<Page>
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
Hotchkis and Wiley Funds
(Exact Name of Registrant as specified in charter)
725 S. Figueroa Street, 39th Floor
Los Angeles, California 90071
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (213) 430-1000
Date of fiscal year end: June 30, 2004
Date of reporting period: July 1, 2003 - June 30, 2004
Anna Marie Lopez
Hotchkis and Wiley Capital Management, LLC
725 S. Figueroa Street, 39th Floor
Los Angeles, California 90071
(name and address of agent for service)
Copies to:
Julie Allecta, Esq.
Paul, Hastings, Janofsky & Walker, LLP
55 Second Street, Twenty-Fourth Floor
San Francisco, California 94105
(Counsel for the Registrant)
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Item 1 - Report to Shareholder
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[GRAPHIC]
LARGE CAP VALUE FUND
MID-CAP VALUE FUND
SMALL CAP VALUE FUND
ALL CAP VALUE FUND
[HOTCHKIS AND WILEY FUNDS LOGO]
JUNE 30, 2004
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
</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, 2004.
OVERVIEW
U.S. markets had a strong year (for the period ended June 30, 2004), as the
Standard & Poor's 500 Index closed up 19.11% and the Dow Jones Industrials
Average posted a gain of 18.76%. Much of the markets' gains occurred during the
first half of the fiscal year, though modest gains were achieved during the
second half as well. The solid performance during the first half was driven by
favorable economic reports buoyed by historically low interest rates. Renewed
focus on interest rates and speculation regarding the Federal Reserve's efforts
to quell inflation with a tighter monetary policy led to moderate performance
during the second half of the fiscal year. In June 2004, the Federal Reserve
finally acted, raising the federal funds rate from 1.0% to 1.25%, the first
increase in four years. As this move had been widely anticipated, the
announcement actually reassured investors that increases in rates would be
gradual. By the end of the year, investors' focus had once again returned to the
strong outlook for corporate earnings and a healthy economy. Consumer spending
continues to be robust and job growth has resumed. Investment banking activity,
another indicator of economic optimism, is beginning to pick up as well.
Stock volatility is still very apparent in the market. Risk factors, such as
inflation, the prospect for further moves by the Federal Reserve and aggressive
expectations for future profits, could all come into play during the remainder
of the year, exacerbating an already tense environment given the current
geopolitical tensions (the war on terrorism and Iraq) and the upcoming
elections. The counterbalance to these risks lies with the high returns being
provided by solid businesses within a good economy.
Valuation differentials across the market have narrowed in recent years, as most
valuation anomalies associated with market capitalization, investment style or
industry specific concerns have narrowed. In the current market environment, we
believe stock selection will be the dominant factor associated with superior
investment results. Our value disciplines will continue to seek stocks that
offer attractive appreciation potential and controlled risk.
HOTCHKIS AND WILEY LARGE CAP VALUE FUND
The Fund's Class I, Class A, Class B, Class C and Class R shares had total
returns of 33.20%, 32.78%, 31.78%, 31.83% and 33.22%, respectively,
outperforming both the passive S&P 500 Index return of 19.11% and the
style-specific Russell 1000 Value Index return of 21.13%, for the one year ended
June 30, 2004. (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 (vs. the S&P 500 Index) was superior stock
selection in the consumer discretionary and financials sectors. When considering
the total attribution effect (sector allocation and security selection
combined), the consumer discretionary sector added most to the Fund's upside,
primarily benefiting from retail stocks J.C. Penney and Sears Roebuck as well as
hotel stock Mandalay Resort Group. J.C. Penney's stock price rose as the sale of
its troubled Eckerd division appeared imminent. The company also reported strong
same store sales and revised its earnings upwards during the second quarter of
2004. Sears Roebuck had solid gains throughout much of the fiscal year but fell
during the later months due to soft same store sales. Much of the strong
performance was due to investor reaction from the sale of its credit card
division in November 2003 and the company's subsequent stock buyback, which
continued throughout February 2004. Mandalay Resort Group's share price
benefited when the company agreed to be bought at a premium by MGM Mirage.
Furthermore, the financials sector performed strongly (despite a higher interest
rate environment) as Allmerica Financial, CIT Group, Metlife Inc. and Prudential
Financial posted double-digit gains. Conversely, relative weakness in the Fund
was due to stock selection within the information technology sector as
Electronic Data Systems' (EDS) stock price dropped, as concerns over cash flow
generation, management credibility and a difficult IT spending environment have
caused the stock to trade at low multiples. The stock price increased in June,
however, as renegotiations led to more favorable terms. We continue to believe
that many of EDS' problems are temporary and are maintaining the investment.
Negative contributors for the fiscal year included Lennar Corp., Eastman Kodak
Co. and AT&T Corp.
3
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HOTCHKIS AND WILEY MID-CAP VALUE FUND
The Fund's Class I, Class A, Class B, Class C and Class R shares had total
returns of 41.67%, 41.21%, 40.21%, 40.19% and 43.01%, respectively, compared to
the Russell Midcap Index return of 29.39% and the Russell Midcap Value Index
return of 30.81%, for the one year ended June 30, 2004. (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.)
The Fund's outperformance (vs. the Russell Midcap Index) was the result of stock
selection in the consumer discretionary and financial sectors. Economically
sensitive stocks posted strong gains which coincided with an improved economic
outlook and higher consumer confidence levels. Specifically, J.C. Penney,
Mandalay Resort Group and Foot Locker were among the strongest performers. The
Federal Reserve's announcement to increase interest rates in June 2004 actually
helped boost the financials sector, as double-digit gains from Allmerica
Financial, LNR Property and CIT Group increased relative returns. Allmerica
Financial benefited from strong earnings and improved cashflow. LNR Property
benefited from a strong real estate market buoyed by historically-low interest
rates. CIT Group rebounded from previous lows. Weakness in the Fund was due to
stock selection within the information technology sector. Electronic Data
Systems (EDS), the Fund's worst performer, led the decline as concerns over cash
flow generation, management credibility, and a difficult IT spending environment
have caused the stock to trade at low multiples. We continue to believe that
many of EDS' problems are temporary and are maintaining the investment.
Additional negative contributors to the Fund included Carolina Group, Eastman
Kodak and Lear Corp.
HOTCHKIS AND WILEY SMALL CAP VALUE FUND
The Fund's Class I, Class A, Class B and Class C shares had total returns of
49.06%, 48.70%, 47.60% and 47.62%, respectively, significantly outperforming
both the Russell 2000 Index return of 33.37% and the Russell 2000 Value Index
return of 35.17%, for the one year ended June 30, 2004. (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 outperformed large cap stocks as the S&P 500
Index return of 19.11% lagged the Russell 2000 Index by 1426 basis points. With
respect to style, value outperformed growth as the Russell 2000 Value Index
returned 35.17% versus 31.55% for the Russell 2000 Growth Index.
The Fund's outperformance (vs. the Russell 2000 Index) resulted primarily from
security selection within the consumer discretionary and financials sectors of
the market. Specifically, consumer discretionary holdings such as Mandalay
Resort Group, Brookfield Homes Corp. and Toll Brothers Inc. led the sector,
posting strong gains. Mandalay Resort Group benefited from news of a buyout from
one of its rivals as well as from an overall increase in travel. Brookfield
Homes and Toll Brothers benefited from the resilient housing market.
Additionally, stock selection within the financials sector contributed to both
absolute and relative performance as Allmerica Financial Corp. rebounded from
last year's lows and became the Fund's strongest contributor. The stock gained
on increased first quarter 2004 earnings and expectations of an increase in
cashflow due to the monetization of Allmerica's life insurance and annuity
business. Conversely, negative contributors to Fund performance included
Atlantic Coast Airlines Holdings, Central Freight Lines and United National
Group.
HOTCHKIS AND WILEY ALL CAP VALUE FUND
The Fund's Class I, Class A and Class C shares had total returns of 35.48%,
35.56% and 34.08%, respectively, outperforming both the S&P 500 Index return of
19.11% and the Russell 3000 Index return of 20.46%, for the one year ended June
30, 2004. (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.)
Dominating the Fund's relative outperformance (vs. the S&P 500 Index) was
superior stock selection in the financials and consumer discretionary sectors.
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
4
<Page>
concerns over the capital adequacy of the company's life insurance and annuity
subsidiary. Within the consumer discretionary sector, the highest contributor to
the Fund's upside was our position in retail stocks Sears Roebuck and JC Penney.
JC Penney gained as the sale of its troubled Eckerd division appeared imminent.
Despite a sell-off in the second quarter of 2004, Sears Roebuck performed
strongly throughout most of the fiscal year as the company's financial strength
became more apparent with the sale of its credit card division in November 2003
and the company's subsequent stock buyback, which has continued throughout
February 2004. In spite of the recent weakness, we are confident that the stock
continues to be an excellent value. Weakness in the Fund was due to stock
selection within the information technology sector. Leading the decline was the
Fund's weakest contributor, Electronic Data Systems (EDS). EDS' share price
dropped due to concerns over cash flow generation, management credibility, and a
difficult IT spending environment have caused the stock to trade at low
multiples. The company has made progress on its troubled Navy Marine project and
ended the fiscal year on an upbeat note. Furthermore, Government Properties
Trust, Atlantic Coast Airlines Holdings and Capital Lease Funding were among the
weakest contributors to the Fund's absolute performance.
We appreciate your continued support of the Hotchkis and Wiley Funds, and we
look forward to serving your investment needs in the future.
Sincerely,
/s/ Nancy D. Celick /s/ George H. Davis /s/ Sheldon Lieberman
Nancy D. Celick George H. Davis Sheldon Lieberman
PRESIDENT PORTFOLIO MANAGER PORTFOLIO MANAGER
Large Cap Value Fund Large Cap Value Fund
All Cap Value Fund
/s/ Jim Miles /s/ Stanley I. Majcher /s/ David Green
Jim Miles Stanley I. 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
/s/ Joe Huber
Joe Huber
PORTFOLIO MANAGER
All Cap Value Fund
JULY 30, 2004
THE ABOVE REFLECTS OPINIONS OF PORTFOLIO MANAGERS AS OF JUNE 30, 2004. 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
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FUND PERFORMANCE DATA
ABOUT FUND PERFORMANCE
The Large Cap Value Fund and Mid-Cap Value Fund offer five classes of shares.
The Small Cap Value Fund offers four classes of shares (currently only to
existing investors) and the All Cap Value Fund offers three classes of shares.
Each share class has its own sales charge and expense structure, allowing you to
invest in the way that best suits your needs. The Small Cap Value Fund is closed
to new investors. The Mid-Cap Value Fund is available to limited investors.
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 an annual
distribution and service fee of 0.25%.
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 an annual
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 an annual 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.
CLASS R SHARES have no initial sales charge or CDSC and are subject to an annual
distribution and service fee of 0.50%. Class R shares are available only to
certain retirement plans.
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 "Average Annual Total Return" 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, Class C and Class R 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, if any, applicable to each class, which are
deducted from the income available to be paid to shareholders. Performance of
all Funds except All Cap Value Fund 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 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(R) 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(R) INDEX, an unmanaged index, measures the performance of the 800
smallest companies in the Russell 1000 Index.
RUSSELL 2000(R) INDEX, an unmanaged index, measures the performance of the 2,000
smallest companies in the Russell 3000 Index.
6
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[CHART]
LARGE CAP VALUE FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
<Table>
<Caption>
LARGE CAP VALUE FUND+ -
CLASS I SHARES S&P 500 INDEX++
6/24/87 $ 10,000 $ 10,000
6/30/87 $ 10,000 $ 9,931
6/30/88 $ 9,724 $ 9,225
6/30/89 $ 11,860 $ 11,107
6/30/90 $ 11,811 $ 12,919
6/30/91 $ 12,632 $ 13,875
6/30/92 $ 15,069 $ 15,743
6/30/93 $ 16,830 $ 17,885
6/30/94 $ 17,403 $ 18,123
6/30/95 $ 20,970 $ 22,856
6/30/96 $ 25,172 $ 28,825
6/30/97 $ 31,754 $ 38,842
6/30/98 $ 38,930 $ 50,612
6/30/99 $ 41,780 $ 62,105
6/30/2000 $ 33,500 $ 66,710
6/30/2001 $ 44,186 $ 56,811
6/30/2002 $ 44,018 $ 46,595
6/30/2003 $ 46,198 $ 46,711
6/30/2004 $ 61,536 $ 55,637
</Table>
COMPARATIVE RESULTS+++
<Table>
<Caption>
SINCE
1 YEAR 5 YEARS 10 YEARS 6/24/87*
- -------------------------------------------------------------------------------------------------------------------------
CLASS I
Average annual total return 33.20% 8.05% 13.46% 11.27%
CLASS A(a)
Average annual total return (with sales charge)(b) 25.81% 6.71% 12.67% 10.69%
Average annual total return (without sales charge) 32.78% 7.87% 13.28% 11.04%
CLASS B(a)
Average annual total return (with sales charge)(b) 26.78% 6.71% 12.36% 10.16%
Average annual total return (without sales charge) 31.78% 7.01% 12.36% 10.16%
CLASS C(a)
Average annual total return (with sales charge)(b) 30.83% 7.00% 12.35% 10.16%
Average annual total return (without sales charge) 31.83% 7.00% 12.35% 10.16%
CLASS R(a)
Average annual total return 33.22% 7.62% 12.96% 10.75%
S&P 500 INDEX
Average annual total return 19.11% -2.20% 11.84% 10.61%
</Table>
(a) RETURNS SHOWN FOR CLASS A, B, C AND R 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; CLASS R -- 8/28/03.)
