UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-10487
Name of Fund: Hotchkis and Wiley Funds
Fund Address: 725 S. Figueroa Street, 39th Floor
Los Angeles, CA 90017-5439
Name and address of agent for service: Anna Marie Lopez, Treasurer,
Hotchkis and Wiley Capital Management, 725 S. Figueroa St. 39th Floor,
Los Angeles, CA 90017-5439
Mailing address: 725 S. Figueroa Street, 39th Floor
Los Angeles, CA 90017-5439
Registrant's telephone number, including area code: (213) 430-1000
Date of fiscal year end: 06/30/03
Date of reporting period: 07/01/02 - 6/30/03
Item 1 - Attach shareholder report
<Page>
[GRAPHIC]
LARGE CAP VALUE FUND
MID-CAP VALUE FUND
SMALL CAP VALUE FUND
ALL CAP VALUE FUND
[HOTCHKIS AND WILEY FUNDS LOGO]
JUNE 30, 2003
ANNUAL REPORT
<Page>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<Table>
SHAREHOLDER LETTER................................ 3
FUND PERFORMANCE DATA............................. 6
SCHEDULE OF INVESTMENTS:
LARGE CAP VALUE FUND............................ 11
MID-CAP VALUE FUND.............................. 13
SMALL CAP VALUE FUND............................ 15
ALL CAP VALUE FUND.............................. 17
STATEMENTS OF ASSETS AND LIABILITIES.............. 18
STATEMENTS OF OPERATIONS.......................... 19
STATEMENTS OF CHANGES IN NET ASSETS............... 20
FINANCIAL HIGHLIGHTS.............................. 22
NOTES TO THE FINANCIAL STATEMENTS................. 26
REPORT OF INDEPENDENT AUDITORS.................... 34
INDEPENDENT TRUSTEES, INTERESTED TRUSTEE AND
OFFICERS........................................ 35
</Table>
<Page>
DEAR SHAREHOLDER:
We are pleased to present you with this annual report for the Hotchkis and Wiley
Funds. The following investment review and annual report represents the
activities for the Funds for the fiscal year ended June 30, 2003.
OVERVIEW
As of June 30, 2003, the U.S. equity market managed to end the fiscal year in
positive territory, fueled by a second quarter rally that generated the best
quarterly performance for the S&P 500 Index and Nasdaq Composite Index since the
fourth quarter of 1998 and 2001, respectively. The fiscal year began on a
downbeat note as concerns regarding slow economic growth, corporate
profitability and heightened expectations for a war with Iraq took a toll on the
market. Equities moved higher in the fourth quarter of 2002 as expectations for
corporate profitability improved. Nevertheless, the second half of the fiscal
year began with major market indices posting losses, highlighted by poor
economic data, and evidence of another corporate accounting scandal at
HealthSouth. The last quarter of the fiscal year closed with a swift end to the
war in Iraq and a growing consensus that favorable economic activity would
materialize. The fiscal year ended with slight gains in the S&P 500 Index
(+0.25%) and a significant increase to the Nasdaq Composite Index (+10.91%).
Notably, the recovery was not driven by style as the market's bullish sentiment
favored value and growth, which was in stark contrast to the late 1990's when
style determined performance.
The current market is characterized as a stimulative economic and investment
environment with historically low interest rates; a weak dollar; and tax cuts on
wages, dividend income, and capital gains. Moreover, U.S. policy makers are
determined to re-energize the economy. We believe the market will continue to be
volatile, presenting opportunities to find value in "out-of-favor" stocks.
HOTCHKIS AND WILEY LARGE CAP VALUE FUND
The Fund's Class I, Class A, Class B and Class C shares had total returns of
4.95%, 4.79%, 4.05% and 4.05%, respectively, outperforming both the passive
S&P 500 Index return of 0.25% and the style-specific Russell 1000 Value Index
return of -1.02%, for the one year ended June 30, 2003. (Fund results shown do
not reflect sales charges and would be lower if sales charges were included.
More complete performance information can be found on page 7 of this report to
shareholders.)
Dominating the Fund's outperformance was superior stock selection in the
information technology and industrials sectors, collectively adding
approximately 400 basis points to the Fund's relative performance during the
one-year period, versus the S&P 500 Index. When considering the total
attribution effect (sector allocation and security selection combined), the
information technology sector added most to the Fund's upside, primarily
benefiting from software holdings such as Computer Associates. After a sell-off
throughout most of the fiscal year, Computer Associates recovered during the
second quarter of 2003, gaining on strong quarterly earnings, in spite of
disappointing results across the entire industry. Further outperformance can be
found within the industrials sector as Tyco's stock price benefited from a
successful transition in management and fading concerns over accounting
irregularities and liquidity issues. The consumer discretionary sector presented
some challenges for the Fund during the year. Despite a rally in the last
quarter of the fiscal year, the volatility in the markets has left consumer
confidence levels relatively low and left many economically sensitive stocks
particularly hard hit. General Motors, Dana Corp., May Department Stores and
Ford Motor Co. were among the Fund's worst performers. Additionally, TXU Corp.
put pressure on the Fund's performance as the company incurred a large
write-down and reduced its forward earnings guidance in October 2002 due to
problems at its European subsidiary.
HOTCHKIS AND WILEY MID-CAP VALUE FUND
The Fund's Class I, Class A, Class B and Class C shares had total returns of
6.46%, 6.26%, 5.41%, and 5.40%, respectively, compared to the Russell Midcap
Index return of 2.63% and the Russell Midcap Value Index return of -0.64%, for
the one year ended June 30, 2003. (Fund results shown do not reflect sales
charges and would be lower if sales charges were included. More complete
performance information can be found on page 8 of this report to shareholders.)
3
<Page>
The Fund's outperformance (vs. the Russell Midcap Index) was the direct result
of stock selection in the information technology and consumer discretionary
sectors. Specifically, in September 2002, we took advantage of low valuations by
increasing our investments in the information technology sector. This helped the
Fund's performance during the rest of the fiscal year as investments such as
Computer Associates, Tellabs and Storage Technology had dramatic rebounds after
we increased our positions. Within the consumer discretionary sector, Centex
Corp. benefited from a resilient housing market. Additionally, the Fund's
absolute performance benefited from holdings in the energy sector. Teekay
Shipping's stock price rose as world oil tanker rates increased due to strong
demand for tanker capacity as well as an increase in the premium for high
quality tankers in the wake of the PRESTIGE disaster off the coast of Spain. An
area of weakness in the Fund was the materials sector, with holdings in IMC
Global and Millenium Chemicals declining over the period. IMC Global's stock
price fell due to a first quarter loss, versus a profit in the previous year.
Millenium Chemicals suffered from a surge in natural gas prices, which cut into
the company's profit margins. Additionally, despite our increased investment and
prior to a solid rebound in the second half of the fiscal year, Allmerica
Financial was the Fund's lowest contributor to performance.
HOTCHKIS AND WILEY SMALL CAP VALUE FUND
The Fund's Class I, Class A, Class B and Class C shares had total returns of
8.72%, 8.57%, 7.63% and 7.66%, respectively, strongly outperforming both the
Russell 2000 Index return of -1.64% and the Russell 2000 Value Index return of
- -3.80%, for the one year ended June 30, 2003. (Fund results shown do not reflect
sales charges and would be lower if sales charges were included. More complete
performance information can be found on page 9 of this report to shareholders.)
Small cap stocks moderately underperformed large cap stocks as the S&P 500 Index
return of 0.25% outperformed the Russell 2000 Index by 189 basis points. With
respect to style, growth outperformed value as the Russell 2000 Growth Index
returned 0.69% versus -3.80% for the Russell 2000 Value Index.
The Fund's outperformance (vs. the Russell 2000 Index) was primarily from
security selection within the consumer discretionary sector. Specifically,
consumer discretionary holdings such as Brookfield Homes Corp., Toll Brothers
Inc. and Beazer Homes USA benefited from a strong housing market buoyed by
record low mortgage rates. Additionally, the information technology sector
contributed to the Fund's absolute performance with holdings in Tellabs. The
stock gained on cost cutting efforts made by company management. Relative
weakness in the Fund was concentrated in the utilities sector, with names within
electric utilities (OGE Energy Corp. and Northeast Utilities) and in the
insurance sector (Allmerica) having the largest negative impact.
HOTCHKIS AND WILEY ALL CAP VALUE FUND
The Fund commenced operations on December 31, 2002. The investment review below
discusses the Fund's performance for the six months ended June 30, 2003.
The Fund's Class I and A shares had total returns of 25.80% and 26.20%,
respectively, outperforming both the S&P 500 Index return of 11.76% and the
Russell 3000 Index return of 12.71%, for the six-months ended June 30, 2003.
(Fund results shown do not reflect sales charges and would be lower if sales
charges were included. More complete performance information can be found on
page 10 of this report to shareholders.) Small caps outperformed large caps as
the Russell 2000 Index return of 17.88% beat the S&P 500 Index by 612 basis
points. With respect to style, growth outperformed value as the Russell 3000
Growth Index returned 13.49% versus 11.91% for the Russell 3000 Value Index.
Dominating the Fund's relative outperformance (vs. the S&P 500 Index) was
superior stock selection in the financials, consumer discretionary and
information technology sectors. When considering the total attribution effect
(sector allocation and security selection combined), the financials sector added
most to the Fund's upside, primarily benefiting from insurance holdings such as
Allmerica Financial. Our decision to add to this position during previous lows
helped performance, as the stock gained from fading concerns over the capital
adequacy of the company's life insurance and annuity
4
<Page>
subsidiary. Within the information technology sector, the highest contributor to
the Fund's upside was our position in Computer Associates. After a sell-off
throughout most of 2002, the company recovered during the second quarter of
2003, gaining on strong quarterly earnings, in spite of disappointing results
across the entire industry. Further outperformance can be found in the consumer
discretionary sector with positions in Sears Roebuck & Co. and Toll Brothers
Inc. Sears gained as the company made progress regarding the sale of its credit
card business. Toll Brothers benefited from a strong housing market buoyed by
record low mortgage rates. Offsetting the gains within consumer discretionary,
J.C. Penney Co. put downward pressure on the Fund's absolute performance,
declining on lowered market expectations for earnings and weak sales.
Furthermore, relative weakness (vs. the S&P 500 Index) is attributable to
security selection within the healthcare sector as Tenet Healthcare reported its
second quarter results, lowering guidance for the next 12 months.
We appreciate your continued support of the Hotchkis and Wiley Funds, and we
look forward to serving your investment needs in the future.
Sincerely,
<Table>
/s/ NANCY D. CELICK /s/ GAIL BARDIN /s/ SHELDON LIEBERMAN
Nancy D. Celick Gail Bardin Sheldon Lieberman
PRESIDENT PORTFOLIO MANAGER PORTFOLIO MANAGER
LARGE CAP VALUE FUND LARGE CAP VALUE FUND
</Table>
<Table>
/s/ JIM MILES /s/ STANLEY I. MAJCHER /s/ DAVID GREEN
James Miles Stan Majcher David Green
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
MID-CAP VALUE FUND MID-CAP VALUE FUND SMALL CAP VALUE FUND
SMALL CAP VALUE FUND
</Table>
<Table>
/s/ JOE HUBER /s/ GEORGE H. DAVIS
Joe Huber George H. Davis
PORTFOLIO MANAGER PORTFOLIO MANAGER
ALL CAP VALUE ALL CAP VALUE
FUND FUND
</Table>
THE ABOVE REFLECTS OPINIONS OF PORTFOLIO MANAGERS AS OF JUNE 30, 2003. THEY ARE
SUBJECT TO CHANGE AND ANY FORECASTS MADE CANNOT BE GUARANTEED. THE FUNDS MIGHT
NOT CONTINUE TO HOLD ANY SECURITIES MENTIONED AND HAVE NO OBLIGATION TO DISCLOSE
PURCHASES OR SALES IN THESE SECURITIES. PAST PERFORMANCE IS NO GUARANTEE OF
FUTURE PERFORMANCE.
5
<Page>
FUND PERFORMANCE DATA
- --------------------------------------------------------------------------------
ABOUT FUND PERFORMANCE
The Funds currently offer up to four classes of shares, each with its own sales
charge and expense structure, allowing you to invest in the way that best suits
your needs.
CLASS I SHARES have no initial sales charge and bear no ongoing distribution and
service fees under a 12b-1 plan. Class I Shares are available only to eligible
investors.
CLASS A SHARES incur a maximum initial sales charge of 5.25% and a distribution
and service fee of 0.25%. Small Cap Value Fund Class A Shares may incur a 2.00%
redemption fee if redeemed within 180 days of purchase.
CLASS B SHARES are subject to a maximum contingent deferred sales charge (CDSC)
of 5%, which is reduced in the first six years (5, 4, 3, 3, 2, 1) to 0% after
the sixth year. In addition, Class B Shares are subject to a distribution and
service fee of 1.00%. These shares automatically convert to Class A Shares after
approximately seven years.
CLASS C SHARES are subject to a distribution and service fee of 1.00%. In
addition, Class C Shares are subject to a 1.00% CDSC if redeemed within one year
after purchase.
None of the past results shown should be considered a representation of future
performance. Performance results do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
Figures shown in the "Comparative Results" tables assume reinvestment of all
dividends and capital gains distributions at net asset value on the ex-dividend
date. The Funds' investment advisor pays annual operating expenses of the Funds'
Class I, Class A, Class B and Class C Shares over certain levels. If the
investment advisor did not pay such expenses, net returns would be lower.
