undiscovered
managers(tm)
UNDISCOVERED MANAGERS FUNDS
FOR INSTITUTIONAL INVESTORS
P R O S P E C T U S
MARCH 16, 1998
INSTITUTIONAL CLASS SHARES OF:
-------------------------------------------------------
UNDISCOVERED MANAGERS BEHAVIORAL GROWTH FUND
UNDISCOVERED MANAGERS SPECIAL SMALL CAP FUND
UNDISCOVERED MANAGERS REIT FUND
UNDISCOVERED MANAGERS SMALL CAP VALUE FUND
UNDISCOVERED MANAGERS HIDDEN VALUE FUND
UNDISCOVERED MANAGERS CORE EQUITY FUND
UNDISCOVERED MANAGERS ALL CAP VALUE FUND
Undiscovered Managers Funds
Plaza of the Americas
700 North Pearl Street
Dallas, Texas 75201
1-888-242-3514
<PAGE>
Prospectus March 16, 1998
UNDISCOVERED MANAGERS FUNDS
Undiscovered Managers Funds (the "Trust") is a registered open-end management
investment company with seven separately managed, no-load portfolios (each a
"Fund" and collectively, the "Funds"). Undiscovered Managers, LLC
("Undiscovered Managers") is the investment adviser of the Funds. Each Fund's
portfolio is managed by a sub-adviser selected by Undiscovered Managers for its
experience managing a portfolio of this kind:
[bullet] Undiscovered Managers Behavioral Growth Fund (the "Behavioral Growth
Fund") is managed by RJF Asset Management, Inc.
[bullet] Undiscovered Managers Special Small Cap Fund (the "Special Small Cap
Fund") is managed by Kestrel Investment Management Corporation.
[bullet] Undiscovered Managers REIT Fund (the "REIT Fund") is managed by Bay
Isle Financial Corporation.
[bullet] Undiscovered Managers Small Cap Value Fund (the "Small Cap Value
Fund") is managed by J.L. Kaplan Associates, LLC.
[bullet] Undiscovered Managers Hidden Value Fund (the "Hidden Value Fund") is
managed by J.L. Kaplan Associates, LLC.
[bullet] Undiscovered Managers Core Equity Fund (the "Core Equity Fund") is
managed by Waite & Associates L.L.C.
[bullet] Undiscovered Managers All Cap Value Fund (the "All Cap Value Fund") is
managed by E.R. Taylor Investments, Inc.
Each Fund's investment objective is long-term growth of capital, except for the
Behavioral Growth Fund, which has the investment objective of growth of
capital, and the REIT Fund, which has the investment objective of high total
investment return. In seeking to achieve its objective, each Fund invests
primarily in equity securities of U.S. companies. There can be no assurance
that the Funds will achieve their investment objectives.
Each Fund currently offers one class of shares -- the Institutional Class. This
Prospectus concisely describes the information that an investor should know
before investing in each Fund. Please read it carefully and keep it for future
reference. A Statement of Additional Information (the "SAI") dated March 16,
1998, is available free of charge. Write to Undiscovered Managers, LLC, Plaza
of the Americas, 700 North Pearl Street, Dallas, Texas 75201, or call toll free
at 1-888-242-3514. The SAI, which contains more detailed information about the
Funds, has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus. The SEC maintains a
Website (http://www.sec.gov) that contains the SAI, material incorporated by
reference into this Prospectus and the SAI, and other information regarding
registrants that file electronically with the SEC.
For more information about establishing an account, or any other information
about the Funds, call 1-888-242-3514.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary of Expenses .................................................. 4
The Funds ............................................................ 6
Behavioral Growth Fund ............................................. 6
Special Small Cap Fund ............................................. 7
REIT Fund .......................................................... 8
Small Cap Value Fund ............................................... 9
Hidden Value Fund .................................................. 11
Core Equity Fund ................................................... 13
All Cap Value Fund ................................................. 15
All Funds .......................................................... 16
More Information About the Funds' Investments and Risk Considerations 17
Management of the Funds .............................................. 19
Portfolio Transactions ............................................... 21
How to Purchase Shares ............................................... 22
Shareholder Services ................................................. 24
How to Redeem Shares ................................................. 24
Calculation of Performance Information ............................... 25
Dividends, Capital Gain Distributions and Taxes ...................... 25
Organization and Capitalization of the Trust ......................... 26
</TABLE>
3
<PAGE>
SUMMARY OF EXPENSES
The following information is provided to assist an investor in understanding
the various expenses that an investor in a Fund will bear indirectly. Since the
Funds commenced operations on December 29, 1997, the information about each
Fund shown below is based on annualized projected expenses of the Institutional
Class shares for the 1998 fiscal year. The information below should not be
considered a representation of past or future expenses, as actual expenses may
be greater or less than those shown. The examples show the cumulative expenses
attributable to a hypothetical $1,000 investment over specified periods,
assuming the 5% annual return required under federal regulations.
<TABLE>
<CAPTION>
Behavioral Special
Growth Small Cap
Fund Fund REIT Fund
------------ ------------------------------------ ----------
<S> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on
Purchases (as % of offering price) ....................... none none none
Maximum Sales Load Imposed on
Reinvested Dividends (as % of
offering price) .......................................... none none none
Maximum Deferred Sales Load (as %
of original purchase price or
redemption proceeds as applicable) ....................... none none none
Redemption Fees* ........................................... none none none
Exchange Fees .............................................. none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees ............................................ 0.95% 1.15% for the first year; there- 1.05%
after, fees will vary from 0.65%
to 1.65% based on the invest-
ment performance of the Fund
relative to a benchmark.**
12b-1 Fees ................................................. none none none
Other Operating Expenses (after
expense reimbursements) .................................. 0.35% 0.55% 0.35%
Total Operating Expenses (after
expense reimbursements) .................................. 1.30% 1.70% for the first year; there- 1.40%
after, expenses will vary from
1.20% to 2.20% based on,
among other things, the invest-
ment performance of the Fund
relative to a benchmark.**
Example***:
An investor would pay the following expenses
on a $1,000 investment assuming a 5%
annual return (with or without a redemption
at the end of each time period):
One Year .. $ 13 $ 17 $ 14
Three Years ................................................ $ 41 $ 38-69** $ 44
</TABLE>
- ------------
* Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
** The advisory fee rate for the Special Small Cap Fund will vary depending on
the investment performance of the Fund. In particular, the applicable fee
rate is determined by adding to (or subtracting from) 1.15% one-fifth of
the number of basis points by which the total return of the Fund during
the one-year period ending at the end of a quarter exceeds (or falls short
of) the total return of the Russell 2000 Index during the one-year period
ending at the end of such quarter. The advisory fee rate will not exceed
the annual rate of 1.65% nor be less than the annual rate of 0.65%. The
Russell 2000 Index is composed of the common stocks of the 2000 smallest
of the 3000 largest publicly-traded U.S. companies, measured by market
capitalization. See "Management of the Funds -- Advisory and Sub-Advisory
Fees."
*** Under SEC rules, newly-organized funds, such as the Funds, are required to
show expenses in an example for one- and three-year periods only.
4
<PAGE>
<TABLE>
<CAPTION>
Small Hidden Core All Cap
Cap Value Value Equity Value
Fund Fund Fund Fund
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on Purchases (as % of
offering price) ......................................... none none none none
Maximum Sales Load Imposed on Reinvested Dividends
(as % of offering price) ................................ none none none none
Deferred Sales Load (as % of original purchase price or
redemption proceeds as applicable) ...................... none none none none
Redemption Fees* .......................................... none none none none
Exchange Fees ............................................. none none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees ........................................... 1.05% 0.95% 0.74% 0.74%
12b-1 Fees ................................................ none none none none
Other Operating Expenses (after expense
reimbursements) ......................................... 0.35% 0.35% 0.25% 0.25%
Total Operating Expenses (after expense
reimbursements) ......................................... 1.40% 1.30% 0.99% 0.99%
Example**:
An investor would pay the following expenses on a
$1,000 investment assuming a 5% annual return (with
or without a redemption at the end of each time
period):
One Year .................................................. $ 14 $ 13 $ 10 $ 10
Three Years ............................................... $ 44 $ 41 $ 32 $ 32
</TABLE>
- ------------
* Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
** Under SEC rules, newly-organized funds, such as the Funds, are required to
show expenses in an example for one- and three-year periods only.
Other Operating Expenses are based on estimated amounts for the 1998 fiscal
year after giving effect to voluntary expense limitations. Undiscovered
Managers, the Funds' investment adviser, has voluntarily agreed, for an
indefinite period, to limit each Fund's Total Operating Expenses to the
percentages of net assets shown above, subject to later reimbursement by the
Funds in certain circumstances. Without this agreement, estimated Other
Operating Expenses and Total Operating Expenses would be 2.24% and 3.19%,
respectively, for the Behavioral Growth Fund, 2.31% and 3.46%, respectively,
for the Special Small Cap Fund, 2.32% and 3.37%, respectively, for the REIT
Fund, 2.32% and 3.37%, respectively, for the Small Cap Value Fund, 2.28% and
3.23%, respectively, for the Hidden Value Fund, 2.25% and 2.99%, respectively,
for the Core Equity Fund, and 2.24% and 2.98%, respectively, for the All Cap
Value Fund. See "Management of the Funds -- Advisory and Sub-Advisory Fees."
5
<PAGE>
THE FUNDS
The following sections present information about the investment objective,
policies and strategies, sub-adviser and portfolio manager(s) for each Fund.
The sections also present information about the investment performance of
accounts managed by certain of the Funds' sub-advisers ("Performance
Information"). THIS PERFORMANCE INFORMATION DOES NOT REPRESENT THE PERFORMANCE
OF THE FUNDS. THE FUNDS COMMENCED OPERATIONS ON DECEMBER 29, 1997 AND EACH HAS
A LIMITED PERFORMANCE RECORD OF ITS OWN. THE FOLLOWING PERFORMANCE INFORMATION
SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF ANY OF THE
FUNDS. EACH FUND'S PERFORMANCE MAY BE HIGHER OR LOWER THAN THAT SHOWN BELOW.
FOR MORE ABOUT THE PERFORMANCE INFORMATION, SEE "ALL FUNDS--PAST PERFORMANCE OF
CERTAIN SUB-ADVISERS" BELOW.
BEHAVIORAL GROWTH FUND
- -------------------------
The Behavioral Growth Fund's investment objective is growth of capital.
The Fund seeks to achieve its objective by investing primarily in common stocks
of U.S. companies that the Fund's sub-adviser believes have growth
characteristics. In selecting stocks for the Fund, the sub-adviser applies
principles based on behavioral studies. The sub-adviser believes that
behavioral biases on the part of investors may cause the market to under-react
to new, positive information concerning a company. The sub-adviser analyzes
companies that have recently announced higher than expected earnings, and seeks
to determine whether the market value of the company's stock fully reflects the
sub-adviser's expectations as to the company's future earnings and growth
prospects. The sub-adviser expects that the median market capitalization of
stocks held by the Fund will ordinarily be approximately $1 billion, and that
the average market capitalization will be between $1.5 and $2 billion, but the
median and average capitalizations could be significantly higher or lower. The
Fund will ordinarily remain substantially fully invested in common stocks.
RJF Asset Management, Inc. ("RJF Management") is the sub-adviser to the Fund.
RJF Management, 1300 S. El Camino Real, Suite 504, San Mateo, California was
founded in 1993, and currently serves as an investment adviser to pension and
profit sharing plans, academic institutions and other institutional investors.
Russell J. Fuller and Frederick W. Stanske have day-to-day responsibility for
the management of the Fund's portfolio. Mr. Fuller founded RJF Management and
has served as its President since 1993. He was a Vice President of Strategic
Development of Concord Capital Management from 1990 to 1993, and a Professor of
Finance and Chair of the Department of Finance at Washington State University
from 1984 to 1990. Mr. Stanske joined RJF Management in 1996, having previously
been employed as a Securities Analyst at Farmers Insurance Group from 1987 to
1989 and as Vice President and Research Analyst at Fisher Investments from 1989
to 1996.
6
<PAGE>
SPECIAL SMALL CAP FUND
- -------------------------
The Special Small Cap Fund's investment objective is long-term growth of
capital.
The Fund seeks to achieve its objective by investing primarily in common stocks
of small cap U.S. companies that have one or more of the following special
characteristics: (1) the company has recently been spun off or divested from a
former parent company, (2) the company has announced or is conducting a program
to buy back its own stock, (3) the company has made or intends to make a
relatively significant sale of assets, or (4) the sub-adviser believes the
company is undervalued because of other special circumstances, such as
regulatory changes affecting its industry. Under normal market conditions, the
Fund invests at least 65% of its assets in stocks of companies in such special
situations with market capitalization of between $50 million and $1.2 billion.
Kestrel Investment Management Corporation ("Kestrel Management") is the
sub-adviser to the Fund. Kestrel Management, 1300 S. El Camino Real, Suite 502,
San Mateo, California, was founded in 1993, and serves as an investment adviser
for pension and profit sharing plans, trusts, charitable organizations, and
other institutional and individual investors.
David J. Steirman and Abbott J. Keller have day-to-day responsibility for the
management of the Fund. Messrs. Steirman and Keller have served as President
and Chief Investment Officer, respectively, of Kestrel Management since
founding the firm in 1993. Messrs. Steirman and Keller have worked together in
the investment management business for nearly twenty years, having served from
1981 to 1993 as vice president and investment strategist, respectively, at
Concord Capital Management, and having both been employed before that at
American National Bank of Chicago.
The gross investment performance for the period from August 17, 1993 to
December 31, 1997 of all discretionary, fee-paying accounts managed by Kestrel
Management with investment objectives, policies and strategies substantially
similar to that of the Special Small Cap Fund has been attested to by KPMG Peat
Marwick LLP for use in connection with the registration statement of the Trust
under the Securities Act of 1933 (the "Securities Act"), in accordance with
standards established by the Association for Investment Management and
Research. This investment performance (i) represents total return, assuming
reinvestment of all dividends and proceeds from capital transactions and (ii)
has been adjusted for actual fees and expenses incurred by the accounts. The
method for calculating performance produces a different result than if the
performance information were calculated using the SEC's method for calculating
the total return of a mutual fund. The investment performance net of actual
fees and expenses incurred by the accounts is presented in the table below. The
benchmark index to which the accounts are compared is the Russell 2000 Index.
The Russell 2000 Index is an unmanaged index representing the performance of
the 2000 smallest of the 3000 largest U.S.- domiciled corporations, ranked by
market capitalization. Although used as a benchmark, the Russell 2000 Index's
performance may not be comparable to the performance of the accounts since,
unlike the performance of the accounts, the Russell 2000 Index's performance
has not been adjusted for any fees or expenses.
The information provided does not represent the performance of the Special
Small Cap Fund, which commenced operations on December 29, 1997 and has a
limited performance record of its own. The following information should not be
considered a prediction of future performance of the Special Small Cap Fund.
