<PAGE> 1
------------------------------------------------------------
------------------------------------------------------------
HOTCHKIS AND
WILEY FUNDS
------------------------------------------------------------
------------------------------------------------------------
Equity Fund For Insurance Companies
ANNUAL REPORT
------------------------------------------------------------------------
June 30, 2000
725 South Figueroa Street
Suite 4000
Los Angeles, CA 90017-5400
(213) 430-1000
Investment Adviser
Mercury Advisors
Distributor
FAM Distributors, Inc.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS.
<PAGE> 2
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
We are pleased to present to you the annual report of the Hotchkis and
Wiley Equity Income Fund for the fiscal year ended June 30, 2000.
The U.S. equity market continued its upward move for the fiscal year ended
June 30, 2000, with the S&P 500 Index returning 7.4% and the Nasdaq Composite
Index up an astounding 48.0%. The primary reason for the Fund's underperformance
during this twelve-month period was its emphasis on value stocks during a period
when technology and growth stocks greatly outperformed value.
Although all appears to be grand, a close look behind the numbers reveals a
volatile market with questionable direction. All of the gains mentioned above
were posted in the third and fourth quarters of 1999 and both indexes have
actually suffered losses during the first six months of 2000. The nagging
question remains -- are current prices supported by fundamentals and can these
prices continue to advance?
By the first quarter of 2000, the markets began to experience an unstable
pattern of performance. Investors couldn't decide whether to continue buying the
pricey, high momentum winners of 1998-99 or to take profits and pay more
attention to valuation. Following weak performance in January and February, the
U.S. large capitalization equity market, as defined by the S&P 500 Index,
rebounded to finish the first quarter with a 2.3% gain. "Value" investments
continued to trail as technology issues led the charge with an 11.9% gain for
the quarter.
However, all was not sanguine for the technology sector. Beginning on March
27, 2000 and extending through April and May 2000, the Nasdaq Composite Index
experienced a sharp correction, declining -31.5%. During the Nasdaq's sell-off,
large cap value investments held up exceedingly well. While the S&P 500 Index
was -6.8%, the Russell 1000 Value Index actually posted a gain of 0.3%. With its
unwavering value focus, the Fund gained approximately 9.5% from March 27 through
May 31, 2000.
The Fund performed exceedingly well when the environment turned favorable
for value investments. A lack of technology in the portfolio was the single
biggest contributor to the Fund's outperformance in April and May, while
exposure to many of the manufacturing cyclicals (i.e., papers and steel) was the
primary detractor from performance. Also, adding to the Fund's performance was a
broad based group of holdings that generated excellent returns during April and
May. Northrup (+45%), Philip Morris (+24%), Waste Management (+49%), Russell
Corp (+55%), Lockheed Martin (+21%) and Aetna (+20%) are but a few of our
holdings where a dramatic upward reassessment of valuation by investors
occurred. In short, the Fund again demonstrated that it tends to outperform not
only the broad market, but also the value index, when value stocks are in favor.
In June 2000, the market returned to its speculative pattern, bidding up
the price of technology and healthcare stocks (the only two S&P 500 sectors
showing positive returns), and selling off many of the value stocks that had
outperformed the prior two months. June's market dynamics culminated on the last
trading day of the quarter (June 30) when investors were rebalancing their
portfolios to adjust for the reconstitution of the Russell 1000 Index.
Unfortunately, value stocks came under selling pressure as their weight within
the reconstituted index had diminished. Although we are disappointed that our
<PAGE> 3
April/May outperformance of the S&P 500 Index was eliminated by the market
dynamics in June, our second quarter returns still compared favorably to the
Russell 1000 Value Index.
As we have pointed out in the past, many of the more traditional value
areas of the market appear incredibly oversold. Since underlying valuation
(i.e., the present value of the future cash flows of a company) is the
fundamental determinant of a stock's intrinsic value, we believe that adherence
to our traditional value disciplines will perform well over the long-term.
