As filed with the Securities and Exchange Commission on October 14, 1998
Registration Nos. 811-8437 and 333-37711
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 3 [X]
and
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 5 [X]
(Check appropriate box or boxes)
-----------
UNDISCOVERED MANAGERS FUNDS
(Exact name of registrant as specified in charter)
Plaza of the Americas
700 North Pearl Street
Dallas, Texas 75201
Registrant's telephone number, including area code: (214) 999-7200
Name and address
of agent for service with a copy to:
Mark P. Hurley John M. Loder, Esq.
Undiscovered Managers, LLC Ropes & Gray
Plaza of the Americas One International Place
700 North Pearl Street Boston, MA 02110
Dallas, Texas 75201
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Amendment.
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485.
[ ] on (date) pursuant to paragraph (b) of Rule 485.
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
[X] 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest.
<PAGE>
UNDISCOVERED MANAGERS FUNDS
Cross Reference Sheet
Items required by Form N-1A
PART A
<TABLE>
<CAPTION>
Item No. Registration Statement Caption Caption in Prospectuses
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Summary of Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; The Funds; More Information About the
Funds' Investments and Risk Considerations; Organization and Capitalization
of The Trust
5. Management of the Fund Cover Page; The Funds; Management of the Funds;
Organization and Capitalization of The Trust; Portfolio Transactions; Back
Cover
5A. Management's Discussion of Fund Not Applicable
Performance
6. Capital Stock and Other Securities Cover Page; General Shareholder Services; How to Redeem Shares;
Dividends, Capital Gain Distributions and Taxes; Organization and
Capitalization of The Trust
7. Purchase of Securities Being Offered Management of the Funds; How to Purchase Shares; General Shareholder
Services; Back Cover
8. Redemption or Repurchase How to Purchase Shares; How to Redeem Shares
9. Pending Legal Proceedings Not Applicable
</TABLE>
-2-
<PAGE>
PART B
<TABLE>
<CAPTION>
Item No. Registration Statement Caption Caption in Prospectuses or Statement of Additional Information
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Policies Investment Objectives, Policies and Restrictions
14. Management of the Fund Management of the Trust
15. Control Persons and Principal Holders of Ownership of Shares of the Funds
Securities
16. Investment Advisory and Other Services Investment Advisory and Other Services; Management
of the Funds (Prospectus)
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage; Portfolio
Transactions (Prospectus)
18. Capital Stock and Other Securities How to Redeem Shares (Prospectus); Redemptions;
Dividends, Capital Gain Distributions and Taxes
(Prospectus); Income Dividends, Capital Gain
Distributions and Tax Status
19. Purchase, Redemption and Pricing of How to Purchase Shares (Prospectus); How to Buy
Securities Being Offered Shares; Shareholder Services; How to Redeem Shares
(Prospectus); Redemptions; Net Asset Value
20. Tax Status Dividends, Capital Gain Distributions and Taxes
(Prospectus); Income Dividends, Capital Gain
Distributions and Tax Status
21. Underwriters Investment Advisory and Other Services
22. Calculations of Performance Data Calculation of Total Return
23. Financial Statements Financial Statements
</TABLE>
-3-
<PAGE>
PART C
The information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
-4-
<PAGE>
[Logo: Undiscovered Managers(TM)]
UNDISCOVERED MANAGERS FUNDS
Institutional Class
P R O S P E C T U S
December , 1998
INSTITUTIONAL CLASS SHARES OF:
---------------------------------------------------------
UNDISCOVERED MANAGERS BEHAVIORAL GROWTH FUND
UNDISCOVERED MANAGERS BEHAVIORAL VALUE FUND
UNDISCOVERED MANAGERS BEHAVIORAL LONG/SHORT 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
UM INTERNATIONAL EQUITY FUND
UM INTERNATIONAL SMALL CAP EQUITY FUND
Undiscovered Managers Funds
Plaza of the Americas
700 North Pearl Street, Suite 1700
Dallas, Texas 75201
1-888-242-3514
<PAGE>
Institutional Class
Prospectus December , 1998
UNDISCOVERED MANAGERS FUNDS
Undiscovered Managers Funds (the "Trust") is a registered open-end management
investment company with eleven 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:
o Undiscovered Managers Behavioral Growth Fund (the "Behavioral Growth Fund") is
managed by RJF Asset Management, Inc.
o Undiscovered Managers Behavioral Value Fund (the "Behavioral Value Fund") is
managed by RJF Asset Management, Inc.
o Undiscovered Managers Behavioral Long/Short Fund (the "Behavioral Long/Short
Fund") is managed by RJF Asset Management, Inc.
o Undiscovered Managers Special Small Cap Fund (the "Special Small Cap Fund") is
managed by Kestrel Investment Management Corporation.
o Undiscovered Managers REIT Fund (the "REIT Fund") is managed by Bay Isle
Financial Corporation.
o Undiscovered Managers Small Cap Value Fund (the "Small Cap Value Fund") is
managed by J.L. Kaplan Associates, LLC.
o Undiscovered Managers Hidden Value Fund (the "Hidden Value Fund") is managed
by J.L. Kaplan Associates, LLC.
o Undiscovered Managers Core Equity Fund (the "Core Equity Fund") is managed by
Waite & Associates L.L.C.
o Undiscovered Managers All Cap Value Fund (the "All Cap Value Fund") is managed
by E.R. Taylor Investments, Inc.
o UM International Equity Fund (the "International Equity Fund") is managed by
Unibank Securities, Inc.
o UM International Small Cap Equity Fund (the "International Small Cap Equity
Fund") is managed by Unibank Securities, Inc.
Each Fund's investment objective is long-term growth of capital, except for the
Behavioral Growth Fund and the Behavioral Long/Short Fund, which have the
investment objective of growth of capital, the REIT Fund, which has the
investment objective of high total investment return, and the Behavioral Value
Fund, the International Equity Fund and the International Small Cap Equity Fund,
which have the investment objective of capital appreciation. In seeking to
achieve its objective, each Fund invests primarily in equity securities of U.S.
companies, except for the International Equity Fund and the International Small
Cap Equity Fund, which invest primarily in equity securities of companies that
are principally traded on any of the stock markets of Europe, Asia, Australia or
New Zealand. There can be no assurance that the Funds will achieve their
investment objectives.
The Behavioral Growth Fund, the Small Cap Value Fund, the Hidden Value Fund,
the Core Equity Fund and the All Cap Value Fund currently offer two classes of
shares -- Institutional Class shares and Investor Class shares. The Behavioral
Value Fund, the Behavioral Long/Short Fund, the Special Small Cap Fund, the
REIT Fund, the International Equity Fund and the International Small Cap Equity
Fund offer only Institutional Class shares. This Prospectus concisely describes
the information that an investor should know before investing in Institutional
Class shares of each Fund. Please read it carefully and keep it for future
reference. Investor Class shares of those Funds that offer such shares are
described in a separate prospectus. To obtain more information about such
Funds' Investor Class shares, please call toll free 1-888-242-3514.
A Statement of Additional Information (the "SAI") dated December , 1998, is
available upon request and free of charge. Write to Undiscovered Managers, LLC,
Plaza of the Americas, 700 North Pearl Street, Suite 1700, Dallas, Texas 75201,
or call toll free 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 toll free 1-888-242-3514.
- --------------------------------------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the 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
Financial Highlights ................................................. 8
The Funds ............................................................ 9
Behavioral Growth Fund ............................................. 9
Behavorial Value Fund .............................................. 10
Behavioral Long/Short Fund ......................................... 11
Special Small Cap Fund ............................................. 12
REIT Fund .......................................................... 13
Small Cap Value Fund ............................................... 14
Hidden Value Fund .................................................. 15
Core Equity Fund ................................................... 16
All Cap Value Fund ................................................. 17
International Equity Fund .......................................... 18
International Small Cap Equity Fund ................................ 19
All Funds .......................................................... 20
More Information About the Funds' Investments and Risk Considerations 21
Management of the Funds .............................................. 25
Portfolio Transactions ............................................... 27
How to Purchase Shares ............................................... 28
General Shareholder Services ......................................... 30
How to Redeem Shares ................................................. 30
Calculation of Performance Information ............................... 32
Dividends, Capital Gain Distributions and Taxes ...................... 32
Organization and Capitalization of the Trust ......................... 33
</TABLE>
3
<PAGE>
SUMMARY OF EXPENSES
The following information is provided to assist an investor in understanding the
various expenses that an investor in Institutional Class shares of a Fund will
bear directly or indirectly. Since each of the Funds commenced operations on
either December 29, 1997, or December __ 1998, the information about each Fund's
Institutional Class shares shown below is based on annualized projected expenses
of the Institutional Class shares for the 1999 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 in the
Institutional Class shares of each Fund over specified periods, assuming the 5%
annual return required under federal regulations.
<TABLE>
<CAPTION>
Behavioral Behavioral Behavioral
Growth Value Long/Short
Fund Fund Fund
--------------- ------------------ ------------------
Institutional Institutional Institutional
Class Class Class
--------------- ------------------ ------------------
<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
Maximum Contingent Redemption Fees
(as a percentage of amount
redeemed)(1) ..................................... none 1.00%(2) 1.00%(2)
Exchange Fees ...................................... none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees .................................... 0.95% 1.05% 1.55%
12b-1 Fees ......................................... none none none
Other Operating Expenses (after expense
reimbursements) .................................. 0.35% 0.35% 0.45%
Total Operating Expenses (after expense
reimbursements) .................................. 1.30% 1.40% 2.00%(3)
Example(4):
An investor would pay the following expenses on a
$1,000 investment assuming (i) a 5% annual return
and (ii) unless otherwise noted, redemption at
period end. (5) (6) (5) (6)
One Year ........................................... $13 $14 $24 $20 $30
Three Years ........................................ $41 $44 $44 $63 $63
</TABLE>
(1) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(2) A contingent redemption fee in the amount of 1.00% is imposed on redemptions
and exchanges of Fund shares held for one year or less from the time of
purchase. The contingent redemption fee does not apply to reinvested
dividends. See "How to Redeem Shares--Contingent Redemption Fee."
(3) Total Operating Expenses do not include dividend expenses incurred in
connection with short sales, which are included in and reduce the
investment return of the Fund.
(4) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.
(5) Assumes no redemption at end of period.
(6) Assumes redemption at end of period.
4
<PAGE>
<TABLE>
<CAPTION>
Special Small
Small Cap REIT Cap Value
Fund Fund Fund
-------------------------------- --------------- --------------
Institutional Institutional Institutional
Class Class Class
-------------------------------- --------------- --------------
<S> <C> <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(1) ........................... none none none
Exchange Fees ................................ none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees .............................. 1.15% for the first year; 1.05% 1.05%
thereafter, fees will vary
from 0.65% to 1.65%
based on the invest-
ment performance of
the Fund relative to a
benchmark (2)
12b-1 Fees ................................... none none none
Other Operating Expenses (after expense
reimbursements) ............................ 0.55% 0.35% 0.35%
Total Operating Expenses (after expense
reimbursements) ............................ 1.70% for the first year;
thereafter, expenses
will vary from 1.20% to
2.20% based on,
among other things,
the investment perfor-
mance of the Fund rela-
tive to a benchmark (2) 1.40% 1.40%
Example(3):
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 ..................................... $17 $14 $14
Three Years .................................. $38-69(2) $44 $44
</TABLE>
(1) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(2) 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."
(3) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.
5
<PAGE>
<TABLE>
<CAPTION>
Hidden Core All Cap
Value Equity Value
Fund Fund Fund
--------------- --------------- --------------
Institutional Institutional Institutional
Class Class Class
--------------- --------------- --------------
<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
Deferred Sales Load (as % of original
purchase price or redemption proceeds,
as applicable) ............................. none none none
Redemption Fees(1) ........................... none none none
Exchange Fees ................................ none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees .............................. 0.95% 0.74% 0.74%
12b-1 Fees ................................... none none none
Other Operating Expenses (after expense
reimbursements) ............................ 0.35% 0.25% 0.25%
Total Operating Expenses (after expense 1.30% 0.99% 0.99%
reimbursements) ............................
Example(2):
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 $10 $10
Three Years .................................. $41 $32 $32
</TABLE>
- ------------
(1) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(2) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.
6
<PAGE>
<TABLE>
<CAPTION>
International International
Equity Small Cap Equity
Fund Fund
-------------------- -----------------
Institutional Institutional
Class Class
-------------------- -----------------
<S> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Load Imposed on
Purchases (as % of offering price) ......... none none
Maximum Sales Load Imposed on
Reinvested Dividends (as % of offering
price) ..................................... none none
Deferred Sales Load (as % of original
purchase price or redemption proceeds,
as applicable) ............................. none none
Redemption Fees(1) ........................... 1.00%(2) 1.00%(2)
Exchange Fees ................................ none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees .............................. 0.95% 1.15%
12b-1 Fees ................................... none none
Other Operating Expenses (after expense
reimbursements) ............................ 0.50% 0.45%
Total Operating Expenses (after expense
reimbursements) ............................ 1.45% 1.60%
Example(3):
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): (4) (5) (4) (5)
One Year ..................................... $15 $25 $16 $26
Three Years .................................. $46 $46 $50 $50
</TABLE>
- ------------
(1) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(2) A contingent redemption fee in the amount of 1.00% is imposed on redemptions
and exchanges of Fund shares held for one year or less from the time of
purchase. The contingent redemption fee does not apply to reinvested
dividends. See "How to Redeem Shares--Contingent Redemption Fee."
(3) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.
(4) Assumes no redemption at end of period.
(5) Assumes redemption at end of period.
Other Operating Expenses are based on estimated amounts for the 1999 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 Institutional Class 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 for the Institutional Class
would be 2.54% and 3.49%, respectively, for the Behavioral Growth Fund; 4.82%
and 5.87%, respectively, for the Behavioral Value Fund; 4.87% and 6.42%,
respectively, for the Behavioral Long/Short Fund; 1.59% and 2.74%, respectively,
for the Special Small Cap Fund; 1.79% and 2.84%, respectively, for the REIT
Fund; 1.91% and 2.96%, respectively, for the Small Cap Value Fund; 8.05% and
9.00%, respectively, for the Hidden Value Fund; 3.53% and 4.27%, respectively,
for the Core Equity Fund; 21.21% and 21.95%, respectively, for the All Cap Value
Fund; 2.68% and 3.63%, respectively, for the International Equity Fund; and
2.68% and 3.83%, respectively, for the International Small Cap Equity Fund. See
"Management of the Funds -- Advisory and Sub-Advisory Fees."
7
<PAGE>
FINANCIAL HIGHLIGHTS
[To be supplied by amendment]
8
<PAGE>
THE FUNDS
The following sections present information about the investment objective,
policies and strategies, sub-adviser and portfolio manager(s) for each Fund.
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, 411 Borel Avenue, Suite 402, 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 as Vice President
and Portfolio Manager and became Senior Vice President and Portfolio Manager in
1997. Prior to joining RJF Management, Mr. Stanske was employed as a Securities
Analyst at Farmers Insurance Group from 1987 to 1989 and as a Vice President
and Research Analyst at Fisher Investments from 1989 to 1996.
9
<PAGE>
BEHAVIORAL VALUE FUND
- -------------------------
The Behavioral Value Fund's investment objective is capital appreciation.
The Fund seeks to achieve its objective by investing primarily in common stocks
of U.S. companies. 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 over-react to old,
negative information and under-react to new, positive information concerning a
company. In order to take advantage of such behavioral biases, the sub-adviser
begins by looking at companies that have (i) price-to-earnings ratios below the
median in their industry group or (ii) decreasing stock values on an absolute
basis. Within such universes of stocks, the sub-adviser selects investments for
the Fund based on such factors as (i) recent underperformance of the company's
stock relative to the market, (ii) significant share purchases by company
insiders or (iii) stock repurchase activity by the company. The sub-adviser
expects that the median market capitalization of stocks held by the Fund will
ordinarily be within the range of stocks encompassed by the Russell 2000 Index,
but the median capitalization could be significantly higher or lower. The Fund
will ordinarily remain substantially fully invested in common stocks.
The Fund's sub-adviser is RJF Management, and Russell J. Fuller and Joanne S.
Ott have day-to-day responsibility for managing the Fund's portfolio. Ms. Ott
joined RJF Management in 1993 as a Research Analyst and Portfolio Manager and
became a Vice President in 1995. Prior to joining RJF Management, Ms. Ott was
employed as a Portfolio Manager in the trust department at Richfield Bank and
Trust from 1985 to 1990 and as an Investment Consultant in the trust department
at University National Bank from 1991 to 1993. For more information about RJF
Management and Mr. Fuller, see "Behavioral Growth Fund" above.
10
<PAGE>
BEHAVIORAL LONG/
SHORT FUND
- -------------------------
The Behavioral Long/Short Fund's investment objective is growth of capital.
The Fund seeks to achieve its objective by taking long positions in stocks of
U.S. companies that the Fund's sub-adviser believes are undervalued and short
positions in stocks of other U.S. companies that the Fund's sub-adviser believes
are overvalued. See "More Information About the Funds' Investments and Risk
Considerations--Short Sales" below. When taking long positions, the sub-adviser
utilizes a combination of its growth and value strategies. A portion of the
Fund's long portfolio is selected using the strategies used for selecting stocks
for the Behavioral Growth Fund. The remainder of the long portfolio is selected
using the strategies used for selecting stocks for the Behavioral Value Fund.
For a description of such strategies, see "Behavioral Growth Fund" and
"Behavioral Value Fund" above. When taking short positions, the sub-adviser
begins with universes of stocks that have high valuation ratios and then
analyzes companies within such universes that have had recent stock issuances or
where there has been a significant divestiture of company stock by management.
In constructing the Fund's long and short portfolios, the sub-adviser does not
seek to achieve characteristics that would tend to reduce the likelihood of
divergence in the value of the two portfolios (such as similiar industry
weightings). In this respect, the Fund differs from so-called "market neutral"
funds. There may be instances when the sub-adviser will have to terminate short
positions at a time when it would not otherwise do so, in order to ensure that
the market value of all short positions does not exceed 100% of the value of the
Fund's net assets. The sub-adviser expects that the median market capitalization
of stocks held by the Fund will ordinarily be approximately $1.5 billion, but
the median capitalization could be significantly higher or lower. The Fund will
ordinarily remain substantially fully invested in common stocks. The dollar
value of the Fund's long portfolio will at least equal the dollar value of its
short portfolio, and, under normal market conditions, the dollar value of the
long portfolio could exceed that of the short portfolio by up to 30%.
Investment in shares of the Fund is more volatile and risky than some other
forms of investment. If the sub-adviser takes long positions in stocks that
underperform the market and short positions in stocks that outperform the
market, then the losses of the Fund may exceed those of other stock mutual
funds. Furthermore, because the Fund's sub-adviser will manage both a long and
a short portfolio, an investment in the Fund will involve the risk that the
sub-adviser may make more poor investment decisions than a manager of a typical
stock mutual fund with only a long portfolio.
The Fund's sub-adviser is RJF Management, and Russell J. Fuller, Frederick W.
Stanske and Joanne S. Ott have day-to-day responsibility for managing the
Fund's long portfolio, and Mr. Stanske and Ms. Ott have day-to-day
responsibility for managing the Fund's short portfolio. For more information
about RJF Management and Messrs. Fuller and Stanske, see "Behavioral Growth
Fund" above, and for more information about Ms. Ott, see "Behavioral Value
Fund" above.
11
<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, 411 Borel Avenue, Suite 403, 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 more than 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.
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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.
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<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.
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<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.
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<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.
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<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.
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<PAGE>
INTERNATIONAL EQUITY FUND
- -------------------------
The International Equity Fund's investment objective is capital appreciation.