The Special Small Cap Fund's performance may be higher or lower than that shown
below. If the performance information were to reflect the estimated fees and
expenses of the Special Small Cap Fund, the total returns would be lower than
those shown. For more information about the performance data, see "All
Funds--Past Performance of Certain Sub-Advisers" below.
- --------------------------------------------------------------------------------
Accounts(%) Russell 2000 Index(%)
- --------------------------------------------------------------------------------
1997 30.67 22.36
1996 36.33 16.49
1995 30.22 28.47
1994 8.89 (1.83)
8/17/93* - 12/31/93 9.31 8.30
- --------------------------------------------------------------------------------
Accounts(%) Russell 2000 Index(%)
- --------------------------------------------------------------------------------
Average Annual Returns
- --------------------------------------------------------------------------------
1 Year 30.67 22.36
3 Years 32.38 22.34
Since 8/17/93* 26.18 16.45
- --------------------------------------------------------------------------------
Cumulative Returns
- --------------------------------------------------------------------------------
1 Year 30.67 22.36
3 Years 131.97 83.11
Since 8/17/93* 176.39 94.66
- --------------------------------------------------------------------------------
* 8/17/93 is the date of inception of Kestrel Management.
7
<PAGE>
REIT FUND
- -------------------------
The REIT Fund's investment objective is high total investment return through a
combination of capital appreciation and current income.
The Fund seeks to achieve its objective by investing substantially all of its
assets, and in any event in normal market conditions at least 65% of its
assets, in equity securities of real estate investment trusts ("REITs"),
including REITs with relatively small market capitalization. In selecting
investments for the Fund, the Fund's sub-adviser seeks to identify REITs that
have good management, strong balance sheets, above average growth in funds from
operations and that trade at a discount to their underlying value.
Bay Isle Financial Corporation ("Bay Isle") is the Fund's sub-adviser. Bay
Isle, 160 Sansome Street, San Francisco, California, was founded in 1986, and
serves an investment adviser to pension and profit sharing plans, trusts,
charitable organizations, and other institutional and individual investors.
William F.K. Schaff has day-to-day responsibility for the management of the
Fund's portfolio. He receives significant analytical assistance from Bay Isle's
chief REIT analyst, Ralph L. Block. Mr. Schaff has served as a portfolio
manager and Chief Investment Officer of Bay Isle since 1989. Mr. Block has
nearly 30 years' experience investing in REITs and is the author of a recent
book on REIT investing, The Essential REIT. Mr. Block has served as a REIT
analyst for Bay Isle since 1993. Mr. Block was also a Partner of the law firm
of Graven Perry Block Brody & Qualls from 1969 to 1995.
8
<PAGE>
SMALL CAP VALUE FUND
- -------------------------
The Small Cap Value Fund's investment objective is long-term growth of capital.
The Fund seeks to achieve its objective by investing primarily in common stocks
of companies with a market float of $1.2 billion or less that the Fund's
sub-adviser considers to be undervalued at the time of purchase and to have the
potential for long-term capital appreciation. (Market float is the total value
of all the outstanding shares of a company that are registered for public
trading and does not include shares held by company founders or other insiders
that are not freely resalable.) In selecting stocks for the Fund, the Fund's
sub-adviser will consider, among other things, the issuer's earning power and
the relative value of the issuer's assets. Under normal market conditions, the
Fund will invest at least 65% of its total assets in common stocks of companies
with a market float of $1.2 billion or less.
J.L. Kaplan Associates, LLC ("Kaplan Associates") is the sub-adviser to the
Fund. Kaplan Associates, 75 Park Plaza, 4th Floor, Boston, Massachusetts, is
the successor firm to J.L. Kaplan Associates, an investment advisory firm
founded in 1976. Kaplan Associates serves as an investment adviser to pension
and profit sharing plans, trusts, charitable organizations and other
institutional and private investors. Kaplan Associates believes that a stock
can be a good value either by virtue of exceptional earning power or because
such stock sells at a substantial discount to its asset base.
James L. Kaplan and Paul Weisman have day-to-day responsibility for managing
the Fund's portfolio. Mr. Kaplan has been the principal of Kaplan Associates
and its predecessor since founding the firm in 1976. From 1972 to 1984, he was
Associate Professor of Mathematics at Boston University. Mr. Weisman has been a
portfolio manager at the firm since 1986. From 1984 to 1986, Mr. Weisman was an
investment analyst at Delphi Management, Inc.
The gross investment performance for the period from January 1, 1990 to
December 31, 1997 of all discretionary, fee-paying accounts managed by Kaplan
Associates and its predecessor with investment objectives, policies and
strategies substantially similar to that of the Small Cap Value Fund has been
attested to by Deloitte & Touche LLP for use in connection with the
registration statement of the Trust under the Securities Act. For all periods
presented, the investment performance has been calculated using a time-weighted
rate of return methodology that is based on geometrically linked monthly
returns that employ a modified Dietz formula which weighs each cash flow by the
amount of time it is held in the account. This investment performance (i)
represents total return, assuming reinvestment of all dividends and proceeds
from capital transactions and (ii) has been adjusted for actual fees and
expenses incurred by the accounts. The method for calculating performance
produces a different result than if the performance information were calculated
using the SEC's method for calculating the total return of a mutual fund. The
investment performance net of actual fees and expenses incurred by the accounts
is presented in the table below. The benchmark index to which the accounts are
compared is the Russell 2000 Index. The Russell 2000 Index is an unmanaged
index representing the performance of the 2000 smallest of the 3000 largest
U.S.-domiciled corporations, ranked by market capitalization. Although used as
a benchmark, the Russell 2000 Index's performance may not be comparable to the
performance of the accounts since, unlike the performance of the accounts, the
Russell 2000 Index's performance has not been adjusted for any fees or
expenses.
The information provided does not represent the performance of the Small Cap
Value Fund, which commenced operations on December 29, 1997 and has a limited
performance record of its own. The following information should not be
considered a prediction of future performance of the Small Cap Value Fund. The
Small Cap Value Fund's performance may be higher or lower than that shown
below. If the performance information were to reflect the estimated fees and
expenses of the Small Cap Value Fund, the total returns would be lower than
those shown below. For more information about the performance data, see "All
Funds--Past Performance of Certain Sub-Advisers" below.
9
<PAGE>
- --------------------------------------------------------------------------------
Small Cap Equity Accounts*(%) Russell 2000 Index(%)
- --------------------------------------------------------------------------------
1997 37.14 22.36
1996 41.24 16.49
1995 29.16 28.47
1994 1.69 ( 1.83)
1993 9.51 18.89
1992 10.88 18.43
1991 37.03 46.05
1990** (19.39) (19.52)
- --------------------------------------------------------------------------------
Small Cap Equity Accounts*(%) Russell 2000 Index(%)
- --------------------------------------------------------------------------------
Average Annual Returns
- --------------------------------------------------------------------------------
1 Year 37.14 22.36
3 Years 35.76 22.34
5 Years 22.74 16.40
Since 1/1/90** 16.58 14.60
- --------------------------------------------------------------------------------
Cumulative Returns
- --------------------------------------------------------------------------------
1 Year 37.14 22.36
3 Years 150.19 83.11
5 Years 178.62 113.71
Since 1/1/90** 241.24 197.49
- --------------------------------------------------------------------------------
* The performance information for accounts managed by Kaplan Associates and
its predecessor represents the average quarterly returns for accounts with
assets in excess of $250,000.
** 1/1/90 is the date of inception of the small cap equity accounts managed by
Kaplan Associates and its predecessor.
10
<PAGE>
HIDDEN VALUE FUND
- -------------------------
The Hidden Value Fund's investment objective is long-term growth of capital.
The Fund seeks to achieve its objective by investing primarily in common stocks
of companies that the Fund's sub-adviser considers to be undervalued at the
time of purchase and to have the potential for long-term capital appreciation.
The sub-adviser believes the value of certain stocks will tend to be "hidden"
from the market for reasons including the coverage of certain companies by
relatively few securities analysts. The sub-adviser expects that the median
market capitalization of stocks held by the Fund will ordinarily range from
$800 million to $5 billion. In selecting stocks for the Fund, the sub-adviser
will consider, among other things, the issuer's earning power and the relative
value of the issuer's assets. Under normal market conditions, the Fund will
invest at least 65% of its total assets in common stocks.
The Fund's sub-adviser is Kaplan Associates, and James L. Kaplan and Paul
Weisman have day-to-day responsibility for managing the Fund's portfolio. For
more information about Kaplan Associates and Messrs. Kaplan and Weisman, see
"Small Cap Value Fund" above.
The gross investment performance for the period from January 1, 1988 to
December 31, 1997 of all discretionary, fee-paying pooled account managed by
Kaplan Associates and its predecessor with investment objectives, policies and
strategies substantially similar to that of the Hidden Value Fund has been
attested to by Deloitte & Touche LLP for use in connection with the
registration statement of the Trust under the Securities Act. For all periods
presented, the investment performance has been calculated using a time-weighted
rate of return methodology that is based on geometrically linked monthly
returns that employ a modified Dietz formula which weighs each cash flow by the
amount of time it is held in the account. This investment performance (i)
represents total return, assuming reinvestment of all dividends and proceeds
from capital transactions and (ii) has been adjusted for actual fees and
expenses incurred by the pooled account. The method for calculating performance
produces a different result than if the performance information were calculated
using the SEC's method for calculating the total return of a mutual fund. The
investment performance net of actual fees and expenses incurred by the accounts
is presented in the table below. The benchmark index to which the pooled
account is compared is the Russell Midcap Index (the "Russell Midcap"). The
Russell Midcap is an unmanaged index representing the performance of the 800
smallest of the 1000 largest U.S.-domiciled corporations, ranked by market
capitalization. Although used as a benchmark, the Russell Midcap's performance
may not be comparable to the performance of the pooled account since, unlike
the performance of the pooled account, the Russell Midcap's performance has not
been adjusted for any fees or expenses.
The information provided does not represent the performance of the Hidden Value
Fund, which commenced operations on December 29, 1997 and has a limited
performance record of its own. The following information should not be
considered a prediction of future performance of the Hidden Value Fund. The
Hidden Value Fund's performance may be higher or lower than that shown below.
If the performance information were to reflect the estimated fees and expenses
of the Hidden Value Fund, the total returns would be lower than those shown
below. For more information about the performance data, see "All Funds--Past
Performance of Certain Sub-Advisers" below.
- --------------------------------------------------------------------------------
Mid Cap Equity Pooled Account*(%) Russell Midcap(%)
- --------------------------------------------------------------------------------
1997 33.06 29.00
1996 34.30 19.00
1995 32.23 34.46
1994 5.13 ( 2.08)
1993 14.98 14.29
1992 6.70 16.37
1991 23.48 41.53
1990 (11.32) (11.49)
1989 21.48 26.26
1988 29.84 19.80
- --------------------------------------------------------------------------------
* The performance information represents the average quarterly returns for a
single pooled account, which is the only account managed in this style by
Kaplan Associates and its predecessor.
11
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Mid Cap Equity Pooled Account*(%) Russell Midcap(%)
- --------------------------------------------------------------------------------
<S> <C> <C>
Average Annual Returns
- --------------------------------------------------------------------------------
1 Year 33.06 29.00
3 Years 33.20 27.32
5 Years 23.36 18.23
10 Years 18.07 17.68
- --------------------------------------------------------------------------------
Cumulative Returns
- --------------------------------------------------------------------------------
1 Year 33.06 29.00
3 Years 136.30 106.41
5 Years 185.64 131.00
10 Years 426.40 409.33
- --------------------------------------------------------------------------------
</TABLE>
* The performance information represents the average quarterly returns for a
single pooled account, which is the only account managed in this style by
Kaplan Associates and its predecessor.
12
<PAGE>
CORE EQUITY FUND
- -------------------------
The Core Equity Fund's investment objective is long-term growth of capital.
The Fund seeks to achieve its objective by investing substantially all of its
assets in common stocks of well-established, high-quality U.S. companies.
Although the common stocks in which the Fund invests will typically have larger
market capitalization, the Fund may invest in stocks with capitalization as low
as $1 billion. In selecting investments for the Fund, the Fund's sub-adviser
will consider, among other things, its expectations as to the relative
performance of various sectors of the economy and the relative growth prospects
of different companies within such sectors. Under normal market conditions, the
Fund will ordinarily be substantially fully invested in common stocks of U.S.
companies.
Waite & Associates L.L.C. is the Fund's sub-adviser. Waite & Associates L.L.C.,
601 South Figueroa Street, Los Angeles, California, is the successor firm to
Waite & Associates, the successor firm to Waite & Correnti, an investment
advisory firm founded in 1978. Leslie A. Waite and Diana L. Calhoun have
day-to-day responsibility for the management of the Fund's portfolio. Mr. Waite
founded Waite & Correnti in 1978 and has served as President and Chief
Investment Officer of the firm since then. Ms. Calhoun joined the firm in 1981
and holds the positions of Managing Director and Senior Portfolio Manager. Ms.
Calhoun held the position of Senior Vice President of Trading from 1981 until
becoming a Managing Director in 1997, and has been a Senior Portfolio Manager
since 1992.
The gross investment performance for the period from January 1, 1988 to
December 31, 1997 of all discretionary, fee-paying accounts managed by Waite &
Associates L.L.C. and its predecessors with investment objectives, policies and
strategies substantially similar to that of the Core Equity Fund has been
attested to by KPMG Peat Marwick LLP for use in connection with the
registration statement of the Trust under the Securities Act, in accordance
with standards established by the Association for Investment Management and
Research. This investment performance (i) represents total return, assuming
reinvestment of all dividends and proceeds from capital transactions and (ii)
has been adjusted for actual fees and expenses incurred by the accounts. The
method for calculating performance produces a different result than if the
performance information were calculated using the SEC's method for calculating
the total return of a mutual fund. The investment performance net of actual
fees and expenses incurred by the accounts is presented in the table below. The
benchmark index to which the accounts are compared is the Standard & Poor's 500
Index (the "S&P 500"). The S&P 500 is an unmanaged index representing the
performance of 500 major companies, most of which are listed on the New York
Stock Exchange. Although used as a benchmark, the S&P 500's performance may not
be comparable to the performance of the accounts since, unlike the performance
of the accounts, the S&P 500's performance has not been adjusted for any fees
or expenses.
The information provided does not represent the performance of the Core Equity
Fund, which commenced operations on December 29, 1997 and has a limited
performance record of its own. The following information should not be
considered a prediction of future performance of the Core Equity Fund. The Core
Equity Fund's performance may be higher or lower than that shown below. If the
performance information were to reflect the estimated fees and expenses of the
Core Equity Fund, the total returns would be lower than those shown. For more
information about the performance data, see "All Funds--Past Performance of
Certain Sub-Advisers" below.