Investment return and principal value of shares will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost. Dividends
paid to each class of shares will vary because of the different levels of
distribution and service fees applicable to each class, which are deducted from
the income available to be paid to shareholders. Performance includes that of
predecessor funds.
Investment by the Small Cap Value Fund, Mid-Cap Value Fund and All Cap Value
Fund in small and medium-size companies presents greater risk than investment in
larger, more established companies.
MARKET INDEXES
The following are definitions for indexes used in the performance summary graphs
and tables on the following pages. These indexes are unmanaged and include the
reinvestment of dividends, but do not reflect the payment of transaction costs
and advisory and other fees associated with an investment in the Funds. The
securities that comprise these indexes may differ substantially from the
securities in the Funds' portfolios. The Funds' value disciplines may prevent or
restrict investment in major stocks in the benchmark indexes. It is not possible
to invest directly in an index. Each index named is not the only index which may
be used to characterize performance of a specific Fund and other indexes may
portray different comparative performance.
S&P 500 INDEX, an unmanaged index, consists of 500 stocks chosen for market
size, liquidity, and industry group representation. It is a market-value
weighted index (stock price times number of shares outstanding), with each
stock's weight in the Index proportionate to its market value.
RUSSELL MIDCAP INDEX, an unmanaged index, measures the performance of the 800
smallest companies in the Russell 1000 Index, which represents approximately 26%
of the total market capitalization of the Russell 1000 Index.
RUSSELL 2000 INDEX, an unmanaged index, measures the performance of the 2,000
smallest companies in the Russell 3000 Index which represents approximately 8%
of the total market capitalization of the Russell 3000 Index.
6
<Page>
FUND PERFORMANCE DATA
- --------------------------------------------------------------------------------
LARGE CAP FUND VALUE
TOTAL RETURN BASED ON A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
LARGE CAP VALUE FUND+ -
Class I Shares S&P 500 Index++
6/30/93 $10,000 $10,000
6/30/94 $10,340 $9,861
6/30/95 $12,460 $12,091
6/30/96 $14,956 $14,885
6/30/97 $18,867 $19,647
6/30/98 $23,131 $25,167
6/30/99 $24,824 $30,469
6/30/2000 $19,905 $32,286
6/30/2001 $26,254 $27,177
6/30/2002 $26,154 $21,970
6/30/2003 $27,450 $21,630
</Table>
COMPARATIVE RESULTS+++
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------------------------
CLASS I
Average annual total return 4.95% 3.48% 10.63%
CLASS A(a)
Average annual total return
(with sales charge)(b) -0.71% 2.24% 9.87%
Average annual total return
(without sales charge) 4.79% 3.35% 10.47%
CLASS B(a)
Average annual total return
(with sales charge)(b) -0.95% 2.15% 9.56%
Average annual total return
(without sales charge) 4.05% 2.51% 9.56%
CLASS C(a)
Average annual total return
(with sales charge)(b) 3.05% 2.50% 9.55%
Average annual total return
(without sales charge) 4.05% 2.50% 9.55%
S&P 500 INDEX
Average annual total return 0.25% -1.61% 10.05%
</Table>
(a) RETURNS SHOWN FOR CLASS A, B, AND C SHARES FOR THE PERIODS PRIOR TO THEIR
INCEPTION ARE DERIVED FROM THE HISTORICAL PERFORMANCE OF CLASS I SHARES OF THE
FUND DURING SUCH PERIODS AND HAVE BEEN ADJUSTED TO REFLECT THE HIGHER TOTAL
ANNUAL OPERATING EXPENSES OF EACH SPECIFIC CLASS. (INCEPTION DATES: CLASS A --
10/26/01; CLASS B AND C -- 2/4/02.)
(b) RETURNS SHOWN FOR CLASS A, B, AND C SHARES HAVE BEEN ADJUSTED TO REFLECT THE
CURRENT APPLICABLE SALES CHARGES OF EACH SPECIFIC CLASS. RETURNS FOR CLASS A
REFLECT THE CURRENT MAXIMUM INITIAL SALES CHARGE OF 5.25%. CLASS B SHARE
PERFORMANCE IS ADJUSTED FOR THE APPLICABLE CDSC, WHICH IS 5% WITHIN THE FIRST
YEAR AFTER PURCHASE, DECLINING TO 0% AFTER SIX YEARS. CLASS C SHARES HAVE NO
ADJUSTMENT FOR SALES CHARGES, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY BE
SUBJECT TO A CDSC OF 1%.
+ THE FUND INVESTS PRIMARILY IN STOCKS OF U.S. COMPANIES WITH MARKET
CAPITALIZATIONS SIMILAR TO THE RUSSELL 1000 INDEX.
++ THIS UNMANAGED BROAD-BASED INDEX IS COMPRISED OF COMMON STOCKS.
+++ FUND RETURNS DURING THE 10-YEAR PERIOD SHOWN REFLECT A FEE WAIVER AND/OR
EXPENSE REIMBURSEMENT. WITHOUT WAIVER/REIMBURSEMENT, RETURNS WOULD HAVE BEEN
LOWER.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE GRAPH AND TABLE DO
NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
7
<Page>
FUND PERFORMANCE DATA
- --------------------------------------------------------------------------------
MID-CAP VALUE FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
MID-CAP VALUE FUND+ -
Class I Shares Russell Midcap Index++
1/2/97 $10,000 $10,000
6/30/97 $11,669 $11,306
6/30/98 $13,419 $13,921
6/30/99 $14,446 $15,252
6/30/2000 $15,949 $16,934
6/30/2001 $22,386 $16,854
6/30/2002 $23,455 $15,077
6/30/2003 $24,970 $15,223
</Table>
COMPARATIVE RESULTS+++
<Table>
<Caption>
1 YEAR 5 YEARS SINCE 1/2/97*
- --------------------------------------------------------------------------------------------
CLASS I
Average annual total return 6.46% 13.22% 15.14%
CLASS A(a)
Average annual total return
(with sales charge)(b) 0.69% 11.74% 13.94%
Average annual total return
(without sales charge) 6.26% 12.95% 14.89%
CLASS B(a)
Average annual total return
(with sales charge)(b) 0.41% 11.83% 13.97%
Average annual total return
(without sales charge) 5.41% 12.09% 13.97%
CLASS C(a)
Average annual total return
(with sales charge)(b) 4.40% 12.11% 13.98%
Average annual total return
(without sales charge) 5.40% 12.11% 13.98%
RUSSELL MIDCAP
Average annual total return 2.63% 3.35% 8.32%
</Table>
(a) RETURNS SHOWN FOR CLASS A, B, AND C SHARES FOR THE PERIOD PRIOR TO THEIR
INCEPTION ARE DERIVED FROM THE HISTORICAL PERFORMANCE OF CLASS I SHARES OF THE
FUND DURING SUCH PERIOD AND HAVE BEEN ADJUSTED TO REFLECT THE HIGHER TOTAL
ANNUAL OPERATING EXPENSES OF EACH SPECIFIC CLASS. (INCEPTION DATE: CLASS A, B,
C -- 1/2/01.)
(b) RETURNS SHOWN FOR CLASS A, B, AND C SHARES HAVE BEEN ADJUSTED TO REFLECT THE
CURRENT APPLICABLE SALES CHARGES OF EACH SPECIFIC CLASS. RETURNS FOR CLASS A
REFLECT THE CURRENT MAXIMUM INITIAL SALES CHARGE OF 5.25%. CLASS B SHARE
PERFORMANCE IS ADJUSTED FOR THE APPLICABLE CDSC, WHICH IS 5% WITHIN THE FIRST
YEAR AFTER PURCHASE, DECLINING TO 0% AFTER SIX YEARS. CLASS C SHARES HAVE NO
ADJUSTMENT FOR SALES CHARGES, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY BE
SUBJECT TO A CDSC OF 1%.
+ THE FUND INVESTS PRIMARILY IN STOCKS OF U.S. COMPANIES WITH MARKET
CAPITALIZATIONS SIMILAR TO THE RUSSELL MIDCAP INDEX.
++ THIS UNMANAGED INDEX MEASURES THE PERFORMANCE OF THE 800 SMALLEST COMPANIES
IN THE RUSSELL 1000 INDEX, WHICH REPRESENTS APPROXIMATELY 26% OF THE TOTAL
MARKET CAPITALIZATION OF THE RUSSELL 1000 INDEX.
+++ FUND RETURNS DURING THE PERIOD SHOWN REFLECT A FEE WAIVER AND/OR EXPENSE
REIMBURSEMENT. WITHOUT WAIVER/REIMBURSEMENT, RETURNS WOULD HAVE BEEN LOWER.
* INCEPTION DATE OF CLASS I.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE GRAPH AND TABLE DO
NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
8
<Page>
FUND PERFORMANCE DATA
- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
SMALL CAP VALUE FUND+ -
Class I Shares Russell 2000 Index ++
6/30/93 $10,000 $10,000
6/30/94 $10,377 $10,298
6/30/95 $11,911 $12,170
6/30/96 $13,606 $14,859
6/30/97 $17,652 $17,022
6/30/98 $21,578 $19,587
6/30/99 $18,502 $19,604
6/30/2000 $15,060 $22,121
6/30/2001 $23,447 $21,926
6/30/2002 $28,241 $19,773
6/30/2003 $30,702 $19,162
</Table>
COMPARATIVE RESULTS+++
<Table>
<Caption>
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
CLASS I
Average annual total return 8.72% 7.31% 11.87%
CLASS A(a)
Average annual total return
(with sales charge)(b) 2.87% 6.30% 11.16%
Average annual total return
(without sales charge) 8.57% 7.45% 11.76%
CLASS B(a)
Average annual total return
(with sales charge)(b) 2.63% 5.98% 10.79%
Average annual total return
(without sales charge) 7.63% 6.30% 10.79%
CLASS C(a)
Average annual total return
(with sales charge)(b) 6.66% 6.30% 10.79%
Average annual total return
(without sales charge) 7.66% 6.30% 10.79%
RUSSELL 2000 INDEX
Average annual total return -1.64% 0.97% 8.24%
</Table>
(a) RETURNS SHOWN FOR CLASS A, B, AND C SHARES FOR THE PERIODS PRIOR TO THEIR
INCEPTION ARE DERIVED FROM THE HISTORICAL PERFORMANCE OF CLASS I SHARES OF THE
FUND DURING SUCH PERIODS AND HAVE BEEN ADJUSTED TO REFLECT THE HIGHER TOTAL
ANNUAL OPERATING EXPENSES OF EACH SPECIFIC CLASS. (INCEPTION DATES: CLASS A --
10/6/00; CLASS B AND C -- 2/4/02.)
(b) RETURNS SHOWN FOR CLASS A, B, AND C SHARES HAVE BEEN ADJUSTED TO REFLECT THE
CURRENT APPLICABLE SALES CHARGES OF EACH SPECIFIC CLASS. RETURNS FOR CLASS A
REFLECT THE CURRENT MAXIMUM INITIAL SALES CHARGE OF 5.25%. CLASS B SHARE
PERFORMANCE IS ADJUSTED FOR THE APPLICABLE CDSC, WHICH IS 5% WITHIN THE FIRST
YEAR AFTER PURCHASE, DECLINING TO 0% AFTER SIX YEARS. CLASS C SHARES HAVE NO
ADJUSTMENT FOR SALES CHARGES, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY BE
SUBJECT TO A CDSC OF 1%.
+ THE FUND INVESTS PRIMARILY IN STOCKS OF U.S. COMPANIES WITH MARKET
CAPITALIZATIONS LESS THAN $3 BILLION.
++ THIS UNMANAGED INDEX MEASURES THE PERFORMANCE OF 2,000 SMALLEST COMPANIES IN
THE RUSSELL 3000 INDEX, WHICH REPRESENTS APPROXIMATELY 8% OF THE TOTAL MARKET
CAPITALIZATION OF THE RUSSELL 3000 INDEX.
+++ FUND RETURNS DURING THE 10-YEAR PERIOD SHOWN REFLECT A FEE WAIVER AND/OR
EXPENSE REIMBURSEMENT. WITHOUT WAIVER/REIMBURSEMENT, RETURNS WOULD HAVE BEEN
LOWER.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE GRAPH AND TABLE DO
NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
9
<Page>
FUND PERFORMANCE DATA
- --------------------------------------------------------------------------------
ALL CAP VALUE FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
ALL CAP VALUE FUND+ -
Class I Shares S&P 500 Index++
12/31/2002 $10,000 $10,000
1/31/2003 $10,010 $9,738
2/28/2003 $9,630 $9,592
3/31/2003 $9,820 $9,685
4/30/2003 $10,860 $10,483
5/31/2003 $12,300 $11,035
6/30/2003 $12,580 $11,176
</Table>
COMPARATIVE RESULTS+++
<Table>
<Caption>
SINCE
12/31/02(A)
- ----------------------------------------------------------------------------
CLASS I
Aggregate total return 25.80%
CLASS A
Aggregate total return (with sales
charge)(b) 19.57%
Aggregate total return (without sales
charge) 26.20%
S&P 500 INDEX
Aggregate total return 11.76%
</Table>
(a) INCEPTION OF CLASS.
(b) RETURN SHOWN FOR CLASS A SHARES HAS BEEN ADJUSTED TO REFLECT THE CURRENT
MAXIMUM INITIAL SALES CHARGE OF 5.25%.
+ THE FUND INVESTS PRIMARILY IN STOCKS OF U.S. COMPANIES.