The Fund seeks to achieve its objective by investing in common stocks of
issuers of any market capitalization (small-, mid- or large-cap) that are
principally traded on any of the stock markets of Europe, Asia, Australia or
New Zealand. Although permitted to invest in common stocks that are principally
traded on any of the foregoing stock markets, the Fund will not, under normal
market conditions, invest more than 15% of its total assets in issuers whose
common stocks are not principally traded in countries included in the Morgan
Stanley Capital International Europe, Australia and Far East ("MSCI EAFE")
Index. In selecting stocks for the Fund, the sub-adviser focuses on economies,
industries or companies that are undergoing significant structural or other
changes. Under normal market conditions, the Fund will ordinarily be
substantially fully invested in common stocks.
Unibank Securities, Inc. ("Unibank"), 13-15 West 54th Street, New York, New
York, was founded in 1994, and is the sub-adviser to the Fund. Unibank or its
affiliate Unibank A/S currently serves as an investment adviser to pension and
profit sharing plans, trusts and other institutional and private investors.
Investment decisions for the Fund are made by an investment team, of which
Niels-Ulrik Mousten is the head.
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<PAGE>
INTERNATIONAL SMALL CAP
EQUITY FUND
- --------------------------
The International Small Cap Equity Fund's investment objective is capital
appreciation.
The Fund seeks to achieve its objective by investing primarily in common stocks
of small cap issuers that are principally traded on any of the stock markets of
Europe, Asia, Australia or New Zealand. Although permitted to invest in common
stocks that are principally traded on any of the foregoing stock markets, it is
expected that the Fund will invest primarily in issuers whose common stocks are
principally traded on stock markets in Europe. The Fund will not, under normal
market conditions, invest more than 15% of its total assets in issuers whose
common stocks are not principally traded on stock markets in countries included
in the MSCI EAFE Index. In selecting stocks for the Fund, the sub-adviser
focuses on economies, industries or companies that are undergoing significant
structural or other changes. Under normal market conditions, the Fund will
ordinarily be substantially fully invested in common stocks and will invest at
least 65% of its total assets in common stocks of issuers with market
capitalizations, at the time of purchase, of under $1.5 billion.
The Fund's sub-adviser is Unibank. Investment decisions for the Fund are made by
an investment team. For more information about Unibank, see "International
Equity Fund" above.
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<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 OBJECTIVES AND POLICIES
Except as explicitly described otherwise, the investment objective and policies
of each of the Funds are not "fundamental" and may be changed without
shareholder approval.
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.
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<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-
21
<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.
SHORT SALES
The Behavioral Long/Short Fund will make short sales of securities. A short
sale is a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. When the Fund
makes a short sale, it must borrow the security sold short from a broker or
other institution and deliver it to the other party to the transaction. The
Fund will incur a loss as a result of a short sale if the price of the borrowed
security increases between the date of the short sale and the date on which the
Fund replaces such security. The Fund will realize a gain if the security
declines in price between those dates. There can be no assurance that the Fund
will be able to close out a short position at any particular time or at an
acceptable price. Although the Fund's gain is limited to the amount at which it
sold a security short, its potential loss is limited only by the maximum
attainable price of the security less the price at which the security was sold
short. Until the security sold short is replaced, the Fund is required to repay
the lender any dividends or interest that accrue during the period of the loan.
To borrow the security, the Fund also may be required to pay a premium. The
Fund also will incur transaction costs in effecting short sales. The amount of
any gain resulting from a short sale will be decreased, and the amount of any
loss increased, by the amount of premiums, dividends, interest or expenses the
Fund may be required to pay in connection with a short sale.
Until the Fund replaces a borrowed security, it will maintain daily a
segregated account with its custodian containing cash, U.S. Government
securities or other liquid securities such that the amount deposited in the
account plus any amount deposited with a broker or other custodian as
collateral will at least equal the current market value of the security sold
short. Depending on arrangements made with such broker or custodian, the Fund
may not receive any payments (including interest) on collateral deposited with
such broker or custodian. The Fund will not make a short sale if, after giving
effect to such sale, the market value of all short positions exceeds 100% of
the value of the Fund's net assets. The Fund's use of short sales may result in
the Fund realizing more short-term capital gains (generally subject to tax at
ordinary income tax rates) than it would if it did not engage in short sales.
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 Internal Revenue Code of 1986, as amended
(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.
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<PAGE>
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.
FOREIGN SECURITIES
The International Equity and International Small Cap Equity Funds (the
"International Funds") will invest primarily in foreign securities. Investments
in foreign securities present risks not typically associated with investments
in comparable securities of U.S. issuers.
Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income
available for distribution to shareholders of the International Funds may be
affected favorably or unfavorably by changes in currency exchange rates or
exchange control regulations. Because the International Funds may purchase
securities denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a change in the U.S. dollar
value of the Funds' assets and the Funds' income available for distribution.
In addition, although the International Funds' income may be received or
realized in foreign currencies, the Funds will be required to compute and
distribute their income in U.S. dollars. Therefore, if the value of a currency
relative to the U.S. dollar declines after a Fund's income has been earned in
that currency, translated into U.S. dollars and declared as a dividend, but
before payment of such dividend, the Fund could be required to liquidate
portfolio securities to pay such dividend. Similarly, if the value of a
currency relative to the U.S. dollar declines between the time a Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of
such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in such
currency of such expenses at the time they were incurred.
There may be less information publicly available about a foreign corporate or
government issuer than about a U.S. issuer, and foreign corporate issuers are
not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commissions and securities custody
costs are often higher than those in the United States, and judgments against
foreign entities may be more difficult to obtain and enforce. With respect to
certain foreign countries, there is a possibility of governmental expropriation
of assets, confiscatory taxation, political or financial instability and
diplomatic developments that could affect the value of investments in those
countries. The receipt of interest on foreign government securities may depend
on the availability of tax or other revenues to satisfy the issuer's
obligations.
The International Funds' investments in foreign securities may include
investments in emerging or developing countries, whose economies or securities
markets are not yet highly developed. Special considerations associated with
these investments (in addition to the considerations regarding foreign
investments generally) may include, among others, greater political
uncertainties, an economy's dependence on revenues from particular commodities
or on international aid or development assistance, currency transfer
restrictions, highly limited numbers of potential buyers for such securities
and delays and disruptions in securities settlement procedures.
The International Funds may invest in foreign equity securities either by
purchasing such securities directly or by purchasing "depository receipts."
Depository receipts are instruments issued by a bank that represent an interest
in equity securities held by arrangement with the bank. Depository
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<PAGE>
receipts can be either "sponsored" or "unsponsored." Sponsored depository
receipts are issued by banks in cooperation with the issuer of the underlying
equity securities. Unsponsored depository receipts are arranged without
involvement by the issuer of the underlying equity securities. Less information
about the issuer of the underlying equity securities may be available in the
case of unsponsored depository receipts.
In determining whether to invest in securities of foreign issuers, the
subadviser of the International Funds will consider the likely effects of
foreign taxes on the net yield available to such Funds and their shareholders.
Compliance with foreign tax law may reduce each such Fund's net income
available for distribution to its shareholders.
FOREIGN CURRENCY
Most foreign securities in the International Funds' portfolios will be
denominated in foreign currencies or traded in securities markets in which
settlements are made in foreign currencies. Similarly, any income on such
securities is generally paid to the Fund holding such securities in foreign
currencies. The value of these foreign currencies relative to the U.S. dollar
varies continually, causing changes in the dollar value of the Fund's portfolio
investments (even if the local market price of the investments is unchanged)
and changes in the dollar value of the Fund's income available for distribution
to its shareholders. The effect of changes in the dollar value of a foreign
currency on the dollar value of the Fund's assets and on the net investment
income available for distribution may be favorable or unfavorable.
The International Funds may incur costs in connection with conversions between
various currencies. In addition, each International Fund may be required to
liquidate portfolio assets, or may incur increased currency conversion costs,
to compensate for a decline in the dollar value of a foreign currency occurring
between the time when the Fund declares and pays a dividend, or between the
time when the Fund accrues and pays an operating expense in U.S. dollars.
CURRENCY HEDGING TRANSACTIONS
Each of the International Funds may, at the discretion of its subadviser, engage
in foreign currency exchange transactions, in connection with the purchase and
sale of portfolio securities, to protect the value of specific portfolio
positions or in anticipation of changes in relative values of currencies in
which current or future Fund portfolio holdings are denominated or quoted.
Currency hedging transactions may include forward contracts (contracts with
another party to buy or sell a currency at a specified price on a specified
date), futures contracts (which are similar to forward contracts but are traded
on an exchange) and options to buy or sell currencies and currency futures
contracts. For more information on foreign currency hedging transactions, see
the SAI. The International Funds' sub-adviser expects to engage in currency
hedging transactions only under unusual circumstances. Therefore, investors in
the International Funds will ordinarily be exposed to the risks associated with
fluctuations in the value of the U.S. dollar relative to the currencies in which
those Funds' portfolio securities trade.
"YEAR 2000" MATTERS
Many of the services provided to the Funds depend on the smooth functioning of
computer systems. Many systems in use today cannot distinguish between the year
1900 and the year 2000. Should any of the service systems of a Fund fail to
process information properly, such failure could have an adverse impact on the
Fund's operations and services provided to shareholders. Undiscovered Managers,
the sub-advisers and the distributor, administrator, sub-administrator,
transfer agent, custodian and certain other service providers to each of the
Funds have reported that each expects to modify its systems, as necessary,
prior to January 1, 2000 to address this so-called "Year 2000 problem."
However, there can be no assurance that the problem will be corrected in all
respects and that the Funds' operations and services provided to shareholders
will not be adversely affected.
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<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.
Undiscovered Managers was organized in 1997 as a Delaware limited liability
company. 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, except
Unibank, 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).
Unibank is regarded for purposes of the 1940 Act as being controlled by
Unidanmark A/S, a publicly traded financial services holding company in
Denmark. Unibank has no prior experience managing mutual funds.
The Bank of New York is the custodian for each Fund, except the Behavioral
Long/Short Fund whose custodian is , and First Data Distributors,
Inc. is the distributor for all the Funds (the "Distributor").
ADVISORY AND SUB-ADVISORY FEES AND OTHER EXPENSES
Each Fund pays Undiscovered Managers a management fee at the following annual
percentage rates of the Fund's daily net assets, subject to the fee deferral
arrangements described below:
<TABLE>
<CAPTION>
Fund Fee Rate
<S> <C>
Behavioral Growth Fund 0.95%
Behavioral Value Fund 1.05%
Behavioral Long/Short Fund 1.55%
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%
International Equity Fund 0.95%
International Small Cap Equity Fund 1.15%
</TABLE>
- ------------
* After December 31, 1998, 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 December 31, 1998, the annual fee rate is
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.
25
<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.
<TABLE>
<CAPTION>
Special Small Cap Fund
Total Return Differential
with respect to Fee
Russell 2000 Index Percentage
<S> <C>
-2.5% .65%*
-1.5% .85%
0% 1.15%
1.5% 1.45%
2.5% 1.65%**
</TABLE>
- ------------
* 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
- --------------------------------------------------------------------------------------------------------
Behavioral Value Fund RJF Management 0.70% of the first $200 million
----- -------------------------------------
0.65% of the next $100 million
----- -------------------------------------
0.60% of assets in excess of $300 million
- --------------------------------------------------------------------------------------------------------
Behavioral Long/Short RJF Management 1.20% of the first $200 million
Fund ----- -------------------------------------
1.15% of the next $100 million
----- -------------------------------------
1.10% 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
- --------------------------------------------------------------------------------------------------------
International Equity Fund Unibank 0.60% of the first $200 million
----- -------------------------------------
0.55% of the next $100 million
----- -------------------------------------
0.50% of assets in excess of $300 million
- --------------------------------------------------------------------------------------------------------
International Small Cap Unibank 0.80% of the first $200 million
Equity Fund ----- -------------------------------------
0.75% of the next $100 million
----- -------------------------------------
0.70% of assets in excess of $300 million
- --------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
*After December 31, 1998, 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 deter-
26
<PAGE>
mined 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 December 31, 1998, the annual fee rate is
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 certain 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.
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, at the expense of Undiscovered Managers. First Data
has no responsibility with respect to the oversight of any Fund's investment
advisory services.
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, shareholder servicing fees, 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. In general, fees and expenses of a Fund are allocated pro rata among
such Fund's shares, regardless of class. Shareholder servicing fees, however,
are alllocated only to a Fund's Investor Class shares.
Undiscovered Managers has voluntarily agreed, for an indefinite period, to
reduce its fees and pay the expenses of each Fund's Institutional Class in
excess of the following annual percentage rates of the average daily net assets
of each Fund's Institutional Class, subject to the obligation of the Fund to
repay Undiscovered Managers such expenses in future years, if any, when the
Fund's Institutional Class expenses fall below the stated percentage rate, but
only to the extent that such repayment would not cause the Fund's Institutional
Class 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; 1.45% for the International
Equity Fund; 1.40% for the Behavioral Value Fund, the REIT Fund and the Small
Cap Value Fund; 1.60% for the International Small Cap Equity Fund; 2.00% for
the Behavioral Long/Short 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 this 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
com-
27
<PAGE>
mission 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 uses 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 evaluates 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 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-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.
Portfolio transactions for the International Equity and International Small Cap
Equity Funds may be effected by Aros Securities Inc., which is an affiliate of
Unibank, the sub-adviser to such Funds.
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,
REIT and International Equity Funds; 60% for the International Small Cap Equity
Fund; 75% for the Small Cap Value, Hidden Value and Special Small Cap Funds;
100% for the Behavioral Value Fund; 200% for the Behavioral Growth Fund and
300% for the Behavioral Long/Short 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 (including short-term capital gains
generally taxed at ordinary income tax rates). See "Dividends, Capital Gain
Distributions and Taxes" below.
HOW TO PURCHASE SHARES
An investor may make an initial purchase of Institutional Class 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
28
<PAGE>
The minimum initial investment in any Fund 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 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 of 1933, as amended, 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:
29
<PAGE>
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 the Funds 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.
GENERAL 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, subject to any applicable redemption fees, for Institutional Class
shares of any other Fund. Institutional Class shares may not be exchanged for
Investor Class shares. 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. An exchange of shares of one Fund for
shares of another Fund will generally be treated as a sale of the exchanged
shares for federal income tax purposes. 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 of any Fund 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 of any Fund by calling Undiscovered Man-
30
<PAGE>
agers 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 class of shares, 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 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 for shares of any Fund 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, less any applicable redemption fee. See
"Contingent Redemption Fee" below.
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 Trust 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 Funds to dispose of their 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.
31
<PAGE>
CONTINGENT REDEMPTION FEE
Each of the Behavioral Value Fund, the Behavioral Long/Short Fund, the
International Equity Fund and the International Small Cap Equity Fund are
intended for long-term investors. In each such Fund, short-term "market timers"
who engage in frequent purchases and redemptions can disrupt the Fund's
investment program and create additional transaction costs that are borne by all
shareholders. For these reasons, each of the Behavioral Value Fund, the
Behavioral Long/Short Fund, the International Equity Fund and the International
Small Cap Equity Fund assess a redemption fee in the amount of 1.00% on
redemptions and exchanges of Fund shares held for one year or less from the time
of purchase.
The contingent redemption fee will be paid to the Fund from which the
redemption is made to help offset brokerage and other Fund costs associated
with redemptions. The Funds will use the "First-in, First-out" (FIFO) method to
determine the holding period of an investor's shares. Under this method, the
date of the redemption or exchange will be compared with the earliest purchase
date of Fund shares held in the account. If this holding period is one year or
less, the contingent redemption fee will be assessed. Redemption fees are not
sales loads or contingent deferred sales loads.
The contingent redemption fee does not apply to any shares purchased through
the reinvestment of dividends.
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 (generally subject to a 20% tax rate) whether distributed in cash or
additional shares and regardless of how long an investor has owned shares of a
Fund. Some 1998 distributions of long-term capital gains realized in 1997 may
be subject to a 28% tax rate. Distributions are taxable to a shareholder of a
Fund even if they are paid from income or gains earned by the Fund prior to the
shareholder's investment (and thus were included in the price paid by the
shareholder).
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.
32
<PAGE>
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.
Each of the International Funds may be liable to foreign governments for taxes
relating primarily to investment income or capital gains on foreign securities
in such Fund's portfolio. Each International Fund may in some circumstances be
eligible to, and in its discretion may, make an election under the Code which
may allow certain Fund shareholders to claim a foreign tax credit or deduction
(but not both) on their U.S. income tax return. If a Fund makes the election,
the amount of each shareholder's distribution reported on the information
returns filed by such Fund with the Internal Revenue Service must be increased
by the amount of the shareholder's portion of such Fund's foreign tax paid. In
addition, each International Fund's investment in foreign securities or foreign
currencies may increase or accelerate such Fund's recognition of ordinary income
and may affect the timing or amount of such Fund's distributions.
NOTE: The foregoing summarizes certain tax consequences of investing in the
Funds for shareholders who are U.S. citizens or corporations. Before
investing, an investor should consult his or her own tax adviser for
more information concerning the federal, state, local and foreign 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. The Trustees may, without shareholder approval, divide the
shares of any series into two or more classes. Currently, the Behavioral Growth
Fund, the Small Cap Value Fund, the Hidden Value Fund, the Core Equity Fund and
the All Cap Value Fund have two classes of shares--Institutional Class shares
and Investor Class shares. The Behavioral Value Fund, the Behavioral Long/Short
Fund, the Special Small Cap Fund, the REIT Fund, the International Equity Fund
and the International Small Cap Equity Fund have only Institutional Class
shares. Investor Class shares are offered in a separate prospectus. 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 class
unless the rights of a particular series or class would be adversely affected
by the vote, in which case a separate vote of that series or class 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.
Investor Class shares are identical to Institutional Class shares, except that
Investor Class shares bear shareholder servicing fees and have separate voting
rights in certain circumstances. Since Institutional Class shares of a Fund
bear no shareholder servicing fees and consequently lower total fees, they are
expected to have a higher total return than Investor Class shares of such Fund,
if any. Institutional Class shares do not convert into Investor Class shares,
and Investor Class shares do not convert into Institutional Class shares.
33
<PAGE>
As of November 15, 1998, the following persons or entities held more than 25% of
the outstanding shares of a Fund, and as a result, may be deemed to "control"
such Fund as that term is defined in the 1940 Act.
Behavioral Growth Fund
Behavioral Value Fund
Behavioral Long/Short Fund
Special Small Cap Fund
REIT Fund
Small Cap Value Fund
Hidden Value Fund
Core Equity Fund
All Cap Value Fund
International Equity Fund
International Small Cap Equity Fund
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.
34
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
INVESTMENT ADVISER
Undiscovered Managers, LLC
Plaza of the Americas
700 North Pearl Street, Suite 1700
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
CUSTODIANS
The Bank of New York
48 Wall Street
New York, New York 10286
--------------
<PAGE>
undiscovered
managers[TM]
UNDISCOVERED MANAGERS FUNDS
INVESTOR CLASS
P R O S P E C T U S
JULY 30, 1998
INVESTOR CLASS SHARES OF:
-----------------------------------------------------
UNDISCOVERED MANAGERS BEHAVIORAL GROWTH 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>
Investor Class
Prospectus July 30, 1998
UNDISCOVERED MANAGERS FUNDS
Undiscovered Managers Funds (the "Trust") is a registered open-end management
investment company with seven separately managed, no-load portfolios. Five of
the Trust's portfolios (each such portfolio a "Fund" and collectively, the
"Funds") offer Investor Class shares. 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 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. 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 two classes of shares -- the Investor Class and the
Institutional Class. This Prospectus concisely describes the information that
an investor should know before investing in Investor Class shares of each Fund.