- --------------------------------------------------------------------------------
Accounts(%) S&P 500(%)
- --------------------------------------------------------------------------------
1997 39.02 33.36
1996 27.72 22.97
1995 42.78 37.59
1994 0.32 1.32
1993 12.30 10.08
1992 7.49 7.61
1991 22.23 30.45
1990 2.77 ( 3.09)
1989 21.32 31.55
1988 12.25 16.57
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
Accounts(%) S&P 500(%)
- --------------------------------------------------------------------------------
Average Annual Returns
- --------------------------------------------------------------------------------
1 Year 39.02 33.36
3 Years 36.35 31.16
5 Years 23.36 20.27
10 Years 18.04 18.04
- --------------------------------------------------------------------------------
Cumulative Returns
- --------------------------------------------------------------------------------
1 Year 39.02 33.36
3 Years 153.51 125.64
5 Years 185.62 151.67
10 Years 425.21 425.07
- --------------------------------------------------------------------------------
14
<PAGE>
ALL CAP VALUE FUND
- -------------------------
The All Cap Value Fund's investment objective is long-term growth of capital.
The Fund seeks to achieve its objective by investing in common stocks of
companies of any market capitalization (small-, mid- or large-cap) that its
sub-adviser believes are undervalued and therefore offer above-average
potential for capital growth. In selecting these stocks, the sub-adviser will
consider, among other things, the issuer's cash flow, price-to-book ratio,
return on capital, balance sheets, and management. The Fund will ordinarily
remain substantially fully invested in common stocks.
E.R. Taylor Investments, Inc. ("E.R. Taylor") is the sub-adviser to the Fund.
E.R. Taylor, 46 South Main Street, Suite 4, Concord, New Hampshire, was founded
in 1983, and serves as an investment adviser to endowment funds, charitable
organizations and other institutional and individual investors. E.R. Taylor's
philosophy is to invest in undervalued, quality companies where management uses
cash flow to build shareholder value.
Investment decisions for the Fund are made by E.R. Taylor's Investment
Committee, which consists of six investment professionals. Sherwood T. Small,
President of E.R. Taylor, is the Chairman of the Investment Committee. Mr.
Small has served as President of E.R. Taylor since 1992.
15
<PAGE>
ALL FUNDS
THE FUNDS' INVESTMENTS
In addition to the investments described above, each Fund may lend its
portfolio securities and enter into repurchase agreements. See "More
Information About the Funds' Investments and Risk Considerations" below.
INVESTMENT POLICIES
Except for investment policies that are identified as "fundamental," all of the
investment policies of each Fund may be changed without a vote of Fund
shareholders.
DIVERSIFICATION
Each Fund is a "diversified" fund, as defined in the Investment Company Act of
1940 (the "1940 Act"), except for the REIT and the Special Small Cap Funds,
which are "non-diversified." With respect to 75% of its assets, a diversified
fund may not invest more than 5% of its total assets in the securities of any
one issuer (except U.S. government securities) while the remaining 25% of its
total assets is not subject to such restriction. A non-diversified fund is
restricted with respect to 50% of its total assets from investing more than 5%
of its total assets in the securities of any one issuer (except U.S. government
securities), and with respect to the remaining 50% of its total assets from
investing more than 25% of its total assets in the securities of any one
issuer. A non-diversified fund may invest a greater percentage of its total
assets in securities of individual issuers, or may invest in a smaller number
of different issuers, than a diversified fund. Accordingly, a non-diversified
fund is more susceptible to risks associated with particular issuers than a
diversified fund.
PAST PERFORMANCE OF CERTAIN SUB-ADVISERS
As stated above, information about the investment performance of accounts
managed by certain of the Funds' sub-advisers (and, in certain cases, their
predecessors) is provided above. Investment performance is shown on an annual
return basis, with returns for periods of less than one year not annualized,
and on an average annual return and cumulative return basis. Past performance
information is provided for the 10-year period ended December 31, 1997, except
where the sub-adviser has managed accounts using substantially the same
investment objective as the relevant Fund for a period of less than 10 years.
The information represents performance data furnished by certain of the Funds'
sub-advisers relating to accounts managed by them. In each case, the relevant
sub-adviser's accounts have investment objectives substantially similar to that
of the Fund(s) managed by that sub-adviser; were managed throughout the periods
shown using investment styles and strategies substantially similar (although
not necessarily identical) to that of the relevant Fund; and except as noted
above include all of the fully-discretionary, fee-paying equity accounts
managed by such sub-adviser during the periods shown using investment
objectives, policies and strategies substantially similar to that of the
relevant Fund. The returns are adjusted to give effect to the actual fees and
expenses incurred by the accounts. AS STATED ABOVE, THE PERFORMANCE INFORMATION
DOES NOT REPRESENT THE PERFORMANCE OF THE FUNDS. THE FUNDS COMMENCED OPERATIONS
ON DECEMBER 29, 1997 AND EACH HAS A LIMITED PERFORMANCE RECORD OF ITS OWN. THE
PERFORMANCE INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE
PERFORMANCE OF ANY OF THE FUNDS. EACH FUND'S PERFORMANCE MAY BE HIGHER OR LOWER
THAN THAT SHOWN.
During the periods shown, the sub-advisers' accounts were managed by the
portfolio manager(s) who will be responsible for the day-to-day portfolio
management of the Fund(s) managed by that sub-adviser.
The accounts are not subject to the same types of expenses to which each of the
Funds are subject, nor to the diversification requirements, specific tax
restrictions and investment limitations imposed on each of the Funds by the
1940 Act or the Internal Revenue Code of 1986 (the "Code"). The performance
results for the accounts shown above might have been less favorable had the
accounts been subject to these requirements, restrictions and limitations.
16
<PAGE>
MORE INFORMATION ABOUT THE FUNDS' INVESTMENTS AND RISK CONSIDERATIONS
It is important to understand the following risks inherent in a Fund before you
invest.
COMMON STOCKS AND OTHER EQUITY SECURITIES
Common stocks and similar equity securities are securities that represent an
ownership interest (or the right to acquire such an interest) in a company and
include securities exercisable for or convertible into common stocks (e.g.,
warrants). While offering greater potential for long-term growth, common stocks
and similar equity securities are more volatile and more risky than some other
forms of investment. Therefore, the value of your investment in a Fund may
sometimes decrease instead of increase. Each Fund may invest in equity
securities of companies with relatively small market capitalization. Securities
of such companies may be more volatile than the securities of larger, more
established companies and the broad equity market indices. See "Small
Companies" below. Each Fund's investments may include securities traded
"over-the-counter" as well as those traded on a securities exchange. Some
over-the-counter securities may be more difficult to sell under some market
conditions.
Convertible securities include other securities, such as warrants, that provide
an opportunity for equity participation. Because convertible securities can be
converted into equity securities, their values will normally increase or
decrease as the values of the underlying equity securities increase or
decrease. The movements in the prices of convertible securities, however, may
be smaller than the movements in the value of the underlying equity securities.
SMALL COMPANIES
All of the Funds may invest in companies with relatively small market
capitalization, and several of the Funds will invest primarily in such
companies. See "The Funds" above.
Investments in companies with relatively small capitalization may involve
greater risk than is usually associated with stocks of larger companies. These
companies often have sales and earnings growth rates which exceed those of
companies with larger capitalization. Such growth rates may in turn be
reflected in more rapid share price appreciation. However, companies with
smaller capitalization often have limited product lines, markets or financial
resources and may be dependent upon a relatively small management group. The
securities may have limited marketability and may be subject to more abrupt or
erratic movements in price than securities of companies with larger
capitalization or market averages in general. The net asset value per share of
Funds that invest in companies with smaller capitalization therefore may
fluctuate more widely than market averages.
REPURCHASE AGREEMENTS
All of the Funds will normally invest at least 65% of their total assets in
common stocks. Any assets not invested in common stocks or other equity
securities will generally be held in the form of cash or in repurchase
agreements.
Under a repurchase agreement, a Fund buys securities from a seller, usually a
bank or brokerage firm, with the understanding that the seller will repurchase
the securities at a higher price at a later date. If the seller fails to
repurchase the securities, the Fund has rights to sell the securities to third
parties. Repurchase agreements can be regarded as loans by the Fund to the
seller, collateralized by the securities that are the subject of the agreement.
Repurchase agreements afford an opportunity for the Fund to earn a return on
available cash at relatively low credit risk, although the Fund may be subject
to various delays and risks of loss if the seller fails to meet its obligation
to repurchase.
The staff of the SEC is currently of the view that repurchase agreements
maturing in more than seven days are illiquid securities.
LOANS OF SECURITIES
The Funds may lend their portfolio securities, provided that cash or equivalent
collateral equal to at least 100% of the market value of the securities loaned
is continuously maintained by the borrower with the Funds. During the time
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividends or interest paid on such securities, and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed upon
amount of interest income from the borrower who has delivered equivalent
collateral. These loans are subject to ter-
17
<PAGE>
mination at the option of the Fund or the borrower. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent collateral
to the borrower or placing broker. It is not currently anticipated that any
Fund will have on loan at any given time securities totaling more than
one-third of its net assets. A Fund runs the risk that the counterparty to a
loan transaction will default on its obligation and that the value of the
collateral received may be insufficient to cover the securities loaned as a
result of an increase in the value of the securities or decline in the value of
the collateral.
REAL ESTATE INVESTMENT TRUSTS
The REIT Fund will invest primarily in shares of REITs. REITs pool investors'
funds for investment primarily in income producing real estate or real estate
related loans or interests. Under the Code, a REIT is not taxed on income it
distributes to its shareholders if it complies with several requirements
relating to its organization, ownership, assets, and income and a requirement
that it generally distribute to its shareholders at least 95% of its taxable
income (other than net capital gains) for each taxable year. REITs can
generally be classified as Equity REITs, Mortgage REITs, and Hybrid REITs.
Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITS
combine the characteristics of both Equity REITs and Mortgage REITs.
While the Fund will not invest in real estate directly, the Fund may be subject
to risks similar to those associated with the direct ownership of real estate
(in addition to securities markets' risks) because of its policy of
concentration in the securities of companies in the real estate industry. These
risks include declines in the value of real estate, risks related to general
and local economic conditions, dependency on management skill, heavy cash flow
dependency, possible lack of availability of mortgage funds, overbuilding,
extended vacancies of properties, increased competition, increases in property
taxes and operating expenses, changes in zoning laws, losses due to costs
resulting from the clean-up of environmental problems, liability to third
parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values and
in the appeal of properties to tenants and changes in interest rates.
In addition to these risks, Equity REITs may be affected by changes in the
value of the underlying property owned by the trusts, while Mortgage REITs may
be affected by the quality of any credit they extend. Further, Equity REITs and
Mortgage REITs are dependent upon management skills and generally may not be
diversified. Equity REITs and Mortgage REITs are also subject to heavy cash
flow dependency, defaults by borrowers and self-liquidation. In addition,
Equity REITs and Mortgage REITs could possibly fail to qualify for tax-free
pass-through of income under the Code or to maintain their exemptions from
registration under the 1940 Act. The above factors may also adversely affect a
borrower's or a lessee's ability to meet its obligations to the REIT. In the
event of a default by a borrower or lessee, the REIT may experience delays in
enforcing its rights as a mortgagee or lessor and may incur substantial costs
associated with protecting its investments. In addition to the foregoing risks,
certain "special purpose" REITs in which the Fund invests may invest their
assets in specific real estate sectors, such as hotel REITs, nursing home REITs
or warehouse REITs, and are therefore subject to the risks associated with
adverse developments in any such sectors.
18
<PAGE>
MANAGEMENT OF THE FUNDS
Undiscovered Managers is the investment adviser of each Fund and has
responsibility for the management of the Funds' affairs, under the supervision
of the Trust's Board of Trustees. Each Fund's investment portfolio is managed
on a day-to-day basis by that Fund's sub-adviser, under the general oversight
of Undiscovered Managers and the Board of Trustees. Undiscovered Managers
monitors and evaluates each sub-adviser to assure that the sub-adviser is
managing its Fund consistently with the Fund's investment objective and
restrictions and applicable laws and guidelines. Undiscovered Managers does
not, however, determine what investments will be purchased or sold for a Fund.
Pursuant to an Administrative Services Agreement, Undiscovered Managers has
agreed to provide each Fund all administrative services, including but not
limited to corporate secretarial, treasury, blue sky and fund accounting
services. For these services, each Fund pays Undiscovered Managers a monthly
fee at the annual rate of .25% of the Fund's average net asset value.
Undiscovered Managers has entered into an agreement with First Data Investor
Services Group, Inc. ("First Data") to provide certain of the foregoing
administrative services. First Data has no responsibility with respect to the
oversight of any Fund's investment advisory services.
Undiscovered Managers was organized in 1997 as a Delaware limited liability
company and has no prior experience managing mutual funds. The address of
Undiscovered Managers is Plaza of the Americas, 700 North Pearl Street, Dallas,
Texas 75201. Mark P. Hurley, the President of Undiscovered Managers, and
AMRESCO, Inc., a publicly traded corporation engaged in residential mortgage
banking, commercial mortgage banking, asset management and commercial finance,
each own more than 25% of the voting securities of Undiscovered Managers and
therefore are regarded to control Undiscovered Managers for purposes of the
1940 Act. Each of the sub-advisers is regarded for purposes of the 1940 Act as
being controlled by the following persons, each of whom is a principal of the
firm and owns more than 25% of the voting securities of the firm: Russell J.
Fuller (RJF Management); David J. Steirman and Abbott J. Keller (Kestrel
Management); Gary G. Pollock and William F.K. Schaff (Bay Isle); James L.
Kaplan (Kaplan Associates); Leslie A. Waite (Waite & Associates L.L.C.); and
Sherwood T. Small (E.R. Taylor). Except for Bay Isle, none of the sub-advisers
has prior experience managing a mutual fund.
The Bank of New York is the custodian for the Funds and First Data
Distributors, Inc. is the distributor for the Funds.
ADVISORY AND SUB-ADVISORY FEES
Each Fund pays Undiscovered Managers a management fee at the following annual
percentage rates of the Fund's daily net assets:
Fund Fee Rate
Behavioral Growth Fund 0.95%
Special Small Cap Fund 0.65-1.65%*
REIT Fund 1.05%
Small Cap Value Fund 1.05%
Hidden Value Fund 0.95%
Core Equity Fund 0.74%
All Cap Value Fund 0.74%
- ------------
* The advisory fee rate for the Special Small Cap Fund will vary depending on
the investment performance of the Fund. In particular, the applicable fee
rate is determined by adding to (or subtracting from) 1.15% one-fifth of the
number of basis points by which the total return of the Fund during the
one-year period ending at the end of a quarter exceeds (or falls short of)
the total return of the Russell 2000 Index during the one-year period ending
at the end of such quarter. The advisory fee rate will not exceed the annual
rate of 1.65% nor be less than the annual rate of 0.65%. Until the end of
the first calendar quarter ending on or after the 364th day following the
commencement of the Fund's operations, the annual fee rate shall be 1.15%.