++ THIS UNMANAGED BROAD-BASED INDEX IS COMPRISED OF COMMON STOCKS.
+++ FUND RETURNS DURING THE PERIOD SHOWN REFLECT A FEE WAIVER AND/OR EXPENSE
REIMBURSEMENT. WITHOUT WAIVER/REIMBURSEMENT, RETURNS WOULD HAVE BEEN LOWER.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE GRAPH AND TABLE DO
NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
10
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2003
- --------------------------------------------------------------------------------
LARGE CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 92.48% HELD VALUE
- --------------------------------------------------------------
AUTO COMPONENTS -- 0.66%
Dana Corporation 26,700 $ 308,652
.............................................................
Delphi Automotive Systems 22,549 194,598
- --------------------------------------------------------------
503,250
- --------------------------------------------------------------
AUTOMOBILES -- 0.83%
Ford Motor Company 57,139 627,958
- --------------------------------------------------------------
CHEMICALS -- 1.35%
The Dow Chemical Company 25,522 790,161
.............................................................
Eastman Chemical Company 7,300 231,191
- --------------------------------------------------------------
1,021,352
- --------------------------------------------------------------
COMMERCIAL BANKS -- 2.27%
KeyCorp 37,000 934,990
.............................................................
UnionBanCal Corporation 18,900 781,893
- --------------------------------------------------------------
1,716,883
- --------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 4.88%
Cendant Corporation (A) 82,600 1,513,232
.............................................................
Waste Management, Inc. 90,700 2,184,963
- --------------------------------------------------------------
3,698,195
- --------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 1.59%
Gateway, Inc. (A) 330,800 1,207,420
- --------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 5.47%
CIT Group, Inc. 81,000 1,996,650
.............................................................
Principal Financial Group, Inc. 66,600 2,147,850
- --------------------------------------------------------------
4,144,500
- --------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 1.30%
ALLTEL Corporation 11,800 568,996
.............................................................
AT&T Corporation 9,900 190,575
.............................................................
SBC Communications, Inc. 3,017 77,084
.............................................................
Verizon Communications, Inc. 3,776 148,963
- --------------------------------------------------------------
985,618
- --------------------------------------------------------------
ELECTRIC UTILITIES -- 6.33%
American Electric Power Company 66,600 1,986,678
.............................................................
Cinergy Corporation 6,000 220,740
.............................................................
DTE Energy Company 13,200 510,048
.............................................................
<Caption>
COMMON SHARES
STOCKS -- 92.48% HELD VALUE
- --------------------------------------------------------------
Entergy Corporation 18,900 $ 997,542
.............................................................
FirstEntergy Corporation 18,900 726,705
.............................................................
OGE Energy Corporation 16,500 352,605
- --------------------------------------------------------------
4,794,318
- --------------------------------------------------------------
FOOD & STAPLES RETAILING -- 0.38%
Albertson's Inc. 14,800 284,160
- --------------------------------------------------------------
FOOD PRODUCTS -- 0.19%
Sara Lee Corporation 7,600 142,956
- --------------------------------------------------------------
GAS UTILITIES -- 0.27%
People's Energy Corporation 4,700 201,583
- --------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 1.57%
Bausch & Lomb Inc. 31,800 1,192,500
- --------------------------------------------------------------
HEALTH CARE PROVIDERS AND SERVICES -- 5.03%
Aetna Inc. 39,100 2,353,820
.............................................................
Tenet Healthcare Corporation (A) 125,200 1,458,580
- --------------------------------------------------------------
3,812,400
- --------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 6.44%
Mandalay Resort Group 52,400 1,668,940
.............................................................
Park Place Entertainment Corporation (A) 82,400 749,016
.............................................................
Yum! Brands, Inc. (A) 83,100 2,456,436
- --------------------------------------------------------------
4,874,392
- --------------------------------------------------------------
HOUSEHOLD DURABLES -- 3.86%
Fortune Brands, Inc. 19,600 1,023,120
.............................................................
Lennar Corporation 24,600 1,758,900
.............................................................
Lennar Corporation -- B Shares 2,060 141,522
- --------------------------------------------------------------
2,923,542
- --------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 2.99%
Tyco International Limited 119,200 2,262,416
- --------------------------------------------------------------
INSURANCE -- 14.86%
Allmerica Financial Corporation 94,400 1,698,256
.............................................................
The Allstate Corporation 61,400 2,188,910
.............................................................
MetLife, Inc. 117,550 3,329,016
.............................................................
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
11
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2003
- --------------------------------------------------------------------------------
LARGE CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 92.48% HELD VALUE
- --------------------------------------------------------------
Prudential Financial, Inc. 65,200 $ 2,193,980
.............................................................
The St. Paul Companies, Inc. 50,600 1,847,406
- --------------------------------------------------------------
11,257,568
- --------------------------------------------------------------
IT SERVICES -- 3.17%
Electronic Data Systems Corporation 112,100 2,404,545
- --------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS -- 1.53%
Eastman Kodak Company 42,300 1,156,905
- --------------------------------------------------------------
METALS & MINING -- 2.92%
Alcoa Inc. 86,748 2,212,074
- --------------------------------------------------------------
MULTILINE RETAIL -- 9.17%
The May Department Stores Company 31,500 701,190
.............................................................
J.C. Penney Company, Inc. 151,000 2,544,350
.............................................................
Sears, Roebuck & Company 109,900 3,697,036
- --------------------------------------------------------------
6,942,576
- --------------------------------------------------------------
MULTI-UTILITIES -- 0.81%
SCANA Corporation 17,796 610,047
- --------------------------------------------------------------
OIL & GAS -- 2.93%
Occidental Petroleum Corporation 17,800 597,190
.............................................................
Sunoco, Inc. 23,810 898,589
.............................................................
Teekay Shipping Corporation 16,800 720,720
- --------------------------------------------------------------
2,216,499
- --------------------------------------------------------------
<Caption>
COMMON SHARES
STOCKS -- 92.48% HELD VALUE
- --------------------------------------------------------------
PAPER & FOREST PRODUCTS -- 1.14%
International Paper Company 6,400 $ 228,672
.............................................................
Weyerhaeuser Company 11,700 631,800
- --------------------------------------------------------------
860,472
- --------------------------------------------------------------
SOFTWARE -- 4.52%
Computer Associates International, Inc. 153,600 3,422,208
- --------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE -- 1.43%
Washington Mutual, Inc. 26,200 1,082,060
- --------------------------------------------------------------
TOBACCO -- 4.60%
Altria Group, Inc. 76,600 3,480,705
- --------------------------------------------------------------
Total investments -- 92.48%
(cost -- $59,258,383) 70,039,102
.............................................................
Time deposit* -- 4.71% 3,567,450
.............................................................
Other assets less liabilities -- 2.81% 2,128,378
...............................................................
- --------------------------------------------------------------
Net Assets -- 100.00% $75,734,930
- --------------------------------------------------------------
</Table>
(A) -- NON-INCOME PRODUCING SECURITY.
* -- TIME DEPOSIT BEARS INTEREST AT 0.61% AND MATURES ON 07/01/2003.
SEE NOTES TO THE FINANCIAL STATEMENTS
12
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2003
- --------------------------------------------------------------------------------
MID-CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 94.81% HELD VALUE
- -----------------------------------------------------------------
AUTO COMPONENTS -- 1.54%
Dana Corporation 335,800 $ 3,881,848
- -----------------------------------------------------------------
BIOTECHNOLOGY -- 0.48%
Medarex, Inc. (A) 182,100 1,200,039
- -----------------------------------------------------------------
CHEMICALS -- 5.90%
Celanese AG 144,160 3,459,840
................................................................
Eastman Chemical Company 57,700 1,827,359
................................................................
FMC Corporation (A) 265,200 6,001,476
................................................................
IMC Global Inc. 200,400 1,344,684
................................................................
Millenium Chemicals, Inc. 231,900 2,205,369
- -----------------------------------------------------------------
14,838,728
- -----------------------------------------------------------------
COMMERCIAL BANKS -- 2.01%
KeyCorp 108,350 2,738,005
................................................................
UnionBanCal Corporation 56,100 2,320,857
- -----------------------------------------------------------------
5,058,862
- -----------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 5.96%
Allied Waste Industries, Inc. (A) 456,000 4,582,800
................................................................
Cendant Corporation (A) 270,600 4,957,392
................................................................
Valassis Communications (A) 211,300 5,434,636
- -----------------------------------------------------------------
14,974,828
- -----------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 1.10%
Tellabs, Inc. (A) 418,900 2,752,173
- -----------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 1.84%
Gateway, Inc. (A) 1,267,500 4,626,375
- -----------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 4.56%
CIT Group, Inc. 308,400 7,602,060
................................................................
Principal Financial Group 119,900 3,866,775
- -----------------------------------------------------------------
11,468,835
- -----------------------------------------------------------------
ELECTRIC UTILITIES -- 6.95%
Alliant Energy Corporation 160,300 3,050,509
................................................................
American Electric Power Company 138,000 4,116,540
................................................................
Constellation Energy Group, Inc. 56,900 1,951,670
................................................................
DTE Energy Company 21,400 826,896
................................................................
Entergy Corporation 11,500 606,970
................................................................
<Caption>
COMMON SHARES
STOCKS -- 94.81% HELD VALUE
- -----------------------------------------------------------------
FirstEnergy Corporation 10,517 $ 404,379
................................................................
Northeast Utilities 207,600 3,475,224
................................................................
OGE Energy Corporation 86,400 1,846,368
................................................................
Wisconsin Energy Corporation 41,400 1,200,600
- -----------------------------------------------------------------
17,479,156
- -----------------------------------------------------------------
FOOD & STAPLES RETAILING -- 0.91%
Albertson's Inc. 48,600 933,120
................................................................
Safeway Inc. (A) 65,800 1,346,268
- -----------------------------------------------------------------
2,279,388
- -----------------------------------------------------------------
GAS UTILITIES -- 0.38%
Sempra Energy 33,900 967,167
- -----------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 1.96%
Bausch & Lomb, Inc. 91,500 3,431,250
................................................................
Thoratec Corporation (A) 100,231 1,493,442
- -----------------------------------------------------------------
4,924,692
- -----------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES -- 4.17%
Aetna, Inc. 114,700 6,904,940
................................................................
Tenet Healthcare (A) 307,900 3,587,035
- -----------------------------------------------------------------
10,491,975
- -----------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 6.01%
Jack in the Box, Inc. (A) 102,700 2,290,210
................................................................
Mandalay Resort Group 158,600 5,051,410
................................................................
Park Place Entertainment Corporation (A) 291,300 2,647,917
................................................................
Yum! Brands, Inc. (A) 173,100 5,116,836
- -----------------------------------------------------------------
15,106,373
- -----------------------------------------------------------------
HOUSEHOLD DURABLES -- 5.60%
Centex Corporation 74,000 5,756,460
................................................................
Furniture Brands
International, Inc. (A) 106,400 2,777,040
................................................................
Toll Brothers, Inc. (A) 195,300 5,528,943
- -----------------------------------------------------------------
14,062,443
- -----------------------------------------------------------------
INSURANCE -- 9.41%
Allmerica Financial Corporation 569,900 10,252,501
................................................................
CNA Financial Corporation (A) 136,624 3,360,950
................................................................
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
13
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2003
- --------------------------------------------------------------------------------
MID-CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 94.81% HELD VALUE
- -----------------------------------------------------------------
Lincoln National Corporation 95,700 $ 3,409,791
................................................................
The St. Paul Companies, Inc. 181,200 6,615,612
- -----------------------------------------------------------------
23,638,854
- -----------------------------------------------------------------
IT SERVICES -- 2.70%
Electronic Data Systems Corporation 316,000 6,778,200
- -----------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS -- 3.89%
Brunswick Corporation 235,600 5,894,712
................................................................
Eastman Kodak Company 141,900 3,880,965
- -----------------------------------------------------------------
9,775,677
- -----------------------------------------------------------------
MACHINERY -- 1.33%
Joy Global, Inc. (A) 226,300 3,342,451
- -----------------------------------------------------------------
METALS & MINING -- 2.85%
Alcan, Inc. 228,800 7,159,152
- -----------------------------------------------------------------
MULTILINE RETAIL -- 5.50%
J.C. Penney Company, Inc. 336,100 5,663,285
................................................................
Sears, Roebuck & Company 242,300 8,150,972
- -----------------------------------------------------------------
13,814,257
- -----------------------------------------------------------------
OIL & GAS -- 5.10%
Sunoco, Inc. 166,244 6,274,049
................................................................
Teekay Shipping Corporation 152,700 6,550,830
- -----------------------------------------------------------------
12,824,879
- -----------------------------------------------------------------
REAL ESTATE -- 6.83%
AMB Property Corporation 100,200 2,822,634
................................................................
American Financial Reality Trust 414,400 6,178,704
................................................................
Friedman Billings Ramsey Group 30,300 406,020
................................................................
LNR Property Corporation 137,200 5,131,280
................................................................
Ventas, Inc. 172,900 2,619,434
- -----------------------------------------------------------------
17,158,072
- -----------------------------------------------------------------
SOFTWARE -- 4.74%
Activision, Inc. (A) 232,600 3,005,192
................................................................
Computer Associates International, Inc. 312,400 6,960,272
................................................................
<Caption>
COMMON SHARES
STOCKS -- 94.81% HELD VALUE
- -----------------------------------------------------------------
Compuware Corporation (A) 188,300 $ 1,086,491
................................................................
