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[LOGO]
Undiscovered Managers
Behavioral Growth Fund
Undiscovered Managers(TM)
Undiscovered Managers
Special Small Cap Fund
Undiscovered Managers Funds
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
ANNUAL REPORT
TO SHAREHOLDERS
AUGUST 31, 1998
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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 AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
CUSTODIAN
The Bank of New York
48 Wall Street
New York, New York 10286
The report and the financial statements contained herein are submitted for
the general information of the share-holders of Undiscovered Managers
Funds. The report is not authorized for distribution to prospective
investors in Undiscovered Managers Funds unless preceded or accompanied by
the current prospectus.
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undiscovered managers(TM)
To Our Shareholders:
We are pleased to provide to you our inaugural annual report for the
Undiscovered Managers Funds. This report offers you a view to the financial and
operational activities of the funds since their inception and includes a listing
of the securities owned in each of the Fund's portfolios as of August 31, 1998.
In addition, you will find commentaries on the funds by each of their respective
sub-advisers, as well as an opinion from the funds' auditors, Deloitte & Touche
LLP.
We are delighted with the continued interest we are receiving for our products
from institutional investors, particularly registered investment advisers. We
look forward to growth both in our existing funds as well as in new products
that we anticipate rolling out next calendar year.
We would like to thank all of our managers for their support and cooperation in
developing and launching the funds, and for a successful Fiscal Year 1998. Most
importantly, we would like to thank you, our shareholders, for your interest and
participation.
If you have any questions about this report, or would like additional
information about the Undiscovered Managers Funds, please do not hesitate to
call us at 1-888-242-3514.
Sincerely,
/s/ Mark P. Hurley
Mark P. Hurley
President and Chief Executive Officer
Undiscovered Managers, LLC
<PAGE> 4
undiscovered managers(TM)
UNDISCOVERED MANAGERS BEHAVIORAL GROWTH FUND*
SUB-ADVISER TO THE FUND - RJF ASSET MANAGEMENT, INC.
PORTFOLIO MANAGERS - RUSELL J. FULLER, CFA AND FREDERICK W. STANSKE, CFA
All information as of 8/31/98
PERFORMANCE(1)
<TABLE>
<CAPTION>
YEAR- LIFE-
TO-DATE TO-DATE YEAR TO DATE
<S> <C> <C>
Undiscovered Managers [BAR CHART]
Behavioral Growth Fund:
Institutional Class(A) (7.78)% (5.12)%
Investor Class(B) (19.61)% (19.61)%
Russell 2500 Growth Index(2) (24.38)% --
</TABLE>
(A) Institutional Class commenced investment operations on December 31, 1997.
(B) Investor Class commenced operations on July 31, 1998.
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MANAGEMENT COMMENTARY:
Forecasts with regard to the economy and the market are not applicable to the
investment philosophy and process of the Behavioral Growth Fund. The Fund
exploits behavioral biases, which cause investors to underreact to new positive
information on a particular company and as a result underprice its securities.
This strategy has been very successful in the past, and because behavior changes
very slowly, we would expect our strategy to continue to be successful in the
future. Since inception of the Fund, we have outperformed its benchmark, the
Russell 2500 Growth Index. This can be explained by the strategy continuing to
work with new purchases and with existing holdings in the portfolio. Overall, we
expect to continue with similar performance; however it is not unusual to see
monthly and quarterly variances.
Recently, market volatility has put behavioral finance in the headlines.
Questions to experts have included comments about loss aversion, overconfidence
and mental accounting. We classify behavioral bias into three distinct
categories -- emotional reactions, agency problems and cognitive errors. The
recent market volatility has greatly increased emotional reactions in the
marketplace, such as greed, fear and regret, as well as agency problems with the
bailout of Long Term Capital by their suppliers. However, these are not the
types of reactions that RJF tries to exploit.
On the cognitive side, which is the area that RJF seeks to exploit, recent
market volatility has not had an impact on how we manage stock portfolios. We
still see situations where overconfidence and anchoring are creating attractive
equity investments.
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* Small company stocks may be subject to a higher degree of market risk than
the securities of more established companies because they tend to be more
volatile and less liquid.
(1) Investment return and principal value of mutual funds will vary with market
conditions, so that shares, when redeemed, may be worth more or less than
their original cost. Return figures reflect fee waivers. If fee waivers
were not in effect, the Fund's returns would have been lower.
(2) The Russell 2500 Growth Index is an unmanaged index. An individual cannot
invest directly in any index.
For more complete information about the Undiscovered Managers Funds, including
fees and expenses, please call 1-888-242-3514 for a prospectus. Please read it
carefully before you invest or send money.
Distributor: First Data Distributors Inc., 4400 Computer Drive, Westborough,
MA 01581. 1-508-871-9768.
4
<PAGE> 5
undiscovered managers(TM)
UNDISCOVERED MANAGERS SPECIAL SMALL CAP FUND*
SUB-ADVISER TO THE FUND - KESTREL INVESTMENT MANAGEMENT CORPORATION
PORTFOLIO MANAGERS - DAVID J. STEIRMAN AND ABBOTT J. KELLER, CFA
All information as of 8/31/98
PERFORMANCE(1)
<TABLE>
<CAPTION>
YEAR- LIFE-
TO-DATE TO-DATE YEAR TO DATE
(12/30/97)
<S> <C> <C>
Undiscovered Managers
Special Small Cap Fund:
Institutional Class (17.98)% (16.80)% [BAR CHART]
Russell 2000 Index(2) (22.29)% --
</TABLE>
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MANAGEMENT COMMENTARY:
The Fund's performance relative to its benchmark, the Russell 2000 Index, has
been favorable. Year to date through August 31, 1998, the Fund returned -17.98%,
compared with the Russell 2000 return of -22.29%. As anticipated, the Fund's
investments held up much better than average small-capitalization stocks during
a declining period.
Since the Fund's inception, we believe our outperformance has resulted from the
avoidance of big losses. We use a negative screening process to qualify
companies for our portfolio, maintaining a list of 27 factors that are grounds
for rejecting a stock. We are generally buying unexciting companies at depressed
prices.
Our goal is to identify when a company's management believes its stock is
undervalued and that management is taking positive actions to change the
situation. Goodmark Foods is an excellent example of our strategy. In June 1998,
ConAgra, a diversified food company, acquired Goodmark, which makes meat snacks
including Slim Jim(R), for approximately $30 per share. We
purchased Goodmark at $21 per share in March 1998, when the company was
repurchasing its own shares.
Our outlook for the Fund is positive, primarily because small-cap stocks
currently offer far greater value than larger cap stocks. Further, the recent
turbulence in the market has been fairly unusual because, unlike most other bear
markets, value stocks have depreciated in price almost as much as growth stocks,
making value investments particularly attractive. We are uncertain as to a
broader market outlook. We believe that larger cap stocks will likely correct
further before small-cap stocks will experience a sustainable advance on a broad
basis.
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* Small company stocks may be subject to a higher degree of market risk than
the securities of more established companies because they tend to be more
volatile and less liquid.
(1) Investment return and principal value of mutual funds will vary with market
conditions, so that shares, when redeemed, may be worth more or less than
their original cost. Return figures reflect fee waivers. If fee waivers
were not in effect, the Fund's returns would have been lower.
(2) The Russell 2000 Index is an unmanaged index. An individual cannot invest
directly in any index.
For more complete information about the Undiscovered Managers Funds, including
fees and expenses, please call 1-888-242-3514 for a prospectus. Please read it
carefully before you invest or send money.
Distributor: First Data Distributors Inc., 4400 Computer Drive, Westborough,
MA 01581. 1-508-871-9768.
5
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undiscovered managers(TM)
UNDISCOVERED MANAGERS REIT FUND*
SUB-ADVISER TO THE FUND - BAY ISLE FINANCIAL CORPORATION
PORTFOLIO MANAGERS - WILLIAM F. K. SCHAFF, CFA AND RALPH L. BLOCK
All information as of 8/31/98
PERFORMANCE(1)
<TABLE>
<CAPTION>
YEAR- LIFE-
TO-DATE TO-DATE
(01/01/98) YEAR TO DATE
<S> <C> <C>
Undiscovered Managers [BAR CHART]
REIT Fund:
Institutional Class (14.88)% (14.88)%
Morgan Stanley REIT Index(2) (20.09)% --
</TABLE>
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MANAGEMENT COMMENTARY:
The equity REIT market has had one of the worst downturns in the modern REIT era
(since 1993). It has been hit by both a weak small cap market as measured by the
Russell 2000 Index and weakness in the real estate market, which many investors
believe is near the end of the current commercial real estate cycle. However,
valuations of equity REITs are reaching levels not seen since 1993. Average
yields are starting to breach 8% and many equity REITs are trading under their
net asset value.
Our strategy to focus on the more value-oriented REITs within the retail and
multifamily home sector has paid off this year. Underweighting the large cap,
office and lodging sector has greatly enhanced relative returns. We also chose
to invest in niche value REITs with potential upside from restructuring or
better-than-expected internal growth prospects.
Given valuation levels today, we fully expect a stronger relative performance by
REITs vis-a-vis the broader domestic equity market in 1999, especially in a
sideways-to-downward market. Anyone with a minimum of three year time horizon
should find this sector attractive given current valuations. We strongly believe
correlations with the commercial real estate cycle will increase going forward
but investors must recognize that they are still investing in a hybrid asset
class that is, for the most part, comprised of small cap stocks. However,
disciplined portfolio managers should be well rewarded long-term as equity REITs
remain a low-correlated asset class to the general equity markets.
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* REIT funds may be subject to a higher degree of market risk than
diversified funds because of their concentration in a specific industry,
sector or geographic sector. Risks also include declines in the value of
real estate, general and economic conditions, changes in the value of the
underlying property and defaults by borrowers. Also, small company stocks
may be subject to a higher degree of market risk than the securities of
more established companies because they tend to be more volatile and less
liquid.
(1) Investment return and principal value of mutual funds will vary with market
conditions, so that shares, when redeemed, may be worth more or less than
their original cost. Return figures reflect fee waivers. If fee waivers
were not in effect, the Fund's returns would have been lower.
(2) The Morgan Stanley REIT Index is an unmanaged index. An individual cannot
invest directly in any index.
For more complete information about the Undiscovered Managers Funds, including
fees and expenses, please call 1-888-242-3514 for a prospectus. Please read it
carefully before you invest or send money.
Distributor: First Data Distributors Inc., 4400 Computer Drive, Westborough,
MA 01581. 1-508-871-9768.