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
EQUITY FUND FOR INSURANCE COMPANIES
JANUARY 29, 1993 - JUNE 30, 2000
[EQUITY FUND GRAPH]
<TABLE>
<CAPTION>
EQUITY FUND FOR INSURANCE CO. S&P 500 INDEX
----------------------------- -------------
<S> <C> <C>
10000 10000
10180 10443
6/93 10472 10494
10785 10764
11072 11012
10346 10593
6/94 10622 10634
11267 11157
10844 11158
11675 12244
6/95 12813 13411
13968 14483
14570 15343
15526 16180
6/96 15754 16914
16137 17436
17349 18910
17750 19406
6/97 20199 22792
22260 24526
22950 25222
25497 28743
6/98 24975 29698
22360 26770
24430 32475
23929 34064
6/99 26794 36442
23710 34194
23383 39338
22026 40302
6/00 21504 39144
</TABLE>
<TABLE>
<CAPTION>
Ended 6/30/00
-------------
Fund S&P 500
<S> <C> <C>
------------------------------------------------------
One Year -19.74% 7.42%
------------------------------------------------------
Five Years 10.92% 23.89%
------------------------------------------------------
Since Inception (1/29/93) 10.87% 19.99%
------------------------------------------------------
</TABLE>
HOW A $10,000 INVESTMENT HAS GROWN:
The chart above shows the growth of a $10,000 investment for the Fund as
compared to the performance of the S&P 500 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 all of the
operating expenses relating to the Fund other than the advisory fee. 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.
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 Russell 1000 Index measures the performance of the 1,000 largest
companies in the Russell 3000 Index, which represents approximately 90% of the
total market capitalization of the Russell 3000 Index.
The Russell 1000 Value Index measures the performance of those Russell 1000
companies with lower price-to-book value ratios and lower forecasted growth
values.
The S&P 500 Index is an unmanaged, capital-weighted index representing the
aggregate market value of the common equity of 500 stocks primarily traded on
the New York Stock Exchange.
The indexes do not reflect the 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
S&P 500 Index. It is not possible to invest directly in an index.
3
<PAGE> 5
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 2000
<TABLE>
<CAPTION>
COMMON STOCKS--95.9% SHARES VALUE
------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE--3.8%
Lockheed Martin Corporation............................ 16,200 $ 401,963
Northrop Grumman Corporation........................... 11,100 735,375
Rockwell International Corporation..................... 6,000 189,000
-----------
1,326,338
-----------
ALUMINUM--3.0%
Alcoa, Inc............................................. 36,016 1,044,464
-----------
APPAREL & TEXTILES--0.9%
Russell Corporation.................................... 15,300 306,000
-----------
APPLIANCE & HOUSEHOLD FURNITURE--0.8%
Whirlpool Corporation.................................. 5,700 265,763
-----------
AUTO PARTS--4.0%
Dana Corporation....................................... 18,800 398,325
Delphi Automotive Systems Corporation.................. 15,925 231,908
Meritor Automotive, Inc................................ 10,000 110,000
Tenneco, Inc........................................... 8,600 45,150
TRW Inc................................................ 13,600 589,900
Visteton Corporation................................... 2,697 32,704
-----------
1,407,987
-----------
AUTOS & TRUCKS--4.6%
Ford Motor Company..................................... 20,600 885,800
General Motors Corporation............................. 12,201 708,420
-----------
1,594,220
-----------
BEVERAGES--1.1%
Anheuser-Busch Companies, Inc.......................... 5,100 380,906
-----------
CHEMICALS--2.6%
The Dow Chemical Company............................... 15,900 479,981
Eastman Chemical Company............................... 8,700 415,425
-----------
895,406
-----------
</TABLE>
See Notes to the Financial Statements.
4
<PAGE> 6
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 2000
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
CONTAINERS--1.0%
Pactiv Corporation #................................... 43,000 $ 338,625
-----------
COMPUTER SOFTWARE & SERVICES--0.4%
Computer Associates International, Inc................. 2,600 133,088
-----------
ELECTRIC: INTEGRATED--8.5%
American Electric Power Company, Inc................... 4,200 124,425
CMS Energy Corporation................................. 12,600 278,775
DTE Energy Company..................................... 15,700 479,831
Edison International................................... 7,100 145,550
Entergy Corporation.................................... 7,400 201,188
GPU, Inc............................................... 5,400 146,138
PECO Energy Company.................................... 12,900 520,031
P P & L Resources, Inc................................. 12,937 283,805
Public Service Enterprises Group, Inc.................. 10,600 367,025
SCANA Corporation...................................... 11,232 270,972
TXU Corporation........................................ 5,502 162,309
-----------
2,980,049
-----------
ENGINEERING & CONSTRUCTION--0.7%
Harsco Corporation..................................... 9,300 237,150
-----------
FOREST PRODUCTS--2.8%
Georgia-Pacific (Timber Group)......................... 17,200 371,950
Weyerhaeuser Company................................... 14,500 623,500
-----------
995,450
-----------
HEALTHCARE: DRUGS--1.1%
American Home Products Corporation..................... 6,500 381,875
-----------
INSURANCE: LIFE--8.2%
Aetna, Inc............................................. 13,800 885,787
American General Corporation........................... 8,487 517,707
Lincoln National Corporation........................... 16,600 599,675
MetLife, Inc........................................... 18,550 390,709
ReliaStar Financial Corp............................... 9,410 493,436
-----------
2,887,314
-----------
</TABLE>
See Notes to the Financial Statements.