Parametric Technical Corporation (A) 286,200 872,910
- -----------------------------------------------------------------
11,924,865
- -----------------------------------------------------------------
SPECIALTY RETAIL -- 2.08%
Foot Locker, Inc. 394,100 5,221,825
- -----------------------------------------------------------------
TEXTILES, APPARELS & LUXURY GOODS -- 0.07%
Reebok International Limited 4,900 164,787
- -----------------------------------------------------------------
TOBACCO -- 0.95%
Loews Corporation -- Carolina Group 88,100 2,378,700
- -----------------------------------------------------------------
Total investments -- 94.81%
(cost -- $213,611,132) 238,294,601
................................................................
Time deposit* -- 2.17% 5,462,037
................................................................
Other assets less liabilities -- 3.02% 7,578,266
..................................................................
- -----------------------------------------------------------------
Net assets -- 100.00% $251,334,904
- -----------------------------------------------------------------
</Table>
(A) -- NON-INCOME PRODUCING SECURITY.
* -- TIME DEPOSIT BEARS INTEREST AT 0.61% AND MATURES ON 07/01/2003.
SEE NOTES TO THE FINANCIAL STATEMENTS
14
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2003
- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 96.12% HELD VALUE
- ---------------------------------------------------------------
AIRLINES -- 2.56%
Airtran Holdings Inc. (A) 637,800 $ 6,677,766
- ---------------------------------------------------------------
AUTO COMPONENTS -- 0.99%
Dana Corporation 224,000 2,589,440
- ---------------------------------------------------------------
BIOTECHNOLOGY -- 0.53%
Medarex, Inc. (A) 209,500 1,380,605
- ---------------------------------------------------------------
COMMERCIAL BANKS -- 1.49%
Berkshire Hills Bancorp, Inc. 67,268 1,910,411
..............................................................
Provident Financial Services 104,000 1,981,200
- ---------------------------------------------------------------
3,891,611
- ---------------------------------------------------------------
CHEMICALS -- 4.57%
Agrium Inc. 270,300 2,962,488
..............................................................
Celanese AG 95,440 2,290,560
..............................................................
FMC Corporation (A) 246,700 5,582,821
..............................................................
IMC Global, Inc. 165,000 1,107,150
- ---------------------------------------------------------------
11,943,019
- ---------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 13.63%
Allied Waste Industries, Inc. (A) 512,000 5,145,600
..............................................................
Bowne & Co., Inc. 436,300 5,684,989
..............................................................
John H. Harland Company 212,600 5,561,616
..............................................................
Heidrick & Struggles
International, Inc. (A) 323,418 4,081,535
..............................................................
Kelly Services Inc. 120,000 2,814,000
..............................................................
Mac-Gray Corporation (A) 40,300 159,991
..............................................................
Spherion Corporation (A) 486,300 3,379,785
..............................................................
Valassis Communications, Inc. (A) 341,200 8,775,664
- ---------------------------------------------------------------
35,603,180
- ---------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 1.02%
Gateway, Inc. (A) 731,900 2,671,435
- ---------------------------------------------------------------
ELECTRIC UTILTIIES -- 4.41%
Alliant Energy Corporation 112,200 2,135,166
..............................................................
Northeast Utilities 560,900 9,389,466
- ---------------------------------------------------------------
11,524,632
- ---------------------------------------------------------------
<Caption>
COMMON SHARES
STOCKS -- 96.12% HELD VALUE
- ---------------------------------------------------------------
FOOD & STAPLES RETAILING -- 2.02%
Pathmark Stores Inc. (A) 370,400 $ 2,833,560
..............................................................
Topps Inc. 284,600 2,444,714
- ---------------------------------------------------------------
5,278,274
- ---------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 4.91%
Bausch & Lomb, Inc. 94,700 3,551,250
..............................................................
Rotech Healthcare Inc. (A) 328,700 7,198,530
..............................................................
Thoratec Corporation (A) 138,852 2,068,895
- ---------------------------------------------------------------
12,818,675
- ---------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES -- 1.81%
Lifepoint Hospitals (A) 135,800 2,843,652
..............................................................
US Oncology, Inc. (A) 255,255 1,886,334
- ---------------------------------------------------------------
4,729,986
- ---------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 8.83%
Isle of Capri Casinos, Inc. (A) 232,200 3,838,266
..............................................................
Jack in the Box, Inc. (A) 62,500 1,393,750
..............................................................
La Quinta Properties Inc. (A) 326,900 1,408,939
..............................................................
Lone Star Steakhouse & Saloon, Inc. 300,097 6,533,112
..............................................................
Magna Entertainment Corporation (A) 112,300 561,500
..............................................................
Mandalay Resort Group 293,000 9,332,050
- ---------------------------------------------------------------
23,067,617
- ---------------------------------------------------------------
HOUSEHOLD DURABLES -- 11.47%
Beazer Homes USA, Inc. (A) 123,800 10,337,300
..............................................................
Brookfield Homes Corporation 379,000 5,844,180
..............................................................
Furniture Brands
International, Inc. (A) 129,600 3,382,560
..............................................................
M.D.C. Holdings, Inc. 13,750 663,850
..............................................................
Toll Brothers, Inc. (A) 343,600 9,727,316
- ---------------------------------------------------------------
29,955,206
- ---------------------------------------------------------------
INSURANCE -- 4.64%
Allmerica Financial Corporation 674,300 12,130,657
- ---------------------------------------------------------------
MACHINERY -- 2.57%
Joy Global, Inc. (A) 453,800 6,702,626
- ---------------------------------------------------------------
METALS & MINING -- 0.44%
Steel Dynamics, Inc. (A) 83,600 1,145,320
- ---------------------------------------------------------------
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
15
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2003
- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 96.12% HELD VALUE
- ---------------------------------------------------------------
OIL & GAS -- 1.98%
General Maritime Corporation (A) 265,900 $ 2,698,885
..............................................................
Teekay Shipping Corporation 57,800 2,479,620
- ---------------------------------------------------------------
5,178,505
- ---------------------------------------------------------------
REAL ESTATE -- 13.40%
AMB Property Corporation 137,700 3,879,009
..............................................................
American Financial Realty Trust 92,800 1,383,648
..............................................................
American Financial Realty Trust 144A (R) 488,000 7,276,080
..............................................................
Arden Realty Group, Inc. 99,200 2,574,240
..............................................................
First Industrial Realty Trust 130,300 4,117,480
..............................................................
Friedman Billings Ramsey Group 281,120 3,767,008
..............................................................
LNR Property Corporation 229,300 8,575,820
..............................................................
Ventas, Inc. 184,300 2,792,145
..............................................................
Winston Hotels, Inc. 77,900 636,443
- ---------------------------------------------------------------
35,001,873
- ---------------------------------------------------------------
ROAD & RAIL -- 1.58%
USF Corporation 152,700 4,118,319
- ---------------------------------------------------------------
SOFTWARE -- 4.81%
Activision, Inc. (A) 444,750 5,746,170
..............................................................
Compuware Corporation (A) 793,700 4,579,649
..............................................................
Parametric Technology Corporation (A) 733,900 2,238,395
- ---------------------------------------------------------------
12,564,214
- ---------------------------------------------------------------
SPECIALTY RETAIL -- 4.82%
Foot Locker, Inc. 233,600 3,095,200
..............................................................
Genesco, Inc. (A) 219,900 3,892,230
..............................................................
Group 1 Automotive Inc. (A) 78,300 2,537,703
..............................................................
Stage Stores, Inc. (A) 100,000 2,350,000
..............................................................
United Auto Group Inc. (A) 32,400 705,672
- ---------------------------------------------------------------
12,580,805
- ---------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE -- 3.66%
Evertrust Financial Group, Inc. 25,600 588,544
..............................................................
Klamath First Bancorp Inc. 135,300 2,275,746
..............................................................
<Caption>
COMMON SHARES
STOCKS -- 96.12% HELD VALUE
- ---------------------------------------------------------------
Tierone Corporation (A) 235,700 $ 4,589,079
..............................................................
Timberland Bancorp 92,800 2,104,704
- ---------------------------------------------------------------
9,558,073
- ---------------------------------------------------------------
Total investments -- 96.12%
(cost -- $219,063,321) 251,111,838
..............................................................
Time deposit* -- 2.78% 7,269,582
..............................................................
Other assets less liabilities -- 1.10% 2,871,824
................................................................
- ---------------------------------------------------------------
Net assets -- 100.00% $261,253,244
- ---------------------------------------------------------------
</Table>
(A) -- NON-INCOME PRODUCING SECURITY.
(R) -- RESTRICTED SECURITY. PURCHASED IN A PRIVATE PLACEMENT TRANSACTION; RESALE
TO THE PUBLIC MAY REQUIRE REGISTRATION OR BE LIMITED TO QUALIFED INSTITUTIONAL
BUYERS.
* -- TIME DEPOSIT BEARS INTEREST AT 0.61% AND MATURES ON 07/01/2003.
SEE NOTES TO THE FINANCIAL STATEMENTS
16
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2003
- --------------------------------------------------------------------------------
ALL CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 97.17% HELD VALUE
- ------------------------------------------------------------
CHEMICALS -- 0.83%
FMC Corporation (A) 1,300 $ 29,419
- ------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 4.79%
Cendant Corporation (A) 2,600 47,632
...........................................................
Waste Management, Inc. 5,100 122,859
- ------------------------------------------------------------
170,491
- ------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 1.16%
Gateway, Inc. (A) 11,300 41,245
- ------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 8.32%
CIT Group Inc. 3,900 96,135
...........................................................
Principal Financial Group 6,200 199,950
- ------------------------------------------------------------
296,085
- ------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES -- 2.06%
Tenet Healthcare (A) 6,300 73,395
- ------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 4.94%
Mandalay Resort Group 3,200 101,920
...........................................................
Yum! Brands Inc. (A) 2,500 73,900
- ------------------------------------------------------------
175,820
- ------------------------------------------------------------
HOUSEHOLD DURABLES -- 4.06%
Toll Brothers, Inc. (A) 5,100 144,381
- ------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 1.07%
Tyco International Limited 2,000 37,960
- ------------------------------------------------------------
INSURANCE -- 24.39%
Allmerica Financial Corporation 28,200 507,318
...........................................................
Metlife Inc. 6,100 172,752
...........................................................
Prudential Financial 3,100 104,315
...........................................................
The St. Paul Companies, Inc. 2,300 83,973
- ------------------------------------------------------------
868,358
- ------------------------------------------------------------
IT SERVICES -- 6.57%
Electronic Data Systems Corporation 10,900 233,805
- ------------------------------------------------------------
MACHINERY -- 2.24%
Miller Industries Inc. / Tennessee (A) 23,400 79,794
- ------------------------------------------------------------
METALS & MINING -- 0.93%
Alcoa Inc. 1,300 33,150
- ------------------------------------------------------------
<Caption>
COMMON SHARES
STOCKS -- 97.17% HELD VALUE
- ------------------------------------------------------------
MULTILINE RETAIL -- 18.34%
J.C. Penney Company, Inc. 10,800 $ 181,980
...........................................................
Sears Roebuck & Company 14,000 470,960
- ------------------------------------------------------------
652,940
- ------------------------------------------------------------
REAL ESTATE -- 6.78%
American Financial Realty Trust 9,700 144,627
...........................................................
American Financial Realty Trust 144A (R) 2,000 29,820
...........................................................
Friedman Billings Ramsey Group 5,000 67,000
- ------------------------------------------------------------
241,447
- ------------------------------------------------------------
SOFTWARE -- 7.76%
Computer Associates International, Inc. 12,400 276,272
- ------------------------------------------------------------
TOBACCO -- 2.94%
Altria Group Inc. 2,300 104,512
- ------------------------------------------------------------
Total investments -- 97.17%
(cost -- $3,180,569) 3,459,074
...........................................................
Time deposit* -- 0.41% 14,440
...........................................................
Other assets less liabilities -- 2.42% 86,253
.............................................................
- ------------------------------------------------------------
Net assets -- 100.00% $3,559,767
- ------------------------------------------------------------
</Table>
(A) -- NON-INCOME PRODUCING SECURITY.
(R) -- RESTRICTED SECURITY. PURCHASED IN A PRIVATE PLACEMENT TRANSACTION; RESALE
TO THE PUBLIC MAY REQUIRE REGISTRATION OR BE LIMITED TO QUALIFED INSTITUTIONAL
BUYERS.
* -- TIME DEPOSIT BEARS INTEREST AT 0.61% AND MATURES ON 07/01/2003.