Please read it carefully and keep it for future reference. Institutional Class
shares of the Funds are described in a separate prospectus. To obtain more
information about Institutional Class shares of the Funds, please call toll
free 1-888-242-3514.
A Statement of Additional Information (the "SAI") dated July 30, 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
1-888-242-3514. The SAI, which contains more detailed information about the
Funds and other series of the Trust, 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 and any other series of the Trust, call toll free
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 ............................................................ 5
Behavioral Growth Fund ............................................. 5
Small Cap Value Fund ............................................... 6
Hidden Value Fund .................................................. 8
Core Equity Fund ................................................... 10
All Cap Value Fund ................................................. 12
All Funds .......................................................... 13
More Information About the Funds' Investments and Risk Considerations 14
Management of the Funds .............................................. 16
Portfolio Transactions ............................................... 17
How to Purchase Shares ............................................... 18
General Shareholder Services ......................................... 20
How to Redeem Shares ................................................. 20
Calculation of Performance Information ............................... 21
Dividends, Capital Gain Distributions and Taxes ...................... 22
Organization and Capitalization of the Trust ......................... 22
</TABLE>
3
<PAGE>
SUMMARY OF EXPENSES
The following information is provided to assist an investor in understanding
the various expenses that an investor in Investor Class shares of a Fund will
bear indirectly. Since the Funds commenced operations on December 29, 1997, the
information about each Fund's Investor Class shares shown below is based on
annualized projected expenses of the Investor 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 in the Investor Class shares of each Fund over specified periods,
assuming the 5% annual return required under federal regulations.
<TABLE>
<CAPTION>
Behaviorial Small Hidden Core All Cap
Growth Cap Value Value Equity Value
Fund Fund Fund Fund Fund
----------- --------- -------- -------- --------
Investor Investor Investor Investor Investor
Class Class Class Class Class
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Maximum Sales Load Imposed on
Purchases (as % of offering price) ......... none none none none none
Maximum Sales Load Imposed on
Reinvested Dividends (as % of
offering price) ............................ none none none none none
Deferred Sales Load (as % of original
purchase price or redemption
proceeds, as applicable) ................... none none none none none
Redemption Fees* ............................. none none none none none
Exchange Fees ................................ none none none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees .............................. 0.95% 1.05% 0.95% 0.74% 0.74%
12b-1 Fees ................................... none none none none none
Other Operating Expenses
(after expense reimbursements) ............. 0.70% 0.70% 0.70% 0.60% 0.60%
Total Operating Expenses (after expense
reimbursements) ............................ 1.65% 1.75% 1.65% 1.34% 1.34%
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 ..................................... $ 17 $ 18 $ 17 $ 14 $ 14
Three Years .................................. $ 52 $ 55 $ 52 $ 42 $ 42
</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 Investor Class 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 for the Investor Class would be
2.59% and 3.54%, respectively, for the Behavioral Growth Fund; 2.57% and 3.62%,
respectively, for the Small Cap Value Fund; 2.63% and 3.58%, respectively, for
the Hidden Value Fund; 2.60% and 3.34%, respectively, for the Core Equity Fund;
and 2.59% and 3.33%, respectively, for the All Cap Value Fund. See "Management
of the Funds -- Advisory and Sub-Advisory Fees."
4
<PAGE>
THE FUNDS
The following sections present information about the investment objective,
policies and strategies, sub-adviser and portfolio manager(s) for each Fund.
Several sections also present information about the investment performance of
accounts managed by certain of the Funds' sub-advisers. THE PERFORMANCE
INFORMATION SHOULD NOT BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF ANY
OF THE FUNDS. EACH FUND'S PERFORMANCE IN ANY FUTURE PERIOD 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, 411 Borel Avenue, Suite 402, 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 as Vice President
and Portfolio Manager and became Senior Vice President and Portfolio Manager in
1997. Prior to joining RJF Management, Mr. Stanske was employed as a Securities
Analyst at Farmers Insurance Group from 1987 to 1989 and as a Vice President
and Research Analyst at Fisher Investments from 1989 to 1996.
5
<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.
PAST PERFORMANCE OF CERTAIN ACCOUNTS MANAGED BY KAPLAN ASSOCIATES
The following tables present information about the investment returns during
certain past periods of all discretionary, fee-paying accounts managed by
Kaplan Associates and its predecessor, J.L. Kaplan Associates, with investment
objectives, policies and strategies substantially similar to that of the Small
Cap Value Fund (the "Small Cap Equity Accounts"). The gross investment
performance of the Small Cap Equity Accounts for the period from January 1,
1990 to December 31, 1997 has been attested to by Deloitte & Touche LLP for use
in connection with the registration statement of the Trust under the Securities
Act of 1933 (the "Securities Act"). The gross investment performance of the
Small Cap Equity Accounts for the period from January 1, 1998 to June 30, 1998
has not been so attested to. For all periods presented, the investment
performance of the Small Cap Equity Accounts 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 of the Small Cap Equity Accounts (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 this 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 of the Small Cap Equity Accounts presented in the tables below is
net of actual fees and expenses incurred by the accounts. The Small Cap Equity
Accounts are compared to the Russell 2000 Index and to the investment
performance, net of actual fees and expenses, of the Small Cap Value Fund. 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 investment performance of
the Small Cap Value Fund presented below is for the period from December 29,
1997, the date the Small Cap Value Fund commenced operations, to June 30, 1998.
The Small Cap Value Fund's 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 Small
Cap Value Fund, giving effect to the voluntary expense limitations described
below under "Management of the Funds -- Other Fund Expenses." The Small Cap
Value Fund's total return would have been lower if these limitations had not
been in effect.
6
<PAGE>
The following information should not be considered a prediction of future
performance of the Small Cap Value Fund. For more information about the
performance data, see "All Funds -- Past Performance of Certain Sub-Advisers"
below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Small Cap Value Fund (%) Small Cap Equity Accounts*(%) Russell 2000 Index(%)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1/1/98-6/30/98 10.61 6.50 4.93
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 Value Fund (%) Small Cap Equity Accounts*(%) Russell 2000 Index(%)
- ------------------------------------------------------------------------------------------------------------
Average Annual Returns
- ------------------------------------------------------------------------------------------------------------
1 Year 13.44*** 23.16 16.51
3 Years -- 32.41 18.86
5 Years -- 24.03 16.05
Since 1/1/90** -- 16.39 14.33
- ------------------------------------------------------------------------------------------------------------
Cumulative Returns
- ------------------------------------------------------------------------------------------------------------
1 Year 13.44*** 23.16 16.51
3 Years -- 132.13 67.90
5 Years -- 193.52 110.48
Since 1/1/90** -- 263.41 212.18
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*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 first small cap equity accounts
managed by Kaplan Associates and its predecessor.
***Since inception (12/29/97). Not annualized.
7
<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.
PAST PERFORMANCE OF CERTAIN ACCOUNTS MANAGED BY KAPLAN ASSOCIATES
The following tables present information about the investment returns during
certain past periods of all discretionary, fee-paying accounts managed by
Kaplan Associates and its predecessor, J.L. Kaplan Associates, with investment
objectives, policies and strategies substantially similar to that of the Hidden
Value Fund (the "Mid Cap Equity Accounts"). The gross investment performance of
the Mid Cap Equity Accounts for the period from January 1, 1988 to December 31,
1997 has been attested to by Deloitte & Touche LLP for use in connection with
the registration statement of the Trust under the Securities Act. The gross
investment performance of the Mid Cap Equity Accounts for the period from
January 1, 1998 to June 30, 1998 has not been so attested to. For all periods
presented, the investment performance of the Mid Cap Equity Accounts 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 of the Mid Cap Equity Accounts (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 this 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 of the Mid Cap Equity Accounts presented in the tables below is net
of actual fees and expenses incurred by the accounts. The Mid Cap Equity
Accounts are compared to the Russell Midcap Index (the "Russell Midcap") and to
the investment performance, net of actual fees and expenses, of the Hidden
Value Fund. 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 accounts since, unlike the performance of the accounts, the Russell
Midcap's performance has not been adjusted for any fees or expenses. The
investment performance of the Hidden Value Fund presented below is for the
period from December 29, 1997, the date the Hidden Value Fund commenced
operations, to June 30, 1998. The Hidden Value Fund's 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 Hidden Value Fund, giving effect to the voluntary
expense limitations described below under "Management of the Funds -- Other Fund
Expenses." The Hidden Value Fund's total return would have been lower if these
limitations had not been in effect.
The following information should not be considered a prediction of future
performance of the Hidden Value Fund. For more information about the
performance data, see "All Funds -- Past Performance of Certain Sub-Advisers"
below.
8
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Hidden Value Fund (%) Mid Cap Equity Accounts*(%) Russell Midcap(%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1/1/98-6/30/98 1.58 3.92 9.13
1997 -- 33.53 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
- -------------------------------------------------------------------------------------------------
Hidden Value Fund (%) Mid Cap Equity Accounts*(%) Russell Midcap(%)
- -------------------------------------------------------------------------------------------------
Average Annual Returns
- -------------------------------------------------------------------------------------------------
1 Year 2.72** 17.59 25.00
3 Years -- 28.57 23.48
5 Years -- 22.75 18.67
10 Years -- 15.97 16.53
- -------------------------------------------------------------------------------------------------
Cumulative Returns
- -------------------------------------------------------------------------------------------------
1 Year 2.72** 17.59 25.00
3 Years -- 112.53 88.27
5 Years -- 178.64 135.38
10 Years -- 339.82 361.71
- -------------------------------------------------------------------------------------------------
</TABLE>
* 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.
** Since inception (12/29/97). Not annualized.
9
<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.
PAST PERFORMANCE OF CERTAIN ACCOUNTS MANAGED BY WAITE & ASSOCIATES L.L.C.
The following tables present information about the investment returns during
certain past periods of all discretionary, fee-paying accounts managed by Waite
& Associates L.L.C. and its predecessors, Waite & Associates and Waite &
Correnti, with investment objectives, policies and strategies substantially
similar to that of the Core Equity Fund (the "Equity Accounts"). The gross
investment performance of the Equity Accounts for the period from January 1,
1988 to December 31, 1997 has been attested to by KPMG Peat Marwick LLP for use
in connection with the registration statement of the Trust under the Securities
Act. The gross investment performance of the Equity Accounts for the period
from January 1, 1998 to June 30, 1998 has not been so attested to. For all
periods presented, the investment performance of the Equity Accounts has been
calculated in accordance with standards established by the Association for
Investment Management and Research. This investment performance of the Equity
Accounts (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 this
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 of the Equity Accounts presented in the
tables below is net of actual fees and expenses incurred by the accounts. The
Equity Accounts are compared to the Standard & Poor's 500 Index (the "S&P 500")
and to the investment performance, net of actual fees and expenses, of the Core
Equity Fund. 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 investment performance of the Core Equity Fund presented below is
for the period from December 29, 1997, the date the Core Equity Fund commenced
operations, to June 30, 1998. The Core Equity Fund's 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 Core Equity Fund, giving effect to the voluntary
expense limitations described below under "Management of the Funds -- Other Fund
Expenses." The Core Equity Fund's total return would have been lower if these
limitations had not been in effect.
The following information should not be considered a prediction of future
performance of the Core Equity Fund. For more information about the performance
data, see "All Funds -- Past Performance of Certain Sub-Advisers" below.
10
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Core Equity Fund (%) Equity Accounts(%) S&P 500(%)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1/1/98-6/30/98 15.62 15.76 17.74
1997 -- 38.75 33.36
1996 -- 27.15 22.97
1995 -- 42.19 37.59
1994 -- 0.02 1.32
1993 -- 11.89 10.08
1992 -- 7.28 7.61
1991 -- 21.69 30.45
1990 -- 1.94 (3.09)
1989 -- 20.43 31.55
1988 -- 11.48 16.57
- -------------------------------------------------------------------------------
Core Equity Fund (%) Equity Accounts(%) S&P 500(%)
- -------------------------------------------------------------------------------
Average Annual Returns
- -------------------------------------------------------------------------------
1 Year 16.64* 29.77 30.20
3 Years -- 32.65 30.23
5 Years -- 25.37 23.05
10 Years -- 18.37 18.54
- -------------------------------------------------------------------------------
Cumulative Returns
- -------------------------------------------------------------------------------
1 Year 16.64* 29.77 30.20
3 Years -- 133.44 120.86
5 Years -- 209.68 182.13
10 Years -- 439.81 448.01
- -------------------------------------------------------------------------------
</TABLE>
*Since inception (12/29/97). Not annualized.
11
<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.
12
<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"). 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.
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 June 30, 1998, 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
OF THE SUB-ADVISERS 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 OF THE SUB-ADVISERS SHOULD NOT
BE CONSIDERED A PREDICTION OF FUTURE PERFORMANCE OF ANY OF THE FUNDS. EACH
FUND'S PERFORMANCE IN ANY FUTURE PERIOD MAY BE HIGHER OR LOWER THAN THAT SHOWN.
During the periods shown, the sub-advisers' accounts were managed by the
portfolio manager(s) who are 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.
13
<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 the Small Cap Value Fund will invest primarily in such
companies. See "The Funds -- Small Cap Value Fund" 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
14
<PAGE>
income from the borrower who has delivered equivalent collateral. These loans
are subject to termination 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.
"YEAR 2000" MATTERS
Many of the services provided to the Funds depend on the smooth functioning of
computer systems. Many systems in use today cannot distinguish between the year
1900 and the year 2000. Should any of the service systems of a Fund fail to
process information properly, such failure could have an adverse impact on the
Fund's operations and services provided to shareholders. Undiscovered Managers,
the sub-advisers and the distributor, administrator, sub-administrator,
transfer agent, custodian and certain other service providers to each of the
Funds have reported that each expects to modify its systems, as necessary,
prior to January 1, 2000 to address this so-called "Year 2000 problem."
However, there can be no assurance that the problem will be corrected in all
respects and that the Funds' operations and services provided to shareholders
will not be adversely affected.
15
<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.
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); James L. Kaplan (Kaplan Associates); Leslie A. Waite
(Waite & Associates L.L.C.); and Sherwood T. Small (E.R. Taylor). 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 (the "Distributor").
ADVISORY AND SUB-ADVISORY FEES AND OTHER EXPENSES
Each Fund pays Undiscovered Managers a management fee at the following annual
percentage rates of the Fund's daily net assets:
<TABLE>
<CAPTION>
Fund Fee Rate
<S> <C>
Behavioral Growth Fund 0.95%
Small Cap Value Fund 1.05%
Hidden Value Fund 0.95%
Core Equity Fund 0.74%
All Cap Value Fund 0.74%
</TABLE>
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
- -----------------------------------------------------------------------------------------------------
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>
16
<PAGE>
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 or any other series of the Trust 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.
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 0.25% 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.
Pursuant to a Shareholder Servicing Plan, Undiscovered Managers may also
provide (or arrange for another intermediary or agent to provide) certain
additional services to Investor Class shareholders (Undiscovered Managers or
such entity is referred to as a "Servicing Agent" in such capacity). Such
services may include transfer agent and sub-transfer agent services, accounting
services and other administrative and recordkeeping services to both record
owners and non-record owners of Investor Class shares. The Trust's Shareholder
Servicing Plan permits the Funds to pay fees of up to 0.35% of the average
daily net asset value of Investor Class shares to Servicing Agents for these
services.
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, shareholder servicing fees, 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. In general, fees and expenses of a Fund are allocated pro rata among
such Fund's shares, regardless of class. Shareholder servicing fees, however,
are allocated only to a Fund's Investor Class shares.
Undiscovered Managers has voluntarily agreed, for an indefinite period, to pay
the expenses of each Fund's Investor Class in excess of the following annual
percentage rates of the average daily net assets of each Fund's Investor Class,
subject to the obligation of the Fund to repay Undiscovered Managers such
expenses in future years, if any, when the Fund's Investor Class expenses fall
below the stated percentage rate, but only to the extent that such repayment
would not cause the Fund's Investor Class 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: 1.34% for the All Cap Value Fund and
the Core Equity Fund; 1.65% for the Behavioral Growth Fund and the Hidden Value
Fund; and 1.75% for the Small Cap Value Fund. Undiscovered Managers may change
or terminate these voluntary arrangements at any time, but this 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
17
<PAGE>
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 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 and Core Equity
Funds, 75% for the Small Cap Value and Hidden Value 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 Investor Class 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 in any Fund 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
18
<PAGE>
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 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.
19
<PAGE>
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 the Funds 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.
GENERAL 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. Investor Class shares of any Fund may be exchanged for
Investor Class shares of any other Fund. Investor Class shares may not be
exchanged for Institutional Class shares. 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' Investor 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 of any Fund 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 of any Fund 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 class of shares, 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
20
<PAGE>
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 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 for shares of any Fund 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 Trust 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 Funds to dispose of their 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
21
<PAGE>
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.
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). 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).
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. The Trustees may, without shareholder approval, divide the
shares of any series into two or more classes. Currently each Fund has two
classes of shares -- Investor Class shares and Institutional Class shares.
Certain other series of the Trust have only Institutional Class shares.
Institutional Class shares are offered in a separate prospectus. 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 class
unless the rights of a particular series or class would be adversely affected
by the vote, in which case a separate vote of that series or class 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
22
<PAGE>
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.
Institutional Class shares are identical to Investor Class shares, except that
Institutional Class shares bear no shareholder servicing fees and have separate
voting rights in certain circumstances. Since Investor Class shares of a Fund
bear shareholder servicing fees and consequently higher total fees, they are
expected to have a lower total return than Institutional Class shares of such
Fund. Investor Class shares do not convert into Institutional Class shares, and
Institutional Class shares do not convert into Investor Class shares.
As of May 1, 1998, the following entities held more than 25% of the outstanding
shares of a Fund, and as a result, may be deemed to "control" such Fund as that
term is defined in the 1940 Act.
<TABLE>
<S> <C>
Behavioral Growth Fund Charles Schwab & Co., Inc. (on behalf of certain of its
customers)
Small Cap Value Fund Charles Schwab & Co., Inc. (on behalf of certain of its
customers)
Hidden Value Fund None
Core Equity Fund Sofiya Balta
Undiscovered Managers, LLC
All Cap Value Fund Undiscovered Managers, LLC
BankBoston, custodian for James P. Nicholls
IRA Rollover
</TABLE>
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.
23
<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>
[Logo: Undiscovered Managers(TM)]
UNDISCOVERED MANAGERS FUNDS
Statement of Additional Information
December __, 1998
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Undiscovered Managers Funds' Investor
Class Prospectus dated July 30, 1998, and the Undiscovered Managers Funds'
Institutional Class Prospectus dated December __, 1998. If a series of
Undiscovered Managers Funds has more than one form of current prospectus, each
reference to the "Prospectus" in this Statement of Additional Information shall
include all of such series' prospectuses unless otherwise noted. This Statement
of Additional Information should be read with the applicable prospectus. A copy
of the Prospectus may be obtained from Undiscovered Managers Funds, Plaza of
the Americas, 700 North Pearl Street, Suite 1700, Dallas, Texas 75201.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Objectives, Policies and Restrictions .................... 3
Management of the Trust ............................................. 7
Ownership of Shares of the Funds .................................... 8
Investment Advisory and Other Services .............................. 9
Portfolio Transactions and Brokerage ................................ 13
Description of the Trust ............................................ 14
How to Buy Shares ................................................... 16
Net Asset Value ..................................................... 16
Shareholder Services ................................................ 16
Redemptions ......................................................... 17
Income Dividends, Capital Gain Distributions and Tax Status ......... 18
Calculation of Total Return ......................................... 20
Performance Comparisons ............................................. 21
Financial Statements ................................................ 23
Appendix A--Publications That May Contain Fund Information .......... A-1
Appendix B--Advertising and Promotional Literature .................. B-1
</TABLE>
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).