The Russell 2000 Index is composed of the common stocks of the 2000 smallest
of the 3000 largest publicly-traded U.S. companies, measured by market
capitalization. The Fund uses the Russell 2000 Index as the standard of
performance comparison because that index is well known to investors and is
commonly regarded as representative of the performance of United States
smaller capitalization stocks. The sponsor of the Russell 2000 Index does
not sponsor and is not in any other way affiliated with the Fund.
19
<PAGE>
As described above, the advisory fee rate for the Special Small Cap Fund will
vary depending on the investment performance of the Fund. The following table
provides information concerning a range of potential advisory fee rates for the
Special Small Cap Fund.
Special Small Cap Fund
Total Return Differential
with respect to Fee
Russell 2000 Index Percentage
-2.5% .65%*
-1.5% .85%
0% 1.15%
1.5% 1.45%
2.5% 1.65%**
- ------------
* Minimum advisory fee rate even if the differential for the Fund for the
hypothetical period was less than 2.5%.
** Maximum advisory fee rate even if the differential for the Fund for the
hypothetical period exceeded 2.5%.
Undiscovered Managers pays each Fund's sub-adviser a sub-advisory fee at the
following annual percentage rates of the specified levels of the Fund's average
daily net assets:
<TABLE>
<CAPTION>
Fund Sub-adviser Fee Rate as % of Fund's Net Assets
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Behavioral Growth Fund RJF Management 0.60% of the first $200 million
-----------------------------------------------
0.55% of the next $100 million
-----------------------------------------------
0.50% of assets in excess of $300 million
- ------------------------------------------------------------------------------------------------------
Special Small Cap Fund Kestrel Management 0.30% - of all assets
1.30%*
- ------------------------------------------------------------------------------------------------------
REIT Fund Bay Isle 0.70 % of the first $200 million
-----------------------------------------------
0.65 % of the next $100 million
-----------------------------------------------
0.60 % of assets in excess of $300 million
- ------------------------------------------------------------------------------------------------------
Small Cap Value Fund Kaplan Associates 0.70 % of the first $200 million
-----------------------------------------------
0.65 % of the next $100 million
-----------------------------------------------
0.60 % of assets in excess of $300 million
- ------------------------------------------------------------------------------------------------------
Hidden Value Fund Kaplan Associates 0.60 % of the first $200 million
-----------------------------------------------
0.55 % of the next $100 million
-----------------------------------------------
0.50 % of assets in excess of $300 million
- ------------------------------------------------------------------------------------------------------
Core Equity Fund Waite & Associates L.L.C. 0.40 % of the first $200 million
-----------------------------------------------
0.35 % of the next $100 million
-----------------------------------------------
0.30 % of assets in excess of $300 million
- ------------------------------------------------------------------------------------------------------
All Cap Value Fund E.R. Taylor 0.40 % of the first $200 million
-----------------------------------------------
0.35 % of the next $100 million
-----------------------------------------------
0.30 % of assets in excess of $300 million
- ------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
*The sub-advisory fee rate for the Special Small Cap Fund will vary depending
on the investment performance of the Fund. In particular, the applicable fee
rate is determined by adding to (or subtracting from) 0.80% one-fifth of the
number of basis points by which the total return of the Fund during the
one-year period ending at the end of a quarter exceeds (or falls short of) the
total return of the Russell 2000 Index during the one-year period ending at the
end of such quarter. The sub-advisory fee rate will not exceed the annual rate
of 1.30% nor be less than the annual rate of 0.30%. Until the end of the first
calendar quarter ending on or after the 364th day following the commencement of
the Fund's operations, the annual fee rate shall be 0.80%. For more information
about the Russell 2000 Index, see the footnote to the Funds' Advisory Fee Table
above.
The Trust intends to apply for an exemptive order from the Securities and
Exchange Commission to permit Undiscovered Managers, subject to the approval of
the Trust's Board of Trustees and cer-
20
<PAGE>
tain other conditions, to enter into sub-advisory agreements with sub-advisers
other than the current sub-adviser of any Fund without obtaining shareholder
approval. The exemptive request will also seek to permit, without obtaining
shareholder approval, the terms of an existing sub-advisory agreement to be
changed or the employment of an existing sub-adviser to be continued after
events that would otherwise cause an automatic termination of a sub-advisory
agreement when such changes or continuation are approved by the Trust's Board
of Trustees. This Prospectus would be revised and shareholders notified if the
sub-adviser of any Fund is changed.
OTHER FUND EXPENSES
In addition to the investment advisory fee, each Fund pays all expenses not
expressly assumed by Undiscovered Managers, including taxes, brokerage
commissions, fees and expenses of registering and qualifying the Fund's shares
under federal and state securities laws, fees of the Fund's custodian, transfer
agent, independent accountants and legal counsel, expenses of shareholders' and
Trustees' meetings, expenses of preparing, printing and mailing prospectuses to
existing shareholders and fees of Trustees who are not directors, officers or
employees of Undiscovered Managers.
Undiscovered Managers has voluntarily agreed, for an indefinite period, to pay
the expenses of each Fund in excess of the following annual percentage rates of
the average daily net assets of each Fund, subject to the obligation of the
Fund to repay Undiscovered Managers such expenses in future years, if any, when
the Fund's expenses fall below the stated percentage rate, but only to the
extent that such repayment would not cause the Fund's expenses in any such
future year to exceed the stated percentage rate, and provided that the Funds
are not obligated to repay any such expenses more than two years after the end
of the fiscal year in which they were incurred: 0.99% for the All Cap Value
Fund and the Core Equity Fund; 1.30% for the Behavioral Growth Fund and the
Hidden Value Fund; 1.40% for the REIT Fund and the Small Cap Value Fund; and,
for the Special Small Cap Fund, the sum of 0.55% plus the advisory fee rate for
the Fund for the year in question. Undiscovered Managers may change or
terminate these voluntary arrangements at any time, but the Funds' Prospectus
would be supplemented to describe the change.
PORTFOLIO TRANSACTIONS
In addition to selecting portfolio investments for the Fund(s) it manages, each
sub-adviser selects brokers or dealers to execute securities purchases and
sales for the Fund's account. Each sub-adviser selects only brokers or dealers
which it believes are financially responsible, will provide efficient and
effective services in executing, clearing and settling an order and will charge
commission rates which, when combined with the quality of the foregoing
services, will produce best price and execution for the transaction. This does
not necessarily mean that the lowest available brokerage commission will be
paid. However, the commissions are believed to be competitive with generally
prevailing rates. Each sub-adviser will use its best efforts to obtain
information as to the general level of commission rates being charged by the
brokerage community from time to time and will evaluate the overall
reasonableness of brokerage commissions paid on transactions by reference to
such data. In making such evaluation, all factors affecting liquidity and
execution of the order, as well as the amount of the capital commitment by the
broker in connection with the order, are taken into account. The Funds will not
pay a broker a commission at a higher rate than otherwise available for the
same transaction in recognition of the value of research services provided by
the broker or in recognition of the value of any other services provided by the
broker which do not contribute to the best price and execution of the
transaction.
A sub-adviser's receipt of research services from brokers may sometimes be a
factor in its selection of a broker that it believes will provide best price
and execution for a transaction. These research services include not only a
wide variety of reports on such matters as economic and political developments,
industries, companies, securities, portfolio strategy, account performance,
daily prices of securities, stock and bond market conditions and projections,
asset allocation and portfolio structure, but also meetings with management
representatives of issuers and with other analysts and specialists. Although it
is in many cases not possible to assign an exact dollar value to these
services, they may, to the extent used, tend to reduce the sub-adviser's
expenses. Such services may be used by a sub-adviser in managing other client
accounts and in some cases may not be used with respect to the Funds. Receipt
of services or products other than research from brokers is not a factor in the
selection of brokers. Consistent with the Rules of Fair Practice of the
National
21
<PAGE>
Association of Securities Dealers, Inc., and subject to seeking best price and
execution, purchases of shares of a Fund by customers of broker-dealers may be
considered as a factor in the selection of broker-dealers to execute the Fund's
securities transactions.
A sub-adviser may cause a Fund to pay a broker-dealer that provides brokerage
and research services to the sub-adviser an amount of commission for effecting
a securities transaction for that Fund in excess of the amount another
broker-dealer would have charged for effecting that transaction. The
sub-adviser must determine in good faith that such greater commission is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker-dealer viewed in terms of that particular
transaction or the sub-adviser's overall responsibilities to the Fund and its
other clients. The sub-advisers currently have no intention of executing
transactions on such basis. The sub-adviser's authority to cause a Fund to pay
greater commissions is also subject to such policies as the Trustees of the
Trust may adopt from time to time.
It is not possible to predict the Funds' portfolio turnover rates with
certainty. Each Fund's sub-adviser has indicated, however, that it does not
expect that the annual portfolio turnover rate of the Fund(s) it manages would
normally exceed the following rates: 50% for the All Cap Value, Core Equity and
REIT Funds; 75% for the Small Cap Value, Hidden Value and Special Small Cap
Funds; and 200% for the Behavioral Growth Fund. Any Fund's portfolio turnover
rate in any year could be significantly higher or lower than these estimates.
Higher levels of portfolio turnover may result in higher transactions costs and
higher levels of taxable realized capital gains.
HOW TO PURCHASE SHARES
An investor may make an initial purchase of shares of any Fund by submitting a
completed application form and payment to:
Undiscovered Managers Funds
4400 Computer Drive
P.O. Box 5181
Westborough, MA 01581-5181
The minimum initial investment for the Institutional Class of each Fund's
shares is $250,000 in that Fund. A minimum investment of $10,000 applies to the
Trustees of the Trust, investment advisory clients of the sub-advisers (and
their directors, officers and employees), and employees of Undiscovered
Managers and the parents, spouses and children of the foregoing. The minimum
investment may be waived by Undiscovered Managers in its sole discretion and
will be waived for any new shareholder in Undiscovered Managers Funds who
initially invests less than $250,000 but signs a letter of intent stating the
shareholder's intention to bring his or her balance to $250,000 within six
months after the initial purchase. For investors who purchase through a
financial intermediary and hold their shares through an omnibus account with
that financial intermediary, the minimum initial investment applies to the
omnibus account and not to the investors individually. Undiscovered Managers
reserves the right to redeem the accounts at net asset value of shareholders
that have signed a letter of intent but fail to meet the minimum investment
within the specified time or to waive any minimum investment in its sole
discretion. Subsequent investments must be at least $50,000.
If the balance in a shareholder's account with a Fund is less than a minimum
amount set by the Trustees of the Trust from time to time (currently $250,000
for all accounts), that Fund may close the account and send the proceeds to the
shareholder. Shareholders who are affected by this policy will be notified of
the Fund's intention to close the account and will have 60 days immediately
following the notice to bring the account up to the minimum. The minimum does
not apply to automatic investment plans or accounts that have fallen below the
minimum solely because of fluctuations in a Fund's net asset value per share.
Shares of any Fund may be purchased by (i) cash, (ii) exchanging securities on
deposit with a custodian acceptable to Undiscovered Managers or (iii) any
combination of such securities and cash. Purchase of shares of the Fund in
exchange for securities is subject in each case to the determination by
Undiscovered Managers that the securities to be exchanged are acceptable for
purchase by the Fund. In all cases, Undiscovered Managers reserves the right to
reject any securities that are proposed for exchange. Securities accepted by
Undiscovered Managers in exchange for Fund
22
<PAGE>
shares will be valued in the same manner as the Fund's assets as described
below as of the time of the Fund's next determination of net asset value after
such acceptance. All dividends and subscription or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Fund and must be delivered to the Fund upon receipt
by the investor from the issuer. Generally, a gain or loss for federal income
tax purposes would be realized upon the exchange of securities by an investor
that is subject to federal income taxation, depending upon the investor's basis
in the securities tendered. An investor who wishes to purchase shares by
exchanging securities should obtain instructions by calling 1-800-667-1224.
Undiscovered Managers will not approve the acceptance of securities in exchange
for shares of any Fund unless (1) Undiscovered Managers and the applicable
sub-adviser in their discretion, believes the securities are appropriate
investments for the Fund; (2) the investor represents and agrees that all
securities offered to the Fund can be resold by the Fund without restriction
under the Securities Act or otherwise; and (3) the securities are eligible to
be acquired under the Fund's investment policies and restrictions. No investor
owning 5% or more of a Fund's shares may purchase additional shares of that
Fund by an exchange of securities.
All purchases made by check should be in U.S. dollars and made payable to
Undiscovered Managers Funds. Third party checks will not be accepted. When
purchases are made by check, redemption proceeds will not be sent until the
check paying for the investment has cleared, which may take up to 15 calendar
days.
Upon acceptance of an investor's order, First Data opens an account, applies
the payment to the purchase of full and fractional Fund shares and mails a
statement of the account confirming the transaction.
After an account has been established, an investor may send subsequent
investments at any time directly to First Data at the above address. The
remittance must be accompanied by either the account identification slip
detached from a statement of account or a note containing sufficient
information to identify the account, i.e., the Fund name and the investor's
account number or name and social security number.
Initial and subsequent investments can also be made by federal funds wire.
Investors should instruct their banks to wire federal funds to Boston Safe
Deposit & Trust Company, ABA #011001234. The text of the wire should read as
follows:
Boston Safe Deposit & Trust Company
ABA #011001234
Account #145483
FOB: Shareholder Name and Account Number
FOR: Undiscovered Managers Funds
A bank may charge a fee for transmitting funds by wire.
Each Fund and the Distributor reserve the right to reject any purchase order,
including orders in connection with exchanges, for any reason which the Fund or
the Distributor in its sole discretion deems appropriate. Although the Funds do
not presently anticipate that they will do so, each Fund reserves the right to
suspend or change the terms of the offering of its shares.
Except for the broker-dealer transaction-based or other fees described in the
next paragraph, the price an investor pays will be the per share net asset
value next calculated after a proper investment order is received by the
Trust's transfer or other agent or sub-agent. Shares of each Fund are sold with
no sales charge. The net asset value of each Fund's shares is calculated once
daily as of the close of regular trading on the New York Stock Exchange on each
day the Exchange is open for trading, by dividing the Fund's net assets by the
number of shares outstanding. Portfolio securities are valued at their market
value as more fully described in the SAI.
The Distributor may accept telephone orders from broker-dealers, and other
intermediaries designated by such broker-dealers, who have been previously
approved by the Distributor. The Funds will be deemed to have received a
purchase order when an approved broker-dealer or its authorized designee
accepts such order. It is the responsibility of such broker-dealers to promptly
forward purchase or redemption orders to the Distributor. Although there is no
sales charge imposed by the Fund or the Distributor, broker-dealers may charge
the investor a transaction-based fee or other fee for their services at either
the time of purchase or the time of redemption. Such charges may vary among
broker-dealers but in all cases will be retained by the broker-dealers and not
remitted to the Fund.