(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 CHARGES 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 PERIODS SHOWN REFLECT A FEE WAIVER AND/OR EXPENSE
REIMBURSEMENT. WITHOUT WAIVER/REIMBURSEMENT, RETURNS WOULD HAVE BEEN LOWER.
* COMMENCEMENT 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.
7
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[CHART]
MID-CAP VALUE FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
<Table>
<Caption>
MID-CAP VALUE FUND+ -
CLASS I SHARES RUSSELL MIDCAP INDEX++
1/2/97 $ 10,000 $ 10,000
6/30/97 $ 11,669 $ 11,573
6/30/98 $ 13,419 $ 14,552
6/30/99 $ 14,446 $ 15,371
6/30/2000 $ 15,949 $ 14,156
6/30/2001 $ 22,386 $ 17,542
6/30/2002 $ 23,455 $ 17,879
6/30/2003 $ 24,970 $ 17,765
6/30/2004 $ 35,374 $ 23,239
</Table>
COMPARATIVE RESULTS+++
<Table>
<Caption>
SINCE
1 YEAR 5 YEARS 1/2/97*
- ------------------------------------------------------------------------------------------------------------
CLASS I
Average annual total return 41.67% 19.61% 18.37%
CLASS A(a)
Average annual total return (with sales charge)(b) 33.80% 17.97% 17.25%
Average annual total return (without sales charge) 41.21% 19.25% 18.10%
CLASS B(a)
Average annual total return (with sales charge)(b) 35.21% 18.25% 17.16%
Average annual total return (without sales charge) 40.21% 18.45% 17.16%
CLASS C(a)
Average annual total return (with sales charge)(b) 39.19% 18.47% 17.17%
Average annual total return (without sales charge) 40.19% 18.47% 17.17%
CLASS R(a)
Average annual total return 43.01% 19.36% 18.01%
RUSSELL MIDCAP INDEX
Average annual total return 29.39% 6.51% 10.92%
</Table>
(a) RETURNS SHOWN FOR CLASS A, B, C AND R 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, B,
C -- 1/2/01; CLASS R -- 8/28/04.)
(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 CHARGES 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.
+++ FUND RETURNS DURING THE PERIODS SHOWN REFLECT A FEE WAIVER AND/OR EXPENSE
REIMBURSEMENT. WITHOUT WAIVER/REIMBURSEMENT, RETURNS WOULD HAVE BEEN LOWER.
* COMMENCEMENT OF CLASS I.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE GRAPH AND TABLES DO
NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
8
<Page>
[CHART]
SMALL CAP VALUE FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
<Table>
<Caption>
SMALL CAP VALUE FUND+ -
CLASS I SHARES RUSSELL 2000 INDEX++
9/20/85 $ 10,000 $ 10,000
6/30/86 $ 14,500 $ 13,733
6/30/87 $ 15,448 $ 14,966
6/30/88 $ 14,530 $ 14,042
6/30/89 $ 14,411 $ 15,832
6/30/90 $ 17,364 $ 16,317
6/30/91 $ 18,337 $ 16,518
6/30/92 $ 21,829 $ 18,919
6/30/93 $ 26,150 $ 23,829
6/30/94 $ 27,135 $ 24,859
6/30/95 $ 31,147 $ 29,816
6/30/96 $ 35,581 $ 36,950
6/30/97 $ 46,162 $ 43,009
6/30/98 $ 56,428 $ 50,099
6/30/99 $ 48,383 $ 50,847
6/30/2000 $ 39,383 $ 58,132
6/30/2001 $ 61,315 $ 58,464
6/30/2002 $ 73,851 $ 53,440
6/30/2003 $ 80,287 $ 52,563
6/30/2004 $ 119,678 $ 70,101
</Table>
COMPARATIVE RESULTS+++
<Table>
<Caption>
SINCE
1 YEAR 5 YEARS 10 YEARS 9/20/85*
- -------------------------------------------------------------------------------------------------------------------------
CLASS I
Average annual total return 49.06% 19.86% 16.00% 14.13%
CLASS A(a)
Average annual total return (with sales charge)(b) 40.89% 18.69% 15.28% 13.57%
Average annual total return (without sales charge) 48.70% 19.98% 15.91% 13.90%
CLASS B(a)
Average annual total return (with sales charge)(b) 42.60% 18.52% 14.87% 13.03%
Average annual total return (without sales charge) 47.60% 18.72% 14.87% 13.03%
CLASS C(a)
Average annual total return (with sales charge)(b) 46.62% 18.73% 14.87% 13.04%
Average annual total return (without sales charge) 47.62% 18.73% 14.87% 13.04%
RUSSELL 2000 INDEX
Average annual total return 33.37% 6.63% 10.93% 10.93%
</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 CHARGES 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.
+++ FUND RETURNS DURING THE PERIODS SHOWN REFLECT A FEE WAIVER AND/OR EXPENSE
REIMBURSEMENT. WITHOUT WAIVER/REIMBURSEMENT, RETURNS WOULD HAVE BEEN LOWER.
* COMMENCEMENT OF CLASS I.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE GRAPH AND TABLES DO
NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
9
<Page>
[CHART]
ALL CAP VALUE FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT
<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
7/31/2003 $ 13,790 $ 11,373
8/31/2003 $ 14,440 $ 11,595
9/30/2003 $ 14,400 $ 11,472
10/31/2003 $ 15,700 $ 12,121
11/30/2003 $ 16,360 $ 12,227
12/31/2003 $ 16,883 $ 12,868
1/31/2004 $ 17,254 $ 13,105
2/29/2004 $ 17,774 $ 13,287
3/31/2004 $ 17,724 $ 13,086
4/30/2004 $ 16,893 $ 12,881
5/31/2004 $ 16,422 $ 13,058
6/30/2004 $ 17,043 $ 13,312
</Table>
COMPARATIVE RESULTS+++
<Table>
<Caption>
SINCE
1 YEAR 12/31/02*
- --------------------------------------------------------------------------------------------------------------------------
CLASS I
Average annual total return 35.48% 42.82%
CLASS A
Average annual total return (with sales charge)(a) 28.45% 38.12%
Average annual total return (without sales charge) 35.56% 43.19%
CLASS C(b)
Average annual total return (with sales charge)(a) 33.08% 41.32%
Average annual total return (without sales charge) 34.08% 41.32%
S&P 500 INDEX
Average annual total return 19.11% 21.01%
</Table>
(a) RETURNS SHOWN FOR CLASS A 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 CHARGES OF 5.25%. CLASS C SHARES HAVE
NO ADJUSTMENT FOR SALES CHARGES, BUT REDEMPTIONS WITHIN ONE YEAR OF PURCHASE MAY
BE SUBJECT TO A CDSC OF 1%.
(b) RETURNS SHOWN FOR CLASS 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 THE CLASS. (INCEPTION DATE: CLASS C -- 8/28/03.)
+ THE FUND INVESTS PRIMARILY IN STOCKS OF U.S. COMPANIES.
++ THIS UNMANAGED BROAD-BASED INDEX IS COMPRISED OF COMMON STOCKS.
+++ FUND RETURNS DURING THE PERIODS SHOWN REFLECT A FEE WAIVER AND/OR EXPENSE
REIMBURSEMENT. WITHOUT WAIVER/REIMBURSEMENT, RETURNS WOULD HAVE BEEN LOWER.
* COMMENCEMENT OF CLASS I.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND THE GRAPH AND TABLES 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, 2004
LARGE CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 94.42% HELD VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 4.41%
Lockheed Martin Corporation 266,800 $ 13,894,944
Raytheon 350,300 12,530,231
---------------
26,425,175
AUTO COMPONENTS -- 0.99%
Delphi Automotive Systems 557,349 5,952,487
CHEMICALS -- 0.37%
Eastman Chemical Company 48,300 2,232,909
COMMERCIAL BANKS -- 2.39%
Bank One Corporation 44,000 2,244,000
KeyCorp 103,800 3,102,582
UnionBanCal Corporation 159,600 9,001,440
---------------
14,348,022
COMMERCIAL SERVICES & SUPPLIES -- 3.34%
Cendant Corporation 416,000 10,183,680
Waste Management, Inc. 320,500 9,823,325
---------------
20,007,005
DIVERSIFIED FINANCIALS -- 5.35%
CIT Group, Inc. 437,300 16,744,217
Principal Financial Group, Inc. 440,900 15,334,502
---------------
32,078,719
DIVERSIFIED TELECOMMUNICATION SERVICES -- 0.24%
AT&T Corporation 100,000 1,463,000
ELECTRIC UTILITIES -- 6.03%
Alliant Energy Corporation 229,300 5,980,144
American Electric Power Company, Inc. 193,900 6,204,800
DTE Energy Company 2,000 81,080
Entergy Corporation 117,200 6,564,372
FirstEnergy Corporation 463,000 17,320,830
---------------
36,151,226
FOOD & STAPLES RETAILING -- 2.41%
Albertson's Inc. 545,100 14,466,954
FOOD PRODUCTS -- 1.38%
Kraft Foods Inc. 191,900 $ 6,079,392
Sara Lee Corporation 96,400 2,216,236
---------------
8,295,628
HEALTH CARE PROVIDERS & SERVICES -- 6.20%
Aetna Inc. 255,600 21,726,000
Tenet Healthcare Corporation (a) 1,151,000 15,434,910
---------------
37,160,910
HOTELS, RESTAURANTS & LEISURE -- 6.16%
Caesars Entertainment Inc. (a) 610,000 9,150,000
Mandalay Resort Group 221,900 15,231,216
Yum! Brands, Inc. (a) 336,100 12,509,642
---------------
36,890,858
HOUSEHOLD DURABLES -- 3.44%
Lennar Corporation 256,800 11,484,096
Lennar Corporation -- B Shares 220,620 9,140,287
---------------
20,624,383
INDUSTRIAL CONGLOMERATES -- 1.87%
Tyco International Limited 338,800 11,227,832
INSURANCE -- 14.63%
Allmerica Financial Corporation (a) 222,100 7,506,980
The Allstate Corporation 250,400 11,656,120
MetLife, Inc. 656,050 23,519,393
Prudential Financial, Inc. 380,400 17,677,188
The St. Paul Companies, Inc. 297,700 12,068,758
Unumprovident Corporation 960,000 15,264,000
---------------
87,692,439
IT CONSULTING & SERVICES -- 3.96%
Electronic Data Systems Corporation 1,240,000 23,746,000
LEISURE EQUIPMENT & PRODUCTS -- 1.48%
Eastman Kodak Company 327,900 8,846,742
METALS & MINING -- 1.38%
Alcoa Inc. 250,448 8,272,297
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
11
<Page>
<Table>
<Caption>
SHARES
HELD VALUE
- --------------------------------------------------------------------------------
MULTILINE RETAIL -- 7.61%
J.C. Penney Company, Inc. 427,800 $ 16,153,728
Sears, Roebuck and Company 780,000 29,452,800
---------------
45,606,528
MULTI-UTILITIES -- 0.79%
SCANA Corporation 130,896 4,760,688
OIL & GAS -- 3.24%
Sunoco, Inc. 152,210 9,683,600
Teekay Shipping Corporation 259,600 9,703,848
---------------
19,387,448
PAPER & FOREST PRODUCTS -- 0.99%
Weyerhaeuser Company 94,200 5,945,904
REAL ESTATE -- 2.58%
Apartment Investment & Management 303,600 9,451,068
Plum Creek Timber Company 185,000 6,027,300
---------------
15,478,368
SOFTWARE -- 4.02%
Computer Associates International, Inc. 860,000 24,131,600
TEXTILES, APPAREL & LUXURY GOODS -- 1.79%
Jones Apparel Group 271,100 10,703,028
THRIFTS & MORTGAGE FINANCE -- 3.85%
Freddie MAC 238,300 15,084,390
Washington Mutual, Inc. 207,200 8,006,208
---------------
23,090,598
TOBACCO -- 3.52%
Altria Group, Inc. 421,500 21,096,075
Total investments -- 94.42%
(Cost -- $501,140,537) 566,082,823
Time deposit* -- 7.78% 46,655,314
Liabilities in excess of other assets -- (2.20)% (13,188,183)
---------------
Net Assets -- 100.00% $ 599,549,954
</Table>
(a) -- NON-INCOME PRODUCING SECURITY.
* -- TIME DEPOSIT BEARS INTEREST AT 0.76% AND MATURES ON 07/01/2004.