5
<PAGE> 7
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 2000
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
INSURANCE: PROPERTY CASUALTY--4.0%
The Allstate Corporation............................... 29,700 $ 660,825
Safeco Corporation..................................... 15,600 310,050
St. Paul Companies, Inc................................ 12,800 436,800
-----------
1,407,675
-----------
LEISURE/TOYS--0.7%
Fortune Brands, Inc.................................... 10,000 230,625
-----------
MACHINERY--0.4%
CNH Global N.V......................................... 15,000 138,750
-----------
MEDICAL PRODUCTS & SUPPLIES--1.3%
Baxter International, Inc.............................. 6,700 471,094
-----------
METALS: MISC.--0.3%
Phelps Dodge Corporation............................... 3,200 119,000
-----------
OFFICE EQUIPMENT & SUPPLIES--1.1%
Xerox Corporation...................................... 19,400 402,550
-----------
OIL--DOMESTIC--6.5%
Conoco, Inc.--Class A.................................. 1,600 35,200
Conoco, Inc.--Class B.................................. 5,884 144,525
Occidental Petroleum Corporation....................... 35,200 741,400
Phillips Petroleum Company............................. 6,400 324,400
Sunoco Inc............................................. 2,700 79,481
USX-Marathon Group, Inc................................ 23,200 581,450
Ultramar Diamond Shamrock Corporation.................. 15,200 377,150
-----------
2,283,606
-----------
OIL--INTERNATIONAL--2.7%
Dynegy, Inc.--Class A.................................. 11,600 792,425
Texaco Inc............................................. 3,100 165,075
-----------
957,500
-----------
PAPER--3.3%
Georgia-Pacific Group.................................. 15,500 406,875
International Paper Company............................ 24,865 741,288
-----------
1,148,163
-----------
</TABLE>
See Notes to the Financial Statements.
6
<PAGE> 8
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 2000
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PHOTOGRAPHY/IMAGING--2.7%
Eastman Kodak Company.................................. 15,900 $ 946,050
-----------
POLLUTION CONTROL--1.0%
Waste Management, Inc.................................. 18,430 350,170
-----------
RAILROADS--1.6%
CSX Corporation........................................ 3,100 65,681
Norfolk Southern Corporation........................... 33,100 492,363
-----------
558,044
-----------
REGIONAL BANKS--5.0%
Bank One Corporation................................... 19,400 515,313
First Security Corporation............................. 8,200 111,213
First Union Corporation................................ 13,370 331,743
Fleet Financial Group, Inc............................. 12,000 408,000
KeyCorp................................................ 14,200 250,275
UnionBanCal Corporation................................ 7,200 133,650
-----------
1,750,194
-----------
RETAIL: DEPARTMENT STORES--1.1%
May Department Stores Company.......................... 16,600 398,400
-----------
RETAIL: GENERAL MERCHANDISE--2.1%
J.C. Penney Company, Inc............................... 13,600 250,750
Sears, Roebuck & Company............................... 15,100 492,638
-----------
743,388
-----------
SATELLITE TELECOM--0.5%
General Motors Corporation--Class H
(Hughes Electronics Corporation)..................... 2,200 193,050
-----------
SAVINGS & LOANS--2.0%
Washington Mutual, Inc................................. 24,424 705,243
-----------
SMALL LOANS & FINANCE--3.8%
Associates First Capital Corporation--Class A.......... 742 16,555
Fannie Mae............................................. 12,300 641,906
Household International, Inc........................... 16,119 669,946
-----------
1,328,407
-----------
</TABLE>
See Notes to the Financial Statements.