6
<PAGE> 7
undiscovered managers(TM)
UNDISCOVERED MANAGERS SMALL CAP VALUE FUND*
SUB-ADVISER TO THE FUND - J.L. KAPLAN ASSOCIATES, LLC
PORTFOLIO MANAGERS - JAMES L. KAPLAN AND PAUL WEISMAN
All information as of 8/31/98
PERFORMANCE(1)
<TABLE>
<CAPTION>
YEAR- LIFE-
TO-DATE TO-DATE YEAR TO DATE
<S> <C> <C>
Undiscovered Managers
Small Cap Value Fund: [BAR CHART]
Institutional Class(A) (14.98)% (12.80)%
Investor Class(B) (18.96)% (18.88)%
Russell 2000 Index(2) (22.29)% --
</TABLE>
(A) Institutional Class commenced investment operations on December 30, 1997.
(B) Investor Class commenced operations on July 31, 1998.
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MANAGEMENT COMMENTARY:
Superior performance is created through the exploitation of market
inefficiencies. The two most common inefficiencies are informational and
psychological. Informational advantages are created when one analyst has greater
knowledge of a particular company and the fundamental drivers behind its stock
performance. Psychological advantages mostly arise from a willingness to think
independently and be contrary to conventional wisdom (for example, being willing
to own health care stocks when health care reform was being debated).
Informational advantage tends to diminsh as an investment moves up in
capitalization size. Most small-cap companies, if they are followed by any
analysts, tend to have research coverage from only a few. The Small Cap Value
Fund has continued to outperform the Russell 2000 Index as undervalued companies
become "discovered." This approach can often produce outperformance in a short
time period, since a single magazine article or news story can cause the
investment community to focus on a previously obscure company.
Our primary sale in the Small Cap Value Fund was Ryan's Family Steakhouse, which
had appreciated to our sell target on a P/E basis. Two purchases this quarter
which are consistent with our theme of buying very undervalued stocks with
limited exposure to economic turmoil are Quixote Corp. and D&N Financial.
Quixote Corp. is the dominant manufacturer of energy-absorbing highway crash
barriers and other highway safety products and has close to a 90% share of the
highway barrier market. We believe that the combination of increased government
spending on highway safety and niche acquisitions can accelerate Quixote Corp.'s
earnings growth to 18-20% annually. This is also a debt-free company, which
generates significant free cash flow.
D&N Financial is one of the largest independent thrifts remaining in the state
of Michigan. The company is in the process of making an exciting transition from
a slow growing thrift to a consumer and commercial-oriented bank. This has
produced a dramatic improvement in both return on equity and earnings growth.
Currently, the stock sells at a significant discount to its peers on a relative
P/E basis.
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* Small company stocks may be subject to a higher degree of market risk than
the securities of more established companies because they tend to be more
volatile and less liquid.
(1) Investment return and principal value of mutual funds will vary with market
conditions, so that shares, when redeemed, may be worth more or less than
their original cost. Return figures reflect fee waivers. If fee waivers
were not in effect, the Fund's returns would have been lower.
(2) The Russell 2000 Index is an unmanaged index. An individual cannot invest
directly in any index.
For more complete information about the Undiscovered Managers Funds, including
fees and expenses, please call 1-888-242-3514 for a prospectus. Please read it
carefully before you invest or send money.
Distributor: First Data Distributors Inc., 4400 Computer Drive, Westborough,
MA 01581. 1-508-871-9768.
7
<PAGE> 8
undiscovered managers(TM)
UNDISCOVERED MANAGERS HIDDEN VALUE FUND*
SUB-ADVISER TO THE FUND - J.L. KAPLAN ASSOCIATES, LLC
PORTFOLIO MANAGERS - JAMES L. KAPLAN AND PAUL WEISMAN
All information as of 8/31/98
PERFORMANCE(1)
<TABLE>
<CAPTION>
YEAR- LIFE-
TO-DATE TO-DATE YEAR TO DATE
<S> <C> <C>
Undiscovered Managers
Hidden Value Fund:
Institutional Class(A) (22.78)% (21.92)% [BAR CHART]
Investor Class(B) (19.27)% (19.27)%
Russell Mid-Cap Index(2) (12.69)% --
</TABLE>
(A) Institutional Class commenced investment operations on December 31, 1997.
(B) Investor Class commenced operations on July 31, 1998.
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MANAGEMENT COMMENTARY:
The Hidden Value Fund is managed using a contrarian/value investment approach
emphasizing currently out-of-favor companies with low P/E ratios (the most
obvious manifestation of unpopularity). This strategy tends to take a somewhat
longer time to generate superior performance, since perceptions tend to be
persistent and only change gradually as contrary evidence accumulates.
Presently, we are underperforming in the Hidden Value Fund due to an
overweighting of the currently unpopular energy and technology sectors, where we
are confident there is substantial hidden value.
During the third quarter, we sold both Union Carbide and PPG. These are
multinational chemical companies whose earnings are vulnerable in the current
environment, but whose stocks had appreciated.
Two recent significant purchases were Lancaster Colony and Federal Signal.
Lancaster Colony is a $1 billion (sales) manufacturer of housewares, food, and
automotive products. The company's strong management enables it to generate
significant cash to buy back shares as well as to acquire smaller, complementary
product lines, which Lancaster can then leverage through its existing
manufacturing and, more importantly, distribution systems. This stock is selling
at a discount relative to its peers, despite superior financial characteristics.
With $1 billion in forecasted 1998 sales, Federal Signal is a conglomerate with
a focus on safety-related equipment. Federal Signal is debt free, generates
large amounts of free cash flow, and historically had grown consistently at
greater than 15% annually. We believe it is currently undervalued given our
long-term outlook for the company.
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* Small company stocks may be subject to a higher degree of market risk than
the securities of more established companies because they tend to be more
volatile and less liquid.
(1) Investment return and principal value of mutual funds will vary with market
conditions, so that shares, when redeemed, may be worth more or less than
their original cost. Return figures reflect fee waivers. If fee waivers
were not in effect, the Fund's returns would have been lower.
(2) The Russell 2000 Index is an unmanaged index. An individual cannot invest
directly in any index.
For more complete information about the Undiscovered Managers Funds, including
fees and expenses, please call 1-888-242-3514 for a prospectus. Please read it
carefully before you invest or send money.
Distributor: First Data Distributors Inc., 4400 Computer Drive, Westborough,
MA 01581. 1-508-871-9768.
8
<PAGE> 9
undiscovered managers(TM)
UNDISCOVERED MANAGERS CORE EQUITY FUND
SUB-ADVISER TO THE FUND - WAITE & ASSOCIATES, L.L.C.
PORTFOLIO MANAGERS - LESLIE A. WAITE, CFA AND DIANA L. CALHOUN, CFA
All information as of 8/31/98
PERFORMANCE(1)
<TABLE>
<CAPTION>
YEAR- LIFE-
TO-DATE TO-DATE YEAR TO DATE
<S> <C> <C>
Undiscovered Managers
Core Equity Fund:
Institutional Class(A) 1.11% 2.00% [BAR CHART]
Investor Class(B) (13.56)% (13.56)%
S&P 500 Index(2) (0.35)% --
</TABLE>
(A) Institutional Class commenced investment operations on December 31, 1997.
(B) Investor Class commenced operations on July 31, 1998.
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MANAGEMENT COMMENTARY:
The case for a global economic downturn continues to be quite strong. The "Asian
Contagion" has spread throughout other global markets. Korea continues depressed
while Russia and Japan are recording new lows. Pacific Rim stock valuations have
been cut in half over the past 18 months and the average Latin American stock
market has declined by 45%.
Real GDP for the second quarter of 1996 was +2.5% (annual rate). We forecast
that this rate plus or minus 1% will continue for the next four quarters.
Continuing overcapacity on a worldwide basis remains as a main economic theme
helping to keep U.S. inflation under control. The annualized inflation rate for
the second calendar quarter of 1998 was +0.8%. We would expect inflation to
average about 1% for the next 12 months.
Most past economic "crises" (except for the 1930's) have been met with
significant easing moves by the central bankers. We look for the Federal Reserve
to move away from their restrictive stance and lower short-term rates further in
the coming months.
So far, the market in 1998, as measured by the Standard and Poor's 500 Composite
Stock Price Index ("S&P 500 Index"), has had two distinct moves. On July 17, the
S&P 500 Index peaked with a positive return of +22.3% and then sold off -19.3%
for a cumulative negative return of -1.3% (without income) year-to-date through
August 31. Our outperformance versus the S&P 500 Index has been a combination of
sector selection (underweighting basic materials and transportation) and stock
selection. Although we continue to be overweighted to the S&P 500 Index in the
financial sector, our stock selection in this sector as well as consumer
cyclicals has been better than the averages.
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(1) Investment return and principal value of mutual funds will vary with market
conditions, so that shares, when redeemed, may be worth more or less than
their original cost. Return figures reflect fee waivers. If fee waivers
were not in effect, the Fund's returns would have been lower.
(2) The S&P 500 Index is an unmanaged index. An individual cannot invest
directly in any index.
For more complete information about the Undiscovered Managers Funds, including
fees and expenses, please call 1-888-242-3514 for a prospectus. Please read it
carefully before you invest or send money.
Distributor: First Data Distributors Inc., 4400 Computer Drive, Westborough,
MA 01581. 1-508-871-9768.
9
<PAGE> 10
undiscovered managers(TM)
UNDISCOVERED MANAGERS ALL CAP VALUE FUND
SUB-ADVISER TO THE FUND - E.R. TAYLOR INVESTMENTS, INC.
PORTFOLIO MANAGERS - SHERWOOD T. SMALL AND MARTHA COTTRILL, CFA
All information as of 8/31/98
PERFORMANCE(1)
<TABLE>
<CAPTION>
YEAR- LIFE-
TO-DATE TO-DATE
YEAR TO DATE
<S> <C> <C>
Undiscovered Managers [BAR CHART]
All Cap Value Fund:
Institutional Class(A) (7.91)% (7.76)%
Investor Class(B) (18.76)% (18.76)%
S&P 500 Index(2) (0.35)% --
</TABLE>
(A) Institutional Class commenced investment operations on December 31, 1997.
(B) Investor Class commenced operations on July 31, 1998.
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MANAGEMENT COMMENTARY:
The market was dramatically two-tiered in the beginning of 1998. Many large
company stocks continued to make gains while earnings growth has proven to be
much more difficult to achieve. The market has pushed the vast majority of these
"nifty" stocks to dramatically lower valuations, while a select few remain
relatively unaffected.
Global economic problems and the absence of strong political leadership
throughout the world, combined with the introduction of the EMU and the looming
uncertainty of the Year 2000 technology issues, cause us to be conservative in
our outlook for growth potential in the near term. In this environment, a
disciplined value approach should outperform a growth strategy (which is bound
to disappoint).