23
<PAGE>
SHAREHOLDER SERVICES
The Funds offer the following shareholder services, which are more fully
described in the SAI. Explanations and forms are available from First Data.
Telephone redemption and exchange privileges will be established automatically
when an investor opens an account unless an investor elects on the application
to decline the privileges. Other privileges must be specifically elected. A
signature guarantee will be required to establish a privilege after an account
is opened.
FREE EXCHANGE PRIVILEGE. Institutional Class shares of any Fund may be
exchanged for shares of the Institutional Class of any other Fund. Exchanges
may be made by written instructions or by telephone, unless an investor elected
on the application to decline telephone exchange privileges. The exchange
privilege should not be viewed as a means for taking advantage of short-term
swings in the market, and the Funds reserve the right to terminate or limit the
privilege of any shareholder who makes more than four exchanges in any calendar
year. The Funds may terminate or change the terms of the exchange privilege at
any time, upon 60 days' notice to shareholders.
RETIREMENT PLANS. The Funds' Institutional Class shares may be purchased by all
types of tax-deferred retirement plans. The Distributor makes available
retirement plan forms for IRAs.
SYSTEMATIC WITHDRAWAL PLAN. If the value of an account is at least $25,000, an
investor may have periodic cash withdrawals automatically paid to the investor
or any person designated by the investor.
AUTOMATIC INVESTMENT PLAN. Voluntary monthly investments of at least $1,000 may
be made automatically by pre-authorized withdrawals from an investor's checking
account.
HOW TO REDEEM SHARES
An investor can redeem shares by sending a written request to First Data at
4400 Computer Drive, P.O. Box 5181, Westborough, MA 01581-5181, Attn:
Undiscovered Managers Funds. As described below, an investor may also redeem
shares by calling Undiscovered Managers at 1-800-667-1224. Proceeds resulting
from a written or telephonic redemption request can be wired to an investor's
bank account or sent by check in the name of the registered owners to their
record address.
The written request must include the name of the Fund, the account number, the
exact name(s) in which the shares are registered, and the number of shares or
the dollar amount to be redeemed. All owners of the shares must sign the
request in the exact names in which the shares are registered (this appears on
an investor's confirmation statement) and should indicate any special capacity
in which they are signing (such as trustee or custodian or on behalf of a
partnership, corporation or other entity). Investors requesting that redemption
proceeds be wired to their bank accounts must provide specific wire
instructions.
If (1) an investor is redeeming shares worth more than $50,000, (2) an investor
is requesting that the proceeds check be made out to someone other than the
registered owners or be sent to an address other than the record address, (3)
the account registration has changed within the last 30 days or (4) an investor
is providing instructions to wire the proceeds to a bank account not designated
on the application, the investor must have his or her signature guaranteed by
an eligible guarantor. Eligible guarantors include commercial banks, trust
companies, savings associations, credit unions and brokerage firms that are
members of domestic securities exchanges. Before submitting the redemption
request, an investor should verify with the guarantor institution that it is an
eligible guarantor. Signature guarantees by notaries public are not acceptable.
When an investor telephones a redemption request, the proceeds are wired to the
bank account previously chosen by the investor. A wire fee (currently $5) will
be deducted from the proceeds. A telephonic redemption request must be received
by Undiscovered Managers prior to the close of regular trading on the New York
Stock Exchange. If an investor telephones a request to Undiscovered Managers
after the Exchange closes or on a day when the Exchange is not open for
business, Undiscovered Managers cannot accept the request and a new request
will be necessary.
If an investor decides to change the bank account to which proceeds are to be
wired, an investor must send in this change on the Service Options Form with a
signature guarantee. Telephonic
24
<PAGE>
redemptions may only be made if an investor's bank is a member of the Federal
Reserve System or has a correspondent bank that is a member of the System.
Unless an investor indicates otherwise on the account application, Undiscovered
Managers will be authorized to act upon redemption and exchange instructions
received by telephone from the investor or any person claiming to act as the
investor's representative who can provide Undiscovered Managers with the
investor's account registration and address as it appears on the records of the
Trust. Undiscovered Managers will employ these or other reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Trust,
First Data, the Distributor, Undiscovered Managers and the sub-advisers will
not be liable for any losses due to unauthorized or fraudulent instructions if
these or other reasonable procedures are followed, but may be liable for any
losses due to unauthorized or fraudulent instructions in the event reasonable
procedures are not followed. For further information, consult Undiscovered
Managers. In times of heavy market activity, an investor who encounters
difficulty in placing a redemption or exchange order by telephone may wish to
place the order by mail as described above.
The redemption price will be the net asset value per share next determined
after the redemption request and any necessary special documentation are
received by First Data or an approved broker-dealer or its authorized designee
in proper form.
Proceeds resulting from a written redemption request will normally be mailed to
an investor within seven days after receipt of the investor's request, if the
request is in good order. Telephonic redemption proceeds will normally be wired
to an investor's bank on the first business day following receipt of a proper
redemption request. If an investor purchased shares by check and the check was
deposited less than fifteen days prior to the redemption request, the Fund may
withhold redemption proceeds until the check has cleared.
The Fund may suspend the right of redemption and may postpone payment for more
than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the SEC when trading on
the Exchange is restricted or during an emergency which makes it impracticable
for the Fund to dispose of its securities or to determine fairly the value of
its net assets, or during any other period permitted by the SEC for the
protection of investors.
CALCULATION OF PERFORMANCE INFORMATION
The Funds may include in advertising their "total return" for the one-, five-
and ten-year periods (or for the life of a Fund, if shorter) through the most
recent calendar quarter. These total returns represent the average annual
compounded rate of return on a hypothetical investment of $1,000 in a Fund.
Total return may also be presented for other periods and on a cumulative (in
addition to average annual) basis.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
The Funds declare and pay their net investment income to shareholders as
dividends annually. Each Fund also distributes all of its net capital gains
realized from the sale of portfolio securities. Any capital gain distributions
are normally made annually, but may, to the extent permitted by law, be made
more frequently as deemed advisable by the Trustees of the Trust. The Trustees
may change the frequency with which the Funds declare or pay dividends.
Dividends and capital gain distributions will automatically be reinvested in
additional shares of the same Fund on the record date unless an investor has
elected to receive cash.
Each Fund intends to qualify as a regulated investment company under the Code.
As a regulated investment company, and provided that the Fund distributes
substantially all its net investment income to its shareholders, the Fund
itself will not pay any federal income tax on its distributed income and gains.
Income dividends and short term capital gain distributions are taxable as
ordinary income whether distributed in cash or additional shares. Long-term
capital gain distributions from all Funds are taxable as long-term capital
gains whether distributed in cash or additional shares and regardless of how
long an investor has owned shares of a Fund. Pursuant to the Taxpayer Relief
Act of 1997, long-term capital gains generally are subject to a maximum tax
rate of 28% or 20% depending upon the holding period in the portfolio
investment generating the distributed gains.
25
<PAGE>
Each Fund is required to withhold 31% of any redemption proceeds (including the
value of shares exchanged) and all income dividends and capital gain
distributions it pays to the investor (1) if the investor does not provide a
correct, certified taxpayer identification number, (2) if the Fund is notified
that the investor has underreported income in the past, or (3) if an investor
fails to certify to the Fund that the investor is not subject to such
withholding.
Certain designated dividends from the Funds are expected to be eligible for the
dividends-received deduction for corporate shareholders (subject to a holding
period requirement). However, any distributions received by a Fund from REITs
will not qualify for the dividends-received deduction. A Fund's investment in
REIT securities may require such Fund to accrue and distribute income not yet
received. In order to generate sufficient cash to make the requisite
distributions, the Fund may be required to sell securities in its portfolio
that it otherwise would have continued to hold (including when it is not
advantageous to do so). A Fund's investment in REIT securities also may result
in the Fund's receipt of cash in excess of the REIT's earnings; if the Fund
distributes such amounts, such distribution could constitute a return of
capital to Fund shareholders for federal income tax purposes.
First Data will send each investor and the Internal Revenue Service an annual
statement detailing federal tax information, including information about
dividends and distributions paid to the investor during the preceding year. Be
sure to keep this statement as a permanent record. A fee may be charged for any
duplicate information that an investor requests.
NOTE: The foregoing summarizes certain tax consequences of investing in the
Funds. Before investing, an investor should consult his or her own tax
adviser for more information concerning the federal, state and local
tax consequences of investing in, redeeming or exchanging Fund shares.
ORGANIZATION AND CAPITALIZATION OF THE TRUST
Each Fund is a series of the Trust. The Trust was organized as a Massachusetts
business trust on September 29, 1997. The Trust is authorized to issue an
unlimited number of full and fractional shares of beneficial interest in
multiple series. Currently each Fund has only one class of shares. Each share
in a Fund has one vote, with fractional shares voting proportionally. All Trust
shares entitled to vote will vote together irrespective of series or sub-series
unless the rights of a particular series or sub-series would be adversely
affected by the vote, in which case a separate vote of that series or
sub-series will be required to decide the question. Shares are freely
transferable, are entitled to dividends as declared by the Trustees of the
Trust, and, if a Fund were liquidated, would receive the net assets of such
Fund. Each Fund may suspend the sale of shares at any time and may refuse any
order to purchase shares. The Trust does not generally hold regular shareholder
meetings and will do so only when required by law. Shareholders may remove the
Trustees of the Trust from office by votes cast at a shareholder meeting or by
written consent.
On March 1, 1998, Charles Schwab & Co., Inc., on behalf of certain of its
customers, held more than 25% of the outstanding shares of the Trust, and as a
result, may be deemed to "control" the Trust as that term is defined in the
1940 Act.
Shareholders could, under certain circumstances, be held personally liable for
the obligations of the Trust. However, the risk of a shareholder incurring
financial loss on account of such liability is considered remote since it may
arise only in very limited circumstances.
26
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
INVESTMENT ADVISER
Undiscovered Managers, LLC
Plaza of the Americas
700 North Pearl Street
Dallas, Texas 75201
Toll free: 888-242-3514
Phone: 214-999-7200
Fax: 214-999-7201
================================================================================
DISTRIBUTOR
First Data Distributors, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, Massachusetts 02110
TRANSFER AGENT
First Data Investor Services Group, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
CUSTODIAN
The Bank of New York
48 Wall Street
New York, New York 10286
<PAGE>
undiscovered
managers(TM)
UNDISCOVERED MANAGERS FUNDS
Statement of Additional Information
March 16, 1998
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Undiscovered Managers Funds' Prospectus
dated March 16, 1998, and should be read in conjunction therewith. A copy of
the Prospectus may be obtained from Undiscovered Managers Funds, Plaza of the
Americas, 700 North Pearl Street, Dallas, Texas 75201.
<PAGE>
Investment Objectives, Policies and Restrictions .................... 3
Management of the Trust ............................................. 4
Ownership of Shares of the Funds .................................... 5
Investment Advisory and Other Services .............................. 7
Portfolio Transactions and Brokerage ................................ 8
Description of the Trust ............................................ 9
How to Buy Shares ................................................... 11
Net Asset Value ..................................................... 11
Shareholder Services ................................................ 11
Redemptions ......................................................... 12
Income Dividends, Capital Gain Distributions and Tax Status ......... 13
Calculation of Total Return ......................................... 15
Performance Comparisons ............................................. 15
Experts ............................................................. 16
Independent Auditors' Report ........................................ 17
Appendix A--Publications That May Contain Fund Information .......... A-1
Appendix B--Advertising and Promotional Literature .................. B-1
2
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objective and policies of each series (each a "Fund" and
collectively, the "Funds") of Undiscovered Managers Funds (the "Trust") are
summarized in the Prospectus under "The Funds" and "More Information About the
Funds' Investments and Risk Considerations." The investment policies of each
Fund set forth in the Prospectus and in this Statement of Additional
Information may be changed by the Fund's adviser, subject to review and
approval by the Trust's Board of Trustees, without shareholder approval except
that any Fund policy explicitly identified as "fundamental" may not be changed
without the approval of the holders of a majority of the outstanding shares of
the Fund (which in the Prospectus and this Statement of Additional Information
means the lesser of (i) 67% of the shares of the Fund represented at a meeting
at which 50% of the outstanding shares are represented or (ii) more than 50% of
the outstanding shares).
The following investment restrictions are fundamental policies of each Fund.
Each Fund will not:
1. Borrow money in excess of 331/3% of the value of its total assets (not
including the amount borrowed) at the time the borrowing is made.
2. Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under certain federal securities laws.
3. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in
real estate, and securities which represent interests in real estate, and
it may acquire and dispose of real estate or interests in real estate
acquired through the exercise of its rights as a holder of debt
obligations secured by real estate or interests therein.
4. Purchase or sell commodities or commodity contracts, except that the Fund
may purchase and sell financial futures contracts and options, and may
enter into swap agreements, foreign exchange contracts and other financial
transactions not involving physical commodities.
5. Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies, by entering into
repurchase agreements, or by lending its portfolio securities.
6. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, more than
25% of the Fund's total assets would be invested in any one industry;
except that the REIT Fund will invest more than 25% of its total assets in
securities issued by real estate investment trusts (as defined in the
Internal Revenue Code of 1986 (the "Code")).
7. Issue any class of securities which is senior to the Fund's shares of
beneficial interest, except for permitted borrowings.
Although the Funds are permitted to borrow money to a limited extent, no Fund
currently intends to do so.
In addition to the foregoing fundamental investment restrictions, it is
contrary to each Fund's present policy, which may be changed without
shareholder approval, to:
Invest in (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the Trust (or the person designated by the
Trustees to make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Fund's net assets (taken at current value) would be invested in
securities described in (a), (b) and (c) above.
All percentage limitations on investments will apply at the time of the making
of an investment (except for the non-fundamental restriction set forth in the
immediately preceding paragraph) and shall not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of such
investment.
3
<PAGE>
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust, their ages, addresses and principal
occupations during the past five years are as follows:
*Mark P. Hurley (39)--Trustee and President. President and Chief Executive
Officer of Undiscovered Managers, LLC since September, 1997; formerly Managing
Director of Merrill Lynch & Company from February, 1996 to January, 1997;
formerly Vice President of Goldman, Sachs & Co. from August, 1992 to February,
1996.
Roger B. Keating (36)--Trustee. One Belmont Avenue, 11th Floor, Bala Cynwyd,
Pennsylvania 19004; Senior Vice President of Online Division of Comcast Cable
Communications since May, 1996; Area Vice President and General Manager of West
Florida area of Comcast Cable Communications from August, 1993 to May, 1996;
formerly Principal of Mercer Management Consulting from October, 1987 to
August, 1993.