7
<PAGE> 9
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, CONTINUED
June 30, 2000
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
STEEL--1.1%
USX-U.S. Steel Group, Inc.............................. 20,000 $ 371,250
-----------
TELEPHONE--7.9%
AT&T Corporation....................................... 26,850 849,131
ALLTEL Corporation..................................... 9,400 582,213
Bell Atlantic Corporation.............................. 10,780 547,759
GTE Corporation........................................ 1,400 87,150
SBC Communications, Inc................................ 16,090 695,893
-----------
2,762,146
-----------
TOBACCO--2.9%
Philip Morris Companies, Inc........................... 37,700 1,001,406
-----------
TRUCKING/AIR FREIGHT--0.4%
Ryder System, Inc...................................... 8,000 151,500
-----------
Total common stocks (cost $32,621,791)................. 33,592,846
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
CERTIFICATES OF DEPOSIT--3.6% AMOUNT
---------------------------------------------------------------------------------------
<S> <C> <C>
Brown Brothers Call Deposit, 5.5000%................... $1,272,659 1,272,659
-----------
Total certificates of deposit (cost $1,272,659)........ 1,272,659
-----------
Total investments--99.5% (cost $33,894,450)................. 34,865,505
Other assets in excess of liabilities--0.5%................. 161,168
-----------
TOTAL NET ASSETS--100.0%............................... $35,026,673
===========
</TABLE>
See Notes to the Financial Statements.
8
<PAGE> 10
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2000
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $33,894,450)............... $34,865,505
Cash................................................... 20,203
Dividends and interest receivable...................... 131,537
Receivable for investments sold........................ 113,353
Prepaid expenses....................................... 482
-----------
Total assets...................................... 35,131,080
-----------
LIABILITIES:
Payable to Adviser..................................... 12,166
Payable for investments purchased...................... 80,157
Accrued expenses and other liabilities................. 12,084
-----------
Total liabilities................................. 104,407
-----------
Net assets........................................ $35,026,673
===========
NET ASSETS CONSIST OF:
Paid in capital........................................ $34,238,646
Undistributed net investment income.................... 3,004
Undistributed net realized loss on investments......... (186,032)
Net unrealized appreciation of securities.............. 971,055
-----------
Net assets........................................ $35,026,673
===========
CALCULATION OF NET ASSET VALUE PER SHARE:
Shares outstanding (unlimited shares of no par value
authorized)........................................... 2,802,269
Net asset value per share (offering and redemption
price)................................................ $ 12.50
===========
</TABLE>
See Notes to the Financial Statements.
9
<PAGE> 11
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended June 30, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income*
Dividends.............................................. $ 1,202,987
Interest............................................... 22,582
------------
Total income...................................... 1,225,569
------------
Expenses
Advisory fee........................................... 201,998
Legal and auditing fees................................ 5,473
Custodian fees and expenses............................ 12,630
Accounting fee......................................... 19,367
Administration fee..................................... 4,999
Trustees' fees and expenses............................ 3,311
Reports to shareholders................................ 8,974
Other expenses......................................... 993
------------
Total expenses.................................... 257,745
Less, expense reimbursement............................ (55,747)
------------
Net expenses...................................... 201,998
------------
Net investment income..................................... 1,023,571
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on securities transactions........... 1,458,307
Net change in unrealized appreciation of securities.... (11,104,560)
------------
Net loss on investments........................... (9,646,253)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (8,622,682)
============
*Net of Foreign Taxes Withheld......................... $ 4,047
============
</TABLE>
See Notes to the Financial Statements.
10
<PAGE> 12
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................. $ 1,023,571 $ 955,430
Net realized gain on securities........................ 1,458,307 1,951,485
Net change in unrealized appreciation (depreciation) of
securities........................................... (11,104,560) 76,985
------------ -----------
Net increase (decrease) in net assets resulting
from operations................................. (8,622,682) 2,983,900
------------ -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................. (1,020,548) (957,593)
Net realized gain on securities transactions........... (3,053,972) (3,955,702)
------------ -----------
Total dividends and distributions................. (4,074,520) (4,913,295)
------------ -----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold.......................... 0 0
Shares issued in connection with payment of dividends
and distributions.................................... 4,074,520 4,913,295
Cost of shares redeemed................................ (30,001) (29,999)
------------ -----------
Net increase in net assets resulting from Fund
share transactions.............................. 4,044,519 4,883,296
------------ -----------
Total increase (decrease) in net assets..................... (8,652,683) 2,953,901
NET ASSETS:
Beginning of year...................................... 43,679,356 40,725,455
------------ -----------
End of year*........................................... $ 35,026,673 $43,679,356
============ ===========
*Including undistributed net investment income of:.......... $ 3,004 $ 0
============ ===========
CHANGES IN SHARES OUTSTANDING:
Shares sold............................................ 0 0
Shares issued in connection with payment of dividends
and distributions.................................... 303,168 307,125
Shares redeemed........................................ (2,047) (1,827)
------------ -----------
Net increase...................................... 301,121 305,298
============ ===========
</TABLE>
See Notes to the Financial Statements.