SEE NOTES TO THE FINANCIAL STATEMENTS
17
<Page>
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
JUNE 30, 2003
<Table>
<Caption>
LARGE CAP VALUE MID-CAP VALUE SMALL CAP VALUE ALL CAP VALUE
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------
ASSETS:
Investments, at value*...... $70,039,102 $238,294,601 $251,111,838 $3,459,074
Time deposit................ 3,567,450 5,462,037 7,269,582 14,440
Dividends and interest
receivable................ 216,183 383,541 463,788 5,360
Receivable for investments
sold...................... 400,045 1,015,239 1,863,791 62,776
Receivable for Fund shares
sold...................... 2,310,178 7,704,137 2,931,880 100,000
----------- ------------ ------------ ----------
Total assets............ $76,532,958 $252,859,555 $263,640,879 $3,641,650
----------- ------------ ------------ ----------
LIABILITIES:
Payable for investments
purchased................. $ 666,100 $ 970,534 $ 2,018,589 $ 69,529
Payable for Fund shares
repurchased............... 92,543 468,105 266,232 --
Accrued expenses and other
liabilities............... 39,385 86,012 102,814 12,354
----------- ------------ ------------ ----------
Total liabilities....... 798,028 1,524,651 2,387,635 81,883
----------- ------------ ------------ ----------
Net assets.............. $75,734,930 $251,334,904 $261,253,244 $3,559,767
=========== ============ ============ ==========
NET ASSETS CONSIST OF:
Paid in capital............. $65,494,382 $226,238,487 $229,993,087 $3,263,036
Undistributed net investment
income.................... 331,538 691,015 113,238 3,113
Undistributed net realized
gains (losses) on
securities................ (871,709) (278,067) (901,598) 15,113
Net unrealized appreciation
of securities............. 10,780,719 24,683,469 32,048,517 278,505
----------- ------------ ------------ ----------
Net assets.............. $75,734,930 $251,334,904 $261,253,244 $3,559,767
=========== ============ ============ ==========
CALCULATION OF NET ASSET VALUE
PER SHARE -- CLASS A
Net assets.................. $28,704,043 $ 60,159,446 $111,207,700 $ 13
Shares outstanding
(unlimited shares of
$0.001 par value
authorized)............... 1,882,618 3,416,947 3,194,261 1
Net asset value per share... $ 15.25 $ 17.61 $ 34.81 $ 12.62
=========== ============ ============ ==========
PUBLIC OFFERING PRICE PER
SHARE -- CLASS A
($15.25 divided by .9475,
$17.61 divided by .9475,
$34.81 divided by .9475,
$12.62 divided by .9475).. $ 16.09 $ 18.58 $ 36.74 $ 13.32
=========== ============ ============ ==========
CALCULATION OF NET ASSET VALUE
PER SHARE AND PUBLIC
OFFERING PRICE PER SHARE --
CLASS B
Net assets.................. $ 545,696 $ 13,562,104 $ 4,689,257
Shares outstanding
(unlimited shares of
$0.001 par value
authorized)............... 36,055 781,300 137,517
Net asset value per share... $ 15.14 $ 17.36 $ 34.10
=========== ============ ============
CALCULATION OF NET ASSET VALUE
PER SHARE AND PUBLIC
OFFERING PRICE PER SHARE --
CLASS C
Net assets.................. $ 2,408,300 $ 15,209,368 $ 8,676,271
Shares outstanding
(unlimited shares of
$0.001 par value
authorized)............... 158,991 875,203 254,209
Net asset value per share... $ 15.15 $ 17.38 $ 34.13
=========== ============ ============
CALCULATION OF NET ASSET VALUE
PER SHARE AND PUBLIC
OFFERING PRICE PER SHARE --
CLASS I
Net assets.................. $44,076,891 $162,403,986 $136,680,016 $3,559,754
Shares outstanding
(unlimited shares of
$0.001 par value
authorized)............... 2,887,936 9,205,077 3,956,553 283,080
Net asset value per share... $ 15.26 $ 17.64 $ 34.55 $ 12.58
=========== ============ ============ ==========
*Cost of Investments.......... $59,258,383 $213,611,132 $219,063,321 $3,180,569
=========== ============ ============ ==========
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
18
<Page>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 2003
<Table>
<Caption>
LARGE CAP VALUE MID-CAP VALUE SMALL CAP VALUE ALL CAP VALUE
FUND FUND FUND FUND+
- ----------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Income*
Dividends................. $1,241,138 $ 2,850,349 $ 2,270,049 $ 10,290
Interest.................. 15,825 32,493 62,398 146
Other..................... 907 -- 60,979 --
---------- ----------- ----------- --------
Total Income.......... 1,257,870 2,882,842 2,393,426 10,436
---------- ----------- ----------- --------
EXPENSES:
Advisory fees............... 397,860 1,064,516 1,134,911 4,906
Professional fees and
expenses.................. 31,748 56,966 58,041 221
Custodian fees and
expenses.................. 9,455 16,046 14,152 1,612
Transfer agent fees and
expenses.................. 91,555 271,878 348,373 7,992
Accounting fees and
expenses.................. 58,815 68,138 69,301 21,267
Administration fees......... 50,764 135,619 144,610 619
Trustees' fees and
expenses.................. 6,839 16,958 18,669 33
Reports to shareholders..... 12,812 31,556 33,511 295
Registration fees........... 40,385 50,189 51,462 --
Distribution and service
fees -- Class A........... 36,333 78,811 118,755 --
Distribution and service
fees -- Class B........... 3,488 105,974 17,956 --
Distribution and service
fees -- Class C........... 13,761 96,823 50,007 --
Other expenses.............. 9,318 23,096 24,222 1,792
---------- ----------- ----------- --------
Total expenses.......... 763,133 2,016,570 2,083,970 38,737
Less, expense waiver........ (153,790) (104,786) (42,281) (31,414)
---------- ----------- ----------- --------
Net expenses............ 609,343 1,911,784 2,041,689 7,323
---------- ----------- ----------- --------
Net investment income....... 648,527 971,058 351,737 3,113
---------- ----------- ----------- --------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gains
(losses) on
securities.............. 62,972 (290,749) 3,442,200 15,113
Net change in unrealized
appreciation/
depreciation of
securities.............. 4,583,327 22,562,435 25,466,956 278,505
---------- ----------- ----------- --------
Net gains on investments.... 4,646,299 22,271,686 28,909,156 293,618
---------- ----------- ----------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS... $5,294,826 $23,242,744 $29,260,893 $296,731
========== =========== =========== ========
* Net of Foreign Taxes
Withheld.................... $ 230 $ 26,518 $ 11,231 $ --
========== =========== =========== ========
+ Period 12/31/02 (inception)
to 6/30/03.
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
19
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
LARGE CAP VALUE FUND
----------------------------------
YEAR ENDED YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
- -------------------------------------------------------------
OPERATIONS:
Net investment
income.............. $ 648,527 $ 544,975
Net realized gains
(losses) on
securities.......... 62,972 3,911,263
Net change in
unrealized
appreciation/depreciation
of securities....... 4,583,327 (6,044,163)
----------- -----------
Net increase
(decrease) in net
assets resulting
from
operations....... 5,294,826 (1,587,925)
----------- -----------
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS:
Investment income --
net:
Class I............ (402,376) (355,687)
Class A............ (104,103) (0)**
Class B............ (1,610) --
Class C............ (5,830) --
Realized gain on
investments -- net:
Class I............ (2,763,994) (1,195,946)
Class A............ (593,175) (1)
Class B............ (16,162) --
Class C............ (82,303) --
----------- -----------
Net decrease in
net assets
resulting from
dividends and
distributions to
shareholders..... (3,969,553) (1,551,634)
----------- -----------
CAPITAL SHARE
TRANSACTIONS:
Net increase in net
assets derived from
capital share
transactions........ 27,364,247 2,913,733
NET ASSETS:
Total increase
(decrease) in net
assets.............. 28,689,520 (225,826)
Beginning of year.... 47,045,410 47,271,236
----------- -----------
End of year*......... $75,734,930 $47,045,410
=========== ===========
* Undistributed
investment income --
net.................... $ 331,538 $ 217,559
=========== ===========
** Amount is less than
$1.
+ Commencement of
operations.
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
20
<Page>
<Table>
<Caption>
ALL CAP VALUE FUND
MID-CAP VALUE FUND SMALL CAP VALUE FUND ------------------------
---------------------------------- ---------------------------------- PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2002+
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002 THROUGH JUNE 30, 2003
- ---------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment
income.............. $ 971,058 $ 426,143 $ 351,737 $ 333,848 $ 3,113
Net realized gains
(losses) on
securities.......... (290,749) 2,895,352 3,442,200 7,056,211 15,113
Net change in
unrealized
appreciation/depreciation
of securities....... 22,562,435 (1,752,215) 25,466,956 4,425,758 278,505
------------ ------------ ------------ ------------ ----------
Net increase
(decrease) in net
assets resulting
from
operations....... 23,242,744 1,569,280 29,260,893 11,815,817 296,731
------------ ------------ ------------ ------------ ----------
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS:
Investment income --
net:
Class I............ (282,763) (319,841) (166,924) (443,626) --
Class A............ (61,148) (31,783) (76,338) (980) --
Class B............ -- (37,628) (1,797) -- --
Class C............ -- (18,096) (2,813) -- --
Realized gain on
investments -- net:
Class I............ (1,750,822) (1,619,277) -- -- --
Class A............ (595,947) (188,750) -- -- --
Class B............ (224,549) (395,841) -- -- --
Class C............ (207,278) (204,821) -- -- --
------------ ------------ ------------ ------------ ----------
Net decrease in
net assets
resulting from
dividends and
distributions to
shareholders..... (3,122,507) (2,816,037) (247,872) (444,606) --
------------ ------------ ------------ ------------ ----------
CAPITAL SHARE
TRANSACTIONS:
Net increase in net
assets derived from
capital share
transactions........ 128,236,404 66,858,053 116,899,975 55,169,956 3,263,036
NET ASSETS:
Total increase
(decrease) in net
assets.............. 148,356,641 65,611,296 145,912,996 66,541,167 3,559,767
Beginning of year.... 102,978,263 37,366,967 115,340,248 48,799,081 --
------------ ------------ ------------ ------------ ----------
End of year*......... $251,334,904 $102,978,263 $261,253,244 $115,340,248 $3,559,767
============ ============ ============ ============ ==========
* Undistributed
investment income --
net.................... $ 691,015 $ 187,045 $ 113,238 $ 247,914 $ 3,113
============ ============ ============ ============ ==========
** Amount is less than
$1.
+ Commencement of
operations.
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
21
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<Table>
INCOME FROM INVESTMENT
OPERATIONS
--------------------------------
NET GAINS
(LOSSES) DIVIDENDS AND DISTRIBUTIONS
NET ON -------------------------------- NET
ASSET SECURITIES DIVIDENDS ASSET
VALUE, (BOTH TOTAL (FROM DISTRIBUTIONS VALUE,
BEGINNING NET REALIZED FROM NET (FROM END
LARGE CAP OF INVESTMENT AND INVESTMENT INVESTMENT CAPITAL TOTAL OF TOTAL
VALUE FUND PERIOD INCOME UNREALIZED) OPERATIONS INCOME) GAINS) DISTRIBUTIONS PERIOD RETURN(2)
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I
Year ended
6/30/2003 $15.99 $ 0.17 $ 0.36 $ 0.53 $(0.16) $(1.10) $(1.26) $15.26 4.95%
6/30/2002 16.82 0.22 (0.32) (0.10) (0.15) (0.58) (0.73) 15.99 (0.38)
6/30/2001 13.02 0.31 3.80 4.11 (0.31) -- (0.31) 16.82 31.90
6/30/2000 19.96 0.39 (4.14) (3.75) (0.39) (2.80) (3.19) 13.02 (19.82)
6/30/1999 22.02 0.41 0.82 1.23 (0.41) (2.88) (3.29) 19.96 7.32
CLASS A
Year ended
6/30/2003 15.98 0.16 0.35 0.51 (0.14) (1.10) (1.24) 15.25 4.79
Period from
10/26/2001(1) to
6/30/2002 15.57 0.13 0.87 1.00 (0.09) (0.50) (0.59) 15.98 6.51
CLASS B
Year ended
6/30/2003 15.93 0.04 0.36 0.40 (0.09) (1.10) (1.19) 15.14 4.05
Period from
2/4/2002(1) to
6/30/2002 15.60 0.02 0.31 0.33 -- -- -- 15.93 2.12
CLASS C
Year ended
6/30/2003 15.92 (0.16) 0.56 0.40 (0.07) (1.10) (1.17) 15.15 4.05
Period from
2/4/2002(1) to
6/30/2002 15.60 0.03 0.29 0.32 -- -- -- 15.92 2.05
NET RATIOS TO AVERAGE NET ASSETS
ASSETS, ---------------------------------
END OF INVESTMENT
PERIOD EXPENSES, INCOME
LARGE CAP (IN NET OF --
VALUE FUND THOUSANDS) REIMBURSEMENT EXPENSES NET
--------------------------------------------
- ---------------------
CLASS I
Year ended
6/30/2003 $ 44,077 1.05% 1.34% 1.32%
6/30/2002 39,215 1.00 1.50 1.30
6/30/2001 47,271 0.95 1.20 1.96
6/30/2000 79,313 0.95 1.02 2.37
6/30/1999 148,734 0.91 0.91 2.09
CLASS A
Year ended
6/30/2003 28,704 1.30 1.59 1.07
Period from
10/26/2001(1) to
6/30/2002 6,546 1.25(3) 1.75(3) 1.05(3)
CLASS B
Year ended
6/30/2003 546 2.05 2.34 0.32
Period from
2/4/2002(1) to
6/30/2002 193 2.00(3) 2.50(3) 0.30(3)
CLASS C
Year ended
6/30/2003 2,408 2.05 2.34 0.32
Period from
2/4/2002(1) to
6/30/2002 1,092 2.00(3) 2.50(3) 0.30(3)
</Table>
<Table>
<Caption>
YEAR ENDED JUNE 30,
--------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 35% 96% 26%
<Caption>
YEAR ENDED JUNE 30,
--------------------------------
2000 1999
--------------------------------
- -----------------------------------
PORTFOLIO TURNOVER RATE 41% 18%
</Table>
(1) COMMENCEMENT OF OPERATIONS.