INVESTMENT RESTRICTIONS--UNDISCOVERED MANAGERS ALL CAP VALUE FUND, UNDISCOVERED
MANAGERS BEHAVIORAL GROWTH FUND, UNDISCOVERED MANAGERS BEHAVIORAL VALUE FUND,
UNDISCOVERED MANAGERS CORE EQUITY FUND, UNDISCOVERED MANAGERS HIDDEN VALUE
FUND, UNDISCOVERED MANAGERS REIT FUND, UNDISCOVERED MANAGERS SMALL CAP VALUE
FUND, UNDISCOVERED MANAGERS SPECIAL SMALL CAP FUND, UM INTERNATIONAL EQUITY
FUND AND UM INTERNATIONAL SMALL CAP EQUITY FUND
The following investment restrictions are fundamental policies of Undiscovered
Managers All Cap Value Fund (the "All Cap Value Fund"), Undiscovered Managers
Behavioral Growth Fund (the "Behavioral Growth Fund"), Undiscovered Managers
Behavioral Value Fund (the "Behavioral Value Fund"), Undiscovered Managers Core
Equity Fund (the "Core Equity Fund"), Undiscovered Managers Hidden Value Fund
(the "Hidden Value Fund"), Undiscovered Managers REIT Fund (the ("REIT Fund"),
Undiscovered Managers Small Cap Value Fund (the "Small Cap Value Fund"),
Undiscovered Managers Special Small Cap Fund (the "Special Small Cap Fund"), UM
International Equity Fund (the "International Equity Fund") and UM
International Small Cap Equity Fund (the "International Small Cap Equity
Fund").
Each Fund will not:
1. Borrow money in excess of 33 1/3% 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:
3
<PAGE>
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.
INVESTMENT RESTRICTIONS--UNDISCOVERED MANAGERS BEHAVIORAL LONG/SHORT FUND
The following investment restrictions are fundamental policies of Undiscovered
Managers Behavioral Long/Short Fund (the "Behavioral Long/Short Fund").
The Fund will not:
1. Borrow money in excess of 33 1/3% of the value of its total assets (not
including the amount borrowed) at the time the borrowing is made. Short sales
and related borrowings of securities are not subject to this restriction.
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.
7. Issue any class of securities which is senior to the Fund's shares of
beneficial interest, except for permitted borrowings; any pledge or
encumbrance of assets; short sales; any collateral arrangements with respect
to short sales, swaps, options, future contracts and options on future
contracts and with respect to initial and variation margin; and the purchase
or sale of options, future contracts or options on future contracts.
Although the Fund is permitted to borrow money to a limited extent, it does not
currently intend to do so.
In addition to the foregoing fundamental investment restrictions, it is
contrary to the 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 the paragraph immediately preceding such
paragraph) and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment.
4
<PAGE>
ADDITIONAL DESCRIPTION OF INVESTMENTS
The following is an additional description of certain investments of certain of
the Funds.
SHORT SALES. The Behavioral Long/Short Fund will seek to realize gains through
short sales. Short sales are transactions in which the Fund sells a security
that it does not own, in anticipation of a future decline in the value of that
security. To complete such a transaction, the Fund must borrow the security to
make delivery to the buyer. The Fund is then obligated to replace the security
borrowed by purchasing it in the market at or prior to the time of replacement.
The price at such time may be more or less than the price at which the security
was sold by the Fund. Until the security is replaced, the Fund is required to
repay the lender any dividends or interest that accrue during the period of the
loan. To borrow the security, the Fund may also be required to pay a premium,
which would increase the cost of the security sold. The net proceeds of the
short sale will be retained by the broker (or by the Fund's custodian in a
special custody account), to the extent necessary to meet margin requirements,
until the short position is closed out. The Fund will also incur transaction
costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest or expenses the Fund may be required to pay in connection
with a short sale. An increase in the value of a security sold short by the
Fund over the price at which it was sold short will result in a loss to the
Fund. There can be no assurance that the Fund will be able to close out the
position at any particular time or at any acceptable price. The Fund's use of
short sales may cause the Fund to realize higher amounts of short-term capital
gains which are generally taxed at ordinary income tax rates than it would if
it did not engage in short sales.
FOREIGN CURRENCY HEDGING TRANSACTIONS. Each of the International Equity and the
International Small Cap Equity Funds (the "International Funds") may engage in
foreign currency exchange transactions. The International Funds may (i) purchase
or sell a foreign currency on a spot (or cash) basis at the prevailing spot
rate, (ii) enter into negotiated contracts to purchase or sell foreign
currencies at a future date ("forward contracts"), (iii) purchase and sell
standardized, exchange-traded foreign currency futures contracts and (iv)
purchase exchange-listed and over-the-counter call and put options on foreign
currency futures contracts and on foreign currencies. A put option on a futures
contract gives a Fund the right to assume a short position in the futures
contract until the expiration of the option. A put option on currency gives a
Fund the right to sell a currency at an exercise price until the expiration of
the option. A call option on a futures contract gives a Fund the right to assume
a long position in the futures contract until the expiration of the option. A
call option on currency gives a Fund the right to purchase a currency at the
exercise price until the expiration of the option.
The precise matching of the amounts of foreign currency exchange transactions
and the value of any related portfolio securities will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
5
<PAGE>
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, in cases where a Fund seeks to protect the value of portfolio
securities through a foreign currency hedging transaction, it may be necessary
for a Fund to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security or securities
being hedged is less than the amount of foreign currency a Fund is obligated to
deliver and if a decision is made to sell the security or securities and make
delivery of the foreign currency. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security or securities if the market value of such security or
securities exceeds the amount of foreign currency a Fund is obligated to
deliver.
Foreign currency transactions that are intended to hedge the value of
securities a Fund owns or contemplates purchasing do not eliminate fluctuations
in the underlying prices of those securities. Rather, such currency
transactions simply establish a rate of exchange which can be used at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a change in the value of the currency involved, they
tend to limit any potential gain that might result from the increase in the
value of such currency.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts traded
in the interbank market are negotiated directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts are traded on futures exchanges.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a date selected in accordance with
exchange rules in a predetermined month. Forward contracts may be in any
amounts agreed upon by the parties rather than standardized amounts. Also,
forward foreign exchange contracts are traded directly between currency traders
so that no intermediary is required. A forward contract generally requires no
margin or other deposit.
At the maturity of a forward or futures contract, a Fund may either accept or
make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to futures contracts are
effected on an exchange; a clearing corporation associated with the exchange
typically assumes responsibility for closing out such contracts. Closing
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. It may
therefore be more difficult to effect a closing transaction with respect to a
forward contract than with respect to a futures contract.
Positions in foreign currency futures contracts may be closed out only on an
exchange that provides a secondary market in such contracts. Although the Funds
intend to purchase or sell foreign currency futures contracts only on exchanges
where there appears to be an active secondary market, there is no assurance that
a secondary market on an exchange will exist for any particular contract or at
any particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, a Fund would continue to
be required to make daily cash payments of variation margin.
Each International Fund will maintain cash or liquid securities eligible for
purchase by such Fund in a segregated account with the Fund's custodian in an
amount at least equal to (i) the difference between the current value of such
Fund's liquid holdings that settle in the relevant currency and such Fund's
outstanding obligations under currency forward contracts, or (ii) the current
amount, if any, that
6
<PAGE>
would be required to be paid to enter into an offsetting forward currency
contract which would have the effect of closing out the original forward
contract.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly to
options on securities, and are traded primarily in the over-the-counter market,
although options on foreign currencies are listed on several exchanges. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. Options on foreign currencies are affected by all
of those factors that influence foreign exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively
smaller transactions (less than $1 million) where rates may be less favorable.
The interbank market in foreign currencies is a global, around-the-clock
market. To the extent that the U.S. options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the U.S. options markets.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(the "spread") between prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at
one rate, while offering a lesser rate of exchange should a Fund desire to
resell that currency to the dealer.
For a discussion of tax considerations relating to foreign currency
transactions, see "Income Dividends, Capital Gain Distributions and Tax
Status," below.
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 (40)--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 (37)--Trustee. 550 15th Street, Suite 24, San Francisco,
California 94103; President and Chief Executive Officer of ReacTV since March,
1998; Senior Vice President of Online Division of Comcast Cable Communications
from May, 1996 to March, 1998; 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 (37)--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 (43)--Trustee. 900 19th Street, N.W., Suite 400,
Washington, D.C. 20006; Communications Director of America's Community Bankers
since January, 1993.
- ------------
* 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.
7
<PAGE>
Mary Chris Sayre (35)--Secretary. Employee 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.
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 compensation to be paid (or
deferred in lieu of current payment) by the Trust during its fiscal year ending
August 31, 1999 to the persons who are to serve as Trustees during such period:
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation From Trust and
Person From Trust Fund Complex*
- ---------------------- ------------------------ -------------------
<S> <C> <C>
Mark P. Hurley $ 0 $ 0
Roger B. Keating $10,000 $10,000
Matthew J. Kiley $10,000 $10,000
Robert P. Schmermund $10,000 $10,000
</TABLE>
- ------------
* No Trustee receives any compensation from any mutual fund affiliated with
Undiscovered Managers, other than the Trust.
OWNERSHIP OF SHARES OF THE FUNDS
As of November 15, 1998, the following persons or entities held more than 25% of
the outstanding shares of a Fund, and as a result, may be deemed to "control"
such Fund as that term is defined in the Investment Company Act of 1940 (the
"1940 Act").
<TABLE>
<CAPTION>
Fund Name % Ownership
<S> <C> <C>
Behavioral Growth Fund
Behavioral Value Fund
Behavioral Long/Short Fund
Special Small Cap Fund
REIT Fund
Small Cap Value Fund
Hidden Value Fund
Core Equity Fund
All Cap Value Fund
International Equity Fund
International Small Cap Equity Fund
</TABLE>
Undiscovered Managers is a limited liability company organized under the laws
of Delaware with two voting 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 1940 Act.
8
<PAGE>
As of November 15, 1998, to the Trust's knowledge, the following persons or
entities owned of record or beneficially 5% or more of the outstanding
Institutional Class shares of the following Funds:
<TABLE>
<CAPTION>
Institutional Class Shares
--------------------------
Fund Name and Address % Ownership
- ---------------------------- ------------------ ------------
<S> <C> <C>
Behavioral Growth Fund
Behavioral Value Fund
Behavioral Long/Short Fund
Special Small Cap Fund
REIT Fund
Small Cap Value Fund
Hidden Value Fund
Core Equity Fund
All Cap Value Fund
International Equity Fund
International Small Cap
Equity Fund
</TABLE>
As of November 15, 1998, to the Trust's knowledge, the following persons or
entities owned of record or beneficially 5% or more of the outstanding Investor
Class shares of the following Funds:
<TABLE>
<CAPTION>
Investor Class Shares
---------------------
Fund Name and Address % Ownership
- ---------------------------- ------------------ ------------
<S> <C> <C>
Behavioral Growth Fund
Small Cap Value Fund
Hidden Value Fund
Core Equity Fund
All Cap Value Fund
</TABLE>
As of November 15, 1998, the Trustees and officers of the Trust owned
beneficially the following Institutional Class shares, which represent the
following percentage ownership of such class of shares, of each of the
following Funds:
<TABLE>
<CAPTION>
Fund Shares % Ownership
- ---------------------------- ------------------ -------------
<S> <C> <C>
Behavioral Growth Fund
Behavioral Value Fund
Behavioral Long/Short Fund
Special Small Cap Fund
REIT Fund
Small Cap Value Fund
Hidden Value Fund
Core Equity Fund
All Cap Value Fund
International Equity Fund
International Small Cap Equity Fund
</TABLE>
The Trustees and officers of the Trust owned beneficially none of the Investor
Class shares of any of the Funds.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER AND SUB-ADVISERS
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
"The Funds" and "Management of the Funds" in the Prospectus. As disclosed in
this Statement of Additional Information under the heading "Management of the
Trust," (i) Mark P. Hurley is a Trustee and the President of the Trust as well
as the President and Chief Executive Officer and a controlling member of
Undiscovered Managers, and (ii) Mary Chris Sayre is the Secretary of the Trust
as well as an employee of Undiscovered Managers. Undiscovered Managers, the
investment adviser of the Funds, is further affiliated with the Trust through
its ownership as of November 15, 1998, of more than 5% of the outstanding
shares of ______________ Fund.
9
<PAGE>
Under each Fund's advisory agreement with Undiscovered Managers, Undiscovered
Managers is entitled to fees, payable quarterly, of a certain percentage of the
average daily net asset value of such Fund. For a description of such fees, see
"Management of the Funds" in the Prospectus. During the Trust's fiscal year
ended August 31, 1998, the advisory fees payable by the Funds to Undiscovered
Managers pursuant to the relevant advisory agreement (before giving effect to
expense reductions under the expense deferral arrangements described below),
and the amount of expense reductions under the expense deferral arrangements,
were as follows:
<TABLE>
<CAPTION>
Fund Advisory Fee Expense Reduction
- ----------------------------------- ------------ -----------------
<S> <C> <C>
Behavioral Growth Fund $22,388.65 $22,388.65
Behavioral Value Fund -0-* -0-*
Behavioral Long/Short Fund -0-* -0-*
Special Small Cap Fund $61,496.86 $61,496.86
REIT Fund $36,512.56 $36,512.56
Small Cap Value Fund $31,826.76 $31,826.76
Hidden Value Fund $ 4,606.08 $ 4,606.08
Core Equity Fund $ 3,174.77 $ 3,174.77
All Cap Value Fund $ 1,260.02 $ 1,260.02
International Equity Fund -0-* -0-*
International Small Cap Equity Fund -0-* -0-*
</TABLE>
- -------------------
* The Fund had not commenced operations as of August 31, 1998.
The advisory fee payable by the Special Small Cap Fund varies depending on the
Fund's investment performance. For a description of such fee rate see
"Management of the Funds" in the Prospectus.
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. See "Trust Expenses" below.
Under each sub-advisory agreement relating to the Funds between Undiscovered
Managers and such Fund's sub-adviser, the sub-adviser is entitled to fees,
payable quarterly by Undiscovered Managers out of the fees it receives, of a
certain percentage of the average daily net asset value of such Fund. For a
description of such fees, see "Management of the Funds" in the Prospectus.
During the Trust's fiscal year ended August 31, 1998, Undiscovered Managers
paid the following amounts as sub-advisory fees to the following sub-advisers
pursuant to the relevant sub-advisory agreements:
<TABLE>
<CAPTION>
Fund Sub-Adviser Sub-Advisory Fee
- -------------------------- ----------------------------------------- ----------------
<S> <C> <C>
Behavioral Growth Fund RJF Asset Management, Inc. $14,138.55
Behavioral Value Fund RJF Asset Management, Inc. -0-*
Behavioral Long/Short Fund RJF Asset Management, Inc. -0-*
Special Small Cap Fund Kestrel Investment Management Corporation $42,754.47
REIT Fund Bay Isle Financial Corporation $24,341.71
Small Cap Value Fund J.L. Kaplan Associates, LLC $21,213.95
Hidden Value Fund J.L. Kaplan Associates, LLC $ 2,907.46
Core Equity Fund Waite & Associates L.L.C. $ 1,714.98
All Cap Value Fund E.R. Taylor Investments, Inc. $ 679.99
International Equity Fund Unibank Securities, Inc. -0-*
International Small Cap Unibank Securities, Inc. -0-*
Equity Fund
</TABLE>
- ----------------------
* The Fund had not commenced operations as of August 31, 1998.
The sub-advisory fee payable by Undiscovered Managers relating to the Special
Small Cap Fund varies depending on the Fund's investment performance. For a
description of such fee rate, see "Management of the Funds" in the Prospectus.
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
10
<PAGE>
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.
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.
TRUST EXPENSES
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; shareholder servicing fees; 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. Shareholder servicing fees are allocated
to a Fund's Investor Class shares, if any.
As described in the Prospectus, Undiscovered Managers has voluntarily agreed,
for an indefinite period, to reduce its fees and pay the expenses of each
Fund's Institutional and Investor Classes in excess of the following annual
percentage rates of the average daily net assets of such Fund's Institutional
and Investor Classes, respectively, subject to the obligation of each class of
a Fund to repay
11
<PAGE>
Undiscovered Managers such class's expenses in future years, if any, when such
class's expenses fall below the stated percentage rate, but only to the extent
that such repayment would not cause such class's expenses in any such future
year to exceed the stated percentage rate, and provided that such class is not
obligated to repay any such expenses more than two years after the end of the
fiscal year in which they were incurred:
<TABLE>
<CAPTION>
Fund Institutional Class Investor Class
- ------------------------------ ---------------------------------- ---------------
<S> <C> <C>
Behavioral Growth Fund 1.30% 1.65%
Behavioral Value Fund 1.40% N/A*
Behavioral Long/Short Fund 2.00% N/A*
Special Small Cap Fund 0.55% plus the advisory fee rate N/A*
for the year in question
REIT Fund 1.40% N/A*
Small Cap Value Fund 1.40% 1.75%
Hidden Value Fund 1.30% 1.65%
Core Equity Fund 0.99% 1.34%
All Cap Value Fund 0.99% 1.34%
International Equity Fund 1.45% N/A*
International Small Cap Equity Fund 1.60% N/A*
</TABLE>
- -----------------
*Fund does not currently have an Investor Class.
Undiscovered Managers may change or terminate these voluntary arrangements at
any time.
ADMINISTRATOR
Pursuant to an Administrative Services Agreement, each Fund is obligated to pay
Undiscovered Managers a fee at the annual rate of 0.25% of such Fund's average
net assets for providing administrative services to that Fund. During the
Trust's fiscal year ended August 31, 1998, the following amounts were payable to
Undiscovered Managers pursuant to the Administrative Services Agreement:
$5,891.75 from the Behavioral Growth Fund, $13,368.89 from the Special Small Cap
Fund, $8,693.47 from the REIT Fund, $7,577.78 from the Small Cap Value Fund,
$1,212.12 from the Hidden Value Fund, $1,072.55 from the Core Equity Fund and
$425.68 from the All Cap Value Fund. These fees were waived by Undiscovered
Managers but are subject to reimbursement under the expense deferral
arrangements described above. 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.
SHAREHOLDER SERVICING AGENTS
Pursuant to a Shareholder Servicing Plan, Undiscovered Managers may also
provide (or arrange for another intermediary or agent to provide) certain
additional services to Investor Class shareholders of the Funds (Undiscovered
Managers or such entity is referred to as a "Servicing Agent" in such
capacity). Such services may include transfer agent and sub-transfer agent
services, accounting services and other administrative and recordkeeping
services to both record owners and non-record owners of Investor Class shares.
The Trust's Shareholder Servicing Plan permits the Funds with Investor Class
shares to pay fees of up to 0.35% of the average daily net asset value of
Investor Class shares to Servicing Agents for these services. See "Management
of the Funds--Advisory and Sub-Advisory Fees and Other Expenses" in the
Investor Class Prospectus.
DISTRIBUTOR
Institutional Class and Investor Class shares are sold on a continuous basis by
the Trust's distributor, First Data Distributors, Inc., (the "Distributor").
Under the Distribution Agreement between the Trust and the Distributor, the
Distributor is not obligated to sell any specific amount of shares of the
Trust, but will use efforts deemed appropriate by it to solicit orders for the
sale of the Trust's shares and to undertake such advertising and promotion as
it believes reasonable in connection with such solicitation. The Distributor
received no underwriting commissions from the Trust for the fiscal year ended
on August 31, 1998.