SEE NOTES TO THE FINANCIAL STATEMENTS
12
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2004
MID-CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 96.27% HELD VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 1.29%
Raytheon 690,800 $ 24,709,915
AIRLINES -- 1.13%
Airtran Holdings, Inc. (a) 1,532,400 21,668,136
AUTO COMPONENTS -- 2.10%
Delphi Automotive Systems 2,791,500 29,813,220
Lear Corporation 173,900 10,258,361
---------------
40,071,581
BEVERAGES -- 0.50%
Adolph Coors Company 130,800 9,462,072
BUILDING PRODUCTS -- 0.10%
Eagle Materials Inc. 6,041 429,032
Eagle Materials Inc. -- Class B 20,311 1,406,537
---------------
1,835,569
CHEMICALS -- 2.89%
Eastman Chemical Company 205,500 9,500,265
FMC Corporation (a) 430,200 18,545,922
IMC Global, Inc. (a) 2,032,000 27,228,800
---------------
55,274,987
COMMERCIAL BANKS -- 1.67%
KeyCorp 543,550 16,246,710
UnionBanCal Corporation 278,900 15,729,960
---------------
31,976,670
COMMERCIAL SERVICES & SUPPLIES -- 1.03%
Ikon Office Solutions, Inc. 1,724,000 19,774,280
CONSUMER FINANCE -- 1.11%
Americredit Corporation (a) 1,090,100 21,289,653
DIVERSIFIED FINANCIAL SERVICES -- 3.77%
CIT Group, Inc. 1,241,100 47,521,719
Principal Financial Group, Inc. 705,100 24,523,378
---------------
72,045,097
ELECTRIC UTILITIES -- 7.49%
Alliant Energy Corporation 1,350,400 $ 35,218,432
American Electric Power Company, Inc. 590,200 18,886,400
Entergy Corporation 340,500 19,071,405
FirstEnergy Corporation 1,459,800 54,611,118
Northeast Utilities 784,500 15,274,215
---------------
143,061,570
FOOD & STAPLES RETAILING -- 2.03%
Albertson's Inc. 1,077,000 28,583,580
Safeway Inc. (a) 399,600 10,125,864
---------------
38,709,444
FOOD PRODUCTS -- 0.54%
Del Monte Foods Company (a) 1,022,500 10,388,600
GAS UTILITIES -- 1.20%
Southern Union Company (a) 1,092,200 23,023,576
HEALTH CARE PROVIDERS & SERVICES -- 4.74%
Aetna Inc. 440,000 37,400,000
Health Net Inc. (a) 368,800 9,773,200
Tenet Healthcare Corporation (a) 3,238,200 43,424,262
---------------
90,597,462
HOTELS, RESTAURANTS & LEISURE -- 8.38%
Caesars Entertainment (a) 1,379,000 20,685,000
Jack in the Box, Inc. (a) 629,100 18,684,270
La Quinta Properties Inc. (a) 3,262,800 27,407,520
Mandalay Resort Group 837,800 57,506,592
Yum! Brands, Inc. (a) 962,100 35,809,362
---------------
160,092,744
HOUSEHOLD DURABLES -- 4.24%
Beazer Homes USA, Inc. 380,600 38,177,986
Centex Corporation 515,500 23,584,125
Furniture Brands International, Inc. 771,400 19,323,570
---------------
81,085,681
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
13
<Page>
<Table>
<Caption>
SHARES
HELD VALUE
- --------------------------------------------------------------------------------
INSURANCE -- 12.29%
Allmerica Financial Corporation 1,223,700 $ 41,361,060
Assurant Inc. 1,488,800 39,274,544
CNA Financial Corporation (a) 1,018,424 30,135,166
Conseco Inc. (a) 1,995,400 39,708,460
Lincoln National Corporation 568,400 26,856,900
The St. Paul Companies, Inc. 423,700 17,176,798
Unumprovident Corporation 2,534,800 40,303,320
---------------
234,816,248
IT SERVICES -- 4.46%
Electronic Data Systems Corporation 4,454,500 85,303,675
LEISURE EQUIPMENT & PRODUCTS -- 2.16%
Brunswick Corporation 154,800 6,315,840
Eastman Kodak Company 1,297,300 35,001,154
---------------
41,316,994
MARINE -- 1.00%
Alexander & Baldwin Inc. 573,000 19,166,850
MEDIA -- 2.79%
R.H. Donnelley Corporation (a) 248,900 10,886,886
Valassis Communications (a) 1,395,000 42,505,650
---------------
53,392,536
MULTILINE RETAIL -- 7.32%
J.C. Penney Company, Inc. 1,595,200 60,234,752
Sears, Roebuck and Company 2,109,500 79,654,720
---------------
139,889,472
OIL & GAS -- 4.96%
Ashland Inc. 391,500 20,675,115
Sunoco, Inc. 355,544 22,619,709
Teekay Shipping Corporation 1,124,700 42,041,286
Valero Energy Corporation 127,700 9,419,152
---------------
94,755,262
REAL ESTATE -- 9.05%
American Financial Reality Trust 2,575,000 $ 36,796,750
American Home Mortgage Investment 406,600 10,543,138
Apartment Investment & Management 633,700 19,727,081
LNR Property Corporation 722,500 39,195,625
MI Developments Inc. 1,802,100 48,656,700
St. Joe Company 451,800 17,936,460
---------------
172,855,754
ROAD & RAIL -- 2.51%
CSX Corporation 1,466,700 48,063,759
SOFTWARE -- 2.11%
Computer Associates International, Inc. 1,435,900 40,291,354
SPECIALTY RETAIL -- 0.96%
Foot Locker Inc. 757,500 18,437,550
TEXTILES, APPAREL & LUXURY GOODS -- 2.01%
Jones Apparel Group 736,100 29,061,228
Reebok International Limited 258,800 9,311,624
---------------
38,372,852
TOBACCO -- 0.44%
Loews Corporation -- Carolina Group 341,900 8,393,645
Total investments -- 96.27%
(Cost -- $1,618,490,264) 1,840,122,988
Time deposit* -- 4.72% 90,216,764
Liabilities in excess of other assets -- (0.99)% (18,938,631)
---------------
Net Assets -- 100.00% $ 1,911,401,121
</Table>
(a) -- NON-INCOME PRODUCING SECURITY.
* -- TIME DEPOSIT BEARS INTEREST AT 0.76% AND MATURES ON 07/01/2004.
SEE NOTES TO THE FINANCIAL STATEMENTS
14
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2004
SMALL CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 97.28% HELD VALUE
- --------------------------------------------------------------------------------
AIRLINES -- 2.61%
Airtran Holdings Inc. (a) 526,100 $ 7,439,054
Atlantic Coast Airlines (a) 1,337,600 7,677,824
---------------
15,116,878
AUTO COMPONENTS -- 1.65%
Hayes Lemmerz International (a) 634,400 9,579,440
CHEMICALS -- 4.59%
Agrium Inc. 1,053,700 15,331,335
FMC Corporation (a) 39,400 1,698,534
IMC Global, Inc. (a) 714,000 9,567,600
---------------
26,597,469
COMMERCIAL SERVICES & SUPPLIES -- 8.59%
Bowne & Company, Inc. 597,200 9,465,620
Heidrick & Struggles International, Inc. (a) 144,000 4,273,920
Ikon Office Solutions Inc. 494,300 5,669,621
Kelly Services Inc. 597,500 17,805,500
Mac-Gray Corporation (a) 40,300 263,562
Spherion Corporation (a) 1,213,800 12,307,932
---------------
49,786,155
CONSUMER FINANCE -- 0.60%
Americredit Corporation (a) 178,300 3,482,199
ELECTRIC UTILITIES -- 3.02%
Alliant Energy Corporation 359,000 9,362,720
Northeast Utilities 416,700 8,113,149
---------------
17,475,869
FOOD & STAPLES RETAILING -- 3.28%
BJ's Wholesale Club (a) 560,000 14,000,000
Pathmark Stores Inc. (a) 652,600 4,972,812
---------------
18,972,812
FOOD PRODUCTS -- 0.41%
Del Monte Foods Company (a) 234,000 2,377,440
GAS UTILITIES -- 1.34%
Southern Union Company (a) 368,800 7,774,304
HEALTH CARE PROVIDERS & SERVICES -- 2.41%
Lifepoint Hospitals (a) 112,900 $ 4,202,138
Magellan Health Services (a) 291,700 9,757,365
---------------
13,959,503
HOTELS, RESTAURANTS & LEISURE -- 5.69%
Isle of Capri Casinos, Inc. (a) 20,600 359,470
Jack in the Box, Inc. (a) 381,200 11,321,640
La Quinta Properties Inc. (a) 1,387,400 11,654,160
Lodgian Inc. (a) 529,009 5,581,045
Magna Entertainment Corporation (a) 680,400 4,014,360
---------------
32,930,675
HOUSEHOLD DURABLES -- 11.43%
Beazer Homes USA, Inc. 278,000 27,886,180
Brookfield Homes Corporation 82,700 2,165,913
Furniture Brands International, Inc. 282,800 7,084,140
M/I Homes Inc. 32,400 1,315,440
Toll Brothers, Inc. (a) 168,800 7,143,616
WCI Communities Inc. (a) 923,600 20,605,516
---------------
66,200,805
INSURANCE -- 5.19%
Allmerica Financial Corporation (a) 650,100 21,973,380
Conseco Inc. (a) 148,600 2,957,140
United National Group (a) 338,700 5,117,757
---------------
30,048,277
IT SERVICES -- 2.49%
Bearingpoint Inc. (a) 1,626,200 14,424,394
MACHINERY -- 0.46%
Joy Global, Inc. 89,800 2,688,612
MARINE -- 3.42%
Alexander & Baldwin Inc. 592,900 19,832,505
MEDIA -- 4.04%
R.H. Donnelley Corporation (a) 118,300 5,174,442
Valassis Communications (a) 597,600 18,208,872
---------------
23,383,314
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
15
<Page>
<Table>
<Caption>
SHARES
HELD VALUE
- --------------------------------------------------------------------------------
MULTI-UTILITIES -- 1.17%
Sierra Pacific Resources (a) 879,700 $ 6,782,487
OIL & GAS -- 7.96%
Ashland Inc. 58,400 3,084,104
Giant Industries Inc. (a) 163,300 3,592,600
Overseas Shipholding Group 514,300 22,696,059
Stellmar Shipping Limited 327,700 10,863,255
Teekay Shipping Corporation 157,600 5,891,088
---------------
46,127,106
PAPER & FOREST PRODUCTS -- 0.90%
Pope & Talbot Inc. 264,700 5,233,119
REAL ESTATE -- 14.63%
American Financial Realty Trust 92,800 1,326,112
American Financial Realty Trust 144A (r) 488,000 6,973,520
American Home Mortgage Investment 415,000 10,760,950
Fieldstone Investment 144A (r) 542,400 8,542,800
First Industrial Realty Trust 42,900 1,582,152
Friedman Billings Ramsey Group 69,420 1,373,822
LNR Property Corporation 498,800 27,059,900
MI Developments Inc. 859,500 23,206,500
St. Joe Company 98,800 3,922,360
---------------
84,748,116
ROAD & RAIL -- 0.78%
Central Freight Lines Inc. (a) 563,800 4,510,400
SOFTWARE -- 1.75%
Concord Communications (a) 462,800 5,280,548
Parametric Technology Corporation (a) 971,343 4,856,715
---------------
10,137,263
SPECIALTY RETAIL -- 2.68%
Foot Locker, Inc. 368,900 8,979,026
Genesco, Inc. (a) 208,600 4,929,218
Group 1 Automotive Inc. (a) 15,700 521,397
Stage Stores, Inc. (a) 28,800 1,084,608
---------------
15,514,249
TEXTILES, APPAREL & LUXURY GOODS -- 4.97%
Warnaco Group Inc. (a) 1,352,400 $ 28,765,548
THRIFTS & MORTGAGE FINANCE -- 0.36%
Timberland Bancorp 92,800 2,074,080
WIRELESS TELECOMMUNICATION SERVICES -- 0.86%
Metrocall Holdings Inc. (a) 74,000 4,958,000
Total Common Stocks -- 97.28%
(Cost $443,193,536) 563,481,019
<Caption>
BONDS -- 0.07% PRINCIPAL
(COST $372,000) AMOUNT
- --------------------------------------------------------------------------------
Brookfield Homes Corporation Bond,
12% due 6/30/20 $ 372,000 385,950
Total investments -- 97.35%
(Cost -- $443,565,536) 563,866,969
Time deposit* -- 2.18% 12,640,056
Other assets in excess of liabilities -- 0.47% 2,689,909
---------------
Net Assets -- 100.00% $ 579,196,934
</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 QUALIFIED
INSTITUTIONAL BUYERS.
* -- TIME DEPOSIT BEARS INTEREST AT 0.76% AND MATURES ON 07/01/2004.