The Fund performed well through mid-July, outperforming the S&P/Barra Value
Index by over 200 basis points while staying within shooting distance of the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index"), an index
that has been dominated by large cap growth stocks in 1998.
July and August have been a different story. The difficulties in the market that
began on July 17 have been particularly problematic for value investors. The
Fund had a relatively high concentration in financial stocks, which bore the
brunt of the initial sell-off. The average return to our financial securities
from June 30 to August 31 was -24%. With a relatively high weighting, this cost
the Fund over 6 percentage points in return. Our stocks in the consumer-driven
sector were weak as well, returning an average of -16.8%. Although Eastman Kodak
(up 7%) was a bright spot, we suffered with Liz Claiborne (down 4.5%), KMart
(down 34%) and Brunswick Corp. (down 3.5%). The total impact of this sector on
our return was another 6 percentage points. The only sectors which performed
well for the Fund during July and August were healthcare and telecommunications,
but our weightings in these sectors were too small (due to valuation
constraints) to improve performance very much.
- --------------------------------------------------------------------------------
(1) Investment return and principal value of mutual funds will vary with market
conditions, so that shares, when redeemed, may be worth more or less than
their original cost. Return figures reflect fee waivers. If fee waivers
were not in effect, the Fund's returns would have been lower.
(2) The S&P 500 Index is an unmanaged index. An individual cannot invest
directly in any index.
For more complete information about the Undiscovered Managers Funds, including
fees and expenses, please call 1-888-242-3514 for a prospectus. Please read it
carefully before you invest or send money.
Distributor: First Data Distributors Inc., 4400 Computer Drive, Westborough,
MA 01581. 1-508-871-9768.
10
<PAGE> 11
undiscovered managers(TM)
BEHAVIORAL GROWTH FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
COMMON STOCKS - 85.18%
<S> <C> <C> <C>
AEROSPACE AND DEFENSE - 1.92%
1,400 United Technologies Corp. ................ $ 101,588
----------
BANKS - 1.23%
4,100 Golden State Bancorp, Inc. ............... 65,088
----------
BUSINESS MACHINES - 2.52%
2,200 Lexmark International
Group, Inc. - Class A * .................. 133,238
----------
BUILDING AND CONSTRUCTION - 2.00%
3,000 Centex Corp. ............................. 106,125
----------
COMPUTERS - 19.46%
4,000 American Management Systems, Inc. * ...... 107,000
4,200 Bell & Howell Co. * ...................... 98,700
3,800 Compuware Corp. * ........................ 172,663
7,000 INSO Corp. * ............................. 108,500
5,900 INTERSOLV, Inc. * ........................ 64,900
3,200 Keane, Inc. * ............................ 134,400
5,400 Neomagic Corp. * ......................... 69,525
6,450 Progress Software Corp. * ................ 116,503
5,800 Syntel, Inc. * ........................... 66,700
6,700 Systems & Computer
Technology Corp. * ....................... 91,288
----------
1,030,179
----------
CONSUMER PRODUCTS - 1.85%
5,950 Fossil, Inc. * ........................... 98,175
----------
CONTAINERS/PACKAGING - 2.26%
3,200 Ball Corp. ............................... 119,600
----------
ELECTRONICS - 6.11%
7,000 Optical Coating Laboratory, Inc. ......... 110,250
4,500 Qlogic Corp. * ........................... 213,188
----------
323,438
----------
LEISURE - 1.01%
12,400 Players International, Inc. * ............ 53,475
----------
MACHINERY - 1.72%
2,000 Sundstrand Corp. ......................... 91,125
----------
MANUFACTURING - 2.02%
1,700 Alpha Industries, Inc. * ................. 16,150
2,400 Carlisle Companies, Inc. ................. 90,900
----------
107,050
----------
PHARMACEUTICALS - 4.45%
3,200 Allergan, Inc. ........................... $ 151,200
4,700 IDEC Pharmaceuticals Corp. * ............. 84,600
----------
235,800
----------
RECREATION - 2.34%
3,700 Fleetwood Enterprises .................... 123,719
----------
RETAIL - 19.14%
4,600 AnnTaylor Stores Corp. * ................. 111,838
6,500 Best Buy Co., Inc. * ..................... 255,935
11,400 Donna Karan International, Inc. * ........ 86,213
3,800 Longs Drug Stores, Inc. .................. 129,675
5,900 Micro Warehouse, Inc. * .................. 95,875
3,800 Miller (Herman), Inc. .................... 77,900
6,900 TJX Companies, Inc. ...................... 153,956
4,000 Williams-Sonoma, Inc. * .................. 102,000
----------
1,013,392
----------
TELECOMMUNICATIONS - 10.79%
4,100 Avid Technology, Inc. * .................. 103,525
4,500 General Instrument Corp. * ............... 89,438
2,700 Lucent Technologies, Inc. ................ 191,360
4,900 Superior Telecommunications, Inc. ........ 186,813
----------
571,136
----------
TRANSPORTATION - 6.36%
3,600 Expeditors International, WA ............. 100,125
6,300 Hunt (JB) Transport Services, Inc. ....... 106,706
6,500 MotivePower Industries, Inc. * ........... 130,000
----------
336,831
----------
TOTAL COMMON STOCKS ...................... 4,509,959
(Cost $5,458,511) ----------
WARRANTS - 0.25%
BANKS - 0.25%
2,900 Golden State Bancorp, Inc.. .............. 13,050
----------
TOTAL WARRANTS ............................ 13,050
(Cost $16,476) ----------
TOTAL INVESTMENTS - 85.43% .............................. 4,523,009
(Cost $5,474,987) ----------
NET OTHER ASSETS AND LIABILITIES - 14.57% ............... 771,379
----------
NET ASSETS - 100.00% .................................... $5,294,388
==========
</TABLE>
- ----------------------
* Non-income producing security
See Notes to Financial Statements.
11
<PAGE> 12
undiscovered managers(TM)
SPECIAL SMALL CAP FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
<S> <C> <C> <C>
COMMON STOCKS - 98.18%
AUTOMOBILE - 6.00%
23,900 Midas, Inc. ................................ $ 540,738
800 Strattec Security* ......................... 22,200
24,600 TBC Corp.* ................................. 113,775
----------
676,713
----------
BUILDING MATERIALS - 2.83%
1,000 Congoleum Corp., Class A * ................. 7,437
22,800 Justin Industries, Inc. .................... 312,075
----------
319,512
----------
CAPITAL GOODS - 9.15%
10,900 Alltrista Corp. * .......................... 273,181
3,400 Franklin Electric Co., Inc. ................ 213,775
10,300 Jacobs Engineering Group, Inc. * ........... 262,650
8,400 Lawson Products ............................ 182,175
31,900 Royal Appliance Manufacturing Co. * ........ 79,750
3,800 Stimsonite Corp. * ......................... 21,613
----------
1,033,144
----------
CHEMICALS - 13.39%
44,700 Ethyl Corp. ................................ 189,975
12,900 Georgia Gulf Corp. ......................... 221,719
19,700 Lawter International, Inc. ................. 150,213
10,100 LeaRonal, Inc. ............................. 190,638
6,400 NCH Corp. .................................. 364,000
25,700 Octel Corp. * .............................. 395,138
----------
1,511,683
----------
ELECTRONICS - 8.65%
2,300 CIDCO, Inc. * .............................. 5,175
43,600 Commscope, Inc. * .......................... 577,700
1,500 ESCO Electronics Corp. * ................... 18,750
11,000 Varian Associates, Inc. .................... 374,688
----------
976,313
----------
FINANCE - 10.13%
20,118 ADVANTA Corp., Class A ..................... 227,584
5,100 Echelon International Corp. * .............. 116,981
14,800 FirstBank Puerto Rico ...................... 353,350
1,900 Fund American Enterprises Holding, Inc. .... 243,200
5,696 Queens County Bancorp., Inc. ............... 202,208
----------
1,143,323
----------
FOOD AND BEVERAGES - 3.33%
4,100 Coca-Cola Bottling Co. Consolidated ........ 253,175
4,973 ConAgra, Inc. .............................. 123,082
----------
376,257
----------
HEALTH CARE SERVICES - 3.94%
7,100 CorVel Corp. * ............................. $ 238,737
11,700 Morrison Health Care ....................... 206,213
----------
444,950
----------
INSURANCE - 2.60%
6,700 Penn-America Group, Inc. ................... 72,863
11,100 Presidential Life Corp. .................... 220,612
----------
293,475
----------
LEISURE - 5.59%
28,000 Handleman Co. * ............................ 180,250
8,700 Jackpot Enterprises, Inc. * ................ 85,912
18,900 Scientific Games Holdings Corp. * .......... 365,006
----------
631,168
----------
MEDICAL PRODUCTS - 2.17%
12,100 Invacare Corp. ............................. 245,025
----------
OIL, GAS AND PETROLEUM - 5.45%
5,300 Castle Energy Corp. ........................ 91,094
37,700 Costilla Energy, Inc. * .................... 240,337
31,500 Seitel, Inc. * ............................. 283,500
----------
614,931
----------
PHARMACEUTICALS - 2.37%
31,400 Perrigo Co. * .............................. 266,900
----------
PUBLISHING - 2.42%
13,500 Cadmus Communications Corp. ................ 273,375
----------
RESTAURANTS - 4.63%
23,100 Host Marriot Services Corp. * .............. 228,112
9,800 Outback Steakhouse, Inc. * ................. 294,613
----------
522,725
----------
TECHNOLOGY - 1.77%
20,500 Information Resources, Inc. * .............. 199,875
----------
TEXTILES - 0.17%
700 Oxford Industries, Inc. .................... 18,944
----------
TRANSPORTATION - 10.91%
29,100 Arnold Industries, Inc. .................... 352,837
15,700 Landstar System, Inc. * .................... 449,412
15,450 Midwest Express Holdings, Inc.* ............ 413,288
1,100 Transport Corp. of America, Inc.* .......... 15,125
----------
1,230,662
----------
</TABLE>
See Notes to Financial Statements.
12
<PAGE> 13
undiscovered managers(TM)
SPECIAL SMALL CAP FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- AUGUST 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
<S> <C> <C>
UTILITIES - 2.68%
11,700 Illinova Corp. ............................. $ 302,006
-----------
TOTAL COMMON STOCKS ........................ 11,080,981
(Cost $13,914,654) -----------
TOTAL INVESTMENTS - 98.18% ................................ 11,080,981
(Cost $13,914,654) -----------
NET OTHER ASSETS AND LIABILITIES - 1.82% .................. 205,408
-----------
NET ASSETS - 100.00% ...................................... $11,286,389
===========
</TABLE>
- --------------------------
* Non-income producing security
See Notes to Financial Statements.