ADDITIONAL ARRANGEMENTS
CUSTODIAL ARRANGEMENTS. The Bank of New York, 48 Wall Street, New York, New
York 10286, is the custodian for each Fund except the Behavioral Long/Short
Fund. ______________, is the custodian for the Behavioral Long/Short Fund. The
custodians hold in safekeeping certifi-
12
<PAGE>
cated securities and cash belonging to the Funds and, in such capacity, are the
registered owners of securities held in book entry form belonging to the Funds.
Upon instruction, the custodians receive and deliver 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 custodians
also maintain certain accounts and records of the Funds.
INDEPENDENT ACCOUNTANTS. The Funds' independent accountants are Deloitte &
Touche LLP, 125 Summer Street, Boston, Massachusetts 02110. 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.
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.
During the fiscal year ended August 31, 1998, the Trust paid, on behalf of the
following Funds, the aggregate amount of commissions set forth below:
<TABLE>
<CAPTION>
Fund Commissions ($)
- ----------------------------------- ---------------
<S> <C>
Behavioral Growth Fund
Behavioral Value Fund
Behavioral Long/Short Fund
Special Small Cap Fund
REIT Fund
Small Cap Value Fund
Hidden Value Fund
Core Equity Fund
All Cap Value Fund
International Equity Fund
International Small Cap Equity Fund
</TABLE>
During the fiscal year ended August 31, 1998, the sub-advisers to each of the
following Funds directed brokerage transactions, in such aggregate amounts and
for such aggregate commissions as are set forth below, for the purpose of
obtaining research services:
<TABLE>
<CAPTION>
Brokerage Related
Fund Transactions($) Commissions($)
- ----------------------------------- --------------- --------------
<S> <C> <C>
Behavioral Growth Fund
Behavioral Value Fund
Behavioral Long/Short Fund
Special Small Cap Fund
REIT Fund
Small Cap Value Fund
Hidden Value Fund
Core Equity Fund
All Cap Value Fund
International Equity Fund
International Small Cap Equity Fund
</TABLE>
13
<PAGE>
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 Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various classes of shares with
such preferences and other rights as the Trustees may designate. 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.
The shares of the Behavioral Growth Fund, the Small Cap Value Fund, the Hidden
Value Fund, the Core Equity Fund and the All Cap Value Fund are divided into two
classes of shares--Institutional Class shares and Investor Class shares. The
Behavioral Value Fund, the Behavioral Long/Short Fund, the Special Small Cap
Fund, the REIT Fund, the International Equity Fund and the International Small
Cap Equity Fund only offer Institutional Class shares. All expenses of each Fund
are borne by all the shares in such Fund, regardless of class, on a pro rata
basis, except for shareholder servicing fees which are charged only to such
Fund's Investor Class shares.
The assets received by any class of the Funds 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 class. The underlying assets of any class of the
Funds are segregated and are charged with the expenses with respect to that
class and with a share of the general expenses of the corresponding Fund. Any
general expenses of a Fund that are not readily identifiable as belonging to a
particular class of such 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 classes of the Funds.
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 class unless the rights of a particular series or
class would be adversely affected by the vote, in which case a separate vote of
that series or class 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 series or class shall
be deemed to be affected by a matter unless it is clear that the interests of
each series or class in the matter are substantially identical or that the
matter does not affect any interest of such series or class. On matters
affecting an individual series or class, only shareholders of that series or
class are entitled to vote. Consistent with the current position of the SEC,
shareholders of all series and classes vote together, irrespective of series or
class, on the election of Trustees and the selection of the Trust's independent
accountants, but shareholders
14
<PAGE>
of each series vote separately on other matters requiring shareholder approval,
such as certain changes in investment policies of that series or the approval
of the investment advisory and sub-advisory agreements 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.
15
<PAGE>
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 class 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 any class of shares of any Fund are
summarized in "How to Purchase Shares" in the Prospectus.
NET ASSET VALUE
The net asset value of any class of 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 guarantee will be required on the
Plan application. Income dividends and capital gain distributions will
16
<PAGE>
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, subject to any applicable
redemption fees, and have the proceeds applied on the same day to purchase the
same class of 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
1-800-667-1224, 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 shares of any class of any Fund 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 1-800-667-1224. 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 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
17
<PAGE>
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, less any applicable redemption fee. 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 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
18
<PAGE>
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.
Dividends and distributions on a Fund's shares are generally subject to federal
income tax as described herein to the extent they do not exceed the Fund's
realized income and gains, even though such dividends and distributions may
economically represent a return of a particular shareholder's investment. Such
distributions are likely to occur in respect of shares purchased at a time when
a Fund's net asset value reflects gains that are either unrealized, or realized
but not distributed. 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 (generally subject to a 20%
tax rate), 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. Some 1998
distributions of long-term capital gains realized in 1997 may be subject to a
28% tax rate.
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. 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.
Dividends and certain interest income earned by each of the International Funds
from foreign securities may be subject to foreign withholding taxes or other
taxes. So long as more than 50% of the value of a Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, such Fund may elect, for federal income tax purposes, to treat
certain foreign taxes paid by it, including generally any withholding taxes and
other foreign income taxes, as paid by its shareholders. It is possible that
each of the International Funds will make this election in certain years. The
remaining Funds do not expect to be eligible to make this election. If a Fund
makes the election, the amount of such foreign taxes paid by the Fund will be
included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them). A shareholder's ability to claim a
foreign tax credit or deduction in respect of foreign taxes paid by such Fund
may be subject to certain limitations imposed by the Code, as a result of which
a shareholder may not get a full credit or deduction for the amount of such
taxes. Shareholders who do not itemize on their federal income tax returns may
claim a credit (but no deduction) for such foreign taxes.
Each of the International Funds' transactions in foreign currencies and hedging
activities may give rise to ordinary income or loss to the extent such income
or loss results from fluctuations in value of the foreign currency concerned.
In addition, such activities will likely produce a difference between book
income and taxable income. This difference may cause a portion of each such
Fund's income distributions to constitute a return of capital for tax purposes
or require such Fund to make distributions exceeding book income to qualify as
a regulated investment company for tax purposes.
Investment by each of the International Funds in "passive foreign investment
companies" could subject such Funds to a U.S. federal income tax or other
charge on the proceeds from the sale of
19
<PAGE>
its investment in such a company; however, this tax can be avoided by making an
election to mark such investments to market annually or to treat the passive
foreign investment company as a "qualified electing fund".
A "passive foreign investment company" is any foreign corporation: 75 percent
or more of the income of which for the taxable year is passive income, or (ii)
the average percentage of the assets of which (generally by value, but by
adjusted tax basis in certain cases) that produce or are held for the
production of passive income is at least 50 percent. Generally, passive income
for this purpose means dividends, interest (including income equivalent to
interest), royalties, rents, annuities, the excess of gains over losses from
certain property transactions and commodities transactions, and foreign
currency gains. Passive income for this purpose does not include rents and
royalties received by the foreign corporation from active business and certain
income received from related persons.
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, local and foreign 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).
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.
The table below sets forth the average annual total return of (i) the
Institutional Class shares of each Fund from such Fund's inception through the
fiscal year ended August 31, 1998, and (ii) the Investor Class shares of each
Fund that offers such shares from the initial offering of such class of shares
through the fiscal year ended August 31, 1998.
<TABLE>
<CAPTION>
Total Return Total Return
Fund Institutional Class Investor Class
- ----------------------------------------------- ------------------- ---------------
<S> <C> <C>
Behavioral Growth Fund (5.12)% (17.82)%*
(commencement of operations December 29, 1997)
Behavioral Value Fund N/A** N/A**
(commencement of operations December , 1998)
Behavioral Long/Short Fund N/A** N/A**
(commencement of operations December , 1998)
Special Small Cap Fund (16.80)% N/A**
(commencement of operations December 29, 1997)
REIT Fund (14.88)% N/A**
(commencement of operations December 29, 1997)
Small Cap Value Fund (12.64)% (17.17)%*
(commencement of operations December 29, 1997)
Hidden Value Fund (21.92)% (17.15)%*
(commencement of operations December 29, 1997)
</TABLE>
- ------------------------
* Investor Class shares first offered on July 30, 1998.
** No information available since either the Fund or the class within the Fund
was not offered prior to August 31, 1998.
20
<PAGE>
<TABLE>
<CAPTION>
Total Return Total Return
Fund (cont.) Institutional Class Investor Class
- ----------------------------------------------- ------------------- ---------------
<S> <C> <C>
Core Equity Fund 2.00% (12,31)%*
(commencement of operations December 29, 1997)
All Cap Value Fund (7.76)% (16.76)%*
(commencement of operations December 29, 1997)
International Equity Fund N/A** N/A**
(commencement of operations December , 1998)
International Small Cap Equity Fund N/A** N/A**
(commencement of operations December , 1998)
</TABLE>
- --------------
* Investor Class shares first offered on July 30, 1998.
** No information available since either the Fund or the class within the Fund
was not offered prior to August 31, 1998.
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.
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.
21
<PAGE>
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.
MORGAN STANLEY REIT INDEX. The Morgan Stanley REIT Index is a market
capitalization weighted total return index of 93 REITs which exceed certain
minimum liquidity criteria concerning market capitalization, shares
outstanding, trading volume and per share market price.
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.
RUSSELL 2000 VALUE INDEX. The Russell 2000 Value Index is comprised of those
companies within the 2000 smallest of the 3000 largest U.S.-domiciled
corporations with lower price-to-book ratios and lower forecasted growth
values.
RUSSELL 2500 INDEX. The Russell 2500 Index is comprised of the 2500 smallest of
the 3000 largest U.S.-domiciled corporations, ranked by market capitalization.
RUSSELL 2500 GROWTH INDEX. The Russell 2500 Growth Index is comprised of those
companies within the 2500 smallest of the 3000 largest U.S.-domiciled
corporations with higher price-to-book ratios and higher forecasted growth
values.
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.
3-MONTH U.S. TREASURY BILLS. 3-month U.S. Treasury bills are direct obligations
of the United States Treasury which are issued with a three month maturity. No
interest is paid on Treasury bills; instead, they are issued at a discount and
repaid at full face value when they mature. They are backed by the full faith
and credit of the United States Government.
WILSHIRE REAL ESTATE SECURITIES INDEX. The Wilshire Real Estate Securities
Index is a market capitalization weighted index of publicly traded real estate
securities (such as REITs, real estate operating companies and partnerships)
which satisfy certain minimum requirements in book value, market
capitalization, percentage of revenue generated from ownership and operation of
real estate assets and liquidity.
Performance information about the Funds will be provided in the Funds' annual
reports, which 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 pub-
22
<PAGE>
lications 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.
FINANCIAL STATEMENTS
The Trust's audited Financial Statements for the fiscal year ended August 31,
1998, included in the Trust's Annual Report filed with the Securities and
Exchange Commission on ____________, pursuant to Section 30(d) of the 1940 Act
and the rules promulgated thereunder, are hereby incorporated in this Statement
of Additional Information. A copy of the Trust's Annual Report is available
without charge upon request from Undiscovered Managers, LLC, Plaza of the
Americas, 700 North Pearl Street, Suite 1700, Dallas, Texas 75201 or by calling
toll free 1-888-242-3514.
23
<PAGE>
APPENDIX A
PUBLICATIONS THAT MAY CONTAIN FUND INFORMATION
<TABLE>
<S> <C>
ABC and affiliates Fortune
Adam Smith's Money World Fox Network and affiliates
America On Line Fund Action
Anchorage Daily News Fund Decoder
Atlanta Constitution Global Finance
Atlanta Journal (The) Guarantor
Arizona Republic Hartford Courant
Austin American Statesman Houston Chronicle
Baltimore Sun INC
Bank Investment Marketing Indianapolis Star
Barron's Individual Investor
Bergen County Record (NJ) Institutional Investor
Bloomberg Business News International Herald Tribune
Bond Buyer Internet
Boston Business Journal Investment Advisor
Boston Globe Investment Company Institute
Boston Herald Investment Dealers Digest
Broker World Investment Profiles
Business Radio Network Investment Vision
Business Week Investor's Daily
CBS and affiliates IRA Reporter
CDA Investment Technologies Journal of Commerce
CFO Kansas City Star
Changing Times KCMO (Kansas City)
Chicago Sun Times KOA-AM (Denver)
Chicago Tribune LA Times
Christian Science Monitor Leckey, Andrew (syndicated column)
Christian Science Monitor News Service Lear's
Cincinnati Enquirer Life Association News
Cincinnati Post Lifetime Channel
CNBC Miami Herald
CNN Milwaukee Sentinel
Columbus Dispatch Money Magazine
CompuServe Money Maker
Dallas Morning News Money Management Letter
Dallas Times-Herald Morningstar
Denver Post Mutual Fund Market News
Des Moines Register Mutual Funds Magazine
Detroit Free Press National Public Radio
Donoghues Money Fund Report National Underwriter
Dorman, Dan (syndicated column) NBC and affiliates
Dow Jones News Service New England Business
Economist New England Cable News
FACS of the Week New Orleans Times-Picayune
Fee Adviser New York Daily News
Financial News Network New York Times
Financial Planning Newark Star Ledger
Financial Planning on Wall Street Newsday
Financial Research Corp. Newsweek
Financial Services Week Nightly Business Report
Financial World Orange County Register
Fitch Insights Orlando Sentinel
Forbes Palm Beach Post
Fort Worth Star-Telegram Pension World
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
Pensions and Investments Standard & Poor's Stock Guide
Personal Investor Stanger's Investment Advisor
Philadelphia Inquirer Stockbroker's Register
Porter, Sylvia (syndicated column) Strategic Insight
Portland Oregonian Tampa Tribune
Prodigy Time
Public Broadcasting Service Tobias, Andrew (syndicated column)
Quinn, Jane Bryant (syndicated column) Toledo Blade
Registered Representative UPI
Research Magazine US News and World Report
Resource USA Today
Rocky Mountain News USA TV Network
Rukeyser's Business (syndicated column) Value Line
Sacramento Bee Wall Street Journal
San Diego Tribune Wall Street Letter
San Francisco Chronicle Wall Street Week
San Francisco Examiner Washington Post
San Jose Mercury WBZ
Seattle Post-Intelligencer WBZ-TV
Seattle Times WCVB-TV
Securities Industry Management WEEI
Smart Money WHDH
St. Louis Post Dispatch Worcester Telegram
St. Petersburg Times World Wide Web
Standard & Poor's Outlook Worth Magazine
WRKO
</TABLE>
A-2
<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:
o Undiscovered Managers Funds' participation in wrap fee and no transaction fee
programs
o Characteristics of the various sub-advisers, including the locations of
offices, investment practices and clients
o Specific and general investment philosophies, strategies, processes and
techniques
o 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
o Industry conferences at which the various sub-advisers participate
o Current capitalization, levels of profitability and other financial
information
o Identification of portfolio managers, researchers, economists, principals and
other staff members and employees
o 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
o Specific identification of, and general reference to, current individual,
corporate and institutional clients, including pension and profit sharing
plans
o 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:
o 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.
o 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
<PAGE>
Undiscovered Managers Funds
Part C. Other Information
Item 24. -- Financial Statements and Exhibits
(A) (1) Financial Statements: See "Financial Highlights" in the Prospectus
and "Financial Statements" in the Statement of Additional Information.
(B) Exhibits
1. Amended and Restated Agreement and Declaration of Trust of
Undiscovered Managers Funds (the "Trust")--Incorporated by
reference to Pre-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A.
2. By-Laws of the Trust--Incorporated by reference to Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on
Form N-1A.
3. None.
4. None.
5.(a) Form of Management Agreement between the Trust and Undiscovered
Managers, LLC ("Undiscovered Managers")--Incorporated by reference
to the Registrant's Registration Statement on Form N-1A.
(b) Form of Sub-Advisory Agreements between Undiscovered Managers and
each sub-adviser relating to each series of the Trust.
(i) Undiscovered Managers Behavioral Growth Fund (the "Behavioral
Growth Fund"): RJF Asset Management, Inc. ("RJF
Management")--Incorporated by reference to the Registrant's
Registration Statement on Form N1-A.
(ii) Undiscovered Managers Behavioral Value Fund (the "Behavioral
Value Fund"): RJF Management, is filed herewith.
(iii) Undiscovered Managers Behavioral Long/Short Fund (the
"Behavioral Long/Short Fund"): RJF Management, is filed
herewith.
(iv) Undiscovered Managers Special Small Cap Fund (the "Special
Small Cap Fund"): Kestrel Investment Management Corporation
("Kestrel Management")--Incorporated by reference to
Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A.
(v) Undiscovered Managers REIT Fund (the "REIT Fund"): Bay Isle
Financial Corporation ("Bay Isle")--Incorporated by reference
to the Registrant's Registration Statement on Form N1-A.
(vi) Undiscovered Managers Small Cap Value Fund (the "Small Cap
Value Fund") and Undiscovered Managers Hidden Value Fund (the
"Hidden Value Fund"): J.L. Kaplan Associates, LLC ("Kaplan
Associates")--Incorporated by reference to Pre-Effective
Amendment No. 2 to the Registrant's Registration Statement on
Form N-1A.
C-1
<PAGE>
(vii) Undiscovered Managers Core Equity Fund (the "Core Equity
Fund"): Waite & Associates L.L.C.--Incorporated by reference
to the Registrant's Registration Statement on Form N1-A.
(viii) Undiscovered Managers All Cap Value Fund (the "All Cap Value
Fund"): E.R. Taylor Investments, Inc. ("E.R.
Taylor")--Incorporated by reference to the Registrant's
Registration Statement on Form N1-A.
(ix) UM International Equity Fund (the "International Equity
Fund"): Unibank Securities, Inc. ("Unibank"), is filed
herewith.
(x) UM International Small Cap Equity Fund (the "International
Small Cap Equity Fund"): Unibank, is filed herewith.
6. Form of Distribution Agreement between the Trust and First Data
Distributors, Inc.--Incorporated by reference to Pre-Effective
Amendment No. 2 to the Registrant's Registration Statement on
Form N-1A.
7. None.
8.(a) Form of Custodian Agreement between the Trust and The Bank of New
York--Incorporated by reference to Pre-Effective Amendment No. 2
to the Registrant's Registration Statement on Form N-1A.
(b) Form of Special Custody Account Agreement between the Trust and
_______________________, a bank organized and existing under the
laws of the state of ___________________--to be filed by
amendment.
9.(a) Form of Transfer Agency and Services Agreement between the Trust
and First Data Investor Services Group, Inc. ("First
Data")--Incorporated by reference to Pre-Effective Amendment No. 2
to the Registrant's Registration Statement on Form N-1A.
(b) Form of Organizational Expense Reimbursement Agreement between
the Trust and Undiscovered Managers--Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A.
(c) Form of Expense Deferral Agreement between the Trust and
Undiscovered Managers relating to 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--Incorporated by reference to Pre-Effective Amendment No. 2
to the Registrant's Registration Statement on Form N-1A.
(d) Form of Administrative Services Agreement between the Trust and
Undiscovered Managers--Incorporated by reference to Pre-Effective
Amendment No. 2 to the Registrant's Registration Statement on Form
N-1A.
(e) Form of Sub-Administration Agreement between Undiscovered Managers
and First Data--Incorporated by reference to Pre-Effective
Amendment No. 2 to the Registrant's Registration Statement on Form
N-1A.
C-2
<PAGE>
10.(a) Opinion and Consent of Counsel, dated December 17, 1997 relating
to 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--Incorporated by
reference to Pre-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A.
(b) Opinion and Consent of Counsel relating to the Behavioral Value
Fund, the Behavioral Long/Short Fund, the International Equity
Fund and the International Small Cap Equity Fund--to be filed by
amendment.
11. Consent of Independent Accountants--to be filed by amendment.
12. None.
13. Investment Representation Letter--Incorporated by reference to
Pre-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A.