SEE NOTES TO THE FINANCIAL STATEMENTS
16
<Page>
SCHEDULE OF INVESTMENTS -- JUNE 30, 2004
ALL CAP VALUE FUND
<Table>
<Caption>
COMMON SHARES
STOCKS -- 97.95% HELD VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 0.98%
Lockheed Martin Corporation 14,900 $ 775,992
AIRLINES -- 2.00%
Atlantic Coast Airlines (a) 274,100 1,573,334
COMMERCIAL BANKS -- 0.18%
Signature Bank NY (a) 6,058 143,938
COMMERCIAL SERVICES & SUPPLIES -- 0.15%
Cendant Corporation 4,700 115,056
DIVERSIFIED FINANCIAL SERVICES -- 0.92%
Principal Financial Group, Inc. 20,900 726,902
FOOD & STAPLES RETAILING -- 0.98%
Albertsons Inc. 29,200 774,968
HEALTH CARE PROVIDERS & SERVICES -- 5.81%
Magellan Health Services (a) 81,500 2,726,175
Tenet Healthcare Corporation (a) 138,000 1,850,580
---------------
4,576,755
HOTELS, RESTAURANTS & LEISURE -- 4.93%
Jack in the Box Inc. (a) 72,500 2,153,250
Mandalay Resort Group 24,400 1,674,816
Yum! Brands, Inc. (a) 1,500 55,830
---------------
3,883,896
HOUSEHOLD DURABLES -- 9.28%
Toll Brothers, Inc. (a) 7,400 313,168
WCI Communities Inc. (a) 314,000 7,005,340
---------------
7,318,508
INDUSTRIAL CONGLOMERATES -- 0.31%
Tyco International Limited 7,400 245,236
INSURANCE -- 18.42%
Allmerica Financial Corporation (a) 269,000 9,092,200
Metlife, Inc. 20,000 717,000
Prudential Financial, Inc. 42,800 1,988,916
The St Paul Companies Inc. 29,000 1,175,660
Unumprovident Corporation 97,700 1,553,430
---------------
14,527,206
IT SERVICES -- 6.19%
Electronic Data Systems Corporation 255,000 $ 4,883,250
MACHINERY -- 0.65%
Miller Industries Inc. (a) 52,100 513,706
MULTILINE RETAIL -- 12.80%
J.C. Penney Company, Inc. 12,300 464,448
Sears, Roebuck & Company 255,000 9,628,800
---------------
10,093,248
REAL ESTATE -- 23.11%
American Financial Realty Trust 101,400 1,449,006
American Financial Realty Trust 144A (r) 2,000 28,580
American Home Mortgage Investment 131,300 3,404,609
Apartment Investment & Management 51,600 1,606,308
Capital Lease Funding (a) 246,500 2,563,600
Fieldstone Investment 144A (r) 188,900 2,975,175
Government Properties Trust 363,100 3,794,395
MI Developments Inc. 88,700 2,394,900
---------------
18,216,573
SOFTWARE -- 4.19%
Computer Associates International, Inc. 117,700 3,302,662
TEXTILES, APPAREL & LUXURY GOODS -- 4.89%
Warnaco Group Inc. (a) 181,400 3,858,378
THRIFTS & MORTGAGE FINANCE -- 2.16%
Amnet Mortgage Inc. (a) 138,000 1,421,400
Saxon Capital Inc. (a) 12,500 285,375
---------------
1,706,775
Total investments -- 97.95%
(Cost -- $73,315,309) 77,236,383
Time deposit* -- 2.72% 2,145,926
Liabilities in excess of other assets -- (0.67)% (528,272)
---------------
Net Assets -- 100.0% $ 78,854,037
</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 QUALIFIED
INSTITUTIONAL BUYERS.
* -- TIME DEPOSIT BEARS INTEREST AT 0.76% AND MATURES ON 07/01/2004.
SEE NOTES TO THE FINANCIAL STATEMENTS
17
<Page>
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2004
<Table>
<Caption>
LARGE CAP VALUE MID-CAP VALUE SMALL CAP VALUE ALL CAP VALUE
FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value* $ 566,082,823 $ 1,840,122,988 $ 563,866,969 $ 77,236,383
Time deposit 46,655,314 90,216,764 12,640,056 2,145,926
Dividends and interest receivable 761,552 1,259,555 495,884 190,872
Receivable for investments sold -- -- 703,161 --
Receivable for Fund shares sold 14,875,502 11,295,519 5,936,549 1,227,065
--------------- --------------- --------------- ---------------
Total assets $ 628,375,191 $ 1,942,894,826 $ 583,642,619 $ 80,800,246
--------------- --------------- --------------- ---------------
LIABILITIES:
Payable for investments purchased $ 28,465,871 $ 29,797,542 $ 3,811,600 $ 1,851,557
Payable for Fund shares repurchased 222,828 1,198,614 314,179 57,689
Accrued expenses and other liabilities 136,538 497,549 319,906 36,963
--------------- --------------- --------------- ---------------
Total liabilities 28,825,237 31,493,705 4,445,685 1,946,209
--------------- --------------- --------------- ---------------
Net assets $ 599,549,954 $ 1,911,401,121 $ 579,196,934 $ 78,854,037
=============== =============== =============== ===============
NET ASSETS CONSIST OF:
Paid in capital $ 532,338,589 $ 1,658,534,382 $ 387,642,032 $ 74,808,026
Undistributed net investment income -- net 1,063,373 1,614,259 254,783 14,468
Undistributed net realized gains on securities 1,205,706 29,619,756 70,998,686 110,469
Net unrealized appreciation of securities 64,942,286 221,632,724 120,301,433 3,921,074
--------------- --------------- --------------- ---------------
Net assets $ 599,549,954 $ 1,911,401,121 $ 579,196,934 $ 78,854,037
=============== =============== =============== ===============
CALCULATION OF NET ASSET VALUE PER SHARE -- CLASS A
Net assets $ 311,595,551 $ 755,748,501 $ 217,832,830 $ 35,437,625
Shares outstanding (unlimited shares $0.001 par
value authorized) 15,545,037 30,930,361 4,284,502 2,073,651
Net asset value per share $ 20.04 $ 24.43 $ 50.84 $ 17.09
=============== =============== =============== ===============
PUBLIC OFFERING PRICE PER SHARE -- CLASS A
($20.04 divided by .9475, $24.43 divided by .9475,
$50.84 divided by .9475, $17.09 divided by .9475) $ 21.15 $ 25.78 $ 53.66 $ 18.04
=============== =============== =============== ===============
CALCULATION OF NET ASSET VALUE PER SHARE AND PUBLIC
OFFERING PRICE PER SHARE -- CLASS B
Net assets $ 6,584,399 $ 42,018,182 $ 11,247,895
Shares outstanding (unlimited shares $0.001 par
value authorized) 331,851 1,753,137 227,690
Net asset value per share $ 19.84 $ 23.97 $ 49.40
=============== =============== ===============
CALCULATION OF NET ASSET VALUE PER SHARE AND PUBLIC
OFFERING PRICE PER SHARE -- CLASS C
Net assets $ 78,986,352 $ 201,360,225 $ 25,132,147 $ 20,738,727
Shares outstanding (unlimited shares $0.001 par
value authorized) 3,981,327 8,392,804 508,260 1,228,438
Net asset value per share $ 19.84 $ 23.99 $ 49.45 $ 16.88
=============== =============== =============== ===============
CALCULATION OF NET ASSET VALUE PER SHARE AND PUBLIC
OFFERING PRICE PER SHARE -- CLASS R
Net assets $ 1,664,642 $ 4,031,911
Shares outstanding (unlimited shares $0.001 par
value authorized) 82,199 162,726
Net asset value per share $ 20.25 $ 24.78
=============== ===============
CALCULATION OF NET ASSET VALUE PER SHARE AND PUBLIC
OFFERING PRICE PER SHARE -- CLASS I
Net assets $ 200,719,010 $ 908,242,302 $ 324,984,062 $ 22,677,685
Shares outstanding (unlimited shares $0.001 par
value authorized) 9,992,135 37,030,784 6,430,115 1,332,262
Net asset value per share $ 20.09 $ 24.53 $ 50.54 $ 17.02
=============== =============== =============== ===============
*Cost of investments $ 501,140,537 $ 1,618,490,264 $ 443,565,536 $ 73,315,309
=============== =============== =============== ===============
</Table>
SEE NOTES TO THE FINANCIAL STATEMENTS
18
<Page>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2004
<Table>
<Caption>
LARGE CAP VALUE MID-CAP VALUE SMALL CAP VALUE ALL CAP VALUE
FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Income*
Dividends $ 4,875,806 $ 14,173,188 $ 5,152,124 $ 634,123
Interest 69,835 229,082 69,864 5,682
Other 273 1,278 210 --
--------------- --------------- --------------- ---------------
Total Income 4,945,914 14,403,548 5,222,198 639,805
--------------- --------------- --------------- ---------------
EXPENSES:
Advisory fees 1,965,806 6,813,743 3,563,811 311,361
Professional fees and expenses 31,355 78,926 58,386 17,537
Custodian fees and expenses 21,053 58,649 33,902 7,584
Transfer agent fees and expenses 338,736 1,263,781 1,043,261 74,767
Accounting fees and expenses 104,469 212,976 131,115 48,377
Administration fees 222,928 772,796 408,801 35,113
Trustees' fees and expenses 8,521 29,948 19,588 1,344
Reports to shareholders 15,300 51,933 45,955 1,710
Registration fees 61,721 82,106 54,163 40,982
Distribution and services fees -- Class A 332,504 788,608 494,600 45,432
Distribution and services fees -- Class B 35,321 280,971 90,441 --
Distribution and services fees -- Class C 290,921 934,430 207,211 91,952
Distribution and services fees -- Class R 1,672 4,694 -- --
Other expenses 11,521 37,840 33,761 1,240
--------------- --------------- --------------- ---------------
Total expenses 3,441,828 11,411,401 6,184,995 677,399
Less, expense waiver (77,645) -- -- (40,056)
--------------- --------------- --------------- ---------------
Net expenses 3,364,183 11,411,401 6,184,995 637,343
--------------- --------------- --------------- ---------------
Net investment income (loss) 1,581,731 2,992,147 (962,797) 2,462
--------------- --------------- --------------- ---------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gains on securities 2,908,226 40,472,180 81,833,279 142,322
Net change in unrealized appreciation/depreciation
of securities 54,161,567 196,949,255 88,252,916 3,642,569
--------------- --------------- --------------- ---------------
Net gains on investments 57,069,793 237,421,435 170,086,195 3,784,891
--------------- --------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 58,651,524 $ 240,413,582 $ 169,123,398 $ 3,787,353
=============== =============== =============== ===============
*Net of Foreign Taxes Withheld $ -- $ 50,790 $ 33,614 $ 2,913
=============== =============== =============== ===============
</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, 2004 JUNE 30, 2003
- ------------------------------------------------------------------------------------
OPERATIONS:
Net investment income (loss) $ 1,581,731 $ 648,527
Net realized gains (losses) on securities 2,908,226 62,972
Net change in unrealized appreciation/
depreciation of securities 54,161,567 4,583,327
--------------- ---------------
Net increase in net assets resulting
from operations 58,651,524 5,294,826
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Investment income -- net:
Class I (433,595) (402,376)
Class A (381,639) (104,103)
Class B (2,935) (1,610)
Class C (26,203) (5,830)
Realized gain on investments -- net:
Class I (326,451) (2,763,994)
Class A (424,491) (593,175)
Class B (12,781) (16,162)
Class C (73,612) (82,303)
Class R -- --
--------------- ---------------
Net decrease in net assets resulting
from dividends and distributions to
shareholders (1,681,707) (3,969,553)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from
capital share transactions 466,845,207 27,364,247
--------------- ---------------
NET ASSETS:
Total increase in net assets 523,815,024 28,689,520
Beginning of year 75,734,930 47,045,410
--------------- ---------------
End of year* $ 599,549,954 $ 75,734,930
=============== ===============
</Table>
^ Commencement of operations.