(2) TOTAL RETURNS EXCLUDE THE EFFECTS OF SALES CHARGES. THE FUND'S INVESTMENT
ADVISOR WAIVED A PORTION OF ITS ADVISORY FEE AND REIMBURSED A PORTION OF THE
FUND'S EXPENSES. WITHOUT SUCH WAIVER AND REIMBURSEMENT, THE FUND'S
PERFORMANCE WOULD HAVE BEEN LOWER.
(3) ANNUALIZED.
SEE NOTES TO THE FINANCIAL STATEMENTS
22
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<Table>
INCOME FROM INVESTMENT
OPERATIONS
--------------------------------
NET GAINS DIVIDENDS AND DISTRIBUTIONS
NET ON -------------------------------- NET
ASSET SECURITIES DIVIDENDS ASSET
VALUE, (BOTH TOTAL (FROM DISTRIBUTIONS VALUE,
BEGINNING NET REALIZED FROM NET (FROM END
MID-CAP OF INVESTMENT AND INVESTMENT INVESTMENT CAPITAL TOTAL OF TOTAL
VALUE FUND PERIOD INCOME UNREALIZED) OPERATIONS INCOME) GAINS) DISTRIBUTIONS PERIOD RETURN(2)
- ----------------------------------------------------------------------------------------------------------------------------
CLASS I
Year ended
6/30/2003 $17.01 $ 0.09 $0.93 $1.02 $(0.05) $(0.34) $(0.39) $17.64 6.46%
6/30/2002 17.14 0.11 0.68 0.79 (0.15) (0.77) (0.92) 17.01 4.77
6/30/2001 12.75 0.18 4.84 5.02 (0.27) (0.36) (0.63) 17.14 40.36
6/30/2000 12.03 0.18 0.97 1.15 (0.14) (0.29) (0.43) 12.75 10.41
6/30/1999 12.92 0.16 0.46 0.62 -- (1.51) (1.51) 12.03 7.66
CLASS A
Year ended
6/30/2003 16.99 0.05 0.94 0.99 (0.03) (0.34) (0.37) 17.61 6.26
6/30/2002 17.12 0.11 0.66 0.77 (0.13) (0.77) (0.90) 16.99 4.64
Period from
1/2/2001(1)
to 6/30/2001 15.02 0.04 2.06 2.10 -- -- -- 17.12 13.98
CLASS B
Year ended
6/30/2003 16.85 (0.02) 0.87 0.85 -- (0.34) (0.34) 17.36 5.41
6/30/2002 17.06 -- 0.63 0.63 (0.07) (0.77) (0.84) 16.85 3.82
Period from
1/2/2001(1)
to 6/30/2001 15.02 0.01 2.03 2.04 -- -- -- 17.06 13.58
CLASS C
Year ended
6/30/2003 16.87 (0.01) 0.86 0.85 -- (0.34) (0.34) 17.38 5.40
6/30/2002 17.07 0.02 0.62 0.64 (0.07) (0.77) (0.84) 16.87 3.85
Period from
1/2/2001(1)
to 6/30/2001 15.02 --(4) 2.05 2.05 -- -- -- 17.07 13.65
NET RATIOS TO AVERAGE NET ASSETS
ASSETS, ---------------------------------
END OF INVESTMENT
PERIOD EXPENSES, INCOME
MID-CAP (IN NET OF --
VALUE FUND THOUSANDS) REIMBURSEMENT EXPENSES NET
--------------------------------------------
- ----------------------
CLASS I
Year ended
6/30/2003 $162,404 1.15% 1.22% 0.88%
6/30/2002 63,741 1.15 1.40 0.94
6/30/2001 30,198 1.15 1.57 1.91
6/30/2000 10,260 1.15 1.92 2.12
6/30/1999 687 1.05 2.02 1.43
CLASS A
Year ended
6/30/2003 60,159 1.40 1.47 0.63
6/30/2002 18,790 1.40 1.65 0.69
Period from
1/2/2001(1)
to 6/30/2001 844 1.40(3) 2.22(3) 1.02(3)
CLASS B
Year ended
6/30/2003 13,562 2.15 2.22 (0.12)
6/30/2002 11,363 2.15 2.40 (0.07)
Period from
1/2/2001(1)
to 6/30/2001 3,925 2.15(3) 2.96(3) 0.23(3)
CLASS C
Year ended
6/30/2003 15,209 2.15 2.22 (0.12)
6/30/2002 9,084 2.15 2.40 (0.07)
Period from
1/2/2001(1)
to 6/30/2001 2,400 2.14(3) 2.96(3) 0.18(3)
</Table>
<Table>
<Caption>
YEAR ENDED JUNE 30,
--------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 56% 82% 138%
<Caption>
YEAR ENDED JUNE 30,
--------------------------------
2000 1999
--------------------------------
- -----------------------------------------------
PORTFOLIO TURNOVER RATE 179% 113%
</Table>
(1) COMMENCEMENT OF OPERATIONS.
(2) TOTAL RETURNS EXCLUDE THE EFFECTS OF SALES CHARGES. THE FUND'S INVESTMENT
ADVISOR WAIVED A PORTION OF ITS ADVISORY FEE AND REIMBURSED A PORTION OF THE
FUND'S EXPENSES. WITHOUT SUCH WAIVER AND REIMBURSEMENT, THE FUND'S
PERFORMANCE WOULD HAVE BEEN LOWER.
(3) ANNUALIZED.
(4) AMOUNT IS LESS THAN $0.01 PER SHARE.
SEE NOTES TO THE FINANCIAL STATEMENTS
23
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<Table>
INCOME FROM INVESTMENT
OPERATIONS
--------------------------------
NET GAINS
(LOSSES) DIVIDENDS AND DISTRIBUTIONS
NET ON -------------------------------- NET
ASSET SECURITIES DIVIDENDS ASSET
VALUE, (BOTH TOTAL (FROM DISTRIBUTIONS VALUE,
BEGINNING NET REALIZED FROM NET (FROM END
SMALL CAP OF INVESTMENT AND INVESTMENT INVESTMENT CAPITAL TOTAL OF TOTAL
VALUE FUND PERIOD INCOME UNREALIZED) OPERATIONS INCOME) GAINS) DISTRIBUTIONS PERIOD RETURN(2)
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I
Year ended
6/30/2003 $31.83 $ 0.08 $ 2.69 $ 2.77 $(0.05) $ -- $(0.05) $34.55 8.72%
6/30/2002 26.63 0.07 5.33 5.40 (0.20) -- (0.20) 31.83 20.45
6/30/2001 17.11 0.25 9.28 9.53 (0.01) -- (0.01) 26.63 55.69
6/30/2000 21.02 0.02 (3.93) (3.91) -- -- -- 17.11 (18.60)
6/30/1999 26.48 (0.05) (3.88) (3.93) -- (1.53) (1.53) 21.02 (14.26)
CLASS A
Year ended
6/30/2003 32.12 (0.11) 2.85 2.74 (0.05) -- (0.05) 34.81 8.57
6/30/2002 26.86 0.20 5.26 5.46 (0.20) -- (0.20) 32.12 20.47
Period from
10/6/2000(1) to
6/30/2001 19.64 0.16 7.07 7.23 (0.01) -- (0.01) 26.86 38.28
CLASS B
Year ended
6/30/2003 31.71 (0.13) 2.55 2.42 (0.03) -- (0.03) 34.10 7.63
Period from
2/4/2002(1) to
6/30/2002 28.84 (0.03) 2.90 2.87 -- -- -- 31.71 9.99
CLASS C
Year ended
6/30/2003 31.71 (0.14) 2.58 2.44 (0.02) -- (0.02) 34.13 7.66
Period from
2/4/2002(1) to
6/30/2002 28.84 (0.04) 2.91 2.87 -- -- -- 31.71 9.99
NET RATIOS TO AVERAGE NET ASSETS
ASSETS, ---------------------------------
END OF INVESTMENT
PERIOD EXPENSES, INCOME
SMALL CAP (IN NET OF --
VALUE FUND THOUSANDS) REIMBURSEMENT EXPENSES NET
--------------------------------------------
- ---------------------
CLASS I
Year ended
6/30/2003 $136,680 1.22% 1.25% 0.36%
6/30/2002 97,458 1.24 1.32 0.49
6/30/2001 48,773 1.24 1.32 1.16
6/30/2000 32,233 1.32 1.32 0.11
6/30/1999 53,377 1.05 1.19 (0.26)
CLASS A
Year ended
6/30/2003 111,208 1.47 1.50 0.11
6/30/2002 13,660 1.49 1.57 0.24
Period from
10/6/2000(1) to
6/30/2001 26 1.50(3) 1.62(3) 1.42(3)
CLASS B
Year ended
6/30/2003 4,689 2.22 2.25 (0.64)
Period from
2/4/2002(1) to
6/30/2002 738 2.24(3) 2.32(3) (0.51)(3)
CLASS C
Year ended
6/30/2003 8,676 2.22 2.25 (0.64)
Period from
2/4/2002(1) to
6/30/2002 3,484 2.24(3) 2.32(3) (0.51)(3)
</Table>
<Table>
<Caption>
YEAR ENDED JUNE 30,
--------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 54% 75% 197%
<Caption>
YEAR ENDED JUNE 30,
--------------------------------
2000 1999
--------------------------------
- --------------------------------------------------
PORTFOLIO TURNOVER RATE 97% 105%
</Table>
(1) COMMENCEMENT OF OPERATIONS.
(2) TOTAL RETURNS EXCLUDE THE EFFECTS OF SALES CHARGES. THE FUND'S INVESTMENT
ADVISOR WAIVED A PORTION OF ITS ADVISORY FEE AND REIMBURSED A PORTION OF THE
FUND'S EXPENSES. WITHOUT SUCH WAIVER AND REIMBURSEMENT, THE FUND'S
PERFORMANCE WOULD HAVE BEEN LOWER.
(3) ANNUALIZED.
SEE NOTES TO THE FINANCIAL STATEMENTS
24
<Page>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<Table>
INCOME FROM INVESTMENT
OPERATIONS
--------------------------------
NET GAINS DIVIDENDS AND DISTRIBUTIONS
NET ON -------------------------------- NET
ASSET SECURITIES DIVIDENDS ASSET
VALUE, (BOTH TOTAL (FROM DISTRIBUTIONS VALUE,
BEGINNING NET REALIZED FROM NET (FROM END
ALL CAP OF INVESTMENT AND INVESTMENT INVESTMENT CAPITAL TOTAL OF TOTAL
VALUE FUND PERIOD INCOME UNREALIZED) OPERATIONS INCOME) GAINS) DISTRIBUTIONS PERIOD RETURN(2)
- -----------------------------------------------------------------------------------------------------------------------------
CLASS I
Period from
12/31/02(1)
to 6/30/03 $10.00 $0.01 $2.57 $2.58 $ -- $ -- $ -- $12.58 25.80%
CLASS A
Period from
12/31/02(1)
to 6/30/03 10.00 0.03 2.59 2.62 -- -- -- $12.62 26.20%
NET RATIOS TO AVERAGE NET ASSETS
ASSETS, ---------------------------------
END OF INVESTMENT
PERIOD EXPENSES, INCOME
ALL CAP (IN NET OF --
VALUE FUND THOUSANDS) REIMBURSEMENT EXPENSES NET
--------------------------------------------
- -----------------------
CLASS I
Period from
12/31/02(1)
to 6/30/03 $3,560 1.10%(3) 5.84%(3) 0.47%(3)
CLASS A
Period from
12/31/02(1)
to 6/30/03 $ -- 1.10%(3) 5.84%(3) 0.47%(3)
</Table>
<Table>
<Caption>
PERIOD DECEMBER 31, 2002(1)
THROUGH JUNE 30, 2003
- --------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 11%
</Table>
(1) COMMENCEMENT OF OPERATIONS.
(2) TOTAL RETURNS EXCLUDE THE EFFECTS OF SALES CHARGES. THE FUND'S INVESTMENT
ADVISOR WAIVED ITS ADVISORY FEE AND REIMBURSED A PORTION OF THE FUND'S
EXPENSES. WITHOUT SUCH WAIVER AND REIMBURSEMENT, THE FUND'S PERFORMANCE
WOULD HAVE BEEN LOWER.
(3) ANNUALIZED.
SEE NOTES TO THE FINANCIAL STATEMENTS
25
<Page>
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
JUNE 30, 2003
NOTE 1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES. Hotchkis and Wiley Funds (the
"Trust") is registered under the Investment Company Act of 1940 as an open-end,
management investment company. The Trust was organized as a Delaware statutory
trust on July 23, 2001 and consists of four series of shares. The Hotchkis and
Wiley Large Cap Value Fund, the Hotchkis and Wiley Mid-Cap Value Fund and the
Hotchkis and Wiley Small Cap Value Fund (collectively, the "H&W Funds") are
diversified series and the Hotchkis and Wiley All Cap Value Fund (together with
the H&W Funds hereafter are referred to as the "Funds") is a non-diversified
series of the Trust. The Trust was organized to acquire the assets and
liabilities of the Mercury HW Large Cap Value Fund, the Mercury HW Mid-Cap Value
Fund and the Mercury HW Small Cap Value Fund (the "Mercury HW Funds"). On
February 4, 2002, the Mercury HW Funds were reorganized into the Trust through a
non-taxable exchange. These financial statements include operating results,
changes in net assets and financial highlights of the Mercury HW Funds prior to
the reorganization.
All Funds currently have four classes of shares: Class A, Class B, Class C and
Class I. The All Cap Value Fund has issued only Class I and Class A shares.
