NSM") are valued at the last sale price as of 4:00 p.m.,
Eastern Time, or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on such exchange or
NSM. Unlisted securities that are not included in NSM are valued at
the average of the quoted bid and asked price in the over-the-counter
market. Securities for which market quotations are not otherwise
available are valued at fair value as determined in good faith by
Hotchkis and Wiley (the "Advisor") under procedures established by the
Board of Trustees. Short-term investments which mature in less than 60
days are valued at amortized cost (unless the Board of Trustees
determines that this method does not represent fair value), if their
original maturity was 60 days or less, or by amortizing the values as
of the 61st day prior to maturity, if their original term to maturity
exceeded 60 days. Investments quoted in foreign currency are valued
daily in U.S. dollars on the basis of the foreign currency exchange
rate prevailing at the time of valuation.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the
requirements of the Internal Revenue Code applicable to regulated
investment companies and the Fund intends to distribute substantially
all of its investment company net taxable income and net capital gains
to its shareholders. Therefore, no federal income tax provision is
required.
EXPENSE ALLOCATION: Common expenses incurred by the Trust are
allocated among the Funds based upon (i) relative average net assets,
(ii) as incurred on a specific identification basis, or (iii) evenly
among the Funds, depending on the nature of the expenditure.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and
9
<PAGE> 14
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
December 31, 1999
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income are declared and paid quarterly. Distributions of net realized
capital gains, if any, will be declared at least annually.
OTHER: Security and shareholder transactions are recorded on
trade date. Realized gains and losses on sales of investments are
calculated on the identified cost basis. Dividend income and dividends
and distributions to shareholders are recorded on the ex-dividend
date. Interest income is recognized on the accrual basis. Generally
accepted accounting principles require that permanent financial
reporting and tax differences relating to shareholder distributions be
reclassified within the capital accounts.
NOTE 2. INVESTMENT ADVISORY AGREEMENT. The Fund has an investment advisory
agreement with the Advisor with whom certain officers and Trustees of
the Trust are affiliated. The Advisor is a division of Merrill Lynch
Asset Management, L.P., an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. The Advisor receives a fee, computed daily and
payable monthly, at an annual rate of 0.60% of the first $10 million
of the Fund's average daily net assets, and 0.50% of the average daily
net assets in excess of $10 million.
The Advisor provides continuous supervision of the investment
portfolio and pays all of the operating expenses relating to the Fund
other than the advisory fee. For the six months ended December 31,
1999, the Advisor paid $38,698 of operating expenses on behalf of the
Fund.
As permitted under Rule 10f-3 of the Investment Company Act of
1940, the Board of Trustees of the Trust has adopted procedures which
allow the Fund, under certain conditions described in the Rule, to
acquire newly-issued securities from a member of an underwriting group
in which an affiliated underwriter participates.
NOTE 3. PURCHASES AND SALES OF SECURITIES. Purchases and sales of investment
securities, other than short-term investments, for the six months
ended December 31, 1999 were $4,394,985 and $4,569,269, respectively.
There were no purchases or sales of long-term U.S. government
securities.
At December 31, 1999 (for financial reporting and federal income
tax purposes), net unrealized appreciation aggregated $3,970,788, of
which $9,266,408 related to appreciated securities and $5,295,620
related to depreciated securities. At December 31, 1999, the cost of
investments for book and federal income tax purposes was $34,053,982.
10
<PAGE> 15
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED JUNE 30,
DECEMBER 31, 1999 ----------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............ $17.46 $18.55 $16.32 $13.51 $11.53 $ 9.89
------ ------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income....................... 0.20 0.41 0.41 0.39 0.34 0.41
Net realized and unrealized gain (loss) on
investments............................... (2.46) 0.70 3.31 3.30 2.26 1.59
------ ------ ------ ------ ------ ------
Total from investment operations............ (2.26) 1.11 3.72 3.69 2.60 2.00
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)...... (0.20) (0.41) (0.41) (0.40) (0.40) (0.34)
Distributions (from realized gains)......... (1.21) (1.79) (1.08) (0.48) (0.22) (0.02)
------ ------ ------ ------ ------ ------
Total distributions......................... (1.41) (2.20) (1.49) (0.88) (0.62) (0.36)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period.................. $13.79 $17.46 $18.55 $16.32 $13.51 $11.53
====== ====== ====== ====== ====== ======
Total Return.................................... (12.73)%++ 7.29% 23.69% 28.20% 22.93% 20.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)............ $38.1 $43.7 $40.7 $33.0 $24.6 $17.4
Ratio of expenses to average net assets:
Before expense reimbursement................ 0.72%+ 0.65% 0.73% 0.75% 0.76% 1.05%
After expense reimbursement................. 0.53%+ 0.52% 0.52% 0.53% 0.54% 0.58%
Ratio of net investment income to average net
assets:
Before expense reimbursement................ 2.28%+ 2.28% 2.06% 2.50% 2.78% 3.58%
After expense reimbursement................. 2.47%+ 2.41% 2.27% 2.72% 3.00% 4.03%
Portfolio turnover.............................. 11%++ 14% 21% 22% 21% 29%
</TABLE>
+ Annualized.
++ Not Annualized.
See Notes to the Financial Statements.
11