SEE NOTES TO THE FINANCIAL STATEMENTS
20
<Page>
<Table>
<Caption>
MID-CAP VALUE FUND
----------------------------------
YEAR ENDED YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
- ------------------------------------------------------------------------------------
OPERATIONS:
Net investment income (loss) $ 2,992,147 $ 971,058
Net realized gains (losses) on securities 40,472,180 (290,749)
Net change in unrealized appreciation/
depreciation of securities 196,949,255 22,562,435
--------------- ---------------
Net increase in net assets resulting
from operations 240,413,582 23,242,744
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Investment income -- net:
Class I (1,368,825) (282,763)
Class A (587,101) (61,148)
Class B (16,323) --
Class C (390) --
Realized gain on investments -- net:
Class I (5,828,896) (1,750,822)
Class A (3,336,607) (595,947)
Class B (395,838) (224,549)
Class C (1,107,621) (207,278)
Class R (1,658) --
--------------- ---------------
Net decrease in net assets resulting
from dividends and distributions to
shareholders (12,643,259) (3,122,507)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from
capital share transactions 1,432,295,894 128,236,404
--------------- ---------------
NET ASSETS:
Total increase in net assets 1,660,066,217 148,356,641
Beginning of year 251,334,904 102,978,263
--------------- ---------------
End of year* $ 1,911,401,121 $ 251,334,904
=============== ===============
<Caption>
SMALL CAP VALUE FUND
----------------------------------
YEAR ENDED YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
- ------------------------------------------------------------------------------------
OPERATIONS:
Net investment income (loss) $ (962,797) $ 351,737
Net realized gains (losses) on securities 81,833,279 3,442,200
Net change in unrealized appreciation/
depreciation of securities 88,252,916 25,466,956
--------------- ---------------
Net increase in net assets resulting
from operations 169,123,398 29,260,893
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Investment income -- net:
Class I (113,240) (166,924)
Class A -- (76,338)
Class B -- (1,797)
Class C -- (2,813)
Realized gain on investments -- net:
Class I (4,556,091) --
Class A (3,814,494) --
Class B (174,267) --
Class C (409,097) --
Class R -- --
--------------- ---------------
Net decrease in net assets resulting
from dividends and distributions to
shareholders (9,067,189) (247,872)
--------------- ---------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from
capital share transactions 157,887,481 116,899,975
--------------- ---------------
NET ASSETS:
Total increase in net assets 317,943,690 145,912,996
Beginning of year 261,253,244 115,340,248
--------------- ---------------
End of year* $ 579,196,934 $ 261,253,244
=============== ===============
<Caption>
ALL CAP VALUE FUND
----------------------------------------
PERIOD
YEAR ENDED DECEMBER 31, 2002^
JUNE 30, 2004 THROUGH JUNE 30, 2003
- ------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income (loss) $ 2,462 $ 3,113
Net realized gains (losses) on securities 142,322 15,113
Net change in unrealized appreciation/
depreciation of securities 3,642,569 278,505
--------------- ---------------------
Net increase in net assets resulting
from operations 3,787,353 296,731
--------------- ---------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Investment income -- net:
Class I (11,531) --
Class A (5,272) --
Class B -- --
Class C (522) --
Realized gain on investments -- net:
Class I (14,502) --
Class A (12,762) --
Class B -- --
Class C (5,490) --
Class R -- --
--------------- ---------------------
Net decrease in net assets resulting
from dividends and distributions to
shareholders (50,079) --
--------------- ---------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from
capital share transactions 71,556,996 3,263,036
--------------- ---------------------
NET ASSETS:
Total increase in net assets 75,294,270 3,559,767
Beginning of year 3,559,767 --
--------------- ---------------------
End of year* $ 78,854,037 $ 3,559,767
=============== =====================
</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>
<Caption>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET GAINS
(LOSSES) ON
NET ASSET SECURITIES
VALUE, NET (BOTH TOTAL FROM
BEGINNING INVESTMENT REALIZED AND INVESTMENT
LARGE CAP VALUE FUND OF PERIOD INCOME UNREALIZED) OPERATIONS
- -------------------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ 15.26 $ 0.10 $ 4.92 $ 5.02
Year ended 6/30/2003 15.99 0.17 0.36 0.53
Year ended 6/30/2002 16.82 0.22 (0.32) (0.10)
Year ended 6/30/2001 13.02 0.31 3.80 4.11
Year ended 6/30/2000 19.96 0.39 (4.14) (3.75)
CLASS A
Year ended 6/30/2004 15.25 0.11 4.85 4.96
Year ended 6/30/2003 15.98 0.16 0.35 0.51
Period from 10/26/2001(1) to 6/30/2002 15.57 0.13 0.87 1.00
CLASS B
Year ended 6/30/2004 15.14 -- 4.79 4.79
Year ended 6/30/2003 15.93 0.04 0.36 0.40
Period from 2/4/2002(1) to 6/30/2002 15.60 0.02 0.31 0.33
CLASS C
Year ended 6/30/2004 15.15 (0.13) 4.93 4.80
Year ended 6/30/2003 15.92 (0.16) 0.56 0.40
Period from 2/4/2002(1) to 6/30/2002 15.60 0.03 0.29 0.32
CLASS R
Period from 8/28/2003(1) to 6/30/2004 16.26 0.02 3.97 3.99
<Caption>
DIVIDENDS AND DISTRIBUTIONS
--------------------------------------------
DIVIDENDS DISTRIBUTIONS
(FROM NET (FROM
INVESTMENT CAPITAL TOTAL
LARGE CAP VALUE FUND INCOME) GAINS) DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ (0.12) $ (0.07) $ (0.19)
Year ended 6/30/2003 (0.16) (1.10) (1.26)
Year ended 6/30/2002 (0.15) (0.58) (0.73)
Year ended 6/30/2001 (0.31) -- (0.31)
Year ended 6/30/2000 (0.39) (2.80) (3.19)
CLASS A
Year ended 6/30/2004 (0.10) (0.07) (0.17)
Year ended 6/30/2003 (0.14) (1.10) (1.24)
Period from 10/26/2001(1) to 6/30/2002 (0.09) (0.50) (0.59)
CLASS B
Year ended 6/30/2004 (0.02) (0.07) (0.09)
Year ended 6/30/2003 (0.09) (1.10) (1.19)
Period from 2/4/2002(1) to 6/30/2002 -- -- --
CLASS C
Year ended 6/30/2004 (0.04) (0.07) (0.11)
Year ended 6/30/2003 (0.07) (1.10) (1.17)
Period from 2/4/2002(1) to 6/30/2002 -- -- --
CLASS R
Period from 8/28/2003(1) to 6/30/2004 -- -- --
<Caption>
NET ASSETS,
NET ASSET END OF
VALUE, END TOTAL PERIOD (IN
LARGE CAP VALUE FUND OF PERIOD RETURN(2) THOUSANDS)
- ----------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ 20.09 33.20% $ 200,719
Year ended 6/30/2003 15.26 4.95 44,077
Year ended 6/30/2002 15.99 (0.38) 39,215
Year ended 6/30/2001 16.82 31.90 47,271
Year ended 6/30/2000 13.02 (19.82) 79,313
CLASS A
Year ended 6/30/2004 20.04 32.78 311,596
Year ended 6/30/2003 15.25 4.79 28,704
Period from 10/26/2001(1) to 6/30/2002 15.98 6.51 6,546
CLASS B
Year ended 6/30/2004 19.84 31.78 6,584
Year ended 6/30/2003 15.14 4.05 546
Period from 2/4/2002(1) to 6/30/2002 15.93 2.12 193
CLASS C
Year ended 6/30/2004 19.84 31.83 78,986
Year ended 6/30/2003 15.15 4.05 2,408
Period from 2/4/2002(1) to 6/30/2002 15.92 2.05 1,092
CLASS R
Period from 8/28/2003(1) to 6/30/2004 20.25 24.54 1,665
<Caption>
RATIOS TO AVERAGE NET ASSETS
-------------------------------------------
EXPENSES, INVESTMENT
NET OF INCOME --
LARGE CAP VALUE FUND REIMBURSEMENT EXPENSES NET
- ----------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 1.03% 1.06% 0.85%
Year ended 6/30/2003 1.05 1.34 1.32
Year ended 6/30/2002 1.00 1.50 1.30
Year ended 6/30/2001 0.95 1.20 1.96
Year ended 6/30/2000 0.95 1.02 2.37
CLASS A
Year ended 6/30/2004 1.28 1.31 0.60
Year ended 6/30/2003 1.30 1.59 1.07
Period from 10/26/2001(1) to 6/30/2002 1.25(3) 1.75(3) 1.05(3)
CLASS B
Year ended 6/30/2004 2.03 2.06 (0.15)
Year ended 6/30/2003 2.05 2.34 0.32
Period from 2/4/2002(1) to 6/30/2002 2.00(3) 2.50(3) 0.30(3)
CLASS C
Year ended 6/30/2004 2.03 2.06 (0.14)
Year ended 6/30/2003 2.05 2.34 0.32
Period from 2/4/2002(1) to 6/30/2002 2.00(3) 2.50(3) 0.30(3)
CLASS R
Period from 8/28/2003(1) to 6/30/2004 1.71(3) 1.74(3) 0.53(3)
</Table>
<Table>
<Caption>
YEAR ENDED JUNE 30,
------------------------------------
2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 5% 35% 96% 26% 41%
</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 FEES 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>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<Table>
<Caption>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET GAINS
(LOSSES) ON
NET ASSET SECURITIES
VALUE, NET (BOTH TOTAL FROM
BEGINNING INVESTMENT REALIZED AND INVESTMENT
MID-CAP VALUE FUND OF PERIOD INCOME UNREALIZED) OPERATIONS
- -------------------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ 17.64 $ 0.06 $ 7.24 $ 7.30
Year ended 6/30/2003 17.01 0.09 0.93 1.02
Year ended 6/30/2002 17.14 0.11 0.68 0.79
Year ended 6/30/2001 12.75 0.18 4.84 5.02
Year ended 6/30/2000 12.03 0.18 0.97 1.15
CLASS A
Year ended 6/30/2004 17.61 0.03 7.18 7.21
Year ended 6/30/2003 16.99 0.05 0.94 0.99
Year ended 6/30/2002 17.12 0.11 0.66 0.77
Period from 1/2/2001(1) to 6/30/2001 15.02 0.04 2.06 2.10
CLASS B
Year ended 6/30/2004 17.36 (0.06) 7.00 6.94
Year ended 6/30/2003 16.85 (0.02) 0.87 0.85
Year ended 6/30/2002 17.06 -- 0.63 0.63
Period from 1/2/2001(1) to 6/30/2001 15.02 0.01 2.03 2.04
CLASS C
Year ended 6/30/2004 17.38 (0.03) 6.97 6.94
Year ended 6/30/2003 16.87 (0.01) 0.86 0.85
Year ended 6/30/2002 17.07 0.02 0.62 0.64
Period from 1/2/2001(1) to 6/30/2001 15.02 --(4) 2.05 2.05
CLASS R
Period 8/28/2003(1) through 6/30/2004 19.33 0.08 5.78 5.86
<Caption>
DIVIDENDS AND DISTRIBUTIONS
--------------------------------------------
DIVIDENDS DISTRIBUTIONS
(FROM NET (FROM
INVESTMENT CAPITAL TOTAL
MID-CAP VALUE FUND INCOME) GAINS) DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ (0.08) $ (0.33) $ (0.41)
Year ended 6/30/2003 (0.05) (0.34) (0.39)
Year ended 6/30/2002 (0.15) (0.77) (0.92)
Year ended 6/30/2001 (0.27) (0.36) (0.63)
Year ended 6/30/2000 (0.14) (0.29) (0.43)
CLASS A
Year ended 6/30/2004 (0.06) (0.33) (0.39)
Year ended 6/30/2003 (0.03) (0.34) (0.37)
Year ended 6/30/2002 (0.13) (0.77) (0.90)
Period from 1/2/2001(1) to 6/30/2001 -- -- --
CLASS B
Year ended 6/30/2004 -- (0.33) (0.33)
Year ended 6/30/2003 -- (0.34) (0.34)
Year ended 6/30/2002 (0.07) (0.77) (0.84)
Period from 1/2/2001(1) to 6/30/2001 -- -- --
CLASS C
Year ended 6/30/2004 -- (0.33) (0.33)
Year ended 6/30/2003 -- (0.34) (0.34)
Year ended 6/30/2002 (0.07) (0.77) (0.84)
Period from 1/2/2001(1) to 6/30/2001 -- -- --
CLASS R
Period 8/28/2003(1) through 6/30/2004 (0.08) (0.33) (0.41)
<Caption>
NET ASSETS,
NET ASSET END OF
VALUE, END TOTAL PERIOD (IN
MID-CAP VALUE FUND OF PERIOD RETURN(2) THOUSANDS)
- ----------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ 24.53 41.67% $ 908,242
Year ended 6/30/2003 17.64 6.46 162,404
Year ended 6/30/2002 17.01 4.77 63,741
Year ended 6/30/2001 17.14 40.36 30,198
Year ended 6/30/2000 12.75 10.41 10,260
CLASS A
Year ended 6/30/2004 24.43 41.21 755,749
Year ended 6/30/2003 17.61 6.26 60,159
Year ended 6/30/2002 16.99 4.64 18,790
Period from 1/2/2001(1) to 6/30/2001 17.12 13.98 844
CLASS B
Year ended 6/30/2004 23.97 40.21 42,018
Year ended 6/30/2003 17.36 5.41 13,562
Year ended 6/30/2002 16.85 3.82 11,363
Period from 1/2/2001(1) to 6/30/2001 17.06 13.58 3,925
CLASS C
Year ended 6/30/2004 23.99 40.19 201,360
Year ended 6/30/2003 17.38 5.40 15,209
Year ended 6/30/2002 16.87 3.85 9,084
Period from 1/2/2001(1) to 6/30/2001 17.07 13.65 2,400
CLASS R
Period 8/28/2003(1) through 6/30/2004 24.78 30.58 4,032
<Caption>
RATIOS TO AVERAGE NET ASSETS
-------------------------------------------
EXPENSES, INVESTMENT
NET OF INCOME --
MID-CAP VALUE FUND REIMBURSEMENT EXPENSES NET
- ----------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 1.03% 1.03% 0.55%
Year ended 6/30/2003 1.15 1.22 0.88
Year ended 6/30/2002 1.15 1.40 0.94
Year ended 6/30/2001 1.15 1.57 1.91
Year ended 6/30/2000 1.15 1.92 2.12
CLASS A
Year ended 6/30/2004 1.28 1.28 0.30
Year ended 6/30/2003 1.40 1.47 0.63
Year ended 6/30/2002 1.40 1.65 0.69
Period from 1/2/2001(1) to 6/30/2001 1.40(3) 2.22(3) 1.02(3)
CLASS B
Year ended 6/30/2004 2.04 2.04 (0.45)
Year ended 6/30/2003 2.15 2.22 (0.12)
Year ended 6/30/2002 2.15 2.40 (0.07)
Period from 1/2/2001(1) to 6/30/2001 2.15(3) 2.96(3) 0.23(3)
CLASS C
Year ended 6/30/2004 2.04 2.04 (0.45)
Year ended 6/30/2003 2.15 2.22 (0.12)
Year ended 6/30/2002 2.15 2.40 (0.07)
Period from 1/2/2001(1) to 6/30/2001 2.14(3) 2.96(3) 0.18(3)
CLASS R
Period 8/28/2003(1) through 6/30/2004 1.72(3) 1.72(3) 0.16(3)
</Table>
<Table>
<Caption>
YEAR ENDED JUNE 30,
------------------------------------
2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 25% 56% 82% 138% 179%
</Table>
(1) COMMENCEMENT OF OPERATIONS.