11
<PAGE> 13
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
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
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.
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
12
<PAGE> 14
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS CONTINUED
June 30, 2000
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 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 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 Adviser provides continuous supervision of the investment
portfolio and pays all of the operating expenses relating to the Fund
other than the advisory fee. For the year ended June 30, 2000, the
Adviser paid $55,747 of operating expenses on behalf of the Fund.
As permitted under Rule 10f-3 of the Investment Company Act of
1940, the Board of Trustees of the Trust has adopted procedures which
allow the Fund, under certain conditions described in the Rule, to
acquire newly-issued securities from a member of an underwriting group
in which an affiliated underwriter participates.
NOTE 3. PURCHASES AND SALES OF SECURITIES. Purchases and sales of investment
securities, other than short-term investments, for the year ended June
30, 2000 were $8,084,805 and $8,359,674, respectively. There were no
purchases or sales of long-term U.S. government securities.
At June 30, 2000 (for financial reporting and federal income tax
purposes), net unrealized appreciation aggregated $971,055, of which
$6,538,462 related to appreciated securities and $5,567,407 related to
depreciated securities. At June 30, 2000, the cost of investments for
book and federal income tax purposes was $33,894,450. At June 30,
2000, the Fund deferred, on a tax basis, post-October losses of
$186,032. Such amounts may be used to offset future capital gains.
13
<PAGE> 15
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS CONTINUED
June 30, 2000
NOTE 4. SUBSEQUENT EVENTS. The Board of Trustees has approved a change in the
name of the Fund to Mercury HW Equity Fund for Insurance Companies
effective on or about October 5, 2000.
14
<PAGE> 16
HOTCHKIS
AND WILEY Equity Fund for Insurance Companies
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.......................... $ 17.46 $18.55 $16.32 $13.51 $11.53
------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.39 0.41 0.41 0.39 0.34
Net realized and unrealized gain (loss) on
investments........................................... (3.75) 0.70 3.31 3.30 2.26
------- ------ ------ ------ ------
Total from investment operations........................ (3.36) 1.11 3.72 3.69 2.60
------- ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net investment income).................. (0.39) (0.41) (0.41) (0.40) (0.40)
Distributions (from realized gains)..................... (1.21) (1.79) (1.08) (0.48) (0.22)
------- ------ ------ ------ ------
Total distributions..................................... (1.60) (2.20) (1.49) (0.88) (0.62)
------- ------ ------ ------ ------
Net Asset Value, End of Year................................ $ 12.50 $17.46 $18.55 $16.32 $13.51
======= ====== ====== ====== ======
TOTAL RETURN................................................ (19.74)% 7.29% 23.69% 28.20% 22.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (millions).......................... $35.03 $43.68 $40.73 $32.96 $24.65
Ratio of expenses to average net assets:
Before expense reimbursement............................ 0.68% 0.65% 0.73% 0.75% 0.76%
After expense reimbursement............................. 0.53% 0.52% 0.52% 0.53% 0.54%
Ratio of net investment income to average net assets:
Before expense reimbursement............................ 2.54% 2.28% 2.06% 2.50% 2.78%
After expense reimbursement............................. 2.69% 2.41% 2.27% 2.72% 3.00%
Portfolio turnover.......................................... 21% 14% 21% 22% 21%
</TABLE>
See Notes to the Financial Statements.
15
<PAGE> 17
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 Equity Fund for Insurance Companies:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Hotchkis and Wiley Equity Fund
for Insurance Companies (one of the ten portfolios of Hotchkis and Wiley Funds,
the "Fund") at June 30, 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
16