13
<PAGE> 14
undiscovered managers(TM)
REIT FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
COMMON STOCKS - 94.52%
<S> <C> <C>
APARTMENTS - 26.03%
17,900 Archstone Communities Trust ............... $ 346,812
11,942 Avalon Bay Communities, Inc. .............. 394,086
9,000 Chateau Communities, Inc. ................. 234,563
13,900 Home Properties of New York, Inc. ......... 333,600
11,200 Manufactured Home Communities, Inc. ....... 263,900
10,000 Post Properties, Inc. ..................... 380,000
12,900 Sun Communities, Inc. ..................... 421,669
----------
2,374,630
----------
DIVERSIFIED - 10.16%
10,900 Golf Trust of America, Inc. ............... 288,850
1 Omega Worldwide, Inc. ..................... 5
10,300 Spieker Properties, Inc. .................. 366,294
11,300 U.S. Restaurants Properties, Inc. ......... 271,906
----------
927,055
----------
HOTELS, LODGING AND RESTAURANTS - 9.26%
16,000 Host Marriott Corp. * ..................... 224,000
33,550 Innkeepers USA Trust ...................... 322,919
8,150 Starwood Hotels & Resorts ................. 297,475
----------
844,394
----------
INDUSTRIAL - 8.26%
12,700 Bedford Property Investors, Inc. .......... 211,138
18,100 ProLogis Trust ............................ 362,000
6,525 Weeks Corp. ............................... 180,252
----------
753,390
----------
NEIGHBORHOOD SHOPPING CENTERS - 10.49%
29,150 IRT Property Co. .......................... 258,706
8,900 Kimco Realty Corp. ........................ 315,950
6,300 Ramco-Gershenson Properties Trust ......... 105,919
12,500 Regency Realty Corp. ...................... 275,781
----------
956,356
----------
OFFICE PROPERTIES - 7.97%
13,100 Alexandria Real Estate Equities, Inc. ..... 380,719
15,400 CarrAmerica Realty Corp. .................. 346,500
----------
727,219
----------
OUTLET CENTERS - 4.84%
8,400 Chelsea GCA Realty, Inc. .................. 289,800
5,800 Tanger Factory Outlet Centers, Inc. ....... 151,887
----------
441,687
----------
REGIONAL MALLS - 14.24%
18,000 CBL & Associates Properties, Inc. ......... $ 447,750
9,450 Mills Corp. ............................... 183,094
28,700 Taubman Centers, Inc. ..................... 376,688
11,550 The Macerich Co. .......................... 291,638
----------
1,299,170
----------
STORAGE - 3.27%
9,950 Storage USA, Inc. ......................... 297,877
----------
TOTAL COMMON STOCKS ....................... 8,621,778
(Cost $9,938,485) ----------
TOTAL INVESTMENTS - 94.52% ............................... 8,621,778
(Cost $9,938,485) ----------
NET OTHER ASSETS AND LIABILITIES - 5.48% ................. 500,264
----------
NET ASSETS - 100.00% ..................................... $9,122,042
==========
</TABLE>
- -----------------------
* Non-income producing security
REIT Real Estate Investment Trust
See Notes to Financial Statements.
14
<PAGE> 15
undiscovered managers(TM)
SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
<S> <C> <C> <C>
COMMON STOCKS - 87.45%
AEROSPACE AND DEFENSE - 2.39%
13,000 Aviation Sales Co. * ...................... $ 331,500
----------
AUTOMOBILE - 2.50%
6,000 Excel Industries, Inc. .................... 76,500
16,000 Wynn's International, Inc. ................ 271,000
----------
347,500
----------
BASIC MATERIALS - 5.63%
14,000 Chase Industries, Inc. * .................. 178,500
12,000 Reliance Steel & Aluminum Co. ............. 366,000
13,000 Timken Co. ................................ 236,438
----------
780,938
----------
BUILDING AND CONSTRUCTION - 7.69%
5,000 ABT Building Products Corp. * ............. 46,875
17,000 Holophane Corp. * ......................... 354,875
14,000 NCI Building Systems, Inc. * .............. 248,500
33,000 Quixote Corp. ............................. 416,625
----------
1,066,875
----------
BUSINESS SERVICES - 1.69%
15,000 BancTec, Inc. * ........................... 200,625
1,700 Vallen Corp. * ............................ 33,256
----------
233,881
----------
CAPITAL GOODS - 6.80%
10,000 Instron Corp. ............................. 135,000
6,000 Lydall, Inc. * ............................ 83,250
21,500 MTS Systems Corp. ......................... 268,750
3,000 Oak Industries, Inc. * .................... 89,813
3,000 Regal Beloit Corp. ........................ 58,875
13,000 Robbins & Myers, Inc. ..................... 308,750
----------
944,438
----------
CHEMICALS - 2.95%
17,000 Cambrex Corp. ............................. 388,875
2,500 CPAC, Inc. * .............................. 20,313
----------
409,188
----------
CONGLOMERATES - 3.58%
12,000 Stewart & Stevenson Services, Inc. ........ 156,750
14,000 United Dominion Industries, Ltd. .......... 340,375
----------
497,125
----------
ELECTRONICS - 10.15%
35,000 Altron, Inc. * ............................ 332,500
18,000 C & D Technologies, Inc. .................. 393,750
13,000 Dallas Semiconductor Corp. ................ 351,813
16,000 Kollmorgen Corp. .......................... 234,000
10,000 Silicon Valley Group, Inc. * .............. 96,250
----------
1,408,313
----------
FINANCE - 8.59%
10,500 CNB Bancshares, Inc. ...................... $ 451,500
16,000 D & N Financial Corp. ..................... 262,000
6,500 SJNB Financial Corp. ...................... 214,500
16,000 UST Corp. ................................. 264,000
----------
1,192,000
----------
FURNITURE - 2.88%
10,000 Chromcraft Revington, Inc. * .............. 176,250
12,000 Virco Manufacturing Corp. ................. 223,500
----------
399,750
----------
INSURANCE - 3.81%
14,000 Frontier Insurance Group, Inc. ............ 193,375
8,000 RenaissanceRe Holdings, Inc. .............. 335,000
----------
528,375
----------
LEISURE - 2.15%
16,000 Coachmen Industries, Inc. ................. 299,000
----------
MEDICAL SERVICES - 0.09%
800 National Dentex Corp. * ................... 12,800
----------
OIL, GAS AND PETROLEUM - 4.26%
33,000 Key Production Co., Inc. * ................ 198,000
36,500 Trico Marine Services, Inc. * ............. 214,438
23,000 Vintage Petroleum, Inc. ................... 179,688
----------
592,126
----------
REAL ESTATE INVESTMENT TRUST - 2.87%
21,000 Pacific Gulf Properties, Inc. ............. 399,000
----------
RESTAURANTS - 3.07%
23,000 Applebee's International, Inc. ............ 425,500
----------
RETAIL - 10.88%
27,000 Barry (R.G.) Corp. * ...................... 367,875
14,000 Dress Barn, Inc. * ........................ 243,250
5,500 Filene's Basement Corp. * ................. 15,125
10,000 Group 1 Automotive, Inc. * ................ 118,750
35,000 Paxar Corp. * ............................. 280,000
29,000 Sport Supply Group, Inc. * ................ 199,375
15,000 St. John Knits, Inc. ...................... 285,935
----------
1,510,310
----------
SHIPBUILDING - 0.58%
9,000 Halter Marine Group, Inc. * ............... 81,000
----------
</TABLE>
See Notes to Financial Statements.
15
<PAGE> 16
undiscovered managers(TM)
SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
<S> <C> <C> <C>
TECHNOLOGY - 2.39%
14,000 Marshall Industries * ..................... $ 331,624
-----------
TELECOMMUNICATIONS - 2.50%
14,000 Aliant Communications, Inc. ............... 346,500
-----------
TOTAL COMMON STOCKS ....................... 12,137,743
(Cost $16,363,161) -----------
TOTAL INVESTMENTS - 87.45% ............................... 12,137,743
(Cost $16,363,161) -----------
NET OTHER ASSETS AND LIABILITIES - 12.55% ................ 1,742,006
-----------
NET ASSETS - 100.00% ..................................... $13,879,749
===========
</TABLE>
- ----------------------------
* Non-income producing security
See Notes to Financial Statements.
16
<PAGE> 17
undiscovered managers(TM)
HIDDEN VALUE FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
<S> <C> <C>
COMMON STOCKS - 98.12%
AEROSPACE AND DEFENSE - 2.36%
500 Raytheon Co., Class B .................. $ 22,813
--------
AIRLINES - 3.19%
1,000 KLM Royal Dutch Air .................... 30,750
--------
BASIC MATERIALS - 4.14%
600 Carpenter Tech Corp. ................... 21,713
1,000 Timken Co. ............................. 18,188
--------
39,901
--------
BUILDINGS AND CONSTRUCTION - 2.91%
1,200 Champion Enterprises, Inc. * ........... 28,050
--------
BUSINESS SERVICES - 5.35%
1,500 BancTec, Inc. * ........................ 20,063
2,500 Reynolds & Reynolds Co., Class A ....... 31,563
--------
51,626
--------
CAPITAL GOODS - 13.58%
900 Case Corp. ............................. 24,300
1,200 Flowserve Corp. ........................ 22,500
900 General Signal Corp. ................... 33,075
800 Oak Industries, Inc. ................... 23,950
900 Trinity Industries, Inc. ............... 27,225
--------
131,050
--------
CHEMICALS AND ALLIED PRODUCTS - 6.15%
1,200 Cambrex Corp. .......................... 27,450
1,100 Raychem Corp. .......................... 31,900
--------
59,350
--------
COMPUTERS - 1.27%
700 Seagate Technology, Inc. * ............. 12,250
--------
CONGLOMERATES - 13.18%
1,800 Federal Signal Corp. ................... 36,675
1,000 Lancaster Colony Corp. ................. 28,875
700 TRW, Inc. .............................. 30,013
1,300 United Dominion Industries, Ltd. ....... 31,606
--------
127,169
--------
ELECTRONICS - 5.64%
1,700 Esterline Technologies Corp. * ......... 27,200
800 Varian Associates, Inc. ................ 27,250
--------
54,450
--------
ENERGY - 2.40%
600 Kerr McGee Corp. ....................... 23,175
--------
FINANCE - 3.87%
600 Union Planters Corp. ................... $ 24,150
800 UST Corp. .............................. 13,200
--------
37,350
--------
INSURANCE - 4.64%
600 Ohio Casualty Corp. .................... 22,500
1,000 Old Republic International Corp. ....... 22,313
--------
44,813
--------
MACHINERY - 3.45%
1,400 Robbins & Myers, Inc. .................. 33,250
--------
OIL, GAS AND PETROLEUM - 7.81%
1,000 Tidewater, Inc. ........................ 21,000
1,000 Trico Marine Services, Inc. * .......... 5,875
1,100 Unocal Corp. ........................... 34,444
1,800 Vintage Petroleum, Inc. ................ 14,060
--------
75,379
--------
REAL ESTATE INVESTMENT TRUST - 2.99%
1,000 Mack-Cali Realty Corp. ................. 28,813
--------
RETAIL - 4.72%
800 BJ's Wholesale Club, Inc. * ............ 27,000
1,000 Toys R Us, Inc. * ...................... 18,563
--------
45,563
--------
TECHNOLOGY - 6.11%
500 Marshall Industries * .................. 11,844
2,500 National Semiconductor Corp. * ......... 22,810
1,400 Teradyne, Inc. * ....................... 24,325
--------
58,979
--------
TELECOMMUNICATIONS - 4.36%
1,700 Aliant Communications, Inc. ............ 42,075
--------
TOTAL COMMON STOCKS .................... 946,806
(Cost $1,327,457) --------
TOTAL INVESTMENTS - 98.12% ............................ 946,806
(Cost $1,327,457) --------
NET OTHER ASSETS AND LIABILITIES - 1.88% .............. 18,173
--------
NET ASSETS - 100.00% .................................. $964,979
========
</TABLE>
- ---------------------------
* Non-income producing security
See Notes to Financial Statements.