(2) TOTAL RETURNS EXCLUDE THE EFFECTS OF SALES CHARGES. PRIOR TO 7/1/2003, THE
FUND'S INVESTMENT ADVISOR WAIVED A PORTION OF ITS ADVISORY FEES 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>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<Table>
<Caption>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET GAINS
(LOSSES) ON
NET ASSET SECURITIES
VALUE, NET (BOTH TOTAL FROM
BEGINNING INVESTMENT REALIZED AND INVESTMENT
SMALL CAP VALUE FUND OF PERIOD INCOME UNREALIZED) OPERATIONS
- -------------------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ 34.55 $ 0.07 $ 16.77 $ 16.84
Year ended 6/30/2003 31.83 0.08 2.69 2.77
Year ended 6/30/2002 26.63 0.07 5.33 5.40
Year ended 6/30/2001 17.11 0.25 9.28 9.53
Year ended 6/30/2000 21.02 0.02 (3.93) (3.91)
CLASS A
Year ended 6/30/2004 34.81 (0.01) 16.87 16.86
Year ended 6/30/2003 32.12 (0.11) 2.85 2.74
Year ended 6/30/2002 26.86 0.20 5.26 5.46
Period from 10/6/2000(1) to 6/30/2001 19.64 0.16 7.07 7.23
CLASS B
Year ended 6/30/2004 34.10 (0.26) 16.39 16.13
Year ended 6/30/2003 31.71 (0.13) 2.55 2.42
Period from 2/4/2002(1) to 6/30/2002 28.84 (0.03) 2.90 2.87
CLASS C
Year ended 6/30/2004 34.13 (0.24) 16.39 16.15
Year ended 6/30/2003 31.71 (0.14) 2.58 2.44
Period from 2/4/2002(1) to 6/30/2002 28.84 (0.04) 2.91 2.87
<Caption>
DIVIDENDS AND DISTRIBUTIONS
--------------------------------------------
DIVIDENDS DISTRIBUTIONS
(FROM NET (FROM
INVESTMENT CAPITAL TOTAL
SMALL CAP VALUE FUND INCOME) GAINS) DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ (0.02) $ (0.83) $ (0.85)
Year ended 6/30/2003 (0.05) -- (0.05)
Year ended 6/30/2002 (0.20) -- (0.20)
Year ended 6/30/2001 (0.01) -- (0.01)
Year ended 6/30/2000 -- -- --
CLASS A
Year ended 6/30/2004 -- (0.83) (0.83)
Year ended 6/30/2003 (0.05) -- (0.05)
Year ended 6/30/2002 (0.20) -- (0.20)
Period from 10/6/2000(1) to 6/30/2001 (0.01) -- (0.01)
CLASS B
Year ended 6/30/2004 -- (0.83) (0.83)
Year ended 6/30/2003 (0.03) -- (0.03)
Period from 2/4/2002(1) to 6/30/2002 -- -- --
CLASS C
Year ended 6/30/2004 -- (0.83) (0.83)
Year ended 6/30/2003 (0.02) -- (0.02)
Period from 2/4/2002(1) to 6/30/2002 -- -- --
<Caption>
NET ASSETS,
NET ASSET END OF
VALUE, END TOTAL PERIOD (IN
SMALL CAP VALUE FUND OF PERIOD RETURN(2) THOUSANDS)
- ----------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ 50.54 49.06% $ 324,984
Year ended 6/30/2003 34.55 8.72 136,680
Year ended 6/30/2002 31.83 20.45 97,458
Year ended 6/30/2001 26.63 55.69 48,773
Year ended 6/30/2000 17.11 (18.60) 32,233
CLASS A
Year ended 6/30/2004 50.84 48.70 217,833
Year ended 6/30/2003 34.81 8.57 111,208
Year ended 6/30/2002 32.12 20.47 13,660
Period from 10/6/2000(1) to 6/30/2001 26.86 38.28 26
CLASS B
Year ended 6/30/2004 49.40 47.60 11,248
Year ended 6/30/2003 34.10 7.63 4,689
Period from 2/4/2002(1) to 6/30/2002 31.71 9.99 738
CLASS C
Year ended 6/30/2004 49.45 47.62 25,132
Year ended 6/30/2003 34.13 7.66 8,676
Period from 2/4/2002(1) to 6/30/2002 31.71 9.99 3,484
<Caption>
RATIOS TO AVERAGE NET ASSETS
-------------------------------------------
EXPENSES, INVESTMENT
NET OF INCOME --
SMALL CAP VALUE FUND REIMBURSEMENT EXPENSES NET
- ----------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 1.14 1.14 (0.04)
Year ended 6/30/2003 1.22 1.25 0.36
Year ended 6/30/2002 1.24 1.32 0.49
Year ended 6/30/2001 1.24 1.32 1.16
Year ended 6/30/2000 1.32 1.32 0.11
CLASS A
Year ended 6/30/2004 1.39 1.39 (0.29)
Year ended 6/30/2003 1.47 1.50 0.11
Year ended 6/30/2002 1.49 1.57 0.24
Period from 10/6/2000(1) to 6/30/2001 1.50(3) 1.62(3) 1.42(3)
CLASS B
Year ended 6/30/2004 2.14 2.14 (1.04)
Year ended 6/30/2003 2.22 2.25 (0.64)
Period from 2/4/2002(1) to 6/30/2002 2.24(3) 2.32(3) (0.51)(3)
CLASS C
Year ended 6/30/2004 2.14 2.14 (1.04)
Year ended 6/30/2003 2.22 2.25 (0.64)
Period from 2/4/2002(1) to 6/30/2002 2.24(3) 2.32(3) (0.51)(3)
</Table>
<Table>
<Caption>
YEAR ENDED JUNE 30,
------------------------------------
2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 64% 54% 75% 197% 97%
</Table>
(1) COMMENCEMENT OF OPERATIONS.
(2) TOTAL RETURNS EXCLUDE THE EFFECTS OF SALES CHARGES. PRIOR TO 7/1/2003, THE
FUND'S INVESTMENT ADVISOR WAIVED A PORTION OF ITS ADVISORY FEES 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>
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS.
<Table>
<Caption>
INCOME FROM INVESTMENT OPERATIONS
----------------------------------------
NET GAINS
(LOSSES) ON
NET ASSET SECURITIES
VALUE, NET (BOTH TOTAL FROM
BEGINNING INVESTMENT REALIZED AND INVESTMENT
ALL CAP VALUE FUND OF PERIOD INCOME UNREALIZED) OPERATIONS
- -------------------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ 12.58 $ 0.03 $ 4.43 $ 4.46
Period 12/31/2002(1) to 6/30/2003 10.00 0.01 2.57 2.58
CLASS A
Year ended 6/30/2004 12.62 0.01 4.48 4.49
Period 12/31/2002(1) to 6/30/2003 10.00 0.03 2.59 2.62
CLASS C
Period 8/28/2003(1) to 6/30/2004 14.32 (0.04) 2.61 2.57
<Caption>
DIVIDENDS AND DISTRIBUTIONS
--------------------------------------------
DIVIDENDS DISTRIBUTIONS
(FROM NET (FROM
INVESTMENT CAPITAL TOTAL
ALL CAP VALUE FUND INCOME) GAINS) DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ (0.01) $ (0.01) $ (0.02)
Period 12/31/2002(1) to 6/30/2003 -- -- --
CLASS A
Year ended 6/30/2004 (0.01) (0.01) (0.02)
Period 12/31/2002(1) to 6/30/2003 -- -- --
CLASS C
Period 8/28/2003(1) to 6/30/2004 -- (0.01) (0.01)
<Caption>
NET ASSETS,
NET ASSET END OF
VALUE, END TOTAL PERIOD (IN
ALL CAP VALUE FUND OF PERIOD RETURN(2) THOUSANDS)
- ----------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 $ 17.02 35.48% $ 22,678
Period 12/31/2002(1) to 6/30/2003 12.58 25.80 3,560
CLASS A
Year ended 6/30/2004 17.09 35.56 35,438
Period 12/31/2002(1) to 6/30/2003 12.62 26.20 --
CLASS C
Period 8/28/2003(1) to 6/30/2004 16.88 17.97 20,739
<Caption>
RATIOS TO AVERAGE NET ASSETS
-------------------------------------------
EXPENSES, INVESTMENT
NET OF INCOME --
ALL CAP VALUE FUND REIMBURSEMENT EXPENSES NET
- ----------------------------------------------------------------------------------------
CLASS I
Year ended 6/30/2004 1.15% 1.25% 0.32%
Period 12/31/2002(1) to 6/30/2003 1.10(3) 5.84(3) 0.47(3)
CLASS A
Year ended 6/30/2004 1.40 1.50 0.07
Period 12/31/2002(1) to 6/30/2003 1.10(3) 5.84(3) 0.47(3)
CLASS C
Period 8/28/2003(1) to 6/30/2004 2.35(3) 2.46(3) (0.60)(3)
</Table>
<Table>
<Caption>
YEAR ENDED PERIOD DECEMBER 31, 2002(1)
JUNE 30, 2004 THROUGH JUNE 30, 2003
- -----------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 30% 11%
</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
25
<Page>
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004
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 five 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 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. The Hotchkis and Wiley Core Value Fund, the fifth series of the
Trust, was recently established and had no assets as of June 30, 2004.
The Large Cap Value Fund and Mid-Cap Value Fund have five classes of shares:
Class A, Class B, Class C, Class I and Class R. The Small Cap Value Fund and All
Cap Value Fund have four classes of shares: Class A, Class B, Class C and Class
I. The All Cap Value Fund has issued only Class I, Class A and Class C shares.
Class A shares are sold with a front-end sales charge. 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, Class C and Class R
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 Small Cap Value Fund is closed to new investors.
The Mid-Cap Value Fund is available to limited investors. Class B shares are no
longer available for purchase, with limited exceptions.
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. Actual results could differ from
those 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 the New York Stock Exchange (which is generally 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 continue 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 allocable 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 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 Fund. 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, 2005.
<Table>
<Caption>
LARGE CAP MID-CAP SMALL CAP ALL CAP
VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------------
Annual Advisory Fee 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 -- Class B 2.05% 2.15% 2.25% Not applicable
Annual cap on expenses -- Class C 2.05% 2.15% 2.25% 2.25%
Annual cap on expenses -- Class R 1.55% 1.65% Not applicable Not applicable
</Table>
27
<Page>
The Trust has also entered into a Distribution Agreement 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
1940, the Funds pay the Distributor 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%
Class R 0.50%
</Table>
Pursuant to separate agreements with the Distributor, selected dealers and other
financial intermediaries also provide distribution services to the Funds. The
ongoing distribution and service fee compensates the Distributor and selected
dealers for providing distribution-related and shareholder services to Class A,
Class B, Class C and Class R shareholders.
For the fiscal year ended June 30, 2004, 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 $ 27,267 $ 43,701
Large Cap Value Fund -- Class B -- 3,802
Large Cap Value Fund -- Class C -- 2,529
Mid-Cap Value Fund -- Class A 114,850 98,021
Mid-Cap Value Fund -- Class B -- 13,800
Mid-Cap Value Fund -- Class C -- 28,179
Small Cap Value Fund -- Class A 9,549 9,442
Small Cap Value Fund -- Class B -- 3,480
Small Cap Value Fund -- Class C -- 12,933
All Cap Value Fund -- Class A 28,986 58,377
All Cap Value Fund -- Class C -- 6,492
</Table>
Certain selected dealers and other financial intermediaries 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 has 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.
28
<Page>
NOTE 3.