Class A shares are sold with a front-end sales charge. A deferred sales charge
of 1% is assessed on certain redemptions of Class A shares. Class B and Class C
shares may be subject to a contingent deferred sales charge. All classes of
shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class A, Class B and Class C shares bear
certain expenses related to the distribution and servicing fees of such shares.
Each class has exclusive voting rights with respect to matters relating to its
distribution and servicing expenditures (except that Class B shares have certain
voting rights with respect to Class A distribution and servicing expenditures).
The Funds' financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, which may require
the use of management accruals and estimates. The following is a summary of
significant accounting policies followed by the Funds.
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 (or official closing price) on that day as of the
close of regular trading on the New York Stock Exchange (which is currently
4:00 p.m. New York time), or, in the absence of recorded sales, at the average
of readily available closing bid and asked prices on such exchange or NSM.
Unlisted equity 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
broker/ dealers or pricing services. Short-term investments which mature in less
than 60 days are valued at amortized cost, which approximates fair value.
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.
Securities and assets for which market value quotations are not available are
valued at their fair value as determined in good faith by or under the direction
of the Trust's Board of Trustees.
FEDERAL INCOME TAXES: It is each Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
each Fund intends to distribute substantially all of its investment company net
taxable income and net capital gains to shareholders. Therefore, no federal
income tax provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital gains at
various rates.
26
<Page>
INCOME AND EXPENSE ALLOCATION: Common expenses incurred by the Trust which are
not attributable to a specific Fund are allocated among the Funds based upon
relative net assets or evenly, 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).
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income are declared and paid semi-annually for the Large Cap Value Fund and
annually for the Mid-Cap Value Fund, Small Cap Value Fund and All Cap Value
Fund. Distributions of net realized capital gains, if any, will be declared and
paid at least annually.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: 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 AND TRANSACTIONS WITH AFFILIATES. The Trust has
entered into an Investment Advisory Agreement for each of the Funds with
Hotchkis and Wiley Capital Management, LLC (the "Advisor"), with which certain
officers and a Trustee of the Trust are affiliated. The Advisor is a limited
liability company, the primary members of which are HWCap Holdings, a limited
liability company whose members are employees of the Advisor, and Stephens
Group, Inc. and affiliates, which is a diversified holding company. The Advisor
is responsible for the management of the Funds' investments and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Funds. The Advisor receives a fee, computed daily and
payable monthly, at the annual rates presented below as applied to each Fund's
daily net assets. The Advisor has contractually agreed to pay all operating
expenses in excess of the annual rates presented below as applied to such Fund's
daily net assets through October 31, 2004. For the fiscal year ended June 30,
2003, the Advisor waived expenses as follows:
<Table>
<Caption>
LARGE CAP MID-CAP SMALL CAP ALL CAP
VALUE VALUE VALUE VALUE
- -----------------------------------------------------------------------------
Annual Advisory Rate.......... 0.75% 0.75% 0.75% 0.75%
Annual cap on expenses --
Class I..................... 1.05% 1.15% 1.25% 1.25%
Annual cap on expenses --
Class A..................... 1.30% 1.40% 1.50% 1.50%
Annual cap on expenses -- Not
Class B..................... 2.05% 2.15% 2.25% applicable
Annual cap on expenses -- Not
Class C..................... 2.05% 2.15% 2.25% applicable
Investment advisory fees
earned for the year......... $397,860 $1,064,516 $1,134,911 $ 4,906
Investment advisory fees
waived/expense reimbursed
for the year................ $153,790 $ 104,786 $ 42,281 $31,414
</Table>
The Trust has also entered into a Distribution Agreement and a Distribution Plan
with Stephens Inc. (the "Distributor" or "Stephens"), a wholly owned subsidiary
of Stephens Group, Inc. and an affiliate of the Advisor. Pursuant to the
Distribution Plan adopted by the Trust in accordance with Rule 12b-1 under the
Investment Company Act of
27
<Page>
1940, the Funds pay ongoing distribution and service fees. The fees are accrued
daily and paid monthly at the annual rates based upon the average daily net
assets of the shares as follows:
<Table>
<Caption>
DISTRIBUTION AND SERVICE
FEE
- ----------------------------------------------------------------------------
Class A........................................... 0.25%
Class B........................................... 1.00%
Class C........................................... 1.00%
</Table>
Pursuant to separate agreements with the Distributor, selected dealers also
provide distribution services to the Funds. The ongoing distribution and service
fee compensates the Distributor and selected dealers for providing distribution-
related shareholder services to Class A, Class B and Class C shareholders. Under
separate agreements with the Trust, Distributor or Advisor, other financial
intermediaries may be paid service fees by Class A shareholders.
For the fiscal year ended June 30, 2003, Stephens earned underwriting
concessions and dealer commissions on sales of the Funds' shares as follows:
<Table>
<Caption>
UNDERWRITING DEALER
CONCESSIONS COMMISSIONS
- -------------------------------------------------------------------
Large Cap Value Fund -- Class A......... $1,401 $16,212
Large Cap Value Fund -- Class B......... -- 880
Large Cap Value Fund -- Class C......... -- 1,209
Mid-Cap Value Fund -- Class A........... 6,348 49,640
Mid-Cap Value Fund -- Class B........... -- 13,146
Mid-Cap Value Fund -- Class C........... -- 7,022
Small Cap Value Fund -- Class A......... 7,166 4,967
Small Cap Value Fund -- Class B......... -- 4,478
Small Cap Value Fund -- Class C......... -- 1,295
All Cap Value Fund -- Class A........... -- --
</Table>
Certain authorized agents of the Funds charge a fee for shareholder accounting
services and administrative services that they provide to the Funds on behalf of
certain shareholders; the portion of this fee paid by the Funds is included
within transfer agent fees and expenses in the Statements of Operations.
The Trust entered into an Administration Agreement with Stephens.
As permitted under Rule 10f-3 of the Investment Company Act of 1940, the Board
of Trustees of the Trust has adopted procedures, which allow the Funds, under
certain conditions described in the Rule, to acquire newly issued securities
from a member of an underwriting group in which an affiliated underwriter
participates.
NOTE 3.
INVESTMENTS. Purchases and sales of investment securities, excluding short-term
investments, for the fiscal year ended June 30, 2003 were as follows:
<Table>
<Caption>
LARGE CAP VALUE MID-CAP VALUE SMALL CAP VALUE ALL CAP VALUE
- ----------------------------------------------------------------------------------------------
Purchases..................... $39,480,091 $199,096,138 $195,615,807 $3,327,671
Sales......................... 18,455,256 80,244,414 78,879,603 162,215
</Table>
28
<Page>
The following information is presented on an income tax basis as of June 30,
2003:
<Table>
<Caption>
LARGE CAP VALUE MID-CAP VALUE SMALL CAP VALUE ALL CAP VALUE
- ----------------------------------------------------------------------------------------------
Cost of investment............ $60,202,524 $214,972,538 $219,206,239 $3,180,569
- ----------------------------------------------------------------------------------------------
Gross unrealized
appreciation................ 11,676,236 31,623,523 38,231,698 328,167
Gross unrealized
depreciation................ (1,839,658) (8,301,460) (6,326,099) (49,662)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) on
investments................. 9,836,578 23,322,063 31,905,599 278,505
- ----------------------------------------------------------------------------------------------
Distributable ordinary
income...................... 351,178 1,679,621 113,238 18,226
Distributable long-term
gains....................... 183,903 551,858 8,233 --
</Table>
Any differences between book and tax are due primarily to wash sale losses and
REITs tax adjustments.
The tax components of dividends paid during the years ended June 30, 2003 and
2002, capital loss carryforwards as of June 30, 2003, and tax basis post-October
losses as of June 30, 2003, which are not recognized for tax purposes until the
first day of the following fiscal year are:
<Table>
<Caption>
JUNE 30, 2003 JUNE 30, 2002
-------------------------------------------------------- ----------------------------
ORDINARY LONG-TERM NET CAPITAL ORDINARY LONG-TERM
INCOME CAPITAL GAINS LOSS POST-OCTOBER INCOME CAPITAL GAINS
DISTRIBUTIONS DISTRIBUTIONS CARRYOVERS LOSSES DISTRIBUTIONS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------------------------
Large Cap Value.......... $ 717,539 $3,252,014 -- $131,112 $ 217,559 $2,993,820
Mid-Cap Value............ 1,815,502 1,307,005 -- 457,125 1,616,574 1,306,988
Small Cap Value.......... 247,914 -- -- 766,913 247,914 --
All Cap Value............ -- -- -- -- -- --
</Table>
NOTE 4.
CAPITAL SHARE TRANSACTIONS: Transactions in capital shares for each class were
as follows:
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
---------------------- ------------------------
DOLLAR DOLLAR
LARGE CAP VALUE FUND -- CLASS I SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------
Shares sold................... 958,573 $12,974,921 1,137,148 $ 18,589,523
Shares issued to shareholders
in reinvestment of dividends
and distributions........... 180,419 2,311,235 100,673 1,542,061
--------- ----------- ---------- ------------
Total issued.................. 1,138,992 15,286,156 1,237,821 20,131,584
Shares redeemed............... (704,392) (9,286,493) (1,594,752) (25,217,871)
--------- ----------- ---------- ------------
Net increase.................. 434,600 $ 5,999,663 (356,931) $ (5,086,287)
========= =========== ========== ============
</Table>
29
<Page>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 26, 2001* TO
JUNE 30, 2003 JUNE 30, 2002
---------------------- ---------------------
DOLLAR DOLLAR
LARGE CAP VALUE FUND -- CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold.................... 1,677,326 $22,529,194 435,985 $7,115,744
Shares issued to shareholders in
reinvestment of dividends and
distributions................ 46,565 602,583 -- --
--------- ----------- ------- ----------
Total issued................... 1,723,891 23,131,777 435,985 7,115,744
Shares redeemed................ (250,968) (3,345,649) (26,290) (429,705)
--------- ----------- ------- ----------
Net increase................... 1,472,923 $19,786,128 409,695 $6,686,039
========= =========== ======= ==========
</Table>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED FEBRUARY 4, 2002* TO
JUNE 30, 2003 JUNE 30, 2002
------------------- --------------------
DOLLAR DOLLAR
LARGE CAP VALUE FUND -- CLASS B SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------
Shares sold.................... 26,616 $355,640 12,106 $203,377
Shares issued to shareholders in
reinvestment of dividends and
distributions................ 200 2,555 -- --
------ -------- ------ --------
Total issued................... 26,816 358,195 12,106 203,377
Shares redeemed................ (2,867) (40,162) -- --
------ -------- ------ --------
Net increase................... 23,949 $318,033 12,106 $203,377
====== ======== ====== ========
</Table>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED FEBRUARY 4, 2002* TO
JUNE 30, 2003 JUNE 30, 2002
------------------- --------------------
DOLLAR DOLLAR
LARGE CAP VALUE FUND -- CLASS C SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------
Shares sold.................... 113,232 $1,567,010 68,581 $1,111,117
Shares issued to shareholders in
reinvestment of dividends and
distributions................ 625 8,043 -- --
------- ---------- ------ ----------
Total issued................... 113,857 1,575,053 68,581 1,111,117
Shares redeemed................ (23,416) (314,630) (31) (513)
------- ---------- ------ ----------
Net increase................... 90,441 $1,260,423 68,550 $1,110,604
======= ========== ====== ==========
</Table>
30
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
------------------------ ----------------------
DOLLAR DOLLAR
MID-CAP VALUE FUND -- CLASS I SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------
Shares sold................... 7,534,883 $116,936,297 2,295,394 $39,741,136
Shares issued to shareholders
in reinvestment of dividends
and distributions........... 83,275 1,222,479 109,237 1,802,408
---------- ------------ --------- -----------
Total issued.................. 7,618,158 118,158,776 2,404,631 41,543,544
Shares redeemed............... (2,160,651) (31,957,281) (419,366) (7,289,638)
---------- ------------ --------- -----------
Net increase.................. 5,457,507 $ 86,201,495 1,985,265 $34,253,906
========== ============ ========= ===========
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
----------------------- ----------------------
DOLLAR DOLLAR
MID-CAP VALUE FUND -- CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold................... 3,121,375 $ 46,963,574 1,077,323 $18,806,147
Shares issued to shareholders
in reinvestment of dividends
and distributions........... 23,292 341,695 12,875 212,310
--------- ------------ --------- -----------
Total issued.................. 3,144,667 47,305,269 1,090,198 19,018,457
Shares redeemed............... (833,790) (12,304,498) (33,432) (571,921)
--------- ------------ --------- -----------
Net increase.................. 2,310,877 $ 35,000,771 1,056,766 $18,446,536
========= ============ ========= ===========
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
--------------------- -------------------
DOLLAR DOLLAR
MID-CAP VALUE FUND -- CLASS B SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------
Shares sold................... 335,558 $ 5,063,561 469,406 $7,885,081
Shares issued to shareholders
in reinvestment of dividends
and distributions........... 1,258 18,263 21,275 349,545
-------- ----------- ------- ----------
Total issued.................. 336,816 5,081,824 490,681 8,234,626
Shares redeemed............... (230,008) (3,469,681) (46,299) (794,250)
-------- ----------- ------- ----------
Net increase.................. 106,808 $ 1,612,143 444,382 $7,440,376
======== =========== ======= ==========
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
--------------------- -------------------
DOLLAR DOLLAR
MID-CAP VALUE FUND -- CLASS C SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------
Shares sold................... 478,821 $ 7,399,015 409,404 $6,928,242
Shares issued to shareholders
in reinvestment of dividends
and distributions........... 2,916 42,397 12,365 203,285
-------- ----------- ------- ----------
Total issued.................. 481,737 7,441,412 421,769 7,131,527
Shares redeemed............... (145,170) (2,019,417) (23,757) (414,291)
-------- ----------- ------- ----------
Net increase.................. 336,567 $ 5,421,995 398,012 $6,717,236
======== =========== ======= ==========
</Table>
31
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
------------------------ -----------------------
DOLLAR DOLLAR
SMALL CAP VALUE FUND -- CLASS I SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------
Shares sold................... 2,033,946 $ 58,869,044 1,695,871 $ 52,016,013
Shares issued to shareholders
in reinvestment of dividends
and distributions........... 1,898 52,963 15,644 434,890
---------- ------------ --------- ------------
Total issued.................. 2,035,844 58,922,007 1,711,515 52,450,903
Shares redeemed............... (1,140,825) (32,101,714) (481,625) (14,992,368)
---------- ------------ --------- ------------
Net increase.................. 895,019 $ 26,820,293 1,229,890 $ 37,458,535
========== ============ ========= ============
</Table>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
----------------------- --------------------
DOLLAR DOLLAR
SMALL CAP VALUE FUND -- CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold.................... 3,384,161 $100,487,276 453,076 $14,432,130
Shares issued to shareholders in
reinvestment of dividends and
distributions................ 2,100 89,552 34 980
--------- ------------ ------- -----------
Total issued................... 3,386,261 100,576,828 453,110 14,433,110
Shares redeemed................ (617,272) (18,175,782) (28,805) (923,797)
--------- ------------ ------- -----------
Net increase................... 2,768,989 $ 82,401,046 424,305 $13,509,313
========= ============ ======= ===========
</Table>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED FEBRUARY 4, 2002* TO
JUNE 30, 2003 JUNE 30, 2002
------------------- --------------------
DOLLAR DOLLAR
SMALL CAP VALUE FUND -- CLASS B SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------
Shares sold.................... 123,062 $3,598,196 24,325 $781,126
Shares issued to shareholders in
reinvestment of dividends and
distributions................ 8 208 -- --
------- ---------- ------ --------
Total issued................... 123,070 3,598,404 24,325 781,126
Shares redeemed................ (8,830) (254,072) (1,048) (34,222)
------- ---------- ------ --------
Net increase................... 114,240 $3,344,332 23,277 $746,904
======= ========== ====== ========
</Table>
<Table>
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED FEBRUARY 4, 2002* TO
JUNE 30, 2003 JUNE 30, 2002
-------------------- ---------------------
DOLLAR DOLLAR
SMALL CAP VALUE FUND -- CLASS C SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------
Shares sold.................... 200,496 $ 5,859,725 111,345 $3,502,804
Shares issued to shareholders in
reinvestment of dividends and
distributions................ 20 572 -- --
------- ----------- ------- ----------
Total issued................... 200,516 5,860,297 111,345 3,502,804
Shares redeemed................ (56,167) (1,525,993) (1,485) (47,600)
------- ----------- ------- ----------
Net increase................... 144,349 $ 4,334,304 109,860 $3,455,204
======= =========== ======= ==========
</Table>
* COMMENCEMENT OF OPERATIONS.