17
<PAGE> 18
undiscovered managers(TM)
CORE EQUITY FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
<S> <C> <C>
COMMON STOCKS - 83.60%
BANKS - 13.37%
2,200 Bank Of New York, Inc. .................... $ 53,213
800 BankAmerica Corp. ......................... 51,250
1,580 U.S. Bancorp .............................. 53,918
380 Washington Mutual Savings Bank ............ 12,160
30 Wells Fargo & Co. ......................... 8,456
----------
178,997
----------
CONSUMER PRODUCTS - 9.41%
800 General Electric Co. ...................... 64,000
1,520 PepsiCo, Inc. ............................. 42,085
260 Proctor & Gamble Co. ...................... 19,890
----------
125,975
----------
FINANCE - 5.14%
1,210 Federal National Mortgage Association ..... 68,743
----------
HEALTH CARE SERVICES - 4.87%
1,300 American Home Products Corp. .............. 65,163
----------
INSURANCE - 7.27%
750 American International Group .............. 57,984
630 Chubb Corp. ............................... 39,375
----------
97,359
----------
MACHINERY - 1.66%
560 Ingersoll-Rand Co. ........................ 22,260
----------
MANUFACTURING - 1.04%
330 Caterpillar, Inc. ......................... 13,922
----------
OFFICE PRODUCTS - 1.52%
380 Avery Dennison Corp. ...................... 20,401
----------
OIL, GAS AND PETROLEUM - 8.33%
760 Mobil Corp. ............................... 52,535
1,060 Texaco, Inc. .............................. 58,896
----------
111,431
----------
RETAIL - 13.09%
1,260 Costco Companies, Inc. * .................. $ 59,299
1,500 Dayton Hudson Corp. ....................... 54,000
1,100 May Department Stores Co. ................. 61,875
----------
175,174
----------
TELECOMMUNICATIONS - 8.92%
1,430 Bell Atlantic Corp. ....................... 63,099
790 Intel Corp. ............................... 56,238
----------
119,337
----------
TECHNOLOGY - 4.33%
660 Xerox Corp. ............................... 57,956
----------
UTILITIES - 4.65%
520 FPL Group, Inc. ........................... 34,612
650 Texas Utilities Co. ....................... 27,625
----------
62,237
----------
TOTAL COMMON STOCKS ....................... 1,118,955
(Cost $1,299,373) ----------
TOTAL INVESTMENTS - 83.60% ............................... 1,118,955
(Cost $1,299,373) ----------
NET OTHER ASSETS AND LIABILITIES - 16.40% ................ 219,538
----------
NET ASSETS - 100.00% ..................................... $1,338,493
==========
</TABLE>
- ---------------------------
* Non-income producing security
See Notes to Financial Statements.
18
<PAGE> 19
[UNDISCOVERED MANAGERS(TM) LOGO]
ALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- ------ --------
<S> <C> <C>
COMMON STOCKS - 93.06%
AEROSPACE AND DEFENSE - 2.08%
200 Allied Signal, Inc. ......................... $ 6,863
--------
AUTOMOBILE - 9.47%
560 Federal Signal Corp. ........................ 11,410
450 Ford Motor Company .......................... 19,800
--------
31,210
--------
BANKS - 9.19%
65 Bankers Trust Corp. ......................... 4,830
180 Chase Manhattan Corp. ....................... 9,540
180 First Union Corp. ........................... 8,730
225 Washington Mutual Savings Bank .............. 7,200
--------
30,300
--------
CHEMICALS AND ALLIED PRODUCTS - 7.55%
116 du Pont (E.I.) de Nemours & Co. ............. 6,692
145 Eastman Kodak Co. ........................... 11,328
135 PPG Industries, Inc. ........................ 6,860
--------
24,880
--------
COMPUTERS - 5.34%
195 Sun Microsystems, Inc. * .................... 7,727
550 Unisys Corp. * .............................. 9,866
--------
17,593
--------
CONSUMER PRODUCTS - 4.22%
200 Coca-Cola Enterprises, Inc. ................. 4,750
240 Kimberly-Clark Corp. ........................ 9,150
--------
13,900
--------
FINANCE - 8.64%
120 American Express Co. ........................ 9,360
250 Federal Home Loan Mortgage Corp. ............ 9,875
140 Merrill Lynch & Co. ......................... 9,240
--------
28,475
--------
HEALTH CARE SERVICES - 5.59%
270 Abbott Laboratories ......................... 10,395
160 American Home Products Corp. ................ 8,020
--------
18,415
--------
HOTELS AND RESTAURANTS - 3.37%
300 Tricon Global Restaurants * ................. 11,119
--------
INSURANCE - 5.23%
200 RenaissanceRe Holdings Ltd. ................. 8,375
200 Travelers Group, Inc. ....................... 8,875
--------
17,250
--------
MANUFACTURING - 5.29%
170 Caterpillar, Inc. ........................... $ 7,172
150 Minnesota Mining & Manufacturing ............ 10,275
--------
17,447
--------
OIL, GAS AND PETROLEUM - 4.12%
135 British Petroleum ADR ....................... 9,872
400 Rowan Companies, Inc. * ..................... 3,700
--------
13,572
--------
PUBLISHING - 4.23%
225 Central Newspapers, Inc., Class A ........... 13,950
--------
RETAIL - 8.54%
350 Liz Claiborne, Inc. ......................... 9,975
750 K Mart Corp. ................................ 9,560
190 Sears Roebuck & Co. ......................... 8,633
--------
28,168
--------
TECHNOLOGY - 7.48%
400 Compaq Computer Corp. ....................... 11,175
65 International Business Machines Corp. ....... 7,321
70 Xerox Corp. ................................. 6,147
--------
24,643
--------
TELECOMMUNICATIONS - 2.72%
190 Ameritech Corp. ............................. 8,954
--------
TOTAL COMMON STOCKS ......................... 306,739
(Cost $366,793)
TOTAL INVESTMENTS - 93.06% ............................ 306,739
(Cost $366,793)
NET OTHER ASSETS AND LIABILITIES - 6.94% .............. 22,880
--------
NET ASSETS - 100.00% .................................. $329,619
========
</TABLE>
- ----------
* Non-income producing security
ADR American Depositary Receipt
See Notes to Financial Statements.
19
<PAGE> 20
[UNDISCOVERED MANAGERS(TM) LOGO]
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES * AUGUST 31, 1998
- ------------------------------------------------------------------------------------------------------------------
BEHAVIORAL SPECIAL SMALL REIT
GROWTH FUND CAP FUND FUND
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments (Note 2):
Investments at cost ............................... $5,474,987 $13,914,654 $ 9,938,485
Net unrealized depreciation ....................... (951,978) (2,833,673) (1,316,707)
---------- ----------- -----------
Total investments at value ................... 4,523,009 11,080,981 8,621,778
Cash .................................................... 418,195 164,347 615,261
Receivables:
Investments sold .................................. -- -- --
Fund shares sold .................................. 396,185 56,451 --
Dividends and interest ............................ 4,579 12,736 23,190
Due from Adviser, Net ............................. 7,113 -- 2,172
Organization costs (Note 2) ............................. 27,650 27,632 27,667
Prepaid Offering costs .................................. 5,946 5,897 5,996
Other assets ............................................ 1,103 1,095 1,113
---------- ----------- -----------
Total Assets ................................. 5,383,780 11,349,139 9,297,177
---------- ----------- -----------
LIABILITIES:
Payables:
Investments purchased ............................. -- -- 120,430
Fund shares repurchased ........................... 43,971 -- --
Adviser fee (Note 3) .............................. -- 3,382 --
Administration fee (Note 3) ....................... 1,264 2,719 2,034
Deferred Trustee fees (Note 5) .................... 3,815 6,791 5,036
Accrued expenses and other payables ............... 40,342 49,858 47,635
---------- ----------- -----------
Total Liabilities ............................ 89,392 62,750 175,135
---------- ----------- -----------
NET ASSETS .................................................. $5,294,388 $11,286,389 $ 9,122,042
========== =========== ===========
NET ASSETS CONSIST OF:
Paid-in capital ......................................... $6,419,776 $14,514,346 $10,486,798
Undistributed net investment income ..................... -- -- 130,644
Accumulated net realized gain (loss) on investments
sold (computed on the basis of identified cost) ....... (173,410) (394,284) (178,693)
Net unrealized depreciation of investments (computed
on the basis of identified cost) ...................... (951,978) (2,833,673) (1,316,707)
---------- ----------- -----------
TOTAL NET ASSETS ............................................ $5,294,388 $11,286,389 $ 9,122,042
========== =========== ===========
SHARES OF BENEFICIAL INTEREST
Institutional Class:
Net Assets .............................................. $5,254,176 $11,286,389 $ 9,122,042
Shares of beneficial interest outstanding ............... 443,152 1,085,274 857,636
---------- ----------- -----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
(Net Assets/Shares Outstanding) ............................. $ 11.86 $ 10.40 $ 10.64
========== =========== ===========
Investor Class:
Net Assets .............................................. $ 40,212 N/A N/A
Shares of beneficial interest outstanding ............... 3,392 N/A N/A
---------- ----------- -----------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
(Net Assets/Shares Outstanding) ............................. $ 11.85 N/A N/A
========== =========== ===========
</TABLE>
See Notes to Financial Statements.