INVESTMENTS. Purchases and sales of investment securities, excluding short-term
investments, for the fiscal year ended June 30, 2004 were as follows:
<Table>
<Caption>
LARGE CAP VALUE MID-CAP VALUE SMALL CAP VALUE ALL CAP VALUE
- -------------------------------------------------------------------------------------------------------------------------------
Purchases $ 452,633,508 $ 1,586,247,647 $ 433,878,216 $ 82,133,275
Sales 13,659,579 221,840,694 291,209,281 12,140,857
</Table>
The following information is presented on an income tax basis as of June 30,
2004:
<Table>
<Caption>
LARGE CAP VALUE MID-CAP VALUE SMALL CAP VALUE ALL CAP VALUE
- -------------------------------------------------------------------------------------------------------------------------------
Cost of investments $ 501,873,761 $ 1,619,845,527 $ 443,390,477 $ 73,300,841
- -------------------------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation 68,601,096 236,560,116 126,674,222 7,335,311
Gross unrealized depreciation 4,392,034 16,282,656 6,197,730 3,399,769
- -------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) on investments 64,209,062 220,277,460 120,476,492 3,935,542
- -------------------------------------------------------------------------------------------------------------------------------
Distributable ordinary income 1,185,924 23,081,286 18,869,707 --
Distributable long-term gains 1,816,379 9,507,993 51,970,167 110,469
</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, 2004 and
2003, capital loss carryovers as of June 30, 2004, and tax basis post-October
losses as of June 30, 2004, which are not recognized for tax purposes until the
first day of the following fiscal year, are:
<Table>
<Caption>
JUNE 30, 2004 JUNE 30, 2003
----------------------------------------------------------------- -------------------------------
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 $ 1,064,764 $ 616,943 -- -- $ 717,539 $ 3,252,014
Mid-Cap Value 10,760,166 1,883,093 -- -- 1,815,502 1,307,005
Small Cap Value 8,598,344 468,845 -- -- 247,914 --
All Cap Value 50,079 -- -- -- -- --
</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, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
LARGE CAP VALUE FUND -- CLASS I SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 8,504,090 $ 158,794,287 958,573 $ 12,974,921
Shares issued to shareholders in reinvestment of
dividends and distributions 26,724 461,748 180,419 2,311,235
--------------- --------------- --------------- ---------------
Total issued 8,530,814 159,256,035 1,138,992 15,286,156
Shares redeemed (1,426,615) (25,455,786) (704,392) (9,286,493)
--------------- --------------- --------------- ---------------
Net increase 7,104,199 $ 133,800,249 434,600 $ 5,999,663
=============== =============== =============== ===============
</Table>
29
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
LARGE CAP VALUE FUND -- CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 15,276,145 $ 284,828,586 1,677,326 $ 22,529,194
Shares issued to shareholders in reinvestment of
dividends and distributions 29,396 516,588 46,565 602,583
--------------- --------------- --------------- ---------------
Total issued 15,305,541 285,345,174 1,723,891 23,131,777
Shares redeemed (1,643,122) (30,991,894) (250,968) (3,345,649)
--------------- --------------- --------------- ---------------
Net increase 13,662,419 $ 254,353,280 1,472,923 $ 19,786,128
=============== =============== =============== ===============
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
LARGE CAP VALUE FUND -- CLASS B SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 324,753 $ 5,881,041 26,616 $ 355,640
Shares issued to shareholders in reinvestment of
dividends and distributions 236 4,235 200 2,555
--------------- --------------- --------------- ---------------
Total issued 324,989 5,885,276 26,816 358,195
Shares redeemed (29,193) (535,519) (2,867) (40,162)
--------------- --------------- --------------- ---------------
Net increase 295,796 $ 5,349,757 23,949 $ 318,033
=============== =============== =============== ===============
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
LARGE CAP VALUE FUND -- CLASS C SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 3,942,737 $ 74,028,799 113,232 $ 1,567,010
Shares issued to shareholders in reinvestment of
dividends and distributions 1,045 18,699 625 8,043
--------------- --------------- --------------- ---------------
Total issued 3,943,782 74,047,498 113,857 1,575,053
Shares redeemed (121,446) (2,292,037) (23,416) (314,630)
--------------- --------------- --------------- ---------------
Net increase 3,822,336 $ 71,755,461 90,441 $ 1,260,423
=============== =============== =============== ===============
<Caption>
FOR THE PERIOD
AUGUST 28, 2003* TO
JUNE 30, 2004
---------------------------------
DOLLAR
LARGE CAP VALUE FUND -- CLASS R SHARES AMOUNT
- -------------------------------------------------------------------------------------------
Shares sold 110,612 $ 2,136,400
Shares issued to shareholders in reinvestment of
dividends and distributions -- --
--------------- ---------------
Total issued 110,612 2,136,400
Shares redeemed (28,413) (549,940)
--------------- ---------------
Net increase 82,199 $ 1,586,460
=============== ===============
</Table>
30
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
MID-CAP VALUE FUND -- CLASS I SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 30,895,172 $ 689,872,564 7,534,883 $ 116,936,297
Shares issued to shareholders in reinvestment of
dividends and distributions 270,693 5,828,022 83,275 1,222,479
--------------- --------------- --------------- ---------------
Total issued 31,165,865 695,700,586 7,618,158 118,158,776
Shares redeemed (3,340,158) (73,747,488) (2,160,651) (31,957,281)
--------------- --------------- --------------- ---------------
Net increase 27,825,707 $ 621,953,098 5,457,507 $ 86,201,495
=============== =============== =============== ===============
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
MID-CAP VALUE FUND -- CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 30,692,639 $ 692,631,348 3,121,375 $ 46,963,574
Shares issued to shareholders in reinvestment of
dividends and distributions 123,180 2,646,088 23,292 341,695
--------------- --------------- --------------- ---------------
Total issued 30,815,819 695,277,436 3,144,667 47,305,269
Shares redeemed (3,302,405) (74,676,124) (833,790) (12,304,498)
--------------- --------------- --------------- ---------------
Net increase 27,513,414 $ 620,601,312 2,310,877 $ 35,000,771
=============== =============== =============== ===============
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
MID-CAP VALUE FUND -- CLASS B SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 1,238,979 $ 26,836,506 335,558 $ 5,063,561
Shares issued to shareholders in reinvestment of
dividends and distributions 2,782 58,844 1,258 18,263
--------------- --------------- --------------- ---------------
Total issued 1,241,761 26,895,350 336,816 5,081,824
Shares redeemed (269,924) (5,892,264) (230,008) (3,469,681)
--------------- --------------- --------------- ---------------
Net increase 971,837 $ 21,003,086 106,808 $ 1,612,143
=============== =============== =============== ===============
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
MID-CAP VALUE FUND -- CLASS C SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 7,807,579 $ 171,457,635 478,821 $ 7,399,015
Shares issued to shareholders in reinvestment of
dividends and distributions 14,236 301,367 2,916 42,397
--------------- --------------- --------------- ---------------
Total issued 7,821,815 171,759,002 481,737 7,441,412
Shares redeemed (304,214) (6,845,806) (145,170) (2,019,417)
--------------- --------------- --------------- ---------------
Net increase 7,517,601 $ 164,913,196 336,567 $ 5,421,995
=============== =============== =============== ===============
</Table>
31
<Page>
<Table>
<Caption>
FOR THE PERIOD
AUGUST 28, 2003* TO
JUNE 30, 2004
---------------------------------
DOLLAR
MID-CAP VALUE FUND -- CLASS R SHARES AMOUNT
- -------------------------------------------------------------------------------------------
Shares sold 189,139 $ 4,443,651
Shares issued to shareholders in reinvestment of
dividends and distributions 28 607
--------------- ---------------
Total issued 189,167 4,444,258
Shares redeemed (26,441) (619,056)
--------------- ---------------
Net increase 162,726 $ 3,825,202
=============== ===============
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
SMALL CAP VALUE FUND -- CLASS I SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 4,043,877 $ 177,582,301 2,033,946 $ 58,869,044
Shares issued to shareholders in reinvestment of
dividends and distributions 50,225 2,225,455 1,898 52,963
--------------- --------------- --------------- ---------------
Total issued 4,094,102 179,807,756 2,035,844 58,922,007
Shares redeemed (1,620,540) (73,239,516) (1,140,825) (32,101,714)
--------------- --------------- --------------- ---------------
Net increase 2,473,562 $ 106,568,240 895,019 $ 26,820,293
=============== =============== =============== ===============
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
SMALL CAP VALUE FUND -- CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 2,475,984 $ 101,232,269 3,384,161 $ 100,487,276
Shares issued to shareholders in reinvestment of
dividends and distributions 61,526 2,746,209 2,100 89,552
--------------- --------------- --------------- ---------------
Total issued 2,537,510 103,978,478 3,386,261 100,576,828
Shares redeemed (1,447,269) (66,015,319) (617,272) (18,175,782)
--------------- --------------- --------------- ---------------
Net increase 1,090,241 $ 37,963,159 2,768,989 $ 82,401,046
=============== =============== =============== ===============
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
SMALL CAP VALUE FUND -- CLASS B SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 136,073 $ 5,673,528 123,062 $ 3,598,196
Shares issued to shareholders in reinvestment of
dividends and distributions 551 24,001 8 208
--------------- --------------- --------------- ---------------
Total issued 136,624 5,697,529 123,070 3,598,404
Shares redeemed (46,451) (2,071,175) (8,830) (254,072)
--------------- --------------- --------------- ---------------
Net increase 90,173 $ 3,626,354 114,240 $ 3,344,332
=============== =============== =============== ===============
</Table>
* Commencement of operations.
32
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
SMALL CAP VALUE FUND -- CLASS C SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 329,196 $ 13,126,574 200,496 $ 5,859,725
Shares issued to shareholders in reinvestment of
dividends and distributions 2,459 107,194 20 572
--------------- --------------- --------------- ---------------
Total issued 331,655 13,233,768 200,516 5,860,297
Shares redeemed (77,604) (3,504,040) (56,167) (1,525,993)
--------------- --------------- --------------- ---------------
Net increase 254,051 $ 9,729,728 144,349 $ 4,334,304
=============== =============== =============== ===============
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, 2002* TO
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
ALL CAP VALUE FUND -- CLASS I SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 1,227,820 $ 19,857,402 283,080 $ 3,263,026
Shares issued to shareholders in reinvestment of
dividends and distributions 1,595 26,033 -- --
--------------- --------------- --------------- ---------------
Total issued 1,229,415 19,883,435 283,080 3,263,026
Shares redeemed (180,233) (3,138,665) -- --
--------------- --------------- --------------- ---------------
Net increase 1,049,182 $ 16,744,770 283,080 $ 3,263,026
=============== =============== =============== ===============
<Caption>
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, 2002* TO
JUNE 30, 2004 JUNE 30, 2003
--------------------------------- ---------------------------------
DOLLAR DOLLAR
ALL CAP VALUE FUND -- CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------------
Shares sold 2,715,376 $ 45,129,305 1 $ 10
Shares issued to shareholders in reinvestment of
dividends and distributions 665 10,911 -- --
--------------- --------------- --------------- ---------------
Total issued 2,716,041 45,140,216 1 10
Shares redeemed (642,391) (10,674,019) -- --
--------------- --------------- --------------- ---------------
Net increase 2,073,650 $ 34,466,197 1 $ 10
=============== =============== =============== ===============
<Caption>
FOR THE PERIOD
AUGUST 28, 2003* TO
JUNE 30, 2004
---------------------------------
DOLLAR
ALL CAP VALUE FUND -- CLASS C SHARES AMOUNT
- -------------------------------------------------------------------------------------------
Shares sold 1,323,205 $ 21,902,203
Shares issued to shareholders in reinvestment of
dividends and distributions 33 531
--------------- ---------------
Total issued 1,323,238 21,902,734
Shares redeemed (94,800) (1,556,705)
--------------- ---------------
Net increase 1,228,438 $ 20,346,029
=============== ===============
</Table>
* Commencement of operations.
33
<Page>
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, 2004, 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 - 48%, Small Cap Value Fund - 11%, and All Cap Value
Fund - 36%. For the fiscal year ended June 30, 2004, the following percentages
of ordinary distributions paid are designated as qualified income under the Jobs
and Growth Tax Relief Reconciliation Act of 2003: Large Cap Value Fund - 99%,
Mid-Cap Value Fund - 40%, Small Cap Value Fund - 18%, and All Cap Value Fund -
36%. Shareholders should consult their tax advisors.
34
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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,
2004, and the results of each of their operations for the year then ended, the
changes in each of their net assets for each of the years in the two year period
then ended and their financial highlights for each of the years in the three
year period ended June 30, 2004 and for the year ended June 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "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 the standards of the Public Company Accounting Oversight Board
(United States), which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at June 30, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion. The financial highlights of the Funds for the year ended June 30,
2001 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, CA
July 30, 2004
35
<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 PUBLIC
NAME AND YEAR OF BIRTH WITH THE TRUST TIME SERVED FIVE YEARS TRUSTEE DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
Randall H. Breitenbach Trustee Trustee since Co-Founder, Director and CEO, BreitBurn 1 registered None
(born 1960) 2001 Energy Company LP (1988 -- present); investment company
Chairman, Finance Committee, Stanford consisting of 5
University PIC Endowment (1999 -- portfolios
present).
Robert L. Burch III Trustee Trustee since Managing Partner, A.W. Jones Co. 1 registered None
(born 1934) 2001 (investments) (since 1984); Chairman, investment company
Jonathan Mfg. Corp. (slide consisting of 5
manufacturing) (since 1977). portfolios
John A.G. Gavin Trustee Trustee since Formerly Partner and Managing Director, 1 registered Causeway
(born 1931) 2001 Hicks, Muse, Tate & Furst (Latin investment company Capital
America) (private equity investment consisting of 5 Management
firm) (1994 -- 2001); Chairman, Gamma portfolios Trust; Claxson
Holdings (international capital and S.A.;
consulting) (since 1968). 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 PUBLIC
NAME AND YEAR OF BIRTH TRUST TIME SERVED PAST FIVE YEARS TRUSTEE DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
Nancy D. Celick President and President and Chief Operating Officer of the Advisor 1 registered None
(born 1951) Trustee Trustee(1) (since 2001); First Vice President of investment company
since 2001 Merrill Lynch Investment Managers, L.P. consisting of 5
("MLIM") (2000 -- 2001); Director of portfolios
MLIM (1993 -- 1999).
Richard H. Blank, Jr. Vice President Secretary Senior Vice President of Stephens Inc. Not Applicable Not Applicable
(born 1956) and Secretary since 2001; (since 1983).
Vice President
since 2004
Anna Marie Lopez Vice President Treasurer Chief Compliance Officer of the Advisor Not Applicable Not Applicable
(born 1967) and Treasurer since 2001; (since 2001); Compliance Officer of
Vice President MLIM (1997 -- 2001).
since 2004
</Table>
- ----------
(1) EACH TRUSTEE SERVES UNTIL HIS/HER SUCCESSOR IS ELECTED AND QUALIFIED, UNTIL
HE/SHE RETIRES IN ACCORDANCE WITH THE TRUST'S RETIREMENT POLICY, 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 officers, 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 Securities and Exchange
Commission's website at http://www.sec.gov.
Information regarding how the Funds voted proxies relating to portfolio
securities during the 12-month period ended June 30, 2004 is available without
charge on the Funds' website at www.hwcm.com and on the Securities and Exchange
Commission's website at http://www.sec.gov.
36
<Page>
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<Page>
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<Page>
(This page intentionally left blank)
<Page>
[GRAPHIC]
ADVISOR
HOTCHKIS AND WILEY CAPITAL MANAGEMENT, LLC
725 SOUTH FIGUEROA STREET, 39TH FLOOR
LOS ANGELES, CALIFORNIA 90017
LEGAL COUNSEL
PAUL, HASTINGS, JANOFSKY & WALKER LLP
55 SECOND STREET, 24TH FLOOR
SAN FRANCISCO, CA 94105
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PRICEWATERHOUSECOOPERS LLP
350 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
DISTRIBUTOR AND ADMINISTRATOR
STEPHENS INC.
111 CENTER STREET, 14TH FLOOR
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-0604
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, 2004
ANNUAL REPORT
<Page>
Item 2 - Code of Ethics: The registrant has adopted a code of ethics,
attached as an exhibit hereto, that applies to the registrant's
principal executive officer, principal financial officer and principal
accounting officer, or persons performing similar functions. A copy of
the code of ethics is available without charge upon request by calling
toll-free 1-800-796-5606.