14. None.
15. None.
16. None.
17. None.
18. Multi-Class Plan is filed herewith.
19.(a) Powers of Attorney for each of Roger B. Keating, Matthew J. Kiley
and Robert P. Schmermund, designating Mark P. Hurley, John J.
Burke III, Mary Chris Sayre and Neil Forrest--Incorporated by
reference to Pre-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A.
(b) Power of Attorney for Diana Tarnow, designating Mark P. Hurley,
Mary Chris Sayre and Neil Forrest is filed herewith.
(c) Shareholder Servicing Plan for Investor Class shares is
filed herewith.
Item 25. Persons Controlled by or Under Common Control with the Trust
None.
Item 26. Number of Holders of Securities
C-3
<PAGE>
The following table sets forth the number of record holders of the Institutional
Class of each series of the Trust as of November 15, 1998.
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
- ------------------------------------ -------------------------
<S> <C>
Behavioral Growth Fund
Behavioral Value Fund
Behavioral Long/Short Fund
Special Small Cap Fund
REIT Fund
Small Cap Value Fund
Hidden Value Fund
Core Equity Fund
All Cap Value Fund
</TABLE>
The following table sets forth the number of record holders of the Investor
Class of each series of the Trust as of November 15, 1998.
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
- ------------------------------------ -------------------------
<S> <C>
Behavioral Growth Fund
Small Cap Value Fund
Hidden Value Fund
Core Equity Fund
All Cap Value Fund
</TABLE>
Item 27. Indemnification
Article VIII of the Trust's Agreement and Declaration of Trust (Exhibit 1
hereto) and Article 4 of the Trust's By-Laws (Exhibit 2 hereto) provides for
indemnification of its Trustees and officers. The effect of these provisions is
to provide indemnification for each of the Trust's Trustees and officers against
liabilities and counsel fees reasonably incurred in connection with the defense
of any legal proceeding in which such Trustee or officer may be involved by
reason of being or having been a Trustee or officer, except with respect to any
matter as to which such Trustee of officer shall have been adjudicated not to
have acted in good faith in the reasonable belief that such Trustee's or
officer's action was in the best interest of the Trust, and except that no
Trustee or officer shall be indemnified against any liability to the Trust or
its shareholders to which such Trustee or officer otherwise would be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Trustee's or officer's office.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to Trustees, officers and controlling persons
of the Trust pursuant to the foregoing provisions, or otherwise, the Trust has
been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
C-4
<PAGE>
such liabilities (other than the payment by the Trust of expenses incurred or
paid by a Trustee, officer or controlling person of the Trust in the successful
defense of any action, suit or proceeding) is asserted by such Trustee, officer
or controlling person in connection with the securities being registered, the
Trust will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Adviser
(a) Undiscovered Managers is the investment adviser to all series of the Trust,
and its business is summarized in "Management of the Funds" in the
Prospectus. Undiscovered Managers' management committee members and
officers have been engaged during the past two fiscal years in the
following businesses, professions, vocations or employments of a
substantial nature (former affiliations are marked with an asterisk):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Undiscovered Managers Other Affiliations Connection
- ---------------------------- -------------------------------- --------------------------
<S> <C> <C>
Mark P. Hurley *Merrill Lynch & Company Managing Director
President, Chief 250 Vesey Street
Executive Officer and World Financial Center
Management New York, New York 10281
Committee Member
*Goldman, Sachs & Co. Vice President
100 Crescent Court
Suite 1000
Dallas, Texas 75201
Robert L. Adair III AMRESCO, INC. President
Management Committee Plaza of the Americas
Member 700 North Pearl Street
Dallas, Texas 75201
Randolph E. Brown AMRESCO, INC. Senior Vice President
Management Committee
Member
Barry L. Edwards AMRESCO, INC. Executive Vice President
Management Committee and Chief Financial
Member Officer
Robert H. Lutz, Jr. Amresco Advisors, Inc. Director
Management Committee Plaza of the Americas
Member 700 North Pearl Street
Dallas, Texas 75201
Thomas F. O'Toole Principal Financial Securities Consultant; formerly
Management Committee Fountain Place Chairman, President and
Member 1445 Ross Avenue, Suite 2300 Chief Executive Officer
Dallas, Texas 75202
Harris Weinstein Covington & Burling Partner
Management Committee 1201 Pennsylvania Avenue
Member 8th Floor
Washington, D.C. 20004
</TABLE>
C-5
<PAGE>
(b) RJF Management is the sub-adviser to the Behavioral Growth, Behavioral Value
and Behavioral Long/Short Funds, and its business is summarized in "The
Funds" and "Management of the Funds" in the Prospectus. RJF Management's
directors and officers have been engaged during the past two fiscal years in
the following businesses, professions, vocations or employments of a
substantial nature:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
RJF Management Other Affiliations Connection
- ----------------------------- ------------------------------- ------------------------
<S> <C> <C>
Russell J. Fuller Fuller Partners, Ltd. General Partner
Director and President 1300 S. El Camino Real
Suite 504
San Mateo, CA 94402
Anne Fuller San Francisco Society of Education Director
Director Security Analysts
P.O. Box 27278
San Francisco, CA 94127
John L. Kling Fuller Partners, Ltd. General Partner
Director
Washington State University Professor of Finance
Department of Finance
Todd Hall
483 College of Business
and Economics
Pullman, Washington 99164
Frederick W. Stanske *Hexcel Corporation Director
Director and Senior 2 Stamford Plaza
Vice President Stamford, Connecticut 06901
*Fisher Investments Vice President
13100 Skyline Boulevard and Research Analyst
Woodside, California 94062
Richard Thaler University of Chicago Professor of Behavioral
Director Graduate School of Business Science and Economics
1101 East 58th Street
Chicago, Illinois 60637
*Massachusetts Institute of Professor of Behavioral
Technology Science and Economics
Sloan School of Management
50 Memorial Drive
Cambridge, Massachusetts 02142
Crystal Kwuk *Insight Capital Research Vice President
Vice President & Management
2121 North California Blvd
Suite 560
Walnut Creek, CA 94596
*Callan Associates Senior Analyst
71 Stevenson Street
San Francisco, CA 94105
Joanne S. Ott None None
Vice President
</TABLE>
C-6
<PAGE>
(c) Kestrel Management is the sub-adviser to the Special Small Cap Fund, and
its business is summarized in "The Funds" and "Management of the Funds" in
the Prospectus. Kestrel Management's directors and officers have been
engaged during the past two fiscal years in the following businesses,
professions, vocations or employments of a substantial nature:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Kestrel Management Other Affiliations Connection
- ---------------------------- -------------------- ----------
<S> <C> <C>
Abbott J. Keller None None
Director and President
David J. Steirman None None
Director and Chief
Investment Officer
</TABLE>
(d) Bay Isle is the sub-adviser to the REIT Fund, and its business is
summarized in "The Funds" and "Management of the Funds" in the Prospectus.
Bay Isle's directors and officers have been engaged during the past two
fiscal years in the following businesses, professions, vocations or
employments of a substantial nature (former affiliations are marked with
an asterisk):
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Bay Isle Other Affiliations Connection
- ---------------------------- -------------------- ----------
<S> <C> <C>
Gary Pollock None None
Director and President
William Schaff None None
Director and Chief
Investment Officer
Ralph L. Block None None
Director
</TABLE>
(e) Kaplan Associates is the sub-adviser to the Small Cap Value Fund and Hidden
Value Fund and its business is summarized in "The Funds" and "Management
of the Funds" in the Prospectus. The following persons affiliated with
Kaplan Associates have been engaged during the past two fiscal years in
the following businesses, professions, vocations or employments of a
substantial nature:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Kaplan Associates Other Affiliations Connection
- ------------------------ -------------------- ----------
<S> <C> <C>
James L. Kaplan None None
Member
Paul Weisman None None
Portfolio Manager
</TABLE>
C-7
<PAGE>
(f) Waite & Associates L.L.C. is the sub-adviser to the Core Equity Fund and
its business is summarized in "The Funds" and "Management of the Funds" in
the Prospectus. Waite & Associates L.L.C.'s officers have been engaged
during the past two fiscal years in the following businesses, professions,
vocations or employments of a substantial nature:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Waite & Associates L.L.C. Other Affiliations Connection
- --------------------------- -------------------- ----------
<S> <C> <C>
Leslie A. Waite None None
President
Peter D. Tamny None None
Managing Director
Peter C. Brockett None None
Managing Director
Patrick Westmoreland None None
Managing Director
</TABLE>
(g) E.R. Taylor is the sub-adviser to the All Cap Value Fund, and its business
is summarized in "The Funds" and "Management of the Funds" in the
Prospectus. E.R. Taylor's directors and officers have been engaged during
the past two fiscal years in the following businesses, professions,
vocations or employments of a substantial nature:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
E.R. Taylor Other Affiliations Connection
- --------------------------- -------------------------------- ------------------
<S> <C> <C>
Sherwood T. Small None None
President
Martha E. Cottrill None None
Vice President
Kenneth E. DeWitt None None
Vice President
John S. Tamagni Lazard Freres & Co. LLC Managing Director
Director One Rockefeller Plaza
New York, NY 10020
Salvatore J. Cozzolino None None
Director
C. Michael Hazard Westfield Capital Management CEO & Chairman
Director One Financial Center of the Board
Boston, MA 02111
John C. Hou Prince Capital Management, LLC President
Director 240 Madison Avenue
New York, NY 10016
</TABLE>
(h) Unibank is the sub-adviser to the International Equity and International
Small Cap Equity Funds, and its business is summarized in "The Funds" and
"Management of the Funds" in the Prospectus. Unibank's directors and
officers have been engaged during the past two fiscal years in the following
businesses, professions, vocations or employments of a substantial nature:
<TABLE>
<CAPTION>
Name and Office with Name and Address of Nature of
Unibank Other Affiliations Connection
-------------------- -------------------- ----------
<S> <C> <C>
Henrik Bak None None
Director and President
Peter Vilhelm Caroe None None
Chairman of the Board
Christian Clausen None None
Director
John Joseph Mulligan None None
Director
Peter Egelund Jensen None None
Chief Financial Officer
Niels-Ulrik Mousten Unibank A/S First V.P.
Torvegade 2
DK-1786 Copenhagen V
Denmark
</TABLE>
C-8
<PAGE>
Item 29.
(a) First Data Distributors, Inc., a wholly-owned subsidiary of First Data
Investor Services Group, Inc., and an indirect wholly-owned subsidiary of
First Data Corporation, acts as distributor for the Trust. First Data
Distributors, Inc., also distributes the securities of the following
investment companies: ABN AMRO Funds, Alleghany Funds, BT Insurance Funds
Trust, First Choice Funds Trust, Forward Funds, Inc., The Galaxy Fund,
Galaxy VIP Fund, Galaxy Fund II, IBJ Funds Trust, Light Index Fund, Inc.,
Panorama Trust and Wilshire Target Funds, Inc. First Data Distributors,
Inc., is registered with the Securities and Exchange Commission as a
broker-dealer and is a member of the National Association of Securities
Dealers, Inc.
(b) The information required by this Item 29(b) with respect to each director,
officer, or partner of First Data Distributors, Inc., is incorporated by
reference to Schedule A of Form BD filed by First Data Distributors, Inc.,
with the Securities and Exchange Commission pursuant to the Securities Act
of 1934 (file no. 8-45467).
(c) Not applicable.
Item 30. Location of Accounts and Records
Persons maintaining physical possession of accounts, books and other documents
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the Rules promulgated thereunder are the Trust's Secretary, Mary Chris
Sayre; the Trust's investment adviser, Undiscovered Managers; the custodian of
each Fund except the Behavioral Long/Short Fund, The Bank of New York; the
custodian of the Behavioral Long/Short Fund, _____________________; and the
Trust's transfer agent, First Data. The address of the Secretary and the
investment adviser is Plaza of the Americas, 700 North Pearl Street, Dallas,
Texas 75201; the address of The Bank of New York is 48 Wall Street, New York,
New York 10286; the address of _____________________ is ____________________,
__________________________; and the address of the transfer agent is 4400
Computer Drive, Westborough, Massachusetts 01581.
Item 31. Management Services
None.
Item 32. Undertakings
(a) The undersigned Trust hereby undertakes to call a meeting of shareholders
for the purpose of voting on the removal of a trustee or trustees when
requested in writing to do so by the holders of at least 10% of the
Trust's outstanding voting securities and in connection with such meeting
to comply with the provisions of Section 16(c) of the Investment Company
Act of 1940 relating to shareholder communications.
(b) The Trust hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Trust's latest Annual Report to shareholders
upon request and without charge.
NOTICE
A copy of the Agreement and Declaration of Trust of the Trust is on file with
the Secretary of State of The Commonwealth of Massachusetts and notice is
hereby given that this instrument is executed on behalf of the Trust by an
officer of the Trust as an officer and not individually and the obligations of
or arising out of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
the Trust.
C-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Trust has duly caused this amendment to its
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Indianapolis and state of Indiana on the 14th
day of October, 1998.
UNDISCOVERED MANAGERS FUNDS
By: /s/ Mark P. Hurley
------------------------------------
Mark P. Hurley
Title: President
Pursuant to the Securities Act of 1933, this amendment to its registration
statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- -------------------------------- ----------------------- ------------------
<S> <C> <C>
/s/ Mark P. Hurley President and Trustee October 14, 1998
-----------------------------
Mark P. Hurley
/s/ * Mark P. Hurley Trustee October 14, 1998
-----------------------------
Roger B. Keating
/s/ * Mark P. Hurley Trustee October 14, 1998
-----------------------------
Matthew J. Kiley
/s/ * Mark P. Hurley Trustee October 14, 1998
-----------------------------
Robert P. Schmermund
/s/ * Mark P. Hurley Assistant Treasurer October 14, 1998
-----------------------------
Diana Tarnow
</TABLE>
*Signed by Mark P. Hurley as Attorney-In-Fact
C-10
<PAGE>
UNDISCOVERED MANAGERS FUNDS
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------ -----------
<S> <C>
99.5(b)(ii) Form of Sub-Advisory Agreement between Undiscovered Managers
and RJF Management relating to the Behavorial Value Fund.
99.5(b)(iii) Form of Sub-Advisory Agreement between Undiscovered Managers
and RJF Management relating to the Behavorial Long/Short
Fund.
99.5(b)(ix) Form of Sub-Advisory Agreement between Undiscovered Managers
and Unibank relating to the International Equity Fund.
99.5(b)(x) Form of Sub-Advisory Agreement between Undiscovered Managers
and Unibank relating to the International Small Cap Equity
Fund.
99.18 Multi-Class Plan.
99.19(b) Power of Attorney for Diana Tarnow, designating Mark P.
Hurley, Mary Chris Sayre and Neil Forrest.
99.19(c) Shareholder Servicing Plan for Investor Class shares.
</TABLE>
EXHIBIT 99.B5(b)(ii)
--------------------
FORM OF SUB-ADVISORY AGREEMENT (BEHAVIORAL VALUE FUND)
<PAGE>
UNDISCOVERED MANAGERS FUNDS
SUB-ADVISORY AGREEMENT
(Behavioral Value Fund)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
December __, 1998 by and between Undiscovered Managers, LLC, a Delaware limited
liability company (the "Manager") and RJF Asset Management, Inc., a California
corporation (the "Sub-Adviser").
WHEREAS, the Manager has entered into a Management Agreement dated
December __, 1998 (the "Management Agreement") with Undiscovered Managers Funds
(the "Trust"), pursuant to which the Manager provides portfolio management and
administrative services to the Behavioral Value Fund of the Trust (the
"Series");
WHEREAS, the Management Agreement provides that the Manager may
delegate any or all of its portfolio management responsibilities under the
Management Agreement to one or more sub-advisers; and
WHEREAS, the Manager desires to retain the Sub-Adviser to render
portfolio management services in the manner and on the terms set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
a. The Sub-Adviser shall, subject to the supervision of the
Manager and in cooperation with any administrator appointed by the Manager (the
"Administrator"), manage the investment and reinvestment of the assets of the
Series. The Sub-Adviser shall manage the Series in conformity with (1) the
investment objective, policies and restrictions of the Series set forth in the
Trust's prospectus and statement of additional information relating to the
Series, (2) any additional policies or guidelines established by the Manager or
by the Trust's trustees that have been furnished in writing to the Sub-Adviser
and (3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code), all as
from time to time in effect (collectively, the "Policies"), and with all
applicable provisions of law, including without limitation all applicable
provisions of the Investment Company Act of 1940 (the "1940 Act") and the rules
and regulations thereunder. Subject to the foregoing, the Sub-Adviser is
authorized, in its discretion and without prior consultation with the Manager,
to buy, sell, lend and otherwise trade in any stocks, bonds and other securities
and investment instruments on behalf of the Series, without regard to the length
of time the securities have been held and the resulting rate
- 1-
<PAGE>
of portfolio turnover or any tax considerations; and the majority or the whole
of the Series may be invested in such proportions of stocks, bonds, other
securities or investment instruments, or cash, as the Sub-Adviser shall
determine. Notwithstanding the foregoing provisions of this Section 1.a,
however, the Sub-Adviser shall, upon written instructions from the Manager,
effect such portfolio transactions for the Series as the Manager shall determine
are necessary in order for the Series to comply with the Policies.
b. The Sub-Adviser shall furnish the Manager and the
Administrator monthly, quarterly and annual reports concerning portfolio
transactions and performance of the Series in such form as may be mutually
agreed upon, and agrees to review the Series and discuss the management of the
Series with representatives or agents of the Manager, the Administrator or the
Trust at their reasonable request. The Sub-Adviser shall permit all books and
records with respect to the Series to be inspected and audited by the Manager
and the Administrator at all reasonable times during normal business hours, upon
reasonable notice. The Sub-Adviser shall also provide the Manager, the
Administrator or the Trust with such other information and reports as may
reasonably be requested by the Manager, the Administrator or the Trust from time
to time, including without limitation all material as reasonably may be
requested by the trustees of the Trust pursuant to Section 15(c) of the 1940
Act.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange Commission and
as amended from time to time and a list of the persons whom the Sub-Adviser
wishes to have authorized to give written and/or oral instructions to custodians
of assets of the Series.
d. The Sub-Adviser shall maintain and be bound by a Code of
Ethics satisfying the requirements of Rule 17j-1 under the 1940 Act, and shall
provide to the Trust a current copy of such Code of Ethics, as amended from time
to time.
2. Obligations of the Manager.
a. The Manager shall provide (or cause the Trust's custodian
to provide) timely information to the Sub-Adviser regarding such matters as the
composition of assets in the Series, cash requirements and cash available for
investment in the Series, and all other information as may be reasonably
necessary for the Sub-Adviser to perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies of
any revisions or supplements thereto at, or, if practicable, before the time the
revisions or supplements become effective. The Manager agrees to furnish the
Sub-Adviser with minutes of meetings of the trustees of the Trust applicable to
the Series to the extent they may affect the duties of the Sub-Adviser, and with
- 2-
<PAGE>
copies of any financial statements or reports made by the Series to its
shareholders, and any further materials or information which the Sub-Adviser may
reasonably request to enable it to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of
the Series' agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is required by and taken in reliance
upon instructions given to the Custodian by a representative of the Sub-Adviser
properly authorized to give such instructions under the Custody Agreement. Any
assets added to the Series shall be delivered directly to the Custodian.
4. Expenses. Except for expenses specifically assumed or agreed to be
paid by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for
any expenses of the Manager or the Trust including, without limitation, (a)
interest and taxes, (b) brokerage commissions and other costs in connection with
the purchase or sale of securities or other investment instruments with respect
to the Series, and (c) custodian fees and expenses. The Sub-Adviser will pay its
own expenses incurred in furnishing the services to be provided by it pursuant
to this Agreement.