20
<PAGE> 21
[UNDISCOVERED MANAGERS(TM) LOGO]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
SMALL CAP HIDDEN CORE ALL CAP
VALUE FUND VALUE FUND EQUITY FUND VALUE FUND
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
$16,363,161 $1,327,457 $1,299,373 $366,793
(4,225,418) (380,651) (180,418) (60,054)
----------- ---------- ---------- --------
12,137,743 946,806 1,118,955 306,739
1,627,054 4,592 203,680 7,348
109,160 -- -- --
10,490 -- -- 98
7,290 1,758 2,674 1,017
3,400 9,428 9,689 9,899
27,632 27,650 27,650 27,650
5,897 5,946 5,946 5,945
8,984 1,104 1,926 1,103
----------- ---------- ---------- --------
13,937,650 997,284 1,370,520 359,799
----------- ---------- ---------- --------
-- -- -- --
-- 232 42 --
-- -- -- --
3,334 241 315 80
2,684 724 587 363
51,883 31,108 31,083 29,737
----------- ---------- ---------- --------
57,901 32,305 32,027 30,180
----------- ---------- ---------- --------
$13,879,749 $ 964,979 $1,338,493 $329,619
=========== ========== ========== ========
$18,026,436 $1,333,477 $1,513,773 $396,041
7,565 5,908 8,157 4,710
71,166 6,245 (3,019) (11,078)
(4,225,418) (380,651) (180,418) (60,054)
----------- ---------- ---------- --------
$13,879,749 $ 964,979 $1,338,493 $329,619
=========== ========== ========== ========
$13,848,618 $ 924,632 $1,295,277 $288,983
1,270,364 94,762 101,585 25,073
----------- ---------- ---------- --------
$ 10.90 $ 9.76 $ 12.75 $ 11.53
=========== ========== ========== ========
$ 31,131 $ 40,347 $ 43,216 $ 40,636
2,854 4,136 3,390 3,526
----------- ---------- ---------- --------
$ 10.91 $ 9.76 $ 12.75 $ 11.52
=========== ========== ========== ========
</TABLE>
See Notes to Financial Statements.
21
<PAGE> 22
[UNDISCOVERED MANAGERS(TM) LOGO]
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS * FOR THE PERIOD ENDED AUGUST 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
BEHAVIORAL SPECIAL SMALL REIT
GROWTH FUND(1) CAP FUND(1) FUND(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (Note 2) ......................................... $ 8,376 $ 47,286 $ 204,184
Interest (Note 2) .......................................... 14,031 16,177 13,076
----------- ----------- -----------
Total investment income .............................. 22,407 63,463 217,260
----------- ----------- -----------
EXPENSES
Investment advisory fees (Note 3) .......................... 22,389 61,497 36,513
Administration fees (Note 3) ............................... 5,892 13,369 8,693
Custodian fees (Note 3) .................................... 11,663 6,243 6,993
Professional fees .......................................... 33,209 64,261 37,624
Transfer Agent fees ........................................ 26,340 35,603 25,014
Trustees' fees (Note 5) .................................... 5,071 9,079 6,721
Amortization of organization costs (Note 2) ................ 4,265 4,283 4,248
Registration fees .......................................... 30,323 32,804 31,467
Shareholder servicing fees - Investor Class (Note 3) ....... 15 -- --
Other fees ................................................. 2,929 3,647 3,211
----------- ----------- -----------
Total expenses before waiver/reimbursement ........... 142,096 230,786 160,484
Less: waiver/reimbursement (Note 3) .................. (111,446) (139,877) (111,801)
Less: Shareholder servicing fees waiver (Note 3) ..... (15) -- --
----------- ----------- -----------
Total expenses net of waiver/reimbursement ........... 30,635 90,909 48,683
----------- ----------- -----------
NET INVESTMENT INCOME (LOSS) ................................... (8,228) (27,446) 168,577
----------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (NOTE 2):
Net realized gain (loss) on investments sold ............... (173,410) (394,284) (189,265)
Unrealized depreciation of investments ..................... (951,978) (2,833,673) (1,316,707)
----------- ----------- -----------
NET LOSS ON INVESTMENTS ........................................ (1,125,388) (3,227,957) (1,505,972)
----------- ----------- -----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $(1,133,616) $(3,255,403) $(1,337,395)
=========== =========== ===========
</TABLE>
- ----------
(1) The Fund's Institutional Class commenced investment operations on:
Behavioral Growth Fund - 12/31/97; Special Small Cap Fund - 12/30/97;
REIT Fund - 01/01/98; Small Cap Value Fund - 12/30/97;
Hidden Value Fund - 12/31/97; Core Equity Fund - 12/31/97 and All Cap
Value Fund - 12/31/97.
The Fund's Investor Class (not applicable to the Special Small Cap Fund
or REIT Fund) commenced operations on July 31, 1998.
See Notes to Financial Statements.
22
<PAGE> 23
[UNDISCOVERED MANAGERS(TM) LOGO]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
SMALL CAP HIDDEN CORE ALL CAP
VALUE FUND(1) VALUE FUND(1) EQUITY FUND(1) VALUE FUND(1)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 17,230 $ 7,434 $ 6,502 $ 2,762
29,663 1,685 2,812 544
----------- --------- --------- --------
46,893 9,119 9,314 3,306
----------- --------- --------- --------
31,827 4,606 3,175 1,260
7,578 1,212 1,073 426
11,759 6,648 6,028 5,710
26,078 13,717 12,636 11,232
25,499 20,012 19,757 19,225
3,590 965 782 481
4,282 4,265 4,265 4,265
33,792 28,811 28,864 28,534
11 14 15 14
3,262 2,362 2,358 2,301
----------- --------- --------- --------
147,678 82,612 78,953 73,448
(105,232) (76,298) (74,692) (71,749)
(11) (14) (15) (14)
----------- --------- --------- --------
42,435 6,300 4,246 1,685
----------- --------- --------- --------
4,458 2,819 5,068 1,621
----------- --------- --------- --------
71,166 6,245 (3,019) (11,078)
(4,225,418) (380,651) (180,418) (60,054)
----------- --------- --------- --------
(4,154,252) (374,406) (183,437) (71,132)
----------- --------- --------- --------
$(4,149,794) $(371,587) $(178,369) $(69,511)
=========== ========= ========= ========
</TABLE>
See Notes to Financial Statements.
23
<PAGE> 24
[UNDISCOVERED MANAGERS(TM) LOGO]
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
BEHAVIORAL SPECIAL SMALL REIT
GROWTH FUND(1) CAP FUND(1) FUND(1)
---------------- --------------- ---------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED
AUGUST 31, 1998 AUGUST 31, 1998 AUGUST 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSETS AT BEGINNING OF PERIOD .............................. $ -- $ -- $ --
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income (loss) ............................... (8,228) (27,446) 168,577
Net realized gain (loss) on investments sold ............... (173,410) (394,284) (189,265)
Unrealized depreciation of investments ..................... (951,978) (2,833,673) (1,316,707)
----------- ----------- -----------
Net decrease in net assets resulting from operations ....... (1,133,616) (3,255,403) (1,337,395)
----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS:
Institutional Share Class:
Proceeds from shares issued .......................... 6,766,150 15,289,122 10,717,058
Cost of shares repurchased ........................... (388,146) (747,330) (257,621)
----------- ----------- -----------
Net increase in net assets derived from
Institutional Share Class transactions .......... 6,378,004 14,541,792 10,459,437
----------- ----------- -----------
Investor Share Class:
Proceeds from shares issued .......................... 50,000 -- --
----------- ----------- -----------
Increase in net assets derived from Investor
Share Class transactions .......................... 50,000 -- --
----------- ----------- -----------
Net increase in net assets derived from capital
share transactions ................................ 6,428,004 14,541,792 10,459,437
----------- ----------- -----------
Net increase in net assets ...................... 5,294,388 11,286,389 9,122,042
----------- ----------- -----------
NET ASSETS AT END OF PERIOD (INCLUDING LINE A) ................. $ 5,294,388 $11,286,389 $ 9,122,042
=========== =========== ===========
(A) Undistributed net investment income ........................ $ -- $ -- $ 130,644
=========== =========== ===========
OTHER INFORMATION:
SHARE TRANSACTIONS:
Institutional Share Class:
Sold ................................................. 470,937 1,143,447 878,904
Repurchased .......................................... (27,785) (58,173) (21,268)
----------- ----------- -----------
Total Institutional Share Class transactions .... 443,152 1,085,274 857,636
----------- ----------- -----------
Investor Share Class:
Sold ................................................. 3,392 N/A N/A
----------- ----------- -----------
Total Investor Share Class transactions ......... 3,392 N/A N/A
----------- ----------- -----------
Net increase in capital shares .................. 446,544 1,085,274 857,636
=========== =========== ===========
</TABLE>
- ----------
(1) The Fund's Institutional Class commenced investment operations on:
Behavioral Growth Fund - 12/31/97; Special Small Cap Fund - 12/30/97;
REIT Fund - 01/01/98; Small Cap Value Fund - 12/30/97;
Hidden Value Fund - 12/31/97; Core Equity Fund - 12/31/97 and All Cap
Value Fund - 12/31/97.
The Fund's Investor Class (not applicable to the Special Small Cap Fund
or REIT Fund) commenced operations on July 31, 1998.
See Notes to Financial Statements.
24
<PAGE> 25
[UNDISCOVERED MANAGERS(TM) LOGO]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Small Cap Hidden Core All Cap
Value Fund(1) Value Fund(1) Equity Fund(1) Value Fund(1)
----------- ---------- ---------- --------
Period ended Period ended Period ended Period ended
August 31, 1998 August 31, 1998 August 31, 1998 August 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 100,000 $ -- $ -- $ --
----------- ---------- ---------- --------
4,458 2,819 5,068 1,621
71,166 6,245 (3,019) (11,078)
(4,225,418) (380,651) (180,418) (60,054)
----------- ---------- ---------- --------
(4,149,794) (371,587) (178,369) (69,511)
----------- ---------- ---------- --------
18,068,590 1,903,880 1,586,277 401,654
(177,415) (617,314) (119,415) (52,524)
----------- ---------- ---------- --------
17,891,175 1,286,566 1,466,862 349,130
----------- ---------- ---------- --------
38,368 50,000 50,000 50,000
----------- ---------- ---------- --------
38,368 50,000 50,000 50,000
----------- ---------- ---------- --------
17,929,543 1,336,566 1,516,862 399,130
----------- ---------- ---------- --------
13,779,749 964,979 1,338,493 329,619
----------- ---------- ---------- --------
$13,879,749 $ 964,979 $1,338,493 $329,619
=========== ========== ========== ========
$ 7,565 $ 5,908 $ 8,157 $ 4,710
=========== ========== ========== ========
1,263,238 140,327 105,147 29,587
(874) (45,565) (3,562) (4,514)
----------- ---------- ---------- --------
1,262,364 94,762 101,585 25,073
----------- ---------- ---------- --------
2,854 4,136 3,390 3,526
----------- ---------- ---------- --------
2,854 4,136 3,390 3,526
----------- ---------- ---------- --------
1,265,218 98,898 104,975 28,599
=========== ========== ========== ========
</TABLE>
See Notes to Financial Statements.