Item 3 - Audit Committee Financial Expert
The registrant's Board has determined that it does not have an audit
committee financial expert serving on its audit committee. While the
Board believes that each of the members of its audit committee has
sufficient knowledge of accounting principles and financial statements
to serve on the audit committee, none has the requisite experience to
qualify as an "audit committee financial expert" as such term is
defined by the Securities and Exchange Commission but that the
requisite expertise resides in the Committee as a whole.
Item 4 - Principal Accountant Fees and Services
Fees billed by the registrant's auditors for each of the last two
fiscal years, including fees for non-audit services billed to the
adviser and affiliates for engagements that relate directly to the
operations and financial reporting of the registrant, and a description
of the nature of the services comprising the fees, are listed below:
Registrant:
(a) Audit Fees
Fiscal year ended June 30, 2004 - $62,500
Fiscal year ended June 30, 2003 - $61,300
(b) Audit-Related Fees
Fiscal year ended June 30, 2004 - $0
Fiscal year ended June 30, 2003 - $0
(c) Tax Fees
Fiscal year ended June 30, 2004 - $18,500
Fiscal year ended June 30, 2003 - $18,200
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees
Fiscal year ended June 30, 2004 - $0
Fiscal year ended June 30, 2003 - $0
Adviser and affiliates (includes only fees for non-audit services
billed to the adviser and affiliates for engagements that relate
directly to the operations and financial reporting of the registrant
and were subject to the pre-approval policies described below):
(b) Audit-Related Fees
Fiscal year ended June 30, 2004 - $0
<Page>
Fiscal year ended June 30, 2003 - $0
(c) Tax Fees
Fiscal year ended June 30, 2004 - $0
Fiscal year ended June 30, 2003 - $0
(d) All Other Fees
Fiscal year ended June 30, 2004 - $0
Fiscal year ended June 30, 2003 - $15,411
The nature of the service is an internal control review (SAS 70) of
the Adviser's trading and settlement procedures.
(e)(1) The registrant's Audit Committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
The Committee shall pre-approve any engagement of the independent
auditors to provide any non-prohibited services to the registrant,
including the fees and other compensation to be paid to the independent
auditors. The Chairman of the Audit Committee may grant the
pre-approval of services to the registrant for non-prohibited services
for engagements of less than $5,000. All such delegated pre- approvals
shall be presented to the Audit Committee no later than the next
AuditCommittee meeting. The Committee shall also pre-approve any
engagement of the independent auditors, including the fees and other
compensation to be paid to the independent auditors, to provide any
non-audit services to the Adviser (or any "control affiliate" of the
Adviser providing ongoing services to the registrant), if the
engagement relates directly to the operations and financial reporting
of the registrant. The Chairman of the Audit Committee may grant the
pre-approval for non-prohibited services to the Adviser for engagements
of less than $5,000. All such delegated pre-approvals shall be
presented to the Audit Committee no later than the next Audit Committee
meeting.
(e)(2)
(b) Audit-Related Fees
Fiscal year ended June 30, 2004 - 0%
Fiscal year ended June 30, 2003 - 0%
(c) Tax Fees
Fiscal year ended June 30, 2004 - 0%
Fiscal year ended June 30, 2003 - 0%
(d) All Other Fees
Fiscal year ended June 30, 2004 - 0%
Fiscal year ended June 30, 2003 - 0%
(f) Not Applicable
(g)
Fiscal year ended June 30, 2004 - $54,300
Fiscal year ended June 30, 2003 - $63,485
(h) The registrant's Audit Committee has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser and any entity controlling, controlled
<Page>
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Item 5 - Audit Committee of Listed Registrants
Not applicable
Item 6 - Reserved
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable
Item 8 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable
Item 9 - Submission of Matters to a Vote of Security Holders
The identification and recommendation of individuals for Board
membership is the responsibility of the Nominating and Governance
Committee. Shareholders may submit suggestions for candidates by
forwarding their correspondence by U.S. mail or other courier service
to the Funds' Secretary for the attention of the Chairman of the
Nominating and Governance Committee, 725 S. Figueroa Street, 39th
Floor, Los Angeles, CA 90017-5439.
Item 10 - Controls and Procedures
(a) The officers providing the certifications in this report in accordance with
Rule 30a-2 under the Investment Company Act of 1940 (the "Act")have
concluded, based on their evaluation of the registrant's disclosure
controls and procedures (as such term is defined in Rule 30a-3 under the
Act), that such controls and procedures are effective, based on their
evaluation of the disclosure controls and procedures as of a date within 90
days of the filing date of this report.
(b) There was no change in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the registrant's last fiscal half-year which has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
Item 11 - Exhibits
(a)(1) - Code of Ethics: Attached hereto.
(a)(2) - Certifications: Attached hereto.
(a)(3) - Not applicable
(b) - Certification: Attached hereto.
<Page>
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 27, 2004
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.
Hotchkis and Wiley Funds
By: /s/ Nancy D. Celick
----------------------------------------
Nancy D. Celick,
President of Hotchkis and Wiley Funds
Date: August 27, 2004
By: /s/ Anna Marie Lopez
----------------------------------------
Anna Marie Lopez,
Treasurer of Hotchkis and Wiley Funds
Date: August 27, 2004
<Page>
EXHIBIT INDEX
(a)(1) Code of Ethics for Principal Executive Officer and Principal Financial
Officer
(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.
<Page>
EXHIBIT 99
Exhibit (a)(1)
HOTCHKIS AND WILEY FUNDS
(THE "FUND")
CODE OF ETHICS FOR PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER ("OFFICER CODE")
INTRODUCTION
The Fund requires the Principal Executive Officer, Principal Financial
Officer or other Fund Officer performing similar functions as set forth in
Exhibit A ("Covered Officers") to maintain the highest ethical and legal
standards while performing their duties and responsibilities to the Fund, with
particular emphasis on those duties that relate to the preparation and reporting
of financial information of the Fund. The following overriding principles govern
the conduct of Covered Officers:
- Covered Officers shall act with honesty and integrity, avoiding actual
or apparent conflicts of interest between personal and professional
relationships and shall promptly report any potential conflicts.
- Covered Officers shall not use their personal influence or personal
relationships improperly to influence investment decisions or
financial reporting by the Fund whereby the Covered Officer would
benefit personally to the detriment of the Fund or take action, or
fail to take action, for the individual personal benefit of the
Covered Officer rather than the benefit the Fund.
- Covered Officers shall promote full, fair, accurate, timely and
understandable disclosure in reports and documents that the Fund files
with, or submits to, the Securities and Exchange Commission ("SEC")
and in other public communications made by the Fund and that are
within the Covered Officer's responsibility.
- Covered Officers shall promote compliance with applicable laws and
governmental rules and regulations.
- Covered Officers shall promptly report violations of the Officer Code.
Covered Officers are reminded of their obligations under the Code of Ethics
of the Fund and Hotchkis and Wiley Capital Management adopted under Rule 17j-l
of the Investment Company Act of 1940, as amended (the "1940 Act"). The
obligations under that code apply independently of this Code and are not a part
of this Officer Code.
CONFLICTS OF INTEREST
<Page>
OVERVIEW. Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to and seek to avoid situations that may give
rise to actual as well as apparent conflicts of interest. A "conflict of
interest" occurs when a Covered Officer's private interest interferes with the
interests of, or his or her service to, the Fund. For example, a conflict of
interest would arise if a Covered Officer, or a member of his or her family,
receives improper personal benefits as a result of his or her position with the
Fund.
Certain conflicts of interest arise out of the relationships between
Covered Officers and the Fund and already are subject to conflict of interest
provisions in the 1940 Act and the Investment Advisers Act of 1940, as amended
(the "Advisers Act"). For example, Covered Officers may not individually engage
in certain transactions (such as the purchase or sale of securities or other
property) with the Fund because of their status as "affiliated persons" of the
Fund. The Fund and its adviser have adopted compliance programs and procedures
designed to prevent, or identify and correct, violations of these provisions.
This Officer Code does not, and is not intended to, duplicate or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Officer Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts arise from, or as a result of, the contractual relationships
between the Fund and the adviser of which the Covered Officers are also officers
or employees. As a result, this Officer Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Fund or for the adviser, or for both), be involved in establishing policies and
implementing decisions that will have different effects on the adviser and the
Fund. The participation of the Covered Officers in such activities is inherent
in the contractual relationship between the Fund and the adviser and is
consistent with the performance by the Covered Officers of their duties as
officers of the Fund. Thus, if performed in conformity with the provisions of
the 1940 Act and the Advisers Act, such activities will be deemed to have been
handled ethically.
Other conflicts of interest are covered by the Officer Code, even if such
conflicts of interest are not subject to provisions in the 1940 Act and the
Advisers Act. The following list provides examples of conflicts of interest
under the Officer Code, but Covered Officers should keep in mind that these
examples are not exhaustive.
DISCLOSURE OF POTENTIAL CONFLICTS. Each Covered Officer shall provide
prompt and full disclosure to the Code Compliance Officer (as defined below), in
writing, prior to entering into any material transaction or relationship which
may reasonably be expected to give rise to a conflict (other than conflicts
arising from the advisory relationship). This includes, but is not limited to,
the following:
- service as a director, officer, partner, consultant or in any other
key role with any company with which the Fund has current or
prospective business dealings;
- the receipt by a Covered Person and his or her family members of any
gifts from any company with which the Fund has current or prospective
business dealings if it influences or gives the appearance of
influencing the recipient;
2
<Page>
- the receipt of customary business amenities from any company with
which the Fund has current or prospective business dealings unless
such amenity is business-related, reasonable in cost, appropriate as
to time and place, and neither so frequent nor so costly as to raise
any question of impropriety;
- any ownership by a Covered Person and his or her family members of
significant financial interest in any company with which the Fund has
current or prospective business dealings, other than its adviser,
principal underwriter, transfer agent or any affiliated person
thereof; and
- a direct or indirect financial interest in commissions, transaction
charges or spreads paid by the Fund for effecting portfolio
transactions or for selling or redeeming shares other than an interest
arising from the Covered Officer's employment, such as compensation or
equity ownership.
DISCLOSURE AND COMPLIANCE
- Each Covered Officer should familiarize himself or herself with the
disclosure requirements generally applicable to the Fund.
- Each Covered Officer should, to the extent appropriate within his or
her area of responsibility, consult with other officers and employees
of the Fund and the adviser or its affiliates with the goal of
promoting full, fair, accurate, timely and understandable disclosure
in such reports and documents the Fund files with, or submits to, the
SEC.
- Each Covered Officer should not knowingly misrepresent, or cause
others to misrepresent, facts about the Fund to others, whether within
or outside the Fund, including to the Fund's directors and auditors,
and to governmental regulators and self-regulatory organizations.
- It is the responsibility of each Covered Officer to promote compliance
with the standards and restrictions imposed by laws, rules and
regulations applicable to the Fund.
REPORTING AND ACCOUNTABILITY
- Upon adoption of the Officer Code (or thereafter as applicable, upon
becoming a Covered Officer), each Covered Officer shall affirm in
writing to the Code Compliance Officer that he or she has received,
read and understands the Officer Code. Annually thereafter each
Covered Officer shall affirm that he or she has complied with the
requirements of the Officer Code.
- Each Covered Officer shall notify the Code Compliance Officer promptly
if he or she knows of any violation of this Officer Code. Failure to
do so is itself a violation of this Officer Code.
3
<Page>
- A Covered Officer must not retaliate against any other Covered Officer
or any employee of the Fund or its affiliated persons for reports of
potential violations that are made in good faith.
- The provisions of this Code, other than amendments to Exhibit A, and
any waivers, including implicit waivers, shall be disclosed in
accordance with SEC rules and regulations.
CODE ADMINISTRATION
Except as described below, the Code Compliance Officer is responsible for
applying this Officer Code to specific situations in which questions may arise
and has the authority to interpret this Officer Code in any particular
situation. The Board of Trustees of the Fund hereby designates the Audit
Committee Chair as the Code Compliance Officer. The Code Compliance Officer (or
his or her designee) shall take all action he or she considers appropriate to
investigate any actual or potential conflicts or violations reported to him or
her, and is encouraged to consult with counsel to the Independent Trustees.
Any matters that the Code Compliance Officer believes are a conflict or
violation will be reported to the Audit Committee, which shall determine
sanctions or other appropriate action. The Audit Committee shall be responsible
for reviewing any requests for waivers from the provisions of this Officer Code.
Any violations of this Officer Code, any waivers granted from the Officer Code
and any potential conflicts and their resolution shall be reported to the Board
of Trustees at the next regular meeting.
Any amendments to this Officer Code, other than amendments to Exhibit A and
clerical or administrative corrections, must be approved or ratified by a
majority vote of the Board, including a majority of Independent Trustees.
CONFIDENTIALITY
All reports and records prepared or maintained pursuant to this Officer
Code will be considered confidential and shall be maintained and protected
accordingly. Except as otherwise required by law or this Officer Code, such
matters shall not be disclosed to anyone other than the Board, counsel to the
Independent Trustees, the Fund, counsel to the Fund and the Fund's adviser.
INTERNAL USE
The Officer Code is intended solely for the internal use by the Fund and
does not constitute an admission, by or on behalf of the Fund, as to any fact,
circumstance or legal conclusion.
ADOPTED: OCTOBER 29, 2003
4
<Page>
EXHIBIT A
Persons Covered by this Code of Ethics
<Table>
<Caption>
NAME TITLE
---- -----
Nancy D. Celick President and Principal Executive Officer
Anna Marie Lopez Treasurer and Principal Financial Officer
</Table>