Matthew J. Kiley (35)--Trustee. ARAMARK Tower, 1101 Market Street,
Philadelphia, Pennsylvania 19107; Executive Vice President of Sports and
Entertainment and Vice President of Global Food and Support Services at ARAMARK
Corp. since September, 1996; formerly Manager at McKinsey & Company from
January, 1990 to September, 1996.
Robert P. Schmermund (42)--Trustee. 900 19th Street, N.W., Suite 400,
Washington, D.C. 20006; Communications Director of America's Community Bankers
since January, 1993.
John J. Burke III (32)--Treasurer. 4400 Computer Drive, Westborough, MA 01581;
Vice President of Fund Accounting and Portfolio Valuation Group at First Data
Investor Services Group, Inc.
Mary Chris Sayre (34)--Secretary. Office Manager of Undiscovered Managers, LLC
since October, 1997; formerly Assistant to Chairman and President and Special
Events Coordinator at Prentiss Properties Trust from February, 1997 to October,
1997; formerly Director of University Honors Program and Dedman College
Mentoring Program at Southern Methodist University from June, 1991 to February,
1997.
- ------------
* Trustees who are "interested persons" (as defined in the Investment Company
Act of 1940) of the Trust or of the Trust's investment adviser,
Undiscovered Managers, LLC.
The address of each Trustee and officer of the Trust affiliated with
Undiscovered Managers, LLC ("Undiscovered Managers") is Plaza of the Americas,
700 North Pearl Street, Dallas, Texas 75201.
The Trust pays no compensation to its officers or to the Trustees listed above
who are officers or employees of Undiscovered Managers. Each Trustee who is not
an officer or employee of Undiscovered Managers is compensated at the rate of
$10,000 per annum. The Trust provides no pension or retirement benefits to the
Trustees but has adopted a deferred payment arrangement under which each
Trustee who is to receive fees from the Trust may elect not to receive such
fees on a current basis but to receive in a subsequent period an amount equal
to the value that such fees would have if they had been invested in each Fund
on the normal payment date for such fees. As a result of this method of
calculating the deferred payments, each Fund, upon making the deferred
payments, will be in the same financial position as if the fees had been paid
on the normal payment dates.
The following table estimates the amount of the compensation to be paid (or
deferred in lieu of current payment) by the Trust during its fiscal year ending
August 31, 1998 to the persons who are to serve as Trustees during such period:
Total Compensation
Aggregate Compensation From Trust and
Person From Trust Fund Complex*
- ---------------------- ------------------------ -------------------
Mark P. Hurley $ 0 $ 0
Roger B. Keating $7,500 $7,500
Matthew J. Kiley $7,500 $7,500
Robert P. Schmermund $7,500 $7,500
- ------------
* No Trustee receives any compensation from any mutual fund affiliated with
Undiscovered Managers, LLC, other than the Trust.
4
<PAGE>
OWNERSHIP OF SHARES OF THE FUNDS
As of March 1, 1998, to the Trust's knowledge, the following persons or
entities owned of record or beneficially 5% or more of the outstanding shares
of the following Funds:
<TABLE>
<CAPTION>
Fund Name and Address % Ownership
- ---------------------------------------------- -------------------------------------- ------------
<S> <C> <C>
Undiscovered Managers Behavioral Growth Fund Charles Schwab & Co., Inc. 70.81%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn. Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Thomas F. O'Toole & Jane T. O'Toole, 11.89%
JTWROS
5047 Radbrook
Dallas, TX 75220
George K. Fuller 6.24%
4091 Lincoln Drive
Oakland, CA 94602
Undiscovered Managers, LLC 5.35%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
Undiscovered Managers Special Small Cap Fund Charles Schwab & Co., Inc. 27.92%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn. Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Abbott Keller, TTEE 24.27%
Mortimer Keller & Rose Keller Trust
2469 Hallmark Drive
Belmont, CA 94002
Abbott J. Keller 14.07%
2469 Hallmark Drive
Belmont, CA 94002
David J. Steirman 14.07%
628 42nd Avenue
San Mateo, CA 94403
Thomas F. O'Toole & Jane T. O'Toole, 10.23%
JTWROS
5047 Radbrook
Dallas, TX 75220
Undiscovered Managers, LLC 5.35%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
Undiscovered Managers REIT Fund Bank of Boston Customer Rollover IRA 91.53%
FBO Myron DuBain
160 Sansome Street--17th Floor
San Francisco, CA 94104
Undiscovered Managers, LLC 8.47%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
Undiscovered Managers Small Cap Value Fund Thomas F. O'Toole & Jane T. O'Toole, 41.06%
JTWROS
5047 Radbrook
Dallas, TX 75220
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Fund Name and Address % Ownership
- ------------------------------------------ ---------------------------------------- ------------
<S> <C> <C>
Undiscovered Managers, LLC 22.12%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
Charles Schwab & Co., Inc. 14.07%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn. Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
O'Toole Children's Trust 8.21%
FBO Thomas J. O'Toole
Thomas F. O'Toole & Barney T. O'Toole,
TTEES
5047 Radbrook
Dallas, TX 75220
O'Toole Children's Trust 8.21%
FBO Michael A. O'Toole
Thomas F. O'Toole & Barney T. O'Toole,
TTEES
5047 Radbrook
Dallas, TX 75220
Undiscovered Managers Hidden Value Fund Undiscovered Managers, LLC 42.08%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
Sharon M. Cerny, CUST 12.04%
FBO Lindsey Wassermann, UTMA MA
1 Barberry Road
Lexington, MA 02173
Sharon M. Cerny, CUST 12.04%
FBO David Wassermann, UTMA MA
1 Barberry Road
Lexington, MA 02173
James J. Canfield & Marie C. Canfield, 10.13%
JTWROS
649 Bradford Parkway
Dewitt, NY 13224
Peter D. Rosenbaum 9.86%
44 Woodbine Street
Auburndale, MA 02166
Neil E. Lukas & Sarah E. Lukas, JTWROS 9.83%
7 Freedom Way
Walpole, MA 02081
Undiscovered Managers Core Equity Fund Undiscovered Managers, LLC 100.00%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
Undiscovered Managers All Cap Value Fund Undiscovered Managers, LLC 100.00%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
</TABLE>
Undiscovered Managers is a limited liability company organized under the laws
of Delaware with two members, Mark P. Hurley and AMRESCO, INC., a publicly
traded corporation, each owning more than 25% of the voting securities of
Undiscovered Managers and therefore regarded to control Undiscovered Managers
for purposes of the Investment Company Act of 1940 (the "1940 Act").
As of March 1, 1998, the Trustees and officers of the Trust owned beneficially
less than 1% of the shares of any of the Funds.
6
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, Undiscovered Managers is the investment adviser
of each Fund and has responsibility for the management of the Funds' affairs,
under the supervision of the Trust's Board of Trustees. Each Fund's investment
portfolio is managed on a day-to-day basis by that Fund's sub-adviser, under
the general oversight of Undiscovered Managers and the Board of Trustees. See
"Management of the Funds" in the Prospectus.
The Trust pays the compensation of its Trustees who are not officers or
employees of Undiscovered Managers; registration, filing and other fees in
connection with requirements of regulatory authorities; all charges and
expenses of its custodian and transfer agent; the charges and expenses of its
independent accountants; all brokerage commissions and transfer taxes in
connection with portfolio transactions; all taxes and fees payable to
governmental agencies; the cost of any certificates representing shares of the
Funds; the expenses of meetings of the shareholders and trustees of the Trust;
the charges and expenses of the Trust's legal counsel; interest on any
borrowings by the Funds; the cost of services, including services of counsel,
required in connection with the preparation of, and the cost of printing, the
Trust's registration statements and prospectuses, including amendments and
revisions thereto, annual, semiannual and other periodic reports of the Trust,
and notices and proxy solicitation material furnished to shareholders or
regulatory authorities, to the extent that any such materials relate to the
Trust or its shareholders; and the Trust's expenses of bookkeeping, accounting,
auditing and financial reporting, including related clerical expenses.
As described in the Prospectus, Undiscovered Managers has agreed to certain
additional, voluntary arrangements to limit each Fund's expenses. These
arrangements may be modified or terminated by Undiscovered Managers at any
time.
Each Fund's advisory agreement and sub-advisory agreement provides that it will
continue in effect for two years from its date of execution and thereafter from
year to year if its continuance is approved at least annually (i) by the Board
of Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the relevant Fund and (ii) by vote of a majority of the Trustees
who are not "interested persons" of the Trust, Undiscovered Managers or the
relevant sub-adviser, as that term is defined in the 1940 Act, cast in person
at a meeting called for the purpose of voting on such approval. Any amendment
to an advisory agreement must be approved by vote of a majority of the
outstanding voting securities of the relevant Fund and by vote of a majority of
the Trustees who are not interested persons, cast in person at a meeting called
for the purpose of voting on such approval. Any amendment to a sub-advisory
agreement must be approved by vote of a majority of the outstanding voting
securities of the relevant Fund and by vote of a majority of the Trustees who
are not interested persons, cast in person at a meeting called for the purpose
of voting on such approval, unless such approvals are no longer required by
law.
The advisory agreement may be terminated without penalty by vote of the Board
of Trustees of the Trust or by vote of a majority of the outstanding securities
of the relevant Fund, upon sixty days' written notice, and by Undiscovered
Managers upon ninety days' written notice. The advisory agreement shall
automatically terminate in the event of its assignment. The advisory agreement
provides that Undiscovered Managers owns all rights to and control of the name
"Undiscovered Managers." The advisory agreement will automatically terminate if
the Trust or the Fund shall at any time be required by Undiscovered Managers to
eliminate all reference to the words "Undiscovered Managers" in the name of the
Trust or the Fund, unless the continuance of the agreement after such change of
name is approved by a majority of the outstanding voting securities of the
relevant Fund and by a majority of the Trustees who are not interested persons
of the Trust or Undiscovered Managers, cast in person at a meeting called for
the purpose of voting on such approval.
Each sub-advisory agreement may be terminated without penalty by Undiscovered
Managers, by vote of the Board of Trustees or by vote of a majority of the
outstanding voting securities of the relevant Fund, upon sixty days' written
notice, and each terminates automatically in the event of its assignment and
upon termination of the related advisory agreement. Certain of the sub-advisory
agreements may be terminated by the relevant sub-adviser in certain
circumstances.
Each advisory and sub-advisory agreement provides that Undiscovered Managers or
the applicable sub-adviser shall not be subject to any liability in connection
with the performance of its services thereunder in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
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The Trust intends to apply for an exemptive order from the Securities and
Exchange Commission to permit Undiscovered Managers, subject to the approval of
the Trust's Board of Trustees and certain other conditions, to enter into
sub-advisory agreements with sub-advisers other than the current sub-adviser of
any Fund and amend sub-advisory agreements with sub-advisers without obtaining
shareholder approval. See "Management of the Funds" in the Prospectus.
Pursuant to an Administrative Services Agreement, Undiscovered Managers has
agreed to provide administrative services to each Fund. Undiscovered Managers
has entered into an agreement with First Data Investor Services Group, Inc.
("First Data") for the provision of certain administrative services to the
Funds at Undiscovered Managers' expense. See "Management of the Funds" in the
Prospectus.
CUSTODIAL ARRANGEMENTS. The Bank of New York (the "Custodian") is the Trust's
custodian. The Custodian holds in safekeeping certificated securities and cash
belonging to the Funds and, in such capacity, is the registered owner of
securities held in book entry form belonging to the Funds. Upon instruction,
the Custodian receives and delivers cash and securities of the Funds in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. The Custodian
also maintains certain accounts and records of the Funds.
INDEPENDENT ACCOUNTANTS. The Funds' independent accountants are Deloitte &
Touche LLP. Deloitte & Touche LLP conducts an annual audit of the Funds'
financial statements, assists in the preparation of the Funds' federal and
state income tax returns and consults with the Funds as to matters of
accounting and federal and state income taxation.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In placing orders for the purchase and sale of portfolio securities for each
Fund, each sub-adviser seeks the best price and execution. Each sub-adviser has
the ability to pay brokers or dealers commissions in excess of commissions
another broker or dealer would have charged for effecting such transaction on
the basis of receiving brokerage and research products and/or services. The
sub-advisers do not currently intend to effect transactions on such basis.
Transactions in unlisted securities are carried out through broker-dealers who
make the primary market for such securities unless, in the judgment of each
sub-adviser, a more favorable price can be obtained by carrying out such
transactions through other brokers or dealers. See "Portfolio Transactions" in
the Prospectus.
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DESCRIPTION OF THE TRUST
The Trust, registered with the Securities and Exchange Commission (the "SEC")
as an open-end management investment company, is organized as a Massachusetts
business trust under the laws of Massachusetts by an Agreement and Declaration
of Trust dated September 29, 1997 (as amended, the "Declaration of Trust").
The Declaration of Trust currently permits the Trustees to issue an unlimited
number of full and fractional shares of each series. Each share of each Fund
represents an equal proportionate interest in such Fund with each other share
of that Fund and is entitled to a proportionate interest in the dividends and
distributions from that Fund. The shares of each Fund do not have any
preemptive rights. Upon termination of any Fund, whether pursuant to
liquidation of the Trust or otherwise, shareholders of that Fund are entitled
to share pro rata in the net assets of that Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial, transfer agency and servicing expenses.
The assets received by each Fund for the issue or sale of its shares and all
income, earnings, profits, losses and proceeds therefrom, subject only to the
rights of creditors, are allocated to, and constitute the underlying assets of,
that Fund. The underlying assets are segregated and are charged with the
expenses with respect to that Fund and with a share of the general expenses of
the Trust. Any general expenses of the Trust that are not readily identifiable
as belonging to a particular Fund are allocated by or under the direction of
the Trustees in such manner as the Trustees determine to be fair and equitable.
While the expenses of the Trust are allocated to the separate books of account
of each Fund, certain expenses may be legally chargeable against the assets of
all Funds.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series of shares
with such dividend preferences and other rights as the Trustees may designate.
While the Trustees have no current intention to exercise this power, it is
intended to allow them to provide for an equitable allocation of the impact of
any future regulatory requirements which might affect various classes of
shareholders differently, or to permit shares of a series to be distributed
through more than one distribution channel, with the costs of the particular
means of distribution (or costs of related services) to be borne by the
shareholders who purchase through that means of distribution. The Trustees may
also, without shareholder approval, establish one or more additional separate
portfolios for investments in the Trust. Shareholders' investments in such an
additional portfolio would be evidenced by a separate series of shares (i.e., a
new "Fund").
The Declaration of Trust provides for the perpetual existence of the Trust. The
Trust or any Fund, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of each Fund affected. The Declaration of
Trust further provides that the Trustees may also terminate the Trust or any
Fund upon written notice to the shareholders. As a matter of policy, however,
the Trustees will not terminate the Trust or any Fund without submitting the
matter to a vote of the shareholders of the Trust or the relevant Fund.