25
<PAGE> 26
[UNDISCOVERED MANAGERS(TM) LOGO]
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
SPECIAL SMALL
BEHAVIORAL GROWTH FUND CAP FUND REIT FUND
-------------------------------- --------------- ---------------
INSTITUTIONAL INVESTOR INSTITUTIONAL INSTITUTIONAL
CLASS(1) CLASS(2) CLASS(1) CLASS(1)
--------------- --------------- --------------- ---------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
AUGUST 31, 1998 AUGUST 31, 1998 AUGUST 31, 1998 AUGUST 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, beginning of period ............................. $12.50 $14.74 $12.50 $12.50
Income from Investment Operations:
Net investment income (loss) (+) ............................. (0.02) 0.00(A) (0.03)(A) 0.20
Net realized and unrealized gain (loss) on investments ....... (0.62) (2.89) (2.07) (2.06)
------ ------ ------ ------
Total income (loss) from Investment Operations ......... (0.64) (2.89) (2.10) (1.86)
------ ------ ------ ------
Net increase (decrease) in net asset value from operations ....... (0.64) (2.89) (2.10) (1.86)
------ ------ ------ ------
NET ASSET VALUE, end of period ................................... $11.86 $11.85 $10.40 $10.64
====== ====== ====== ======
TOTAL RETURN ..................................................... (5.12)%** (19.61)%** (16.80)%** (14.88)%**
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period (in 000's) ............................. $5,254 $ 40 $11,286 $9,122
Ratios to average net assets:
Net investment income (loss) including reimbursement ......... (0.35)%* (0.35)%* (0.51)%* 4.85%*
Operating expenses including reimbursement ................... 1.30 %* 1.30 %* 1.70 %* 1.40%*
Portfolio Turnover Rate .......................................... 67%** 67%** 9%** 52%**
+ The operating expenses of the Fund may reflect a reduction of the Adviser fee, an allocation of expenses to the Investment
Adviser, or both. Had such actions not been taken, the ratios and net investment income (loss) per share would have been
as follows:
Net investment income (loss) ................................. (5.08)%* (5.43)%* (3.13)%* 1.63%*
Operating Expenses ........................................... 6.03%* 6.38%* 4.32%* 4.62%*
Net investment income (loss) per share ....................... $(0.27) $(0.07) $(0.15) $0.07
</TABLE>
- ----------
* Annualized
** Not Annualized
(1) The Fund's Institutional Class commenced investment operations on:
Behavioral Growth Fund - 12/31/97; Special Small Cap Fund - 12/30/97; REIT
Fund - 01/01/98; Small Cap Value Fund - 12/30/97;
Hidden Value Fund - 12/31/97; Core Equity Fund - 12/31/97 and All Cap Value
Fund - 12/31/97.
(2) The Fund's Investor Class commenced operations on July 31, 1998.
(A) Represents less than $0.005 per share.
See Notes to Financial Statements.
26
<PAGE> 27
[UNDISCOVERED MANAGERS(TM) LOGO]
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND HIDDEN VALUE FUND CORE EQUITY FUND ALL CAP VALUE FUND
-------------------------- ------------------------ ------------------------ ------------------------
INSTITUTIONAL INVESTOR INSTITUTIONAL INVESTOR INSTITUTIONAL INVESTOR INSTITUTIONAL INVESTOR
CLASS(1) CLASS(2) CLASS(1) CLASS(2) CLASS(1) CLASS(2) CLASS(1) CLASS(2)
------------- --------- ----------- --------- ----------- --------- ----------- ---------
PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998 1998 1998 1998 1998 1998 1998 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 12.50 $13.45 $12.50 $12.09 $12.50 $14.75 $12.50 $14.18
0.00(A) 0.00(A) 0.03 0.01 0.05 0.01 0.06 0.01
(1.60) (2.54) (2.77) (2.34) 0.20 (2.01) (1.03) (2.67)
------- ------ ------ ------ ------ ------ ------ ------
(1.60) (2.54) (2.74) (2.33) 0.25 (2.00) (0.97) (2.66)
------- ------ ------ ------ ------ ------ ------ ------
(1.60) (2.54) (2.74) (2.33) 0.25 (2.00) (0.97) (2.66)
------- ------ ------ ------ ------ ------ ------ ------
$ 10.90 $10.91 $ 9.76 $ 9.76 $12.75 $12.75 $11.53 $11.52
======= ====== ====== ====== ====== ====== ====== ======
(12.80)%** (18.88)%** (21.92)%** (19.27)%** 2.00%** (13.56)%** (7.76)%** (18.76)%**
$13,849 $ 31 $ 925 $ 40 $1,295 $ 43 $ 289 $ 41
0.15%* 0.15%* 0.58%* 0.58%* 1.18%* 1.18%* 0.95%* 0.95%*
1.40%* 1.40%* 1.30%* 1.30%* 0.99%* 0.99%* 0.99%* 0.99%*
10%** 10%** 74%** 74%** 46%** 46%** 36%** 36%**
(3.32)%* (3.67)%* (15.16)%* (15.51)%* (16.23)%* (16.58)%* (41.18)%* (41.53)%*
4.87 %* 5.22 %* 17.04 %* 17.39 %* 18.40 %* 18.75 %* 43.12 %* 43.47 %*
$ (0.08) $(0.04) $(0.77) $(0.15) $(0.68) $(0.21) $(2.73) $(0.48)
</TABLE>
See Notes to Financial Statements.
27
<PAGE> 28
[UNDISCOVERED MANAGERS(TM) LOGO]
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Undiscovered Managers Funds (the "Trust") is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment company.
The Trust currently consists of seven separately managed portfolios. The
accompanying financial statements and financial highlights are those of the
Funds, specifically the Undiscovered Managers Behavioral Growth Fund (the
"Behavioral Growth Fund"), the Undiscovered Managers Small Cap Value Fund (the
"Small Cap Value Fund"), the Undiscovered Managers Special Small Cap Fund (the
"Special Small Cap Fund"), the Undiscovered Managers REIT Fund (the "REIT
Fund"), the Undiscovered Managers Hidden Value Fund (the "Hidden Value Fund"),
the Undiscovered Managers Core Equity Fund (the "Core Equity Fund"), and the
Undiscovered Managers All Cap Value Fund (the "All Cap Value Fund"), each a
"Fund", and collectively, the "Funds". Each Fund is a diversified fund except
for the Special Small Cap Fund and the REIT Fund, which are non-diversified.
The Behavioral Growth, Small Cap Value, Hidden Value, Core Equity and All Cap
Value Funds are authorized to issue two classes of shares (Institutional
Class shares and Investor Class shares), while the REIT Fund and the Special
Small Cap Fund are authorized to issue only Institutional Class shares. Each
class of shares represents interests in the assets of the Portfolio and has
identical voting, dividend, liquidation and other rights. Each class of
shares bears its own proportional share of fund level expenses with the
Investor Class of shares bearing a shareholder servicing fee.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary
of the significant accounting policies consistently followed by each Fund in
the preparation of its financial statements. These policies are in conformity
with generally accepted accounting principles.
PORTFOLIO VALUATION: Investments in securities which are traded on a
recognized stock 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, or in the case of
over-the-counter securities not traded on a recognized stock exchange or on
the NASDAQ National Market System, at the last bid price. Short-term
obligations that mature in sixty days or less are valued at amortized cost,
which approximates market value. All other securities for which market
quotations are not readily available (including restricted securities, if
any) and all other assets are appraised at their fair value as determined in
good faith under guidelines established by the Board of Trustees, although
the actual calculations may be made by persons acting pursuant to the
direction of the Board.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
accounted for on a trade date basis. Net realized gains or losses on sales of
securities are determined by the identified cost method. Interest income is
recorded on the accrual basis. Dividend income is recorded on the ex-dividend
date.
FEDERAL INCOME TAXES: Each Fund intends to qualify each year as a "regulated
investment company" under Subchapter M of the Internal Revenue Code and to
distribute substantially all of its net investment income. Accordingly, no
provisions for federal income taxes have been made in the accompanying
financial statements. For the period from the commencement of investment
operations to August 31, 1998, the Funds have elected to defer to the next
fiscal year capital losses of $173,410, $394,284, $127,269, $2,813 and
$11,078 for the Behavioral Growth Fund, Special Small Cap Fund, REIT Fund,
Core Equity Fund and All Cap Value Fund, respectively, attributable to
Post-October Losses.
Paid-in capital, undistributed net investment income, and accumulated net
realized gain/(loss) have been adjusted in the
28
<PAGE> 29
[UNDISCOVERED MANAGERS(TM) LOGO]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Statements of Assets and Liabilities for permanent book-tax differences for all
Funds for the period from the commencement of investment operations to August
31, 1998 as follows:
<TABLE>
<CAPTION>
Increase/(Decrease) Increase/(Decrease) Accumulated
Paid-in Undistributed Net Realized
Fund Capital Investment Income Gain(Loss)
---- ------------------ ------------------- -----------
<S> <C> <C> <C>
Behavioral Growth Fund $ (8,228) $ 8,228 $ --
Special Small Cap Fund (27,446) 27,446 --
REIT Fund 27,361 (37,933) 10,572
Small Cap Value Fund (3,107) 3,107 --
Hidden Value Fund (3,089) 3,089 --
Core Equity Fund (3,089) 3,089 --
All Cap Value Fund (3,089) 3,089 --
</TABLE>
CLASSES: Class-specific expenses are borne by that class. Income, non-class
specific expenses and realized and unrealized gains/(losses) are allocated to
the respective classes on the basis of relative net assets.
EXPENSES: The Trust accounts separately for the assets, liabilities and
operations of each Fund. Expenses directly attributable to a Fund are charged
to the Fund, while expenses which are attributable to more than one Fund are
allocated based upon the relative net assets of each Fund.