5. Purchase and Sale of Assets. Absent instructions from the Manager to
the contrary, the Sub-Adviser shall place all orders for the purchase and sale
of securities for the Series with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated with the
Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940 Act in
all respects. To the extent consistent with applicable law, purchase or sell
orders for the Series may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its best
efforts to obtain execution of transactions for the Series at prices which are
advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination with respect to brokerage and research services or
products may be viewed in terms of either that particular transaction or the
overall
- 3 -
<PAGE>
responsibilities that the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
6. Compensation of the Sub-Adviser. As full compensation for all
services rendered, facilities furnished and expenses borne by the Sub-Adviser
hereunder, the Manager shall pay the Sub-Adviser compensation at the annual rate
of 0.70% of the first $200 million of the Series' average net assets, 0.65% of
the next $100 million of such assets and 0.60% of such assets in excess of $300
million. Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Manager is paid by the
Series pursuant to the Management Agreement. The Manager may from time to time
waive the compensation it is entitled to receive from the Trust; however, any
such waiver will have no effect on the Manager's obligation to pay the
Sub-Adviser the compensation provided for herein.
7. Non-Exclusivity. The Manager and the Series agree that the services
of the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and
its affiliates are free to act as investment manager and provide other services
to various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager may otherwise agree from time to time in writing
before or after the date hereof. This Agreement shall not in any way limit or
restrict the Sub-Adviser or any of its directors, officers, employees or agents
from buying, selling or trading any securities or other investment instruments
for its or their own account or for the account of others for whom it or they
may be acting, provided that such activities do not adversely affect or
otherwise impair the performance by the Sub-Adviser of its duties and
obligations under this Agreement. The Manager and the Series recognize and agree
that the Sub-Adviser may provide advice to or take action with respect to other
clients, which advice or action, including the timing and nature of such action,
may differ from or be identical to advice given or action taken with respect to
the Series. The Sub-Adviser shall for all purposes hereof be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent the Trust or the Manager in any way or
otherwise be deemed an agent of the Trust or the Manager.
8. Liability. Except as may otherwise be provided by the 1940 Act or
other federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties.
9. Effective Date and Termination. This Agreement shall become
effective as of the date of its execution, and
- 4 -
<PAGE>
a. unless otherwise terminated, this Agreement shall continue
in effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically 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 Series, and (ii) by vote of a majority
of the trustees of the Trust who are not interested persons of the Trust, the
Manager or the Sub-Adviser, cast in person at a meeting called for the purpose
of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser by the Manager, by vote of the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Series;
c. this Agreement may be terminated by the Sub-Adviser at any
time on or before December 31, 2005, on one hundred eighty days' written notice
to both the Manager and the Trust, provided that the Manager consents in writing
to such termination;
d. this Agreement may be terminated by the Sub-Adviser on one
hundred eighty days' written notice to both the Manager and the Trust, at any
time after December 31, 2005; and
e. this Agreement shall automatically terminate in the event
of its assignment.
Termination of this Agreement pursuant to this Section 9 shall be
without the payment of any penalty.
10. Amendment. This Agreement may be amended at any time by mutual
consent of the Manager and the Sub-Adviser, provided that, if required by law,
such amendment shall also have been approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of the
trustees of the Trust who are not interested persons of the Trust, the Manager
or the Sub-Adviser, cast in person at a meeting called for the purpose of voting
on such approval.
11. Certain Definitions. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
12. General.
a. If any term or provision of this Agreement or the
application thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to other persons or
- 5 -
<PAGE>
circumstances shall not be affected thereby and shall be enforced to the fullest
extent permitted by law.
b. This Agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts.
UNDISCOVERED MANAGERS, LLC
By: __________________________
Mark P. Hurley
President
RJF ASSET MANAGEMENT, INC.
By: __________________________
Russell J. Fuller
President
- 6 -
EXHIBIT 99.B5(b)(iii)
---------------------
FORM OF SUB-ADVISORY AGREEMENT (BEHAVIORAL LONG/SHORT FUND)
<PAGE>
UNDISCOVERED MANAGERS FUNDS
SUB-ADVISORY AGREEMENT
(Behavioral Long/Short Fund)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
December __, 1998 by and between Undiscovered Managers, LLC, a Delaware limited
liability company (the "Manager") and RJF Asset Management, Inc., a California
corporation (the "Sub-Adviser").
WHEREAS, the Manager has entered into a Management Agreement dated
December __, 1998 (the "Management Agreement") with Undiscovered Managers Funds
(the "Trust"), pursuant to which the Manager provides portfolio management and
administrative services to the Behavioral Long/Short Fund of the Trust (the
"Series");
WHEREAS, the Management Agreement provides that the Manager may
delegate any or all of its portfolio management responsibilities under the
Management Agreement to one or more sub-advisers; and
WHEREAS, the Manager desires to retain the Sub-Adviser to render
portfolio management services in the manner and on the terms set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
a. The Sub-Adviser shall, subject to the supervision of the
Manager and in cooperation with any administrator appointed by the Manager (the
"Administrator"), manage the investment and reinvestment of the assets of the
Series. The Sub-Adviser shall manage the Series in conformity with (1) the
investment objective, policies and restrictions of the Series set forth in the
Trust's prospectus and statement of additional information relating to the
Series, (2) any additional policies or guidelines established by the Manager or
by the Trust's trustees that have been furnished in writing to the Sub-Adviser
and (3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code), all as
from time to time in effect (collectively, the "Policies"), and with all
applicable provisions of law, including without limitation all applicable
provisions of the Investment Company Act of 1940 (the "1940 Act") and the rules
and regulations thereunder. Subject to the foregoing, the Sub-Adviser is
authorized, in its discretion and without prior consultation with the Manager,
to buy, sell, lend and otherwise trade in any stocks, bonds and other securities
and investment instruments on behalf of the Series, without regard to the length
of time the securities have been held and the resulting rate
- 1-
<PAGE>
of portfolio turnover or any tax considerations; and the majority or the whole
of the Series may be invested in such proportions of stocks, bonds, other
securities or investment instruments, or cash, as the Sub-Adviser shall
determine. Notwithstanding the foregoing provisions of this Section 1.a,
however, the Sub-Adviser shall, upon written instructions from the Manager,
effect such portfolio transactions for the Series as the Manager shall determine
are necessary in order for the Series to comply with the Policies.
b. The Sub-Adviser shall furnish the Manager and the
Administrator monthly, quarterly and annual reports concerning portfolio
transactions and performance of the Series in such form as may be mutually
agreed upon, and agrees to review the Series and discuss the management of the
Series with representatives or agents of the Manager, the Administrator or the
Trust at their reasonable request. The Sub-Adviser shall permit all books and
records with respect to the Series to be inspected and audited by the Manager
and the Administrator at all reasonable times during normal business hours, upon
reasonable notice. The Sub-Adviser shall also provide the Manager, the
Administrator or the Trust with such other information and reports as may
reasonably be requested by the Manager, the Administrator or the Trust from time
to time, including without limitation all material as reasonably may be
requested by the trustees of the Trust pursuant to Section 15(c) of the 1940
Act.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub-Adviser's Form ADV as filed with the Securities and Exchange Commission and
as amended from time to time and a list of the persons whom the Sub-Adviser
wishes to have authorized to give written and/or oral instructions to custodians
of assets of the Series.
d. The Sub-Adviser shall maintain and be bound by a Code of
Ethics satisfying the requirements of Rule 17j-1 under the 1940 Act, and shall
provide to the Trust a current copy of such Code of Ethics, as amended from time
to time.
2. Obligations of the Manager.
a. The Manager shall provide (or cause the Trust's custodian
to provide) timely information to the Sub-Adviser regarding such matters as the
composition of assets in the Series, cash requirements and cash available for
investment in the Series, and all other information as may be reasonably
necessary for the Sub-Adviser to perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies of
any revisions or supplements thereto at, or, if practicable, before the time the
revisions or supplements become effective. The Manager agrees to furnish the
Sub-Adviser with minutes of meetings of the trustees of the Trust applicable to
the Series to the extent they may affect the duties of the Sub-Adviser, and with
- 2-
<PAGE>
copies of any financial statements or reports made by the Series to its
shareholders, and any further materials or information which the Sub-Adviser may
reasonably request to enable it to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of
the Series' agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is required by and taken in reliance
upon instructions given to the Custodian by a representative of the Sub-Adviser
properly authorized to give such instructions under the Custody Agreement. Any
assets added to the Series shall be delivered directly to the Custodian.
4. Expenses. Except for expenses specifically assumed or agreed to be
paid by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for
any expenses of the Manager or the Trust including, without limitation, (a)
interest and taxes, (b) brokerage commissions and other costs in connection with
the purchase or sale of securities or other investment instruments with respect
to the Series, and (c) custodian fees and expenses. The Sub-Adviser will pay its
own expenses incurred in furnishing the services to be provided by it pursuant
to this Agreement.
5. Purchase and Sale of Assets. Absent instructions from the Manager to
the contrary, the Sub-Adviser shall place all orders for the purchase and sale
of securities for the Series with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated with the
Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940 Act in
all respects. To the extent consistent with applicable law, purchase or sell
orders for the Series may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its best
efforts to obtain execution of transactions for the Series at prices which are
advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination with respect to brokerage and research services or
products may be viewed in terms of either that particular transaction or the
overall
- 3 -
<PAGE>
responsibilities that the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
6. Compensation of the Sub-Adviser. As full compensation for all
services rendered, facilities furnished and expenses borne by the Sub-Adviser
hereunder, the Manager shall pay the Sub-Adviser compensation at the annual rate
of 1.20% of the first $200 million of the Series' average net assets, 1.15% of
the next $100 million of such assets and 1.10% of such assets in excess of $300
million. Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Manager is paid by the
Series pursuant to the Management Agreement. The Manager may from time to time
waive the compensation it is entitled to receive from the Trust; however, any
such waiver will have no effect on the Manager's obligation to pay the
Sub-Adviser the compensation provided for herein.
7. Non-Exclusivity. The Manager and the Series agree that the services
of the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and
its affiliates are free to act as investment manager and provide other services
to various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager may otherwise agree from time to time in writing
before or after the date hereof. This Agreement shall not in any way limit or
restrict the Sub-Adviser or any of its directors, officers, employees or agents
from buying, selling or trading any securities or other investment instruments
for its or their own account or for the account of others for whom it or they
may be acting, provided that such activities do not adversely affect or
otherwise impair the performance by the Sub-Adviser of its duties and
obligations under this Agreement. The Manager and the Series recognize and agree
that the Sub-Adviser may provide advice to or take action with respect to other
clients, which advice or action, including the timing and nature of such action,
may differ from or be identical to advice given or action taken with respect to
the Series. The Sub-Adviser shall for all purposes hereof be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent the Trust or the Manager in any way or
otherwise be deemed an agent of the Trust or the Manager.
8. Liability. Except as may otherwise be provided by the 1940 Act or
other federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties.
9. Effective Date and Termination. This Agreement shall become
effective as of the date of its execution, and
- 4 -
<PAGE>
a. unless otherwise terminated, this Agreement shall continue
in effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically 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 Series, and (ii) by vote of a majority
of the trustees of the Trust who are not interested persons of the Trust, the
Manager or the Sub-Adviser, cast in person at a meeting called for the purpose
of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser by the Manager, by vote of the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Series;
c. this Agreement may be terminated by the Sub-Adviser at any
time on or before December 31, 2005, on one hundred eighty days' written notice
to both the Manager and the Trust, provided that the Manager consents in writing
to such termination;
d. this Agreement may be terminated by the Sub-Adviser on one
hundred eighty days' written notice to both the Manager and the Trust, at any
time after December 31, 2005; and
e. this Agreement shall automatically terminate in the event
of its assignment.
Termination of this Agreement pursuant to this Section 9 shall be
without the payment of any penalty.
10. Amendment. This Agreement may be amended at any time by mutual
consent of the Manager and the Sub-Adviser, provided that, if required by law,
such amendment shall also have been approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of the
trustees of the Trust who are not interested persons of the Trust, the Manager
or the Sub-Adviser, cast in person at a meeting called for the purpose of voting
on such approval.
11. Certain Definitions. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
12. General.
a. If any term or provision of this Agreement or the
application thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to other persons or
- 5 -
<PAGE>
circumstances shall not be affected thereby and shall be enforced to the fullest
extent permitted by law.
b. This Agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts.
UNDISCOVERED MANAGERS, LLC
By: ___________________________________
Mark P. Hurley
President
RJF ASSET MANAGEMENT, INC.
By: ___________________________________
Russell J. Fuller
President
- 6 -
EXHIBIT 99.5(b)(ix)
-------------------
FORM OF SUB-ADVISORY AGREEMENT (INTERNATIONAL EQUITY FUND)
<PAGE>
UNDISCOVERED MANAGERS FUNDS
SUB-ADVISORY AGREEMENT
(International Equity Fund)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
___________, 1998 by and between Undiscovered Managers, LLC, a Delaware limited
liability company (the "Manager") and Unibank Securities, Inc., a Delaware
corporation (the "Sub-Adviser").
WHEREAS, the Manager has entered into a Management Agreement dated
__________, 1998 (the "Management Agreement") with Undiscovered Managers Funds
(the "Trust"), pursuant to which the Manager provides portfolio management and
administrative services to the International Equity Fund of the Trust (the
"Series");
WHEREAS, the Management Agreement provides that the Manager may
delegate any or all of its portfolio management responsibilities under the
Management Agreement to one or more sub-advisers; and
WHEREAS, the Manager desires to retain the Sub-Adviser to render
portfolio management services in the manner and on the terms set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
----------------------
a. The Sub-Adviser shall, subject to the supervision of the
Manager and in cooperation with any administrator appointed by the Manager (the
"Administrator"), manage the investment and reinvestment of the assets of the
Series. The Sub-Adviser shall manage the Series in conformity with (1) the
investment objective, policies and restrictions of the Series set forth in the
Trust's prospectus and statement of additional information relating to the
Series, (2) any additional policies or guidelines established by the Manager or
by the Trust's trustees that have been furnished in writing to the Sub-Adviser
and (3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code), all as
from time to time in effect (collectively, the "Policies"), and with all
applicable provisions of law, including without limitation all applicable
provisions of the Investment Company Act of 1940 (the "1940 Act") and the rules
and regulations thereunder. Subject to the foregoing, the Sub-Adviser is
authorized, in its discretion and without prior consultation with the Manager,
to buy, sell, lend and otherwise trade in any stocks, bonds and other securities
and investment instruments on behalf of the
<PAGE>
Series, without regard to the length of time the securities have been held and
the resulting rate of portfolio turnover or any tax considerations; and the
majority or the whole of the Series may be invested in such proportions of
stocks, bonds, other securities or investment instruments, or cash, as the
Sub-Adviser shall determine. Notwithstanding the foregoing provisions of this
Section 1.a, however, the Sub-Adviser shall, upon written instructions from the
Manager, effect such portfolio transactions for the Series as the Manager shall
determine are necessary in order for the Series to comply with the Policies.
b. The Sub-Adviser shall furnish the Manager and the
Administrator monthly, quarterly and annual reports concerning portfolio
transactions and performance of the Series in such form as may be mutually
agreed upon, and agrees to review the Series and discuss the management of the
Series with representatives or agents of the Manager, the Administrator or the
Trust at their reasonable request. The Sub-Adviser shall permit all books and
records with respect to the Series to be inspected and audited by the Manager
and the Administrator at all reasonable times during normal business hours, upon
reasonable notice. The Sub-Adviser shall also provide the Manager, the
Administrator or the Trust with such other information and reports as may
reasonably be requested by the Manager, the Administrator or the Trust from time
to time, including without limitation all material as reasonably may be
requested by the trustees of the Trust pursuant to Section 15(c) of the 1940
Act.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub- Adviser's Form ADV as filed with the Securities and Exchange Commission and
as amended from time to time and a list of the persons whom the Sub-Adviser
wishes to have authorized to give written and/or oral instructions to custodians
of assets of the Series.
d. The Sub-Adviser shall be bound by the Code of Ethics of
Undiscovered Managers Funds as such Code of Ethics is amended or superseded from
time to time.
2. Obligations of the Manager.
---------------------------
a. The Manager shall provide (or cause the Trust's custodian
to provide) timely information to the Sub-Adviser regarding such matters as the
composition of assets in the Series, cash requirements and cash available for
investment in the Series, and all other information as may be reasonably
necessary for the Sub-Adviser to perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies of
any revisions or supplements thereto at, or, if practicable, before the time the
revisions or supplements become effective. The Manager agrees to furnish the
Sub-Adviser with minutes of meetings of the trustees of the Trust applicable to
the Series to the extent they may affect the duties of the Sub-Adviser, and with
- 2 -
<PAGE>
copies of any financial statements or reports made by the Series to its
shareholders, and any further materials or information which the Sub-Adviser may
reasonably request to enable it to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of
the Series' agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is required by and taken in reliance
upon instructions given to the Custodian by a representative of the Sub-Adviser
properly authorized to give such instructions under the Custody Agreement. Any
assets added to the Series shall be delivered directly to the Custodian.
4. Expenses. Except for expenses specifically assumed or agreed to be
paid by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for
any expenses of the Manager or the Trust including, without limitation, (a)
interest and taxes, (b) brokerage commissions and other costs in connection with
the purchase or sale of securities or other investment instruments with respect
to the Series, and (c) custodian fees and expenses. The Sub-Adviser will pay its
own expenses incurred in furnishing the services to be provided by it pursuant
to this Agreement.
5. Purchase and Sale of Assets. Absent instructions from the Manager to
the contrary, the Sub-Adviser shall place all orders for the purchase and sale
of securities for the Series with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated with the
Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940 Act in
all respects. To the extent consistent with applicable law, purchase or sell
orders for the Series may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its best
efforts to obtain execution of transactions for the Series at prices which are
advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination with respect to brokerage and research services or
products may be viewed in terms of either that particular transaction or the
overall
- 3 -
<PAGE>
responsibilities that the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
6. Compensation of the Sub-Adviser. As full compensation for all
services rendered, facilities furnished and expenses borne by the Sub-Adviser
hereunder, the Manager shall pay the Sub-Adviser compensation at the annual rate
of 0.60% of the first $200 million of the Series' average net assets, 0.55% of
the next $100 million of such assets and 0.50% of such assets in excess of $300
million. Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Manager is paid by the
Series pursuant to the Management Agreement. The Manager may from time to time
waive the compensation it is entitled to receive from the Trust; however, any
such waiver will have no effect on the Manager's obligation to pay the
Sub-Adviser the compensation provided for herein.
7. Non-Exclusivity. The Manager and the Series agree that the services
of the Sub-Adviser are not to be deemed exclusive and that the Sub-Adviser and
its affiliates are free to act as investment manager and provide other services
to various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager may otherwise agree from time to time in writing
before or after the date hereof. This Agreement shall not in any way limit or
restrict the Sub-Adviser or any of its directors, officers, employees or agents
from buying, selling or trading any securities or other investment instruments
for its or their own account or for the account of others for whom it or they
may be acting, provided that such activities do not adversely affect or
otherwise impair the performance by the Sub-Adviser of its duties and
obligations under this Agreement. The Manager and the Series recognize and agree
that the Sub-Adviser may provide advice to or take action with respect to other
clients, which advice or action, including the timing and nature of such action,
may differ from or be identical to advice given or action taken with respect to
the Series. The Sub-Adviser shall for all purposes hereof be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent the Trust or the Manager in any way or
otherwise be deemed an agent of the Trust or the Manager.