32
<Page>
<Table>
<Caption>
FOR THE PERIOD
DECEMBER 31, 2002* TO
JUNE 30, 2003
-----------------------
DOLLAR
ALL CAP VALUE FUND -- CLASS I SHARES AMOUNT
- -----------------------------------------------------------------
Shares sold............................. 283,080 $3,263,026
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... -- --
------- ----------
Total issued............................ 283,080 3,263,026
Shares redeemed......................... -- --
------- ----------
Net increase............................ 283,080 $3,263,026
======= ==========
</Table>
<Table>
<Caption>
FOR THE PERIOD
DECEMBER 31, 2002* TO
JUNE 30, 2003
-----------------------
DOLLAR
ALL CAP VALUE FUND -- CLASS A SHARES AMOUNT
- -----------------------------------------------------------------
Shares sold............................. 1 $10
Shares issued to shareholders in
reinvestment of dividends and
distributions......................... -- --
---- ---
Total issued............................ 1 10
Shares redeemed......................... -- --
---- ---
Net increase............................ 1 $10
==== ===
</Table>
* COMMENCEMENT OF OPERATIONS.
NOTE 5.
INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and
trustees are indemnified against certain liability arising out of the
performance of their duties to the Funds. In addition, in the normal course of
business the Trust enters into contracts that contain a variety of
representations and warranties, which provide general indemnifications. The
Funds' maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Funds. However, the Funds
expect the risk of loss to be remote.
NOTE 6.
FEDERAL TAX DISCLOSURE (UNAUDITED). For the year ended June 30, 2003, the
following percent of ordinary distributions paid qualifies for the dividend
received deduction available to corporate shareholders: Large Cap Value Fund --
100%, Mid-Cap Value Fund -- 72%, and Small Cap Value Fund -- 16%. Shareholders
should consult their tax advisers.
NOTE 7.
SUBSEQUENT EVENTS (UNAUDITED). Effective August 28, 2003, both the Large Cap
Value Fund and the Mid-Cap Value Fund will begin offering Class R shares and the
All Cap Value Fund will begin offering Class C shares. Also effective
August 28, 2003, the Small Cap Value Fund will be closed to new investors.
33
<Page>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Board of Trustees and Shareholders
of the Hotchkis and Wiley Funds
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the Funds constituting the
Hotchkis and Wiley Funds (hereafter referred to as the "Funds") at June 30,
2003, and the results of each of their operations for the year then ended and
the changes in each of their net assets and their financial highlights for each
of the years in the two year period then ended in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as the "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audits 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 owned at June 30, 2003 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion. The financial highlights of
the Funds for the years ended June 30, 2001 and prior were audited by other
independent auditors whose reports dated August 10, 2001 for the Hotchkis and
Wiley Large Cap Value Fund and August 13, 2001 for the Hotchkis and Wiley Mid
Cap Value Fund and the Hotchkis and Wiley Small Cap Value Fund, expressed
unqualified opinions on those financial highlights.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
August 12, 2003
34
<Page>
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE(1) AND FUND COMPLEX
POSITION HELD LENGTH OF PRINCIPAL OCCUPATION(S) DURING PAST OVERSEEN BY
NAME AND AGE WITH THE TRUST TIME SERVED FIVE YEARS TRUSTEE
- ----------------------------------------------------------------------------------------------------------------
Randall H. Breitenbach Trustee Trustee since Co-Founder, Director and CEO, 1 registered
(43)...................... 2001 BreitBurn Energy Company (1988 -- investment
present); Chairman, Finance company
Committee, Stanford University PIC consisting of
Endowment (1999 -- present). 4 portfolios
Robert L. Burch III (69).... Trustee Trustee since Managing Partner, A.W. Jones Co. 1 registered
2001 (investments) (since 1984); investment
Chairman, Jonathan Mfg. Corp. (slide company
manufacturing) (since 1977). consisting of
4 portfolios
John A.G. Gavin (72)........ Trustee Trustee since Formerly Partner and Managing 1 registered
2001 Director, Hicks, Muse, Tate & Furst investment
(Latin America) (private equity company
investment firm) (1994 -- 2001); consisting of
Chairman, Gamma Holdings 4 portfolios
(international capital and
consulting) (since 1968).
<Caption>
OTHER DIRECTORSHIPS HELD
NAME AND AGE BY TRUSTEE
- ---------------------------------------------------------------------------------
Randall H. Breitenbach None
(43)......................
Robert L. Burch III (69).... None
John A.G. Gavin (72)........ Apex Mortgage
Capital, Inc.; Causeway
Capital Management Trust;
Claxson S.A.;
Ibero-America Media
Partners; International
Wire Corp.; TCW Galileo
Funds
</Table>
INTERESTED TRUSTEE AND OFFICERS(3)
<Table>
<Caption>
NUMBER OF
TERM OF PORTFOLIOS IN
POSITION(S) OFFICE(2) AND FUND COMPLEX
HELD WITH THE LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY
NAME AND AGE TRUST TIME SERVED PAST FIVE YEARS TRUSTEE
- ----------------------------------------------------------------------------------------------------------
Nancy D. Celick (52)........ President and President and Chief Operating Officer of the 1 registered
Trustee Trustee(1) Advisor (since 2001); First investment
since 2001 Vice President of Merrill Lynch company
Investment Managers, L.P. consisting of
("MLIM") (2000 -- 2001); 4 portfolios
Director of MLIM (1993 --
1999).
Richard H. Blank, Jr. Secretary Secretary Senior Vice President of
(47)...................... since 2001 Stephens Inc. (since 1983).
Anna Marie Lopez (35)....... Treasurer and Treasurer and Chief Compliance Officer of the
Assistant Assistant Advisor (since 2001);
Secretary Secretary Compliance Officer of MLIM
since 2001 (1997 -- 2001).
<Caption>
OTHER DIRECTORSHIPS HELD BY
NAME AND AGE TRUSTEE
- ----------------------------------------------------------------------------------------------------------
Nancy D. Celick (52)........ None
Richard H. Blank, Jr.
(47)......................
Anna Marie Lopez (35).......
</Table>
- ------------------------
1 EACH TRUSTEE SERVES UNTIL HIS/HER SUCCESSOR IS ELECTED AND QUALIFIED, OR
UNTIL HIS/HER DEATH OR RESIGNATION OR REMOVAL AS PROVIDED IN THE TRUST'S
AGREEMENT AND DECLARATION OF TRUST.
2 "INTERESTED PERSON" WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF
1940, ON THE BASIS OF HER AFFILIATION WITH THE TRUST'S ADVISOR.
3 ELECTED BY AND SERVES AT THE PLEASURE OF THE BOARD OF TRUSTEES OF THE
TRUST.
The Statement of Additional Information includes additional information about
the Trust's Trustees and is available without charge upon request by calling the
transfer agent at 1-866-HW-FUNDS (1-866-493-8637). The address for all Trustees
and officers of the Trust is c/o Hotchkis and Wiley Capital Management, LLC, 725
South Figueroa Street, 39th Floor, Los Angeles, CA 90017, attention: Trust
Secretary.
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities is included in the Statement of
Additional Information, which is available without charge, upon request, by
calling 1-866-HW-FUNDS (1-866-493-8637) and on the Commission's website at
http://www.sec.gov.
35
<Page>
[GRAPHIC]
ADVISOR
Hotchkis and Wiley Capital Management, LLC
725 South Figueroa Street, 39th Floor
Los Angeles, California 90017
LEGAL COUNSEL
Vedder, Price, Kaufman & Kammholz, P.C.
222 North LaSalle Street
Chicago, Illinois 60601
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
350 South Grand Avenue
Los Angeles, California 90071
DISTRIBUTOR AND ADMINISTRATOR
Stephens Inc.
111 Center Street, Suite 300
Little Rock, Arkansas 72201
TRANSFER AGENT
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
CODE #HWF-AR-0603
THIS REPORT IS FOR THE INFORMATION OF SHAREHOLDERS OF THE HOTCHKIS AND WILEY
FUNDS, BUT MAY ALSO BE USED AS SALES LITERATURE WHEN PRECEDED OR ACCOMPANIED
BY A CURRENT PROSPECTUS, WHICH GIVES DETAILS ABOUT CHARGES, EXPENSES,
INVESTMENT OBJECTIVES AND OPERATING POLICIES OF THE FUNDS.
[HOTCHKIS AND WILEY FUNDS LOGO]
725 SOUTH FIGUEROA STREET, 39th Floor
LOS ANGELES, CALIFORNIA 90017-5439
www.hwcm.com
1.866.HW.FUNDS (1.866.493.8637)
JUNE 30, 2003
ANNUAL REPORT
Item 2 - Not applicable (not answered for periods ending before July 15,
2003 and only annually for funds)
Item 3 - Not applicable (not answered for periods ending before July 15,
2003 and only annually for funds)
Item 4 - Disclose annually only (not answered for periods ending before
December 15, 2003)
Item 5 - Not applicable
Item 6 - Reserved
Item 7 - Not applicable
Item 8 - Reserved
Item 9(a) - The registrant's principal executive and principal financial
officers have determined that the registrant's disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940)are effective based on their evaluation of these
controls and procedures are effective as of a date within 90 days
prior to the filing date of this report.
Item 9(b) - There were no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the
Investment Company Act of 1940) that occurred during the
registrant's last fiscal half-year (the registrant's second fiscal
half-year in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10 - Exhibits
(a)(1)- Not applicable.
(a)(2)- Attach certifications pursuant to Section 302 of the Sarbanes-Oxley Act.
Attached hereto.
(b) - Attach certification pursuant to Section 906 of the Sarbanes-Oxley Act.
Attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Hotchkis and Wiley Funds
By: /s/ Nancy D. Celick
----------------------------------------
Nancy D. Celick,
President of Hotchkis and Wiley Funds
Date: August 20, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Nancy D. Celick
----------------------------------------
Nancy D. Celick,
President of Hotchkis and Wiley Funds
Date: August 20, 2003
By: /s/ Anna Marie Lopez
----------------------------------------
Anna Marie Lopez,
Chief Financial Officer of
Hotchkis and Wiley Funds
Date: August 20, 2003
EXHIBIT INDEX
(a)(2) Certifications of principal executive officer and principal
financial officer as required by Rule 30a-2 under the Investment
Company Act of 1940.
(b) Certification of principal executive officer and principal
financial officer as required by Section 906 of the Sarbanes-Oxley
Act of 2002.