ORGANIZATION COSTS: The Funds have reimbursed Undiscovered Managers, LLC (the
"Adviser") for certain costs incurred in connection with the Funds'
organization. These organization costs are being amortized on a straight-line
basis over five years.
REPURCHASE AGREEMENTS: Each Fund may engage in repurchase agreement
transactions. 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. Each repurchase agreement transaction is
recorded at cost plus accrued interest. The value of the collateral
securities, including accrued interest, is monitored daily to ensure that the
value of the collateral securities equals or exceeds the repurchase price,
including accrued interest. 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.
3. INVESTMENT ADVISORY, SUB-ADVISORY, ADMINISTRATION AND OTHER FEES
The Trust and the Adviser are parties to a management agreement on behalf of
each Fund under which the Adviser provides services for a fee, computed daily
and paid monthly, at the following annual percentage rates based on the
average daily net assets of each Fund: 0.95% for the Behavioral Growth Fund,
0.65% to 1.65% (depending on the investment performance of the Fund) for the
Special Small Cap Fund, 1.05% for the REIT Fund, 1.05% for the Small Cap
Value Fund, 0.95% for the Hidden Value Fund, 0.74% for the Core Equity Fund
and 0.74% for the All Cap Value Fund. Until the end of the first calendar
quarter ending on or after the 364th day following the commencement of the
Special Small Cap Fund's operations, that Fund's annual advisory fee rate is
1.15%.
The Adviser has voluntarily agreed, for an indefinite period, to pay the
expenses of each Fund's Institutional and Investment Classes in excess of the
following annual percentage rates of the average daily net assets of such
classes subject to the obligation of the Fund to repay the Adviser such
expenses in future years, if any, when the Fund's expenses for such classes
fall below the stated percentage rate, but only to the extent that such
repayment would not cause the Fund's expenses for such classes in any such
future year to exceed the stated percentage rate, and provided that each Fund
is not obligated to repay any such expenses more than two years after the end
of the fiscal year in which they were incurred: 1.30% and 1.65%
29
<PAGE> 30
[UNDISCOVERED MANAGERS(TM) LOGO]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
for the Behavioral Growth Fund's Institutional Class and Investor Class,
respectively, the sum of 0.55% plus the advisory fee rate for the Special Small
Cap Fund's Institutional Class for the year in question, 1.40% for the REIT
Fund's Institutional Class, 1.40% and 1.75% for the Small Cap Value Fund's
Institutional Class and Investor Class, respectively, 1.30% and 1.65% for the
Hidden Value Fund's Institutional Class and Investor Class, respectively, 0.99%
and 1.34% for the Core Equity Fund's Institutional Class and Investor Class,
respectively, and 0.99% and 1.34% for the All Cap Value Fund's Institutional
Class and Investor Class, respectively.
For the period from the commencement of investment operations to August 31,
1998, the Adviser reduced its fees and bore expenses pursuant to this
voluntary agreement in the aggregate amounts of $111,446, $139,877, $111,801,
$105,232, $76,298, $74,692 and $71,749 for the Behavioral Growth Fund, the
Special Small Cap Fund, the REIT Fund, the Small Cap Value Fund, the Hidden
Value Fund, the Core Equity Fund and the All Cap Value Fund, respectively.
All of such amounts are subject to recoupment in the next two years.
The Adviser has entered into various sub-advisory agreements pursuant to
which the Adviser shall pay each sub-adviser an annual fee at the following
rates:
<TABLE>
<CAPTION>
FEE RATE AS % OF FUND'S
FUND SUB-ADVISER AVERAGE DAILY NET ASSETS
- ---- ----------- ------------------------
<S> <C> <C>
Behavioral Growth Fund RJF Asset Management, Inc. 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 Investment 0.30% - of all assets
Management Corporation 1.30% *
REIT Fund Bay Isle Financial Corporation 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 J.L. Kaplan Associates, LLC 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 J.L. Kaplan Associates, LLC 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 Investments, Inc. 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. 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 is 0.80%.
30
<PAGE> 31
[UNDISCOVERED MANAGERS(TM) LOGO]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Trust and the Adviser have entered into an Administrative Services
Agreement, pursuant to which the Adviser has agreed to provide each Fund all
administrative services for the Funds. Under the Administrative Services
Agreement the Adviser is entitled to receive a fee computed and paid monthly
at the annual rate of 0.25% of the average net asset value of the Trust.
Pursuant to a Shareholder Servicing Plan, the Trust, on behalf of the
Investor Class shares of each Fund, will pay to Undiscovered Managers, LLC,
as the shareholder servicing agent of the Investor Class shares of the Funds,
or such other entity as shall from time to time act as the shareholder
servicing agent of such Investor Class shares (the "Servicing Agent"), a fee
(the "Shareholder Servicing Fee") for services rendered and expenses borne by
the Servicing Agent in connection with the provision of certain services
provided to Investor Class shareholders, at an annual rate not to exceed
0.35% of a Fund's average daily net assets attributable to such Fund's
Investor Class shares. For the period ended August 31, 1998, the Adviser has
voluntarily agreed to waive fees of $15, $11, $14, $15 and $14 for the
Behavioral Growth Fund, Small Cap Value Fund, Hidden Value Fund, Core Equity
Fund and All Cap Value Fund, respectively.
The Bank of New York is the custodian for the Funds and First Data
Distributors, Inc., a wholly-owned subsidiary of Investor Services Group and
an indirect wholly-owned subsidiary of First Data Corporation, acts as the
distributor for the Funds.
4. DIVIDENDS FROM NET INVESTMENT INCOME AND DISTRIBUTIONS OF CAPITAL GAINS
With respect to all Funds, dividends from net investment income are
distributed annually and net realized capital gains from investment
transactions, if any, are normally distributed to shareholders annually, but
may, to the extent permitted by law, be made more frequently as deemed
advisable by the Trustees of the Trust. Dividends and capital gain
distributions are determined in accordance with income tax requirements which
may differ from generally accepted accounting principles.
Distributions from net realized gains for book purposes may include
short-term capital gains, which are taxed as ordinary income.
5. TRUSTEES' COMPENSATION
Certain officers and trustees of the Funds are also officers and directors of
the Adviser. The Trust does not compensate its officers or its trustees who
are affiliated with the Adviser. Effective December 30, 1997, the Trust pays
each unaffiliated trustee an annual retainer of $10,000. Each unaffiliated
Trustee 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 each
fee.
6. SHARES OF BENEFICIAL INTEREST
The Behavioral Growth Fund, Small Cap Value Fund, Hidden Value Fund, Core
Equity Fund and All Cap Value Fund each offer two classes of shares, the
Institutional Class and the Investor Class. The Special Small Cap Fund and
REIT Fund offer one class of shares, the Institutional Class. Each Fund is
authorized to issue an unlimited number of shares of beneficial interest in a
class with no par value. At August 31, 1998, Undiscovered Managers, LLC
owned the following number of shares in each Fund:
<TABLE>
<CAPTION>
FUND INSTITUTIONAL CLASS INVESTOR CLASS
- ---- ------------------- --------------
<S> <C> <C>
Behavioral Growth Fund 0 3,392
Special Small Cap Fund 0 N/A
REIT Fund 0 N/A
Small Cap Value Fund 8,000 2,854
Hidden Value Fund 0 4,136
Core Equity Fund 0 3,390
All Cap Value Fund 4,474 3,526
</TABLE>
31
<PAGE> 32
[UNDISCOVERED MANAGERS(TM) LOGO]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT TRANSACTIONS
Aggregate purchases and proceeds from sales of investment securities (other
than U.S. Government Obligations and short-term investments) for the period
ended August 31, 1998 were:
<TABLE>
<CAPTION>
AGGREGATE PROCEEDS FROM
FUND PURCHASES SALES
---- --------- -------------
<S> <C> <C>
Behavioral Growth Fund $ 7,639,944 $1,991,547
Special Small Cap Fund 14,892,515 583,577
REIT Fund 12,817,501 2,689,751
Small Cap Value Fund 16,681,236 389,241
Hidden Value Fund 1,808,646 487,434
Core Equity Fund 1,554,666 252,274
All Cap Value Fund 459,903 82,032
</TABLE>
The aggregate gross unrealized appreciation and depreciation and net
unrealized depreciation for all securities as computed on a federal income
tax basis, at August 31, 1998, for each Fund were as follows:
<TABLE>
<CAPTION>
FUND TAX BASIS COST APPRECIATION DEPRECIATION NET DEPRECIATION
---- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Behavioral Growth Fund $ 5,474,987 $130,243 $(1,082,221) $ (951,978)
Special Small Cap Fund 13,914,654 136,065 (2,969,738) (2,833,673)
REIT Fund 9,989,909 5,965 (1,374,096) (1,368,131)
Small Cap Value Fund 16,363,161 20,180 (4,245,598) (4,225,418)
Hidden Value Fund 1,335,315 1,942 (390,451) (388,509)
Core Equity Fund 1,299,579 10,228 (190,852) (180,624)
All Cap Value Fund 366,793 7,580 (67,634) (60,054)
</TABLE>
32
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of Undiscovered Managers Funds:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the Undiscovered Managers Funds,
(the Trust) (comprised of the Undiscovered Managers Behavioral Growth Fund,
the Undiscovered Managers Special Small Cap Fund, the Undiscovered Managers
REIT Fund, the Undiscovered Managers Small Cap Value Fund, the Undiscovered
Managers Hidden Value Fund, the Undiscovered Managers Core Equity Fund and
the Undiscovered Managers All Cap Value Fund (the Funds)) as of August 31,
1998, and the related statements of operations, statements of changes in net
assets, and financial highlights for the period from December 30, 1997, the
commencement of investment operations to August 31, 1998. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion based on our audits.
We conducted our audits 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 statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at August 31, 1998, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. 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
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the
aforementioned Funds at August 31, 1998, the results of their operations, the
changes in their net assets and their financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
October 2, 1998
33
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<PAGE> 35
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HOW TO REACH
[UNDISCOVERED MANAGERS(TM) LOGO]
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BY PHONE
INSTITUTIONAL CLIENT SERVICES....... (888) 202-3981 (TOLL-FREE)
CLIENT SERVICES,
GENERAL INFORMATION OR
TO OBTAIN A PROSPECTUS.............. (888) 242-3514 (TOLL-FREE)
A REGISTERED REPRESENTATIVE OF UNDISCOVERED MANAGERS CAN BE
REACHED FROM 7:30 AM - 7:00 PM CT
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BY FAX.............................. (214) 999-7201
BY MAIL............................. 700 North Pearl, Suite 1700
Dallas, TX 75201
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