8. Liability. Except as may otherwise be provided by the 1940 Act or
other federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties.
9. Effective Date and Termination. This Agreement shall become
effective as of the date of its execution, and
- 4 -
<PAGE>
a. unless otherwise terminated, this Agreement shall continue
in effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically 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 Series, and (ii) by vote of a majority
of the trustees of the Trust who are not interested persons of the Trust, the
Manager or the Sub-Adviser, cast in person at a meeting called for the purpose
of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser by the Manager, by vote of the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Series; and
c. this Agreement shall automatically terminate in the event
of its assignment.
Termination of this Agreement pursuant to this Section 9 shall be
without the payment of any penalty.
10. Amendment. This Agreement may be amended at any time by mutual
consent of the Manager and the Sub-Adviser, provided that, if required by law,
such amendment shall also have been approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of the
trustees of the Trust who are not interested persons of the Trust, the Manager
or the Sub-Adviser, cast in person at a meeting called for the purpose of voting
on such approval.
11. Certain Definitions. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
12. General.
--------
a. If any term or provision of this Agreement or the
application thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to other persons or circumstances shall not be affected
thereby and shall be enforced to the fullest extent permitted by law.
- 5 -
<PAGE>
b. This Agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts.
UNDISCOVERED MANAGERS, LLC
By:________________________
Mark P. Hurley
President
UNIBANK SECURITIES, INC.
By:________________________
Henrik Bak
President
- 6 -
EXHIBIT 99.5(b)(x)
-------------------
FORM OF SUB-ADVISORY AGREEMENT (INTERNATIONAL SMALL CAP EQUITY FUND)
<PAGE>
UNDISCOVERED MANAGERS FUNDS
SUB-ADVISORY AGREEMENT
(International Small Cap Equity Fund)
This Sub-Advisory Agreement (this "Agreement") is entered into as of
___________, 1998 by and between Undiscovered Managers, LLC, a Delaware limited
liability company (the "Manager") and Unibank Securities, Inc., a Delaware
corporation (the "Sub-Adviser").
WHEREAS, the Manager has entered into a Management Agreement dated
__________, 1998 (the "Management Agreement") with Undiscovered Managers Funds
(the "Trust"), pursuant to which the Manager provides portfolio management and
administrative services to the International Small Cap Equity Fund of the Trust
(the "Series");
WHEREAS, the Management Agreement provides that the Manager may
delegate any or all of its portfolio management responsibilities under the
Management Agreement to one or more sub-advisers; and
WHEREAS, the Manager desires to retain the Sub-Adviser to render
portfolio management services in the manner and on the terms set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the Manager and the Sub-Adviser agree as follows:
1. Sub-Advisory Services.
----------------------
a. The Sub-Adviser shall, subject to the supervision of the
Manager and in cooperation with any administrator appointed by the Manager (the
"Administrator"), manage the investment and reinvestment of the assets of the
Series. The Sub-Adviser shall manage the Series in conformity with (1) the
investment objective, policies and restrictions of the Series set forth in the
Trust's prospectus and statement of additional information relating to the
Series, (2) any additional policies or guidelines established by the Manager or
by the Trust's trustees that have been furnished in writing to the Sub-Adviser
and (3) the provisions of the Internal Revenue Code (the "Code") applicable to
"regulated investment companies" (as defined in Section 851 of the Code), all as
from time to time in effect (collectively, the "Policies"), and with all
applicable provisions of law, including without limitation all applicable
provisions of the Investment Company Act of 1940 (the "1940 Act") and the rules
and regulations thereunder. Subject to the foregoing, the Sub-Adviser is
authorized, in its discretion and without prior consultation with the Manager,
to buy, sell, lend and otherwise trade in any stocks, bonds and other securities
and investment instruments on behalf of the
- 1-
<PAGE>
Series, without regard to the length of time the securities have been held and
the resulting rate of portfolio turnover or any tax considerations; and the
majority or the whole of the Series may be invested in such proportions of
stocks, bonds, other securities or investment instruments, or cash, as the
Sub-Adviser shall determine. Notwithstanding the foregoing provisions of this
Section 1.a, however, the Sub-Adviser shall, upon written instructions from the
Manager, effect such portfolio transactions for the Series as the Manager shall
determine are necessary in order for the Series to comply with the Policies.
b. The Sub-Adviser shall furnish the Manager and the
Administrator monthly, quarterly and annual reports concerning portfolio
transactions and performance of the Series in such form as may be mutually
agreed upon, and agrees to review the Series and discuss the management of the
Series with representatives or agents of the Manager, the Administrator or the
Trust at their reasonable request. The Sub-Adviser shall permit all books and
records with respect to the Series to be inspected and audited by the Manager
and the Administrator at all reasonable times during normal business hours, upon
reasonable notice. The Sub-Adviser shall also provide the Manager, the
Administrator or the Trust with such other information and reports as may
reasonably be requested by the Manager, the Administrator or the Trust from time
to time, including without limitation all material as reasonably may be
requested by the trustees of the Trust pursuant to Section 15(c) of the 1940
Act.
c. The Sub-Adviser shall provide to the Manager a copy of the
Sub- Adviser's Form ADV as filed with the Securities and Exchange Commission and
as amended from time to time and a list of the persons whom the Sub-Adviser
wishes to have authorized to give written and/or oral instructions to custodians
of assets of the Series.
d. The Sub-Adviser shall be bound by the Code of Ethics of
Undiscovered Managers Funds as such Code of Ethics is amended or superseded from
time to time.
2. Obligations of the Manager.
---------------------------
a. The Manager shall provide (or cause the Trust's custodian
to provide) timely information to the Sub-Adviser regarding such matters as the
composition of assets in the Series, cash requirements and cash available for
investment in the Series, and all other information as may be reasonably
necessary for the Sub-Adviser to perform its responsibilities hereunder.
b. The Manager has furnished the Sub-Adviser a copy of the
prospectus and statement of additional information of the Series and agrees
during the continuance of this Agreement to furnish the Sub-Adviser copies of
any revisions or supplements thereto at, or, if practicable, before the time the
revisions or supplements become effective. The Manager agrees to furnish the
Sub-Adviser with minutes of meetings of the trustees of the Trust applicable to
the Series to the extent they may affect the duties of the Sub-Adviser, and with
- 2-
<PAGE>
copies of any financial statements or reports made by the Series to its
shareholders, and any further materials or information which the Sub-Adviser may
reasonably request to enable it to perform its functions under this Agreement.
3. Custodian. The Manager shall provide the Sub-Adviser with a copy of
the Series' agreement with the custodian designated to hold the assets of the
Series (the "Custodian") and any modifications thereto (the "Custody
Agreement"), copies of such modifications to be provided to the Sub-Adviser a
reasonable time in advance of the effectiveness of such modifications. The
assets of the Series shall be maintained in the custody of the Custodian
identified in, and in accordance with the terms and conditions of, the Custody
Agreement (or any sub-custodian properly appointed as provided in the Custody
Agreement). The Sub-Adviser shall have no liability for the acts or omissions of
the Custodian, unless such act or omission is required by and taken in reliance
upon instructions given to the Custodian by a representative of the Sub-Adviser
properly authorized to give such instructions under the Custody Agreement. Any
assets added to the Series shall be delivered directly to the Custodian.
4. Expenses. Except for expenses specifically assumed or agreed to be
paid by the Sub-Adviser pursuant hereto, the Sub-Adviser shall not be liable for
any expenses of the Manager or the Trust including, without limitation, (a)
interest and taxes, (b) brokerage commissions and other costs in connection with
the purchase or sale of securities or other investment instruments with respect
to the Series, and (c) custodian fees and expenses. The Sub-Adviser will pay its
own expenses incurred in furnishing the services to be provided by it pursuant
to this Agreement.
5. Purchase and Sale of Assets. Absent instructions from the Manager to
the contrary, the Sub-Adviser shall place all orders for the purchase and sale
of securities for the Series with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated with the
Sub-Adviser, provided such orders comply with Rule 17e-1 under the 1940 Act in
all respects. To the extent consistent with applicable law, purchase or sell
orders for the Series may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Adviser. The Sub-Adviser shall use its best
efforts to obtain execution of transactions for the Series at prices which are
advantageous to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Adviser may select brokers
or dealers on the basis that they provide brokerage, research or other services
or products to the Series and/or other accounts serviced by the Sub-Adviser. To
the extent consistent with applicable law, the Sub-Adviser may pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research products and/or services provided by such broker or
dealer. This determination with respect to brokerage and research services or
products may be viewed in terms of either that particular transaction or the
overall
- 3 -
<PAGE>
responsibilities that the Sub-Adviser and its affiliates have with respect to
the Series or to accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Adviser in managing the
Series.
6. Compensation of the Sub-Adviser. As full compensation for all
services rendered, facilities furnished and expenses borne by the Sub-Adviser
hereunder, the Manager shall pay the Sub-Adviser compensation at the annual rate
of 0.80% of the first $200 million of the Series' average net assets, 0.75% of
the next $100 million of such assets and 0.70% of such assets in excess of $300
million. Such compensation shall be payable monthly in arrears or at such other
intervals, not less frequently than quarterly, as the Manager is paid by the
Series pursuant to the Management Agreement. The Manager may from time to time
waive the compensation it is entitled to receive from the Trust; however, any
such waiver will have no effect on the Manager's obligation to pay the
Sub-Adviser the compensation provided for herein.
7. Non-Exclusivity. The Manager and the Series agree that the services
of the Sub- Adviser are not to be deemed exclusive and that the Sub-Adviser and
its affiliates are free to act as investment manager and provide other services
to various investment companies and other managed accounts, except as the
Sub-Adviser and the Manager may otherwise agree from time to time in writing
before or after the date hereof. This Agreement shall not in any way limit or
restrict the Sub-Adviser or any of its directors, officers, employees or agents
from buying, selling or trading any securities or other investment instruments
for its or their own account or for the account of others for whom it or they
may be acting, provided that such activities do not adversely affect or
otherwise impair the performance by the Sub-Adviser of its duties and
obligations under this Agreement. The Manager and the Series recognize and agree
that the Sub-Adviser may provide advice to or take action with respect to other
clients, which advice or action, including the timing and nature of such action,
may differ from or be identical to advice given or action taken with respect to
the Series. The Sub-Adviser shall for all purposes hereof be deemed to be an
independent contractor and shall, unless otherwise provided or authorized, have
no authority to act for or represent the Trust or the Manager in any way or
otherwise be deemed an agent of the Trust or the Manager.
8. Liability. Except as may otherwise be provided by the 1940 Act or
other federal securities laws, neither the Sub-Adviser nor any of its officers,
directors, employees or agents (the "Indemnified Parties") shall be subject to
any liability to the Manager, the Trust, the Series or any shareholder of the
Series for any error of judgment, any mistake of law or any loss arising out of
any investment or other act or omission in the course of, connected with, or
arising out of any service to be rendered under this Agreement, except by reason
of willful misfeasance, bad faith or gross negligence in the performance of the
Sub-Adviser's duties or by reason of reckless disregard by the Sub-Adviser of
its obligations and duties.
9. Effective Date and Termination. This Agreement shall become
effective as of the date of its execution, and
- 4 -
<PAGE>
a. unless otherwise terminated, this Agreement shall continue
in effect for two years from the date of execution, and from year to year
thereafter so long as such continuance is specifically 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 Series, and (ii) by vote of a majority
of the trustees of the Trust who are not interested persons of the Trust, the
Manager or the Sub-Adviser, cast in person at a meeting called for the purpose
of voting on such approval;
b. this Agreement may at any time be terminated on sixty days'
written notice to the Sub-Adviser by the Manager, by vote of the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Series; and
c. this Agreement shall automatically terminate in the event
of its assignment.
Termination of this Agreement pursuant to this Section 9 shall be
without the payment of any penalty.
10. Amendment. This Agreement may be amended at any time by mutual
consent of the Manager and the Sub-Adviser, provided that, if required by law,
such amendment shall also have been approved by vote of a majority of the
outstanding voting securities of the Series and by vote of a majority of the
trustees of the Trust who are not interested persons of the Trust, the Manager
or the Sub-Adviser, cast in person at a meeting called for the purpose of voting
on such approval.
11. Certain Definitions. For the purpose of this Agreement, the terms
"vote of a majority of the outstanding voting securities," "interested person,"
"affiliated person" and "assignment" shall have their respective meanings
defined in the 1940 Act, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under the 1940 Act.
12. General.
--------
a. If any term or provision of this Agreement or the
application thereof to any person or circumstances is held to be invalid or
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to other persons or circumstances shall not be affected
thereby and shall be enforced to the fullest extent permitted by law.
- 5 -
<PAGE>
b. This Agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts.
UNDISCOVERED MANAGERS, LLC
By:____________________________________
Mark P. Hurley
President
UNIBANK SECURITIES, INC.
By:____________________________________
Henrik Bak
President
- 6 -
EXHIBIT 99.18
-------------
MULTI-CLASS PLAN
<PAGE>
UNDISCOVERED MANAGERS FUNDS
Plan pursuant to Rule 18f-3(d) under the Investment Company Act of 1940
Effective July 9, 1998
WHEREAS, the Board of Trustees of Undiscovered Managers Funds (the
"Trust") has considered the following multi-class plan (the "Plan") under which
the Trust may offer multiple classes of shares of its now existing and hereafter
created series pursuant to Rule 18f-3 (the "Rule") under the Investment Company
Act of 1940 (the "1940 Act"); and
WHEREAS, a majority of the Trustees of the Trust and a majority of the
Trustees who are not interested persons of the Trust have found the Plan, as
proposed, to be in the best interests of each class of shares of each series of
the Trust individually and the Trust as a whole.
NOW, THEREFORE, the Trust hereby approves and adopts the following Plan
pursuant to the Rule.
The Plan
Each now existing and hereafter created series ("Fund")(1) of the Trust
may from time to time issue one or more of the following classes of shares:
Institutional Class shares and Investor Class shares. Each class is subject to
such investment minimums and other conditions of eligibility as are set forth in
the Trust's prospectuses, each as from time to time in effect (each, a
"Prospectus"). The differences in expenses among these classes of shares, and
the exchange features of each class of shares, are set forth below in this Plan,
which is subject to change, to the extent permitted by law and by the Agreement
and Declaration of Trust and Bylaws of the Trust, as amended from time to time,
by action of the Board of Trustees of the Trust. There are no conversion rights
or features relating to either Institutional Class or
- --------
(1) The current Funds of the Trust include: Undiscovered Managers All
Cap Value Fund, Undiscovered Managers Behavioral Growth Fund, Undiscovered
Managers Core Equity Fund, Undiscovered Managers Hidden Value Fund, Undiscovered
Managers REIT Fund, Undiscovered Managers Small Cap Value Fund and Undiscovered
Managers Special Small Cap Fund.
-1-
<PAGE>
Investor Class shares. Nothing in this Plan shall limit the authority of the
Trustees to create additional classes of shares of any Fund.
Class Characteristics
Institutional Class and Investor Class shares of a Fund represent
interests in the assets of such Fund. The classes differ materially only with
respect to the existence of a shareholder servicing fee (the "Shareholder
Servicing Fee") borne exclusively by the Investor Class shares. Shareholder
Servicing Fees are paid under a plan (the "Shareholder Servicing Plan") relating
to the Investor Class shares adopted by the Trustees of the Trust.
Expense Allocations
Investor Class shares pay Shareholder Servicing Fees, while
Institutional Class shares pay no Shareholder Servicing Fees. Each class may, at
the Trustees' discretion, also pay a different share of other expenses, not
including advisory or custodial fees or other expenses related to the management
of the Trust's assets, if these expenses are actually incurred in a different
amount by that class, or if the class receives services of a different kind or
to a different degree than the other classes ("Class Expenses"). All other
expenses will be allocated to each class on the basis of the net asset value of
that class in relation to the net asset value of a particular Fund attributable
to that class.
Exchange Features
Shares of either class of a Fund may be exchanged only for shares of
the same class of another Fund, if any. There is no sales charge on exchanges.
In addition, although the Trust has no current intention of terminating or
modifying the exchange privilege, it reserves the right to do so at any time.
All exchanges will be made based on the respective net asset values next
determined following receipt of the request by the Funds in proper form.
Voting Rights
Each class of shares of each Fund has identical voting rights except
that each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and has separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class. In matters as to which one or more
-2-
<PAGE>
classes do not have exclusive voting rights, all classes of shares of a Fund
will vote together, except when a class vote is required by the 1940 Act.
Amendments
The Plan may be amended from time to time in accordance with the
provisions and requirements of the Rule.
-3-
EXHIBIT 99.19(b)
----------------
POWER OF ATTORNEY FOR DIANA TANOW, DESIGNATING MARK P. HURLEY,
MARY CHRIS SAYRE AND NEIL FORREST
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute and appoint Mark P. Hurley, Mary
Chris Sayre and Neil Forrest, and each of them singly, my true and lawful
attorneys, with full power to them and each of them, to sign for me, and in my
name and in the capacity indicated below, any and all amendments to the
Registration Statement on Form N-1A of Undiscovered Managers Funds (the
"Trust"), and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission for the
purpose of registering the shares of beneficial interest of the Trust and
generally to do all such things in my name in my behalf to enable the Trust to
comply with the provisions of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and all requirements and regulations
of the Securities and Exchange Commission, hereby ratifying and confirming my
signature as it may be signed by my said attorneys on any and all amendments to
said Registration Statement.
WITNESS my hand and common seal on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Diana Tarnow Assistant Treasurer September 8, 1998
- ---------------------
Diana Tarnow
</TABLE>
EXHIBIT 99.19(c)
----------------
SHAREHOLDER SERVICING PLAN FOR INVESTOR CLASS SHARES
<PAGE>
UNDISCOVERED MANAGERS FUNDS
Shareholder Servicing Plan (Investor Class Shares)
(Effective as of July 9, 1998)
This Plan (the "Plan"), as amended from time to time, constitutes the
Shareholder Servicing Plan with respect to each series of shares of beneficial
interest containing Investor Class shares heretofore or hereinafter organized
(each a "Fund," and collectively, the "Funds") of UNDISCOVERED MANAGERS FUNDS, a
Massachusetts business trust (the "Trust").
The Trust, on behalf of the Investor Class shares of each Fund, will
pay to Undiscovered Managers Funds, LLC, a Delaware limited liability company,
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 Investor Class shares. Such services
may include (and are in addition to any such general services provided to a Fund
as a whole): (i) transfer agent and sub-transfer agent services for beneficial
owners of Investor Class shares, (ii) aggregating and processing purchase and
redemption orders for Investor Class shareholders, (iii) providing beneficial
owners of Investor Class shares who are not record owners with statements
showing their positions in the Fund, (iv) processing dividend payments for
Investor Class shares, (v) providing sub-accounting services for Investor Class
shares held beneficially, (vi) forwarding shareholder communications, such as
proxies, shareholder reports, dividend and tax notices, and updating
prospectuses to beneficial owners of Investor Class shares who are not record
owners and (vii) receiving, tabulating and transmitting proxies executed by
beneficial owners of Investor Class shares who are not record owners
(collectively, the "Shareholder Services"). Subject to such limit, the
Shareholder Servicing Fee shall be as approved from time to time by the Trustees
of the Trust. The Shareholder Servicing Fee shall be computed and paid monthly
or at such other intervals as the Trustees shall determine. The Servicing Agent
may pay all or any portion of the Shareholder Servicing Fee to shareholder
servicing agents or other organizations (including, but not limited to, any
affiliate of the Servicing Agent) as shareholder servicing fees pursuant to
agreements with such organizations for providing all or any portion of the
Shareholder Services, and may retain all or any portion of the Shareholder
Servicing Fee as compensation for providing the Shareholder Services.