VOTING RIGHTS
As summarized in the Prospectus, shareholders are entitled to one vote for each
full share held (with fractional votes for each fractional share held) and may
vote (to the extent provided in the Declaration of Trust) on the election of
Trustees and the termination of the Trust and on other matters submitted to the
vote of shareholders.
The Declaration of Trust provides that on any matter submitted to a vote of all
Trust shareholders, all Trust shares entitled to vote shall be voted together
irrespective of series or sub-series unless the rights of a particular series
or sub-series would be adversely affected by the vote, in which case a separate
vote of that series or sub-series shall be required to decide the question.
Also, a separate vote shall be held whenever required by the 1940 Act or any
rule thereunder. Rule 18f-2 under the 1940 Act provides in effect that a class
shall be deemed to be affected by a matter unless it is clear that the
interests of each class in the matter are substantially identical or that the
matter does not affect any interest of such class. On matters affecting an
individual series, only shareholders of that series are entitled to vote.
Consistent with the current position of the SEC, shareholders of all series
vote together, irrespective of series, on the election of Trustees and the
selection of the Trust's independent accountants, but shareholders of each
series vote separately on other matters requiring
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shareholder approval, such as certain changes in investment policies of that
series or the approval of the investment advisory agreement relating to that
series.
There will normally be no meetings of shareholders for the purpose of electing
Trustees except that, in accordance with the 1940 Act, (i) the Trust will hold
a shareholders' meeting for the election of Trustees at such time as less than
a majority of the Trustees holding office have been elected by shareholders,
and (ii) if, as a result of a vacancy on the Board of Trustees, less than
two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may be filled only by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by
the holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares
at a meeting duly called for that purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by ten shareholders of record, who have been such for at
least six months preceding the date of such request and who hold shares in the
aggregate having a net asset value of at least one percent (1%) of the
outstanding shares, stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust has undertaken to
provide a list of shareholders or to disseminate appropriate materials (at the
expense of the requesting shareholders).
Except as set forth above, the Trustees shall continue to hold office and may
appoint successor Trustees. Voting rights are not cumulative.
No amendment may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Trust, except (i) to change
the Trust's name or to cure technical problems in the Declaration of Trust and
(ii) to establish, change or eliminate the par value of any shares (currently
all shares have no par value).
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
each Fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of
assets of a Fund or assets attributable to the particular class of a Fund for
all loss and expense of any shareholder held personally liable for the
obligations of such Fund or such class. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is considered
remote since it is limited to circumstances in which the disclaimer is
inoperative and the Fund itself would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, nothing in the
Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. The By-Laws of the Trust provide for indemnification by the Trust
of the Trustees and officers of the Trust except with respect to any matter as
to which any such person is found after final adjudication in an action, suit
or proceeding not to have acted in good faith in the reasonable belief that
such action was in the best interests of the Trust. No officer or Trustee may
be indemnified against any liability to the Trust or the Trust's shareholders
to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
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HOW TO BUY SHARES
Subject to minimum initial investment requirements and certain other
conditions, an investor may make an initial purchase of shares of any Fund by
submitting a completed application form and payment to:
Undiscovered Managers Funds
4400 Computer Drive
P.O. Box 5181
Westborough, MA 01581-5181
The procedures for purchasing shares of the Funds are summarized in "How to
Purchase Shares" in the Prospectus.
NET ASSET VALUE
The net asset value of the shares of each Fund is determined by dividing that
Fund's total net assets (the excess of its assets over its liabilities) by the
total number of shares of the Fund outstanding and rounding to the nearest
cent. Such determination is made as of the close of regular trading on the New
York Stock Exchange on each day on which that Exchange is open for unrestricted
trading, and no less frequently than once daily on each day during which there
is sufficient trading in a Fund's portfolio securities that the value of that
Fund's shares might be materially affected. The New York Stock Exchange is
expected to be closed on the following weekdays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Equity securities listed on an
established securities exchange or on the Nasdaq National Market System are
normally valued at their last sale price on the exchange where primarily traded
or, if there is no reported sale during the day, and in the case of
over-the-counter securities not so listed, at the last bid price. Other
securities for which current market quotations are not readily available
(including restricted securities, if any) and all other assets are taken at
fair value as determined in good faith by the Board of Trustees, although the
actual calculations may be made by persons acting pursuant to the direction of
the Board.
SHAREHOLDER SERVICES
OPEN ACCOUNTS
A shareholder's investment in any Fund is automatically credited to an open
account maintained for the shareholder by First Data. Following each
transaction in the account, a shareholder will receive an account statement
disclosing the current balance of shares owned and the details of recent
transactions in the account. After the close of each fiscal year First Data
will send each shareholder a statement providing federal tax information on
dividends and distributions paid to the shareholder during the year. This
statement should be retained as a permanent record. Shareholders will be
charged a fee for duplicate information.
The open account system permits the purchase of full and fractional shares and,
by making the issuance and delivery of certificates representing shares
unnecessary, eliminates the problems of handling and safekeeping certificates
and the cost and inconvenience of replacing lost, stolen, mutilated or
destroyed certificates.
The costs of maintaining the open account system are borne by the Trust, and no
direct charges are made to shareholders. Although the Trust has no present
intention of making such direct charges to shareholders, it reserves the right
to do so. Shareholders will receive prior notice before any such charges are
made.
SYSTEMATIC WITHDRAWAL PLAN
A Systematic Withdrawal Plan, referred to in the Prospectus under "Shareholder
Services--Systematic Withdrawal Plan," provides for monthly, quarterly,
semiannual or annual withdrawal payments of $1000 or more from the account of a
shareholder provided that the account has a value of at least $25,000 at the
time the plan is established.
Payments will be made either to the shareholder or to any other person
designated by the shareholder. If payments are issued to an individual other
than the registered owner(s), a signature guar-
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antee will be required on the Plan application. Income dividends and capital
gain distributions will be reinvested at the net asset value determined as of
the close of regular trading on the New York Stock Exchange on the record date
for the dividend or distribution.
Since withdrawal payments represent proceeds from liquidation of shares, the
shareholder should recognize that withdrawals may reduce and possibly exhaust
the value of the account, particularly in the event of a decline in net asset
value. Accordingly, the shareholder should consider whether a Systematic
Withdrawal Plan and the specified amounts to be withdrawn are appropriate in
the circumstances. The Trust makes no recommendations or representations in
this regard. It may be appropriate for the shareholder to consult a tax adviser
before establishing such a plan. See "Redemptions" and "Income Dividends,
Capital Gain Distributions and Tax Status" below for certain information as to
federal income taxes.
EXCHANGE PRIVILEGE
Shareholders may redeem their shares of any Fund and have the proceeds applied
on the same day to purchase shares of any other Fund. The value of shares
exchanged must be at least $1,000 and all exchanges are subject to the minimum
investment requirement of the Fund into which the exchange is being made. This
option is summarized in the Prospectus under "Shareholder Services--Free
Exchange Privilege."
Exchanges may be effected by (1) making a telephone request by calling
1-888-242-3514, provided that a special authorization form is on file with
First Data, or (2) sending a written exchange request to First Data accompanied
by an account application for the appropriate Fund. The Trust reserves the
right to modify this exchange privilege without prior notice.
An exchange constitutes a sale of the shares for federal income tax purposes on
which the investor may realize a capital gain or loss.
IRAs
Under "Shareholder Services--Retirement Plans," the Prospectus refers to IRAs
established under a prototype plan made available by the Distributor. These
plans may be funded with shares of any Fund. All income dividends and capital
gain distributions of plan participants must be reinvested. Plan documents and
further information can be obtained from the Distributor.
Check with your financial or tax adviser as to the suitability of Fund shares
for your retirement plan.
REDEMPTIONS
The procedures for redemption of Fund shares are summarized in the Prospectus
under "How to Redeem Shares."
Except as noted below, signatures on redemption requests must be guaranteed by
commercial banks, trust companies, savings associations, credit unions or
brokerage firms that are members of domestic securities exchanges. Signature
guarantees by notaries public are not acceptable. However, as noted in the
Prospectus, a signature guarantee will not be required if the proceeds of the
redemption do not exceed $50,000 and the proceeds check is made payable to the
registered owner(s) and mailed to the record address.
If a shareholder selects the telephone redemption service in the manner
described in the next paragraph, Fund shares may be redeemed by making a
telephone call directly to Undiscovered Managers at 1-888-242-3514. When a
telephonic redemption request is received, the proceeds are wired to the bank
account previously chosen by the shareholder and a nominal wire fee (currently
$5.00) is deducted. Telephonic redemption requests must be received by
Undiscovered Managers prior to the close of regular trading on the New York
Stock Exchange on a day when the Exchange is open for business. Requests made
after that time or on a day when the New York Stock Exchange is not open for
business cannot be accepted by Undiscovered Managers and a new request will be
necessary.
In order to redeem shares by telephone, a shareholder must either select this
service when completing the Fund application or must do so subsequently on the
Service Options Form available from First Data. When selecting the service, a
shareholder must designate a bank account to which the redemption proceeds
should be wired. Any change in the bank account so designated must
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be made by furnishing to First Data a completed Service Options Form with a
signature guarantee. Whenever the Service Options Form is used, the
shareholder's signature must be guaranteed as described above. Telephone
redemptions may only be made if an investor's bank is a member of the Federal
Reserve System or has a correspondent bank that is a member of the System. If
the account is with a savings bank, it must have only one correspondent bank
that is a member of the System. The Trust, First Data, the Distributor,
Undiscovered Managers and the sub-advisers are not responsible for the
authenticity of withdrawal instructions received by telephone. In the event
that reasonable procedures are not followed in the verification of withdrawal
instructions, the foregoing parties may be liable for any losses due to
unauthorized instructions.
The redemption price will be the net asset value per share next determined
after the redemption request and any necessary special documentation are
received by First Data or an approved broker-dealer or its authorized designee
in proper form. Proceeds resulting from a written redemption request will
normally be mailed to you within seven days after receipt of your request in
good order. Telephonic redemption proceeds will normally be wired on the first
business day following receipt of a proper redemption request. In those cases
where you have recently purchased your shares by check and your check was
received less than fifteen days prior to the redemption request, the Fund may
withhold redemption proceeds until your check has cleared.
Each Fund will normally redeem shares for cash; however, each Fund reserves the
right to pay the redemption price wholly or partly in kind if the Board of
Trustees of the Trust determines it to be advisable in the interest of the
remaining shareholders. If portfolio securities are distributed in lieu of
cash, the shareholder will normally incur brokerage commissions upon subsequent
disposition of any such securities. However, the Trust has elected to be
governed by Rule 18f-1 under the 1940 Act pursuant to which the Trust is
obligated to redeem shares solely in cash for any shareholder during any 90-day
period up to the lesser of $250,000 or 1% of the total net asset value of the
Trust at the beginning of such period.
A redemption constitutes a sale of shares for federal income tax purposes on
which the investor may realize a long- or short-term capital gain or loss. See
"Income Dividends, Capital Gain Distributions and Tax Status."
INCOME DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX STATUS
As described in the Prospectus under "Dividends, Capital Gain Distributions and
Taxes" it is the policy of each Fund to pay its shareholders, as dividends,
substantially all net investment income and to distribute annually all net
realized capital gains, if any, after offsetting any capital loss carryovers.
Income dividends and capital gain distributions are payable in full and
fractional shares of the particular Fund based upon the net asset value
determined as of the close of regular trading on the New York Stock Exchange on
the record date for each dividend or distribution. Shareholders, however, may
elect to receive their income dividends or capital gain distributions, or both,
in cash. The election may be made at any time by submitting a written request
directly to First Data. In order for a change to be in effect for any dividend
or distribution, it must be received by First Data on or before the record date
for such dividend or distribution.
As required by federal law, detailed federal tax information will be furnished
to each shareholder for each calendar year on or before January 31 of the
succeeding year.
Each Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Code and to qualify for the special tax treatment accorded
regulated investment companies and their shareholders. In order so to qualify,
the Fund must, among other things, (i) derive at least 90% of its gross income
from dividends, interest, payments with respect to certain securities loans,
gains from the sale of stock, securities or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; (ii) distribute with respect to each taxable year at least 90% of
the sum of its taxable net investment income, its net tax-exempt income (if
any), and the excess, if any, of net short-term capital gains over net
long-term capital losses for such year; and (iii) at the end of each fiscal
quarter maintain at least 50% of the value of its total assets in cash, cash
items (including receivables), government securities, securities of other
regulated investment
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companies, and other securities of issuers which represent, with respect to
each issuer, no more than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and with no more than 25% of
the value of its total assets invested in the securities (other than those of
the U.S. government or other regulated investment companies) of any one issuer
or of two or more issuers which the Fund controls and which are engaged in the
same, similar or related trades and businesses. If it qualifies for treatment
as a regulated investment company, the Fund will not be subject to federal
income tax on income paid to its shareholders in the form of dividends or
capital gain distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any, of each
Fund's "required distribution" over its actual distributions in any calendar
year. Generally, the "required distribution" is 98% of the Fund's ordinary
income for the calendar year plus 98% of its capital gain net income recognized
during the one-year period ending on October 31 plus undistributed amounts from
prior years. Each Fund intends to make distributions sufficient to avoid
imposition of the excise tax. Distributions declared by a Fund during October,
November or December to shareholders of record on a date in any such month and
paid by the Fund during the following January will be treated for federal tax
purposes as paid by the Fund and received by shareholders on December 31 of the
year in which declared.
Shareholders of each Fund will be subject to federal income taxes on
distributions made by the Fund whether received in cash or additional shares of
the Fund. Distributions by each Fund of net income and short-term capital
gains, if any, will be taxable to shareholders as ordinary income.
Distributions of long-term capital gains, if any, will be taxable to
shareholders as long-term capital gains, without regard to how long a
shareholder has held shares of the Fund. Pursuant to the Taxpayer Relief Act of
1997 (the "1997 Act"), dividends of long-term capital gains generally will be
subject to a maximum tax rate of 28% or 20% depending upon the holding period
in the portfolio investment generating the distributed gains.
Dividends and distributions on Fund shares received shortly after their
purchase, although in effect a return of capital, are subject to federal income
taxes.
In general, sales, redemptions and exchanges of each Fund's shares are taxable
events and, accordingly, shareholders may realize gains and losses on these
transactions. If shares have been held for more than one year, gain or loss
realized will be long-term capital gain or loss, provided the shareholder holds
the shares as a capital asset. Pursuant to the 1997 Act, long-term capital
gains generally will be subject to a maximum tax rate of 28% or 20% depending
upon the shareholder's holding period in Fund shares. If shares have been held
for one year or less, the gain or loss on the sale, redemption or exchange of
such shares will be treated as short-term capital gain. In general, if a
shareholder sells Fund shares at a loss within six months after purchasing the
shares, the loss will be treated as a long-term capital loss to the extent of
any long-term capital gain distributions received by the shareholder.
Furthermore, no loss will be allowed on the sale of Fund shares to the extent
the shareholder acquired other shares of the same Fund within 30 days prior to
the sale of the loss shares or 30 days after such sale.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and regulations currently in effect. For the complete provisions,
reference should be made to the pertinent Code sections and regulations. The
Code and regulations are subject to change by legislative or administrative
action.
Dividends and distributions also may be subject to state and local taxes.
Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, state and local taxes.
The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Fund, including the possibility that
distributions may be subject to a 30% U.S. withholding tax (or a reduced rate
of withholding provided by treaty).
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CALCULATION OF TOTAL RETURN
Total Return with respect to a Fund is a measure of the change in value of an
investment in such Fund over the period covered and assumes any dividends or
capital gains distributions are reinvested immediately, rather than paid to the
investor in cash. The formula for calculating total return includes four steps:
(1) adding to the total number of shares purchased through a hypothetical
$1,000 investment in the Fund all additional shares which would have been
purchased if all dividends and distributions paid or distributed during the
period had been immediately reinvested; (2) calculating the value of the
hypothetical initial investment of $1,000 as of the end of the period by
multiplying the total number of shares owned at the end of the period by the
net asset value per share on the last trading day of the period; (3) assuming
redemption at the end of the period; and (4) dividing the resulting account
value by the initial $1,000 investment.
PERFORMANCE COMPARISONS
TOTAL RETURN. Each Fund may from time to time include its total return
information in advertisements or in information furnished to present or
prospective shareholders. Each Fund may from time to time also include in
advertisements or information furnished to present or prospective shareholders
(i) the ranking of performance figures relative to such figures for groups of
mutual funds categorized by Lipper Analytical Services, Inc. or Micropal, Inc.
as having similar investment objectives, (ii) the rating assigned to the Fund
by Morningstar, Inc. based on the Fund's risk-adjusted performance relative to
other mutual funds in its broad investment class, and/or (iii) the ranking of
performance figures relative to such figures for mutual funds in its general
investment category as determined by CDA/Weisenberger's Management Results.
LIPPER ANALYTICAL SERVICES, INC. ("Lipper") distributes mutual fund rankings
monthly. The rankings are based on total return performance calculated by
Lipper, generally reflecting changes in net asset value adjusted for
reinvestment of capital gains and income dividends. They do not reflect
deduction of any sales charges. Lipper rankings cover a variety of performance
periods, including year-to-date, 1-year, 5-year, and 10-year performance.
Lipper classifies mutual funds by investment objective and asset category.
MICROPAL, INC. ("Micropal") distributes mutual fund rankings weekly and
monthly. The rankings are based upon performance calculated by Micropal,
generally reflecting changes in net asset value that can be adjusted for the
reinvestment of capital gains and dividends. If deemed appropriate by the user,
performance can also reflect deductions for sales charges. Micropal rankings
cover a variety of performance periods, including year-to-date, 1-year, 5-year
and 10-year performance. Micropal classifies mutual funds by investment
objective and asset category.
MORNINGSTAR, INC. ("Morningstar") distributes mutual fund ratings twice a
month. The ratings are divided into five groups: highest, above average,
neutral, below average and lowest. They represent a fund's historical
risk/reward ratio relative to other funds in its broad investment class as
determined by Morningstar. Morningstar ratings cover a variety of performance
periods, including 3-year, 5-year, 10-year and overall performance. The
performance factor for the overall rating is a weighted-average return
performance (if available) reflecting deduction of expenses and sales charges.
Performance is adjusted using quantitative techniques to reflect the risk
profile of the fund. The ratings are derived from a purely quantitative system
that does not utilize the subjective criteria customarily employed by rating
agencies such as Standard & Poor's and Moody's Investors Service, Inc.
CDA/WEISENBERGER'S MANAGEMENT RESULTS ("Weisenberger") publishes mutual fund
rankings and is distributed monthly. The rankings are based entirely on total
return calculated by Weisenberger for periods such as year-to-date, 1-year,
3-year, 5-year and 10-year. Mutual funds are ranked in general categories
(e.g., international bond, international equity, municipal bond, and maximum
capital gain). Weisenberger rankings do not reflect deduction of sales charges
or fees.
As is discussed in greater detail below, performance information may also be
used to compare the performance of the Funds to certain widely acknowledged
standards or indices for stock market performance, such as those listed below.
15
<PAGE>
CONSUMER PRICE INDEX. The Consumer Price Index, published by the U.S. Bureau of
Labor Statistics, is a statistical measure of changes, over time, in the prices
of goods and services in major expenditure groups.
DOW JONES INDUSTRIAL AVERAGE. The Dow Jones Industrial Average is a market
value-weighted and unmanaged index of 30 large industrial stocks traded on the
New York Stock Exchange.
MSCI-EAFE INDEX. The MSCI-EAFE Index contains over 1000 stocks from 20
different countries with Japan (approximately 50%), United Kingdom, France and
Germany being the most heavily weighted.
MSCI-EAFE EX-JAPAN INDEX. The MSCI-EAFE ex-Japan Index consists of all stocks
contained in the MSCI-EAFE Index, other than stocks from Japan.
NAREIT EQUITY INDEX. The NAREIT Equity Index consists of all tax qualified
equity REITs listed on the New York Stock Exchange, American Stock Exchange and
NASDAQ National Market System.
RUSSELL MIDCAP INDEX. The Russell Midcap Index is comprised of the 800 smallest
of the 1000 largest U.S.-domiciled corporations, ranked by market
capitalization.
RUSSELL 2000 INDEX. The Russell 2000 Index is comprised of the 2000 smallest of
the 3000 largest U.S.-domiciled corporations, ranked by market capitalization.
STANDARD & POOR'S/BARRA GROWTH INDEX. The Standard & Poor's/Barra Growth Index
is constructed by ranking the securities in the S&P 500 by price-to-book ratio
and including the securities with the highest price-to-book ratios that
represent approximately half of the market capitalization of the S&P 500.
STANDARD & POOR'S/BARRA VALUE INDEX. The Standard & Poor's/Barra Value Index is
constructed by ranking the securities in the S&P 500 by price-to-book ratio and
including the securities with the lowest price-to-book ratios that represent
approximately half of the market capitalization of the S&P 500.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX (the "S&P 500"). The S&P 500
is a market value-weighted and unmanaged index showing the changes in the
aggregate market value of 500 stocks relative to the base period 1941-43. The
S&P 500 is composed almost entirely of common stocks of companies listed on the
New York Stock Exchange, although the common stocks of a few companies listed
on the American Stock Exchange or traded over-the-counter are included. The 500
companies represented include 400 industrial, 60 transportation and 40
financial services concerns. The S&P 500 represents about 80% of the market
value of all issues traded on the New York Stock Exchange. The S&P 500 is the
most common index for the overall U.S. stock market.
Performance information about the Funds will be provided in the Funds' annual
reports, which reports will be available upon request and without charge. In
addition, from time to time, articles about the Funds regarding performance,
rankings and other characteristics of the Funds may appear in publications
including, but not limited to, the publications included in Appendix A. In
particular, the performance of the Funds may be compared in some or all of
these publications to the performance of various indices and investments for
which reliable performance data is available and to averages, performance
rankings, or other information prepared by recognized mutual fund statistical
services. Such publications may also publish their own rankings or performance
reviews of mutual funds, including the Funds. References to or reprints of such
articles may be used in the Funds' promotional literature. References to
articles regarding personnel of the sub-advisers who have portfolio management
responsibility may also be used in the Funds' promotional literature. For
additional information about the Funds' advertising and promotional literature,
see Appendix B.
EXPERTS
The statement of assets and liabilities of Undiscovered Managers Funds as of
December 16, 1997 appearing in this Statement of Additional Information have
been audited by Deloitte & Touche LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholder of
Undiscovered Managers Small Cap Value Fund
(one of the series comprising Undiscovered Managers Funds)
We have audited the accompanying statement of assets and liabilities of
Undiscovered Managers Small Cap Value Fund (one of the series comprising
Undiscovered Managers Funds) as of December 16, 1997. This financial statement
is the responsibility of the Fund's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statement of assets and liabilities presents fairly, in
all material respects, the financial position of Undiscovered Managers Small
Cap Value Fund series of Undiscovered Managers Funds as of December 16, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
December 17, 1997
17
<PAGE>
UNDISCOVERED MANAGERS SMALL CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 16, 1997
ASSETS:
Cash $ 100,000
Deferred organization expenses (Note 2) 22,000
---------
Total assets 122,000
LIABILITIES--Accrued organization expenses 22,000
---------
NET ASSETS (applicable to 8,000 shares of
beneficial interest issued and outstanding) $ 100,000
=========
NET ASSET VALUE AND OFFERING
PRICE PER SHARE $ 12.50
=========
Notes:
(1) Undiscovered Managers Funds, a Massachusetts business trust (the "Trust"),
established and designated the Undiscovered Managers Small Cap Value Fund
(the "Fund") as a separate series on December 4, 1997. The Fund has been
inactive since that date, except for matters relating to the Fund's
establishment, the designation and the registration under the Securities
Act of 1933 of the Fund's shares of beneficial interest ("Shares"), the
sale of Undiscovered Managers Small Cap Value Fund Shares ("Initial
Shares") to Undiscovered Managers, LLC.
(2) Organization expenses are being deferred and will be amortized on a
straight line basis over a period not to exceed five years, commencing on
the effective date of the Fund's initial offering of its shares. The
amount paid by the Fund on any withdrawal by the holder of the Initial
Shares of any of the respective initial interests will be reduced by a
portion of any unamortized organization expenses, determined by the
proportion of the amount of the initial interests withdrawn to the initial
interests then outstanding.
18
<PAGE>
APPENDIX A
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
ABC and affiliates
Adam Smith's Money World
America On Line
Anchorage Daily News Atlanta Constitution
Atlanta Journal
Arizona Republic Austin
American Statesman
Baltimore Sun
Bank Investment Marketing
Barron's
Bergen County Record (NJ)
Bloomberg Business News
Bond Buyer
Boston Business Journal
Boston Globe
Boston Herald
Broker World
Business Radio Network
Business Week
CBS and affiliates
CDA Investment Technologies
CFOl
Changing Times
Chicago Sun Times
Chicago Tribune
Christian Science Monitor
Christian Science Monitor News Service
Cincinnati Enquirer
Cincinnati Post
CNBC
CNN
Columbus Dispatch
CompuServe
Dallas Morning News
Dallas Times-Herald
Denver Post
Des Moines Register
Detroit Free Press
Donoghues Money Fund Report
Dorman, Dan (syndicated column)
Dow Jones News Service
Economist
FACS of the Week
Fee Adviser
Financial News Network
Financial Planning
Financial Planning on Wall Street
Financial Research Corp.
Financial Services Week
Financial World
Fitch Insights
Forbes
Fort Worth Star-Telegram
Fortune Fox Network and affiliates
Fund Action
Fund Decoder
Global Finance
(The) Guarantor
Hartford Courant
Houston Chronicle
INC
Indianapolis Star
Individual Investor
Institutional Investor
International Herald Tribune
Internet Investment Advisor
Investment Company
Institute Investment Dealers Digest
Investment Profiles
Investment Vision
Investor's Daily
IRA Reporter
Journal of Commerce
Kansas City Star
KCMO (Kansas City)
KOA-AM (Denver)
LA Times
Leckey, Andrew (syndicated column)
Life Association News
Lifetime Channel
Miami Herald
Milwaukee Sentinel
Money Magazine
Money Maker
Money Management Letter
Morningstar Mutual Fund
Market News
Mutual Funds Magazine
National Public Radio
National Underwriter
NBC and affiliates
New England Business
New England Cable News
New Orleans Times-Picayune
New York Daily News
New York Times
Newark Star Ledger
Newsday
Newsweek
Nightly Business Report
Orange County Register
Orlando Sentinel
Palm Beach Post
Pension World
Pensions and Investments
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated column)
A-1
<PAGE>
Portland Oregonian
Prodigy
Public Broadcasting Service
Quinn, Jane Bryant (syndicated column)
Registered Representative
Research Magazine
Resource Reuters
Rocky Mountain News
Rukeyser's Business (syndicated column)
Sacramento Bee
San Diego Tribune
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury
Seattle Post-Intelligencer
Seattle Times
Securities Industry Management
Smart Money
St. Louis Post Dispatch
St. Petersburg Times
Standard & Poor's Outlook
Standard & Poor's Stock Guide
Stanger's Investment Advisor
Stockbroker's Register
Strategic Insight Tampa
Tribune Time
Tobias, Andrew (syndicated column)
Toledo Blade
UP
US News and World Report
USA Today
USA TV Network
Value Line
Wall Street Journal
Wall Street Letter
Wall Street Week
Washington Post
WBZ
WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
World Wide Web
Worth Magazine
WRKO
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<PAGE>
APPENDIX B
ADVERTISING AND PROMOTIONAL LITERATURE
Undiscovered Managers Funds' advertising and promotional material may include,
but is not limited to, discussions of the following information:
[bullet] Undiscovered Managers Funds' participation in wrap fee and no
transaction fee programs
[bullet] Characteristics of the various sub-advisers, including the locations
of offices, investment practices and clients
[bullet] Specific and general investment philosophies, strategies, processes
and techniques
[bullet] Specific and general sources of information, economic models,
forecasts and data services utilized, consulted or considered in the
course of providing advisory or other services
[bullet] Industry conferences at which the various sub-advisers participate
[bullet] Current capitalization, levels of profitability and other financial
information
[bullet] Identification of portfolio managers, researchers, economists,
principals and other staff members and employees
[bullet] The specific credentials of the above individuals, including but not
limited to, previous employment, current and past positions, titles
and duties performed, industry experience, educational background and
degrees, awards and honors
[bullet] Specific identification of, and general reference to, current
individual, corporate and institutional clients, including pension and
profit sharing plans
[bullet] Current and historical statistics relating to:
-- total dollar amount of assets managed
-- Undiscovered Managers Funds' assets managed in total and by Fund
-- the growth of assets
-- asset types managed
References may be included in Undiscovered Managers Funds' advertising and
promotional literature about 401(k) and retirement plans that offer the Funds.
The information may include, but is not limited to:
[bullet] Specific and general references to industry statistics regarding
401(k) and retirement plans including historical information and
industry trends and forecasts regarding the growth of assets, numbers
or plans, funding vehicles, participants, sponsors and other
demographic data relating to plans, participants and sponsors, third
party and other administrators, benefits consultants and firms with
whom Undiscovered Managers Funds may or may not have a relationship.
[bullet] Specific and general reference to comparative ratings, rankings and
other forms of evaluation as well as statistics regarding the Funds as
401(k) or retirement plan funding vehicles produced by industry
authorities, research organizations and publications.
B